Author Topic: Paying off 30-year mortgage in 10 years or less  (Read 24065 times)

oneiota

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Paying off 30-year mortgage in 10 years or less
« on: May 13, 2015, 05:34:46 PM »
Some quick observations:   

Stocks... over the long term have averaged around 7%, yet there seems to be a perception of much higher returns.  No doubt higher returns are possible, but so are losses.  Nothing is a sure thing in stocks, other than the fact that someone can be reasonably sure that over the course of 40 years or so they will probably average 7%, and pray that something like another 9/11 or other economy-shaking event doesn't occur during their retirement.  However, capital gains on that 7% must be paid when liquidated, so what is the REAL return?  Perhaps about 5%.

Mortgage...  It seems most of the time, financial experts seem to think a 15-year mortgage is a great idea.  If that's true, then a 30-year mortgage in the hands of a homeowner who has the discipline to make large payments toward the principal of the loan is onto an even better idea, because not only do they benefit by lowering their total interest paid to the approximate same range as the guy with the 15-year mortgage, they have the flexibility to greatly reduce their mortgage payment (to the actual required payment based on 30-year) if they should encounter some "lean years" due to bad economy, job loss etc., thereby putting themselves in a better position to absorb risk.  Then, at the end of it all not only does the homeowner have a place to live in, free and clear of increasing rent costs and what not, but if they decide to liquidate their asset they aren't taxed on what their money has earned (lets say 4-5% real estate appreciation over the long haul).

So, how can aggressive mortgage pay down possibly be a bad plan.  A guaranteed 4% sounds a lot better to me than a risky 5% that peppered with occasional fees which require constant attention.  The folks who always recommend against early mortgage pay down always seem to be finance-industry folks who have something to gain or sell by creating movement in the stock market. 

The folks I know personally who are financially secure are all from the early pay down, buy the house you need and not you want camp (no McMansions, etc).  This strategy seems to have worked for MMM and wife.  It's worked well for relatives of mine, so it's hard for me to believe my money is better off in stocks.

Anyone care to try to change my mind?






MDM

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #1 on: May 13, 2015, 06:25:58 PM »
A guaranteed 4% sounds a lot better to me than a risky 5%.
At what "guaranteed" and "risky" rates would you choose the risky?

oneiota

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #2 on: May 13, 2015, 06:31:26 PM »
A guaranteed 4% sounds a lot better to me than a risky 5%.
At what "guaranteed" and "risky" rates would you choose the risky?

It would probably depend on the potential range levels of the risk involved.  In the case of the stock market you can put in 10k and watch it get cut in half, or watch it double over the course of a few years.  There's an old saying that a bird in the hand is worth two in the bush, so just for the sake of example maybe we could say a guaranteed 4% would need to be at least a risky 8%?

MDM

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #3 on: May 13, 2015, 07:21:46 PM »
just for the sake of example maybe we could say a guaranteed 4% would need to be at least a risky 8%?
Then, as the 8% is a "real + inflation" number, much depends on what you assume inflation will do over the time period.  If you assume it will stay <2% or so, then "probably not" to the question about changing your mind.  If you are concerned that inflation might go to >5% or so, then you might reconsider....

oneiota

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #4 on: May 13, 2015, 07:36:30 PM »
just for the sake of example maybe we could say a guaranteed 4% would need to be at least a risky 8%?
Then, as the 8% is a "real + inflation" number, much depends on what you assume inflation will do over the time period.  If you assume it will stay <2% or so, then "probably not" to the question about changing your mind.  If you are concerned that inflation might go to >5% or so, then you might reconsider....

Projecting inflation, however, puts me back at the birds in the bush value level (guesswork and taking on risk).  It kind of seems like a matter of choosing between a guaranteed 4%, plus a guarantee of a paid-for roof over my head after 10 years and major reduction in living expense, versus a cross-my-fingers for 8% or so, not having a free and clear roof over my head.

Seems like after 10 years I'm anchored, and in a better position to take on risk (just with lower amounts of money).  Or for that matter, if I really had a reason to escalate my faith in the stock markets long-term stability and didn't mind risking the home, just take out an equity-line against the house, get a tax discount for doing so, put the money on the roulette table...ahem.. I mean in the stock market, and enjoy the stock gains + tax break on equity line interest, minus of course those nasty capital gains on stock sale.

