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Is there a mortgage payoff calculator that calculates extra payment vs. invest+lump s
Old 05-29-2018, 05:45 PM   #1
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Is there a mortgage payoff calculator that calculates extra payment vs. invest+lump s

Apologies if this is out there... if not, bear with me here.


I'm not going to argue the math/psychology of paying off a mortgage early (extra payments/principal) vs. investing/keeping mortgage "forever"


What I'm looking for is a calculator (or equation) that can help me figure out how I can use the power of compounding to actually pay off my house faster.

Scenario:
$200K 30 Year Mortgage at 4% = Minimum Monthly PI Payment of $955
Willing to spend a total of $1500 towards PI payments each month ($545 additional).

Given this scenario, some might say, just throw the $1500 at the mortgage and you'll be done in about 177 Months guaranteed.

But what if I took that extra $545 and invested in at whatever rate (call it 7-10%)? How soon would I be able to payoff the mortgage that way?

In other words, at what point does my $545 extra payment investment equal my minimum monthly payment balance.

=

In the scenario above, I've eyeballed that if I am able to get 10% on $545 monthly, I would hit "equilibrium" at about 142 months.

That is almost 3 years sooner than just going the traditional method of making extra payments.

Obviously, I can figure this out, by using multiple calculators and estimating a couple of things.. but if I change any variables like "gain percentage" or the amount of the "extra payment" I have to redo everything.

Again, understand the nuances here (ie. bear market/negative returns/you're losing money by paying off your mortgage/etc.)

Just hoping someone already has this because I'm pretty clueless at making excel work

Thanks!
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Old 05-29-2018, 07:20 PM   #2
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Your "eyeball" is pretty good! I ran this in Excel (sorry, nothing on- line; I just live and breathe in Excel) and you'd pay it off about 3 years earlier if you invested the extra at 10%, or 20 months faster if invested at 7%. That doesn't include the effects of taxes on the investment income.

There was a product in the UK called "endowment mortgages" that worked similarly but were sadly over-priced, over-sold and over-promised. The idea was that part of your regular payments would go into their investment account and, if their impossibly rosy returns materialized net of their excessive fees, your mortgage would be paid off X years early. Unfortunately, a few years later the customers got letters telling them the investment fund wasn't doing very well and they had to come up with large amounts of money to make up the deficit and reduce their principal balances to reasonable levels.


I know you understand market volatility and that's a risk- but one advantage with your plan is that you maintain control of the money. If you do need it for another purpose, it's available.
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Old 05-29-2018, 07:55 PM   #3
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I opted for the extra mortgage payments when I was making the decision. This was for a few reasons - none came down to strictly best $ advantage.

- I was still working - putting the extra $ towards principal was another way of reducing my spending. (Similar to maxing out the 401k - if it's not in the checking account you can't spend it - you get used to spending less.) This reduced monthly spending helped me get comfortable with a smaller budget in retirement since it was the same budget I'd lived with while working and saving/paying down the mortgage.

- House is different than investments in that it gives you a roof over you head. I wanted that roof secure. Sure a meteor or earthquake could remove that roof - but there are bigger problems (including in your investments) if a meteor hits the planet. I liked reducing the risk of covering my housing expenses if I lost my job.

- There is less cash flow needed in retirement if there is no mortgage. Now housing is just utilities, maintenance, and property taxes.... Need a smaller nest egg to cover this housing expense.

- My husband is extremely debt averse. It added to our marital harmony when we were 100% debt free. I have learned to love having no debt.

I intellectually understand the idea of investing money rather than using it to reduce debt. It makes fiscal sense if you don't mind putting that money at risk. Paying extra principal is the same as a 4% return... but that's a guaranteed return. Consider it like a great CD rate.
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Old 05-29-2018, 08:01 PM   #4
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Hugh Chou. Found his site years ago when we had a mortgage. He keeps adding interesting calculators.
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Old 05-29-2018, 08:08 PM   #5
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Quote:
Originally Posted by rodi View Post
I opted for the extra mortgage payments when I was making the decision. This was for a few reasons - none came down to strictly best $ advantage.

- I was still working - putting the extra $ towards principal was another way of reducing my spending. (Similar to maxing out the 401k - if it's not in the checking account you can't spend it - you get used to spending less.) This reduced monthly spending helped me get comfortable with a smaller budget in retirement since it was the same budget I'd lived with while working and saving/paying down the mortgage.

