Pay Off Loan Sooner?

Question

I bought an out of state property and have about $50,000 left to pay off for the loan. Anyone know if paying 1 huge principle payment at the end of each year would pay it off faster verses bi weekly payments?

Dan H. · Answer

I exert a certain amount of effort to keep a high leverage to maximize return (both ROI and ROE).  I never understood why one would want to pay a low interest mortgage off early:- the difference in rate of return for appreciation of a 80% LTV vs 50% LTV is 2.5x. As an example if a property appreciates 20% at 80% LTV you have made 100% from the appreciation but at 50% LTV you have only made 40% from appreciation.  Going to the next level the difference in rate of return from appreciation at 80% LTV vs 0% LTV is 5x.  The property that appreciates 20% at 0% LTV you made 29% from the appreciation (versus 100% return at 80% LTV).- Fannie/Freddie (f/f) residential conventional loan is the cheapest money available.  Even with the recent rate increase of the last couple of years, f/f is significantly below S&P lifetime return.   This implies that rather than pay the loan early, you are likely to do better putting that money in S&P or you can do far better using it to make a smart RE investment.- current f/f is around 6%.  This implies paying down is saving 6%.  I think most of us can agree that we do not invest in RE for 6% return.  So why would we pay down the lian at a rate of 6%?- 6% rate at 30 year each $100k borrowed adds $600/month. My worst appreciating property has apprecated $2700/month.  My best property has appreciated over $10k/month.  Point is cash flow (positive or negative) can be inconsequential compared to the appreciation assuming you do not need the cash flow to pay the bills

- cash flow is taxed, appreciation is tax deferred and can be avoided.I put forth effort to keep my RE investment significantly leveraged.   To intentionally reduce the leverage more than required is a foreign concept to me.Best wishes

Wesley I. · Answer

@Samuel M.

I have an excel spreadsheet that you can plug in principal payments and see how much interest you can save. It’s similar to the mortgage calculators you can see online but can add extra payments. It can work on car loans or any amortized loans. Let me know if youre interested

Alecia Loveless · Answer

@Samuel It is my understanding that you can recast the loan if you make a large payment which should keep the original low interest rate and give you a new adjusted, lower mortgage payment going forward. Which in turn would increase your already solid cash flow.

I would prefer doing this to get the increased cash flow as opposed to paying additional small amounts monthly.

Benjamin Aaker · Answer

Have you considered what kind of return you could make on that 50k elsewhere? Compare that to the monthly payments you are making on your loan. You'll probably do better paying the minimum and getting investment money back on the 50k.

Per your question: if paying the same amount over a year but the question is to pay a lump sum at the end or in bi-weekly payments, definitely better for bi-weekly as you'll save interest expense.

Samuel M. · Answer

Just don't like having debt. I've got money Just sitting in the bank anyway and wanted to Just pay it off. Interest is low on the house and has a great cash flow, always has been. Just wanted to see what the easiest way to finish paying it off was.

Pay Off Loan Sooner?

Most Popular Reply