Now if the stock market had averaged 15% over the long term, naturally I wouldn't even be pondering this.

MDM

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #5 on: May 13, 2015, 08:16:16 PM »
Everyone has a different perspective, and the only way to know if you made the "best" choice is to look through your hindsight glasses.  As long as you are choosing with open eyes (even though without benefit of those glasses), then have at it and best wishes for a happy ending.

One small item: 15% capital gains tax on 30 years of 7% returns makes the overall return 6.5%, not 5.0%
i = return rate, fraction
P = principal, $
n = term, yr
t = tax rate, fraction

Overall return =
/ P + (P * (1 + i)^n - P) * (1 - t) \^(1/n)
| -------------------------------------  |              - 1
\                 P                              /

P cancels, so we get
Overall return = (1 + ((1 + i)^n - 1) * (1 - t))^(1/n) - 1
                       = (1 + (1.07)^30 - 1) * 0.85)^(1/30) - 1
                       = 0.065

Also, if you can itemize deductions then the 4% mortgage interest costs less.  How much less depends on your marginal tax rate and how much of the interest comes above the standard deduction, after accounting for all other itemized deductions.

But if you need the difference to be 4% vs. 15% before giving up the 4%...again, once we get into qualitative reasoning and speculation there is no way to know the "best" answer beforehand.  So, in all seriousness, I think one should do what gives one the most satisfaction.  As the saying goes, money can't buy happiness.

Drew664

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #6 on: May 13, 2015, 08:31:06 PM »
You'd also have to decide if you want more cash flow at retirement or more before. For some, having a huge sum of retirement funds is their goal - and they are willing to leave it in stocks long term to see those gains. Others will have their retirement funds saving on target, come across excess cash today and place it towards the mortgage to free up cash much sooner as a larger retirement sum isn't needed or desired.

Neither choice, or any other variation of this is a road to financial ruin, simply a personal choice. Besides, who's to say you can't do both?

oneiota

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #7 on: May 13, 2015, 08:59:19 PM »
So, in all seriousness, I think one should do what gives one the most satisfaction.  As the saying goes, money can't buy happiness.

Yes, I guess if there were a clear answer, mortgage vs. stock wouldn't be debated as much as it is.  I think I have a couple of personal factors that sway me toward early mortgage pay down, one is seeing it work out well for folks close to me, and the other is that I keep noticing that the pundits that are so pro-stock market always seem to have something to gain by encouraging stock investments (where as nobody has anything to gain by early mortgage pay down, except the homeowner).  And at the end of the day I think that when all else is equal, I tend to choose the stable/comfortable option over riskier options with higher potential payoffs (in all things in life).

oneiota

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #8 on: May 13, 2015, 09:08:10 PM »
Neither choice, or any other variation of this is a road to financial ruin, simply a personal choice. Besides, who's to say you can't do both?

Glad to hear others feel its a matter of preference rather than one being wiser than the other.  And yes, I am doing both in the sense that I'm taking reasonable amounts of risk with IRA/401k investments, which may help balance things out.

I'm perhaps a bit different in my perspective of cash flow needs in the future.  After a certain age, I see myself wanting to relax and be a homebody more than travel the world, play golf, etc. so I see my retirement spending as being small (relatively speaking that is).  Plus, technically if I really needed extra cash flow, by that time my then-paid-for home would probably be worth a great deal more than it is now, so I could always do something like rent it out, and rent a somewhere else, maybe in a country with a lower cost of living, while holding onto the home as both an income stream and a fallback mechanism should things not work out as planned.  I could potentially pay off another property or two between now and then, for multiple rental income streams (not sure I really want to, but its a thought).

I also have another reason.  I'm with a long-term girlfriend, current unmarried.  If I ever did marry her (possible) and it didn't work out (possible), my home was purchased prior to tying the knot, thus I don't think she could claim equity.  However, any funds in retirement accounts and such might be hard to prove she is not eligible for in a divorce (just thinking aloud, I'm not particularly well informed in divorce law).

