Quote:
Originally Posted by Irace86.2.0
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.
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I get what you are saying and yes it makes good sense in ways, but I am of a similar mind set as dadhawk and want to minimize that debt quicker with paying less interest, I also pay more than necessary, should take me ten years to pay off my new loan. Refinancing to consolidate some debt and lower my payments required and saves a ton on interest at the new rate.
Ultimately it's up to the individual and people really need to do the research and go with what works for them. But I like most people, are open to suggestion, and kind of mirror some of what you're saying. I was lucky enough to buy well within my means so paying extra on a fifteen year note and still sticking a comfortable amount of money into retirement and savings for a rainy day. It's nice to be able to still enjoy life and still plan for retirement, but retirement isn't guaranteed.
Kinda unrelated, but my outlook changed quite a bit about two years ago. Was in a bad motorcycle accident that I'm still recovering from. Luckily no head injuries or internal stuff but if I'd have been a foot to the right I probably wouldn't be here, so I want to also enjoy my life with my wife while we're still here, so having fun money to spend is essential.