Quote:
Originally Posted by e30kawi
Scam isn't the right word, but different strokes for different folks. Depends if you want to potentially get a 7% return or actually pay your debt off faster. When I first got the loan and only seeing $70 come off of the principle every month was sickening and I would have ended up paying over three times what the house was purchased for.
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Yea, that would be hard to swallow because, like you said, you pay the interest up front. If paying it off faster make someone feel better to have that off their books then that is good. That person has some different types of flexibilities, but what they aren't doing is saving as much as that same person who put money into a home and house. Like I said, not only is the return likely to be higher than the interest paid on a home loan, but the money is growing at compound interest, which is highly dependent on time. The later example would grow the compound interest over 30 years versus the 15 years for the person who paid off their home early then started saving.
Example:
Person 1:
--Buys a home for $200k at 5% interest for 15 years.
--Pays $1582/month for a total of $284,686 over 15 years.
--Invests $1582/month after that into the market at 8% return over 15 years.
--401k/ira balance after 15 years is $522,407
Person 2:
--Buys a home for $200k at 5% interest for 30 years.
--Pays $1074/month for a total of $386,512 over 30 years.
--Invests $508/month (the difference between a 15 and 30 year loan) into the market at 8% return for 30 years.
--401k/ira balance after 30 years is $718,197.
Moral of the story: compound interest. Person 2's home is worth the same amount of money after 30 years as Person 1's home, so don't be confused by the total amount paid for the home. They both have a home worth X; they both were paying $1582 a month for 30 years. Person 2 walked away with an extra $195,790 by investing for longer time because of compound interest, and because they made that 3% difference between the 5% loan and the 8% market for a long time too.
Edit note: The 15% loan would likely have a lower interest rate like 4.5%, but the difference wouldn't offset the numbers enough to change the point.