PathtoFIRE

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #9 on: May 14, 2015, 09:54:50 AM »
Yes, I think personal perspective plays a large part in how a financially disciplined person chooses to balance mortgage debt payment versus investment. I'm coming from a little different place, in that I really want to maximize my passive income from investments. And to me, that means achieving as large an exposure to the stock/bond markets as possible as quickly as possible. I'm actually taking on more debt to do this (less than 10% increase, I'm not going crazy here) by refinancing and cashing out, so obviously I'm putting my chips very firmly in the "pay off mortgage as slow/late as possible" camp. But that's just because of my specific income and flexibility needs.

johnhenry

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #10 on: May 14, 2015, 10:30:37 AM »
Some quick observations:   

However, capital gains on that 7% must be paid when liquidated, so what is the REAL return?  Perhaps about 5%.

If you are comparing paying down a mortgage vs investing in a taxable account then capital gains should be factored.  But most folks on this forum may be in a position to liquidate taxable investments an incur LTCG in a year when they'll pay 0% federal on it.

And paying down the mortgage vs. investing in tax advantaged accounts is a different story altogether.

If that's true, then a 30-year mortgage in the hands of a homeowner who has the discipline to make large payments toward the principal of the loan is onto an even better idea, because not only do they benefit by lowering their total interest paid to the approximate same range as the guy with the 15-year mortgage, they have the flexibility to greatly reduce their mortgage payment (to the actual required payment based on 30-year) if they should encounter some "lean years" due to bad economy, job loss etc., thereby putting themselves in a better position to absorb risk.

Anyone care to try to change my mind?

Yes, the 30 year will always provide more "flexibility" in terms of lower payments.... but the 15 year vs the 30 can be had for a lower rate!   If the plan is to pay it down faster than 15 years anyway and even the higher payments of the 15 year note leave enough room to make you feel safe, why pay the higher rate?

nereo

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #11 on: May 14, 2015, 10:48:46 AM »
thought I'd throw in my 2...
Historical rates of real-adjusted returns in the market are about 7-8%.  A mortgage is an inflation hedge, so for me that gives me a strong incentive to not pay down the mortgage early (especially since my rate is 3.1%, not 4%).

another "9/11 or other economy-shaking event" will almost certainly occur during my retirement.  Looking back on history you can find some 'major' event every decade or two (depending on what you quantify as 'major'), from runaway interest to 9/11 to the dot.com bubble to...
What's important is that even with these events long-term stock market returns have still been positive.

I don't want my home to make up too large a share of my total net worth.  Personally, I don't want more than 30% of my total NW to be in my home.  If I paid off my mortgage at the expense of investing more, this is what would happen.

AS MDM said, as long as you go in with your eyes open and a good understanding, I support whatever choice you want to make. For me, that is paying the minimum amount on my mortgage, investing as much as I can and taking advantage of inflation as much as possible. The future is unknown - maybe I'll come out ahead, maybe I won't.  History suggests I'll do ok with my strategy.

oneiota

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #12 on: May 14, 2015, 11:46:32 AM »
If you are comparing paying down a mortgage vs investing in a taxable account then capital gains should be factored.  But most folks on this forum may be in a position to liquidate taxable investments an incur LTCG in a year when they'll pay 0% federal on it.

And paying down the mortgage vs. investing in tax advantaged accounts is a different story altogether.


But with state capital gains tax averaging about 6% and as high as 13% (California), added on top of potential federal capital gains tax, the average that most people should count on is a whopping 28% or so.

http://taxfoundation.org/article/high-burden-state-and-federal-capital-gains-tax-rates

That's not even including the fact that the way accounts are taxed are not guaranteed to be taxed the same way by the time one retires.  Public policy changes can and do occur, and may or may not be disadvantageous/advantageous, and/or grandfathered to existing accounts. 

Counting on future tax breaks as a sure thing based on how they work today seems a bit like putting your entire paycheck into lotto tickets.

This doesn't even go into the subject I mentioned before about marital property division in the event of a divorce (it's usually much more clear cut with a RE purchase than it is with stocks and pension plans who is entitled to what).

If that's true, then a 30-year mortgage in the hands of a homeowner who has the discipline to make large payments toward the principal of the loan is onto an even better idea, because not only do they benefit by lowering their total interest paid to the approximate same range as the guy with the 15-year mortgage, they have the flexibility to greatly reduce their mortgage payment (to the actual required payment based on 30-year) if they should encounter some "lean years" due to bad economy, job loss etc., thereby putting themselves in a better position to absorb risk.

Anyone care to try to change my mind?

Yes, the 30 year will always provide more "flexibility" in terms of lower payments.... but the 15 year vs the 30 can be had for a lower rate!   If the plan is to pay it down faster than 15 years anyway and even the higher payments of the 15 year note leave enough room to make you feel safe, why pay the higher rate?