- House is different than investments in that it gives you a roof over you head. I wanted that roof secure. Sure a meteor or earthquake could remove that roof - but there are bigger problems (including in your investments) if a meteor hits the planet. I liked reducing the risk of covering my housing expenses if I lost my job.

- There is less cash flow needed in retirement if there is no mortgage. Now housing is just utilities, maintenance, and property taxes.... Need a smaller nest egg to cover this housing expense.

- My husband is extremely debt averse. It added to our marital harmony when we were 100% debt free. I have learned to love having no debt.

I intellectually understand the idea of investing money rather than using it to reduce debt. It makes fiscal sense if you don't mind putting that money at risk. Paying extra principal is the same as a 4% return... but that's a guaranteed return. Consider it like a great CD rate.
I'm of the mindset that I too want my house paid off and to be completely debt free, but I believe that my "plan" would still have worked out better for you.

Here's how/why:
  • Create a SEPARATE account for your "extra monthly payments" - Automatically save that (helps reduce spending/lower budget).
  • The difference between making the extra payments towards principal and investing separately was a difference of almost 3 years (at 10%) - That means that either I could pay off my house 3 years faster and be out of debt 3 years faster, or if the market didn't hit 4%, I'd have almost 3 years to catch up.
At the end of the day though I'm sure it feels good not to have that mortgage

*Cue the "mortgage-forever" folks - "but it feels even better to have more money!"
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Old 05-29-2018, 08:10 PM   #6
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Originally Posted by athena53 View Post
Your "eyeball" is pretty good! I ran this in Excel (sorry, nothing on- line; I just live and breathe in Excel) and you'd pay it off about 3 years earlier if you invested the extra at 10%, or 20 months faster if invested at 7%. That doesn't include the effects of taxes on the investment income.

There was a product in the UK called "endowment mortgages" that worked similarly but were sadly over-priced, over-sold and over-promised. The idea was that part of your regular payments would go into their investment account and, if their impossibly rosy returns materialized net of their excessive fees, your mortgage would be paid off X years early. Unfortunately, a few years later the customers got letters telling them the investment fund wasn't doing very well and they had to come up with large amounts of money to make up the deficit and reduce their principal balances to reasonable levels.


I know you understand market volatility and that's a risk- but one advantage with your plan is that you maintain control of the money. If you do need it for another purpose, it's available.
Don't tease me!

Any way you could attach that Excel file or at least give me the formulas/procedure to set up the same thing myself?

Pretty Please!?

And you do make a good point about the taxes... I'll have to put in a 15% margin for argument's sake.
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Old 05-29-2018, 08:16 PM   #7
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10% seems optimistic. Would it be all equities? I have a 60/40 equities/fixed asset allocation and even with the booming markets I don't think 10% is realistic over time. 10% returns suggests some risk.

But your point of reducing the spending by investing is well taken.

As you can tell - I'm not in the 'mortgage forever' camp. Closest I come to that is I have an (unused) HELOC - just in case... and I financed my new car last year - at 0% financing.... I didn't see a downside to that. (Had planned to pay cash... but 0% was too good not to take.)

edited to add: And even with the car - I'm making extra payments just to get the debt off the books..... Not rational at all.
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Old 05-29-2018, 08:18 PM   #8
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Originally Posted by soontobe2015 View Post
Hugh Chou. Found his site years ago when we had a mortgage. He keeps adding interesting calculators.
Nice!

Loan Prepayment vs. Investing Your Money

But I'll still take that Excel
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Old 05-29-2018, 08:19 PM   #9
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Quote:
Originally Posted by rodi View Post
10% seems optimistic. Would it be all equities? I have a 60/40 equities/fixed asset allocation and even with the booming markets I don't think 10% is realistic over time. 10% returns suggests some risk.

But your point of reducing the spending by investing is well taken.

As you can tell - I'm not in the 'mortgage forever' camp. Closest I come to that is I have an (unused) HELOC - just in case... and I financed my new car last year - at 0% financing.... I didn't see a downside to that. (Had planned to pay cash... but 0% was too good not to take.)

edited to add: And even with the car - I'm making extra payments just to get the debt off the books..... Not rational at all.
I'm more of 7% guy myself - but was just using the $200K scenario and 10% as an example.
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