Because, if you pay down a 30 year mortgage in around 10 years, you can get a lower effective APR over the life of the loan than if you got a 15% which has a lower APR, yet with the ability to basically cut your mortgage payment in half if you wanted to.  Let's say something comes along that increases your faith in the stock market, or you want to start putting some money into some stocks for shorter term investments. 

Without doing anything more than taking about 60 seconds to make a quick edit your regularly scheduled online banking payments, you could change the amount you've been paying (let's say $2k a month on a $250K house) to $1k a month.  Now, you have an extra $1k a month to play with, plus the $1k a month that you are still putting toward the home is working for you rather than against you because more of it is applied toward principal (because of all the prior over-payments you've made).

« Last Edit: May 14, 2015, 11:58:51 AM by oneiota »

oneiota

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #13 on: May 14, 2015, 11:57:12 AM »
I don't want my home to make up too large a share of my total net worth.  Personally, I don't want more than 30% of my total NW to be in my home.  If I paid off my mortgage at the expense of investing more, this is what would happen.

I generally agree that your home should not make up too large a share of total net worth, at least not at time of retirement.  By that, I mean that buying an expensive property that's more than you really need to live, or raise a family or whatever the goal is, I think is generally a bad investment.  Most folks that buy a 3000-5000sqft home simply do not need all of it and end up with ongoing over-priced expenses (maintenance, utilities, tax) that continually drain their savings.  At that point, yes paying the mortgage early does seem like putting too much of your net worth where you can't get to it.  Homes are illiquid, and that's a potential problem if all your money is there.  As far as folks buying huge homes under the belief it will get necessarily appreciate at the same rate of smaller more affordable homes, well a sucker is born every minute.

But that aside, assuming one starts with my recommendation of a modest home (just enough), then I believe a 30-year fixed mortgage combined with aggressive early pay down is a good strategy for someone like me who just generally feels better about knowing what is and what will be rather than guessing about what might be, even if what might be has a potentially higher payoff.

James

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #14 on: May 14, 2015, 12:02:19 PM »
AS MDM said, as long as you go in with your eyes open and a good understanding, I support whatever choice you want to make. For me, that is paying the minimum amount on my mortgage, investing as much as I can and taking advantage of inflation as much as possible. The future is unknown - maybe I'll come out ahead, maybe I won't.  History suggests I'll do ok with my strategy.


I'll second (third?) this...

nereo

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #15 on: May 14, 2015, 12:07:12 PM »

But that aside, assuming one starts with my recommendation of a modest home (just enough), then I believe a 30-year fixed mortgage combined with aggressive early pay down is a good strategy for someone like me who just generally feels better about knowing what is and what will be rather than guessing about what might be, even if what might be has a potentially higher payoff.
For me, it isn't about buying a 3k+ sqft home.  I put down 20% on my home and had about 100k leftover in investments, which meant at the time i purchased my home it made up roughly 30% of my total net worth.  I didn't want to go higher than that for reasons you mentioned earlier.  If I had started paying it down aggressively it would have become a larger share of my NW.
I also believe that the inflationary hedge will work in my favor extremely well.  ::shrug::  that's just what I'm comfortable (and uncomfortable) with.

Quote
But with state capital gains tax averaging about 6% and as high as 13% (California), added on top of potential federal capital gains tax, the average that most people should count on is a whopping 28% or so.

http://taxfoundation.org/article/high-burden-state-and-federal-capital-gains-tax-rates

As a general rule I take anything that that particular institution says about taxes.  They promote the rather silly idea of the "Tax Free Day." IMO all they do is get people riled up and angry using shady math and biased conclusions.  It isn't constructive.
http://www.mrmoneymustache.com/2014/06/16/mr-frugal-toque-on-why-tax-freedom-day-is-bullshit/

johnhenry

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #16 on: May 14, 2015, 01:29:19 PM »
If you are comparing paying down a mortgage vs investing in a taxable account then capital gains should be factored.  But most folks on this forum may be in a position to liquidate taxable investments an incur LTCG in a year when they'll pay 0% federal on it.

And paying down the mortgage vs. investing in tax advantaged accounts is a different story altogether.


But with state capital gains tax averaging about 6% and as high as 13% (California), added on top of potential federal capital gains tax, the average that most people should count on is a whopping 28% or so.

http://taxfoundation.org/article/high-burden-state-and-federal-capital-gains-tax-rates

That's not even including the fact that the way accounts are taxed are not guaranteed to be taxed the same way by the time one retires.  Public policy changes can and do occur, and may or may not be disadvantageous/advantageous, and/or grandfathered to existing accounts. 

Counting on future tax breaks as a sure thing based on how they work today seems a bit like putting your entire paycheck into lotto tickets.

This doesn't even go into the subject I mentioned before about marital property division in the event of a divorce (it's usually much more clear cut with a RE purchase than it is with stocks and pension plans who is entitled to what).

If that's true, then a 30-year mortgage in the hands of a homeowner who has the discipline to make large payments toward the principal of the loan is onto an even better idea, because not only do they benefit by lowering their total interest paid to the approximate same range as the guy with the 15-year mortgage, they have the flexibility to greatly reduce their mortgage payment (to the actual required payment based on 30-year) if they should encounter some "lean years" due to bad economy, job loss etc., thereby putting themselves in a better position to absorb risk.

Anyone care to try to change my mind?

Yes, the 30 year will always provide more "flexibility" in terms of lower payments.... but the 15 year vs the 30 can be had for a lower rate!   If the plan is to pay it down faster than 15 years anyway and even the higher payments of the 15 year note leave enough room to make you feel safe, why pay the higher rate?

Because, if you pay down a 30 year mortgage in around 10 years, you can get a lower effective APR over the life of the loan than if you got a 15% which has a lower APR, yet with the ability to basically cut your mortgage payment in half if you wanted to.  Let's say something comes along that increases your faith in the stock market, or you want to start putting some money into some stocks for shorter term investments. 

Without doing anything more than taking about 60 seconds to make a quick edit your regularly scheduled online banking payments, you could change the amount you've been paying (let's say $2k a month on a $250K house) to $1k a month.  Now, you have an extra $1k a month to play with, plus the $1k a month that you are still putting toward the home is working for you rather than against you because more of it is applied toward principal (because of all the prior over-payments you've made).

You are joking, right?!  Your argument is, that in a scenario where plan A is to pay off the loan in 10 years, a 30 year mortgage is superior to a 15 year mortgage with a lower rate because you can make your "effective" rate on the 30-year lower than than the 15-year by paying it off in 10 years!! 

I'm with the others who have already said.... it depends on the situation.  I'm not saying it NEVER makes sense to pay down a mortgage early.  But the points you are making range from absurd (see above) to completely inconsequential. 

I'm not arguing for the sake of arguing.  But for individuals to make their own decision about this issue, the details matter.  That's why it's important to point out if certain details are either left out or glossed over.  Your initial post painted with a very broad brush promoting the benefits using a 30 year mortgage with a plan to pay down early vs "investing in stocks".  The details matter.


- your comparison is for paying down mortgage vs taxable brokerage investments ONLY.  Which assumes you've already maxed out all of your tax-advantaged accounts. You aren't arguing that it makes sense to pay down the mortgage before maxing those, are you?

- Yes, LTGC gains rates CAN be HIGH.  They can also be very low.... even zero.  As you point out, states often collect them even when the seller will pay 0% federal.  But on the other hand, some states don't.

- You say that sellers should "count on" paying 28% on LTCG when they liquidate taxable holdings.  That's absurd.  Individuals can find out what their state rate is, and MANY on this forum will be in a position to control their income enough to pay 0% federal on LTCG.

- one other point you made in your original post is about the benefit of any capital gains on your home being tax free.  That's true in most cases.  But you aren't the first person on this forum to use that as a point in favor of early mortgage paydown even though it's not.  That's a benefit of LTCGs realized on your home sale whether you have paid down your mortgage early or not!




oneiota

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #17 on: May 14, 2015, 01:37:00 PM »
If you are comparing paying down a mortgage vs investing in a taxable account then capital gains should be factored.  But most folks on this forum may be in a position to liquidate taxable investments an incur LTCG in a year when they'll pay 0% federal on it.

And paying down the mortgage vs. investing in tax advantaged accounts is a different story altogether.


But with state capital gains tax averaging about 6% and as high as 13% (California), added on top of potential federal capital gains tax, the average that most people should count on is a whopping 28% or so.

http://taxfoundation.org/article/high-burden-state-and-federal-capital-gains-tax-rates

That's not even including the fact that the way accounts are taxed are not guaranteed to be taxed the same way by the time one retires.  Public policy changes can and do occur, and may or may not be disadvantageous/advantageous, and/or grandfathered to existing accounts. 

Counting on future tax breaks as a sure thing based on how they work today seems a bit like putting your entire paycheck into lotto tickets.

This doesn't even go into the subject I mentioned before about marital property division in the event of a divorce (it's usually much more clear cut with a RE purchase than it is with stocks and pension plans who is entitled to what).

If that's true, then a 30-year mortgage in the hands of a homeowner who has the discipline to make large payments toward the principal of the loan is onto an even better idea, because not only do they benefit by lowering their total interest paid to the approximate same range as the guy with the 15-year mortgage, they have the flexibility to greatly reduce their mortgage payment (to the actual required payment based on 30-year) if they should encounter some "lean years" due to bad economy, job loss etc., thereby putting themselves in a better position to absorb risk.

Anyone care to try to change my mind?

Yes, the 30 year will always provide more "flexibility" in terms of lower payments.... but the 15 year vs the 30 can be had for a lower rate!   If the plan is to pay it down faster than 15 years anyway and even the higher payments of the 15 year note leave enough room to make you feel safe, why pay the higher rate?

Because, if you pay down a 30 year mortgage in around 10 years, you can get a lower effective APR over the life of the loan than if you got a 15% which has a lower APR, yet with the ability to basically cut your mortgage payment in half if you wanted to.  Let's say something comes along that increases your faith in the stock market, or you want to start putting some money into some stocks for shorter term investments. 

Without doing anything more than taking about 60 seconds to make a quick edit your regularly scheduled online banking payments, you could change the amount you've been paying (let's say $2k a month on a $250K house) to $1k a month.  Now, you have an extra $1k a month to play with, plus the $1k a month that you are still putting toward the home is working for you rather than against you because more of it is applied toward principal (because of all the prior over-payments you've made).

You are joking, right?!  Your argument is, that in a scenario where plan A is to pay off the loan in 10 years, a 30 year mortgage is superior to a 15 year mortgage with a lower rate because you can make your "effective" rate on the 30-year lower than than the 15-year by paying it off in 10 years!! 

Oh I'm not moronic enough to try to imply that this particular method is "superior" to all other methods, unconditionally in every case.  I'm pointing out the advantages of one method.  It is superior in some ways, particularly in the sense that the total amount of interest paid (if things go according to plan) can be lower with a 30 year mortgage that is paid down more aggressively than it will be with a 15 year that is paid on schedule.  Will it be by default?  Of course not, because the general rate on a 15 year fixed is lower than a 30 year fixed, but if you pay it off in 10, the difference in APR becomes completely moot, so you've not only pretty much crapped all over whatever the logic might be for going for the 15-fixed APR over the 30-fixed APR, but you've bought yourself a nicety that the 15 year cannot offer -- the ability to systematically cut your out-the-door payment in half during hard times, if needed, without any extra fees (except for a small amount of extra interest, depending of course on at which point over the 10 year period the hard times occur.

So, now that you have called this "absurd", I'd like to understand which part of that argument, exactly, do you disagree with or find difficult to understand, before getting your dispute about the actual state and federal capital gains tax rates?


brooklynguy

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #18 on: May 14, 2015, 01:38:05 PM »
Because, if you pay down a 30 year mortgage in around 10 years, you can get a lower effective APR over the life of the loan than if you got a 15% which has a lower APR, yet with the ability to basically cut your mortgage payment in half if you wanted to.

What does this mean?  As johnhenry said, the second half of your statement is correct (a 30-year mortgage will provide more "flexibility" in terms of payment amounts), but the first part of your statement is incorrect -- a 15-year mortgage can be obtained for a lower interest rate than a 30-year mortgage, which means that if you pay them off in the same time frame the 15-year mortgage costs you less.  The incremental interest margin on the 30-year is your cost of obtaining the increased flexibility, so if you end up not exercising that flexibility (i.e., you pay off the 30-year mortgage using a payment schedule at least as aggressive as what would have been required by a 15-year mortgage), then it turns out you've paid that cost for nothing.

oneiota

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #19 on: May 14, 2015, 01:38:27 PM »

If you are comparing paying down a mortgage vs investing in a taxable account then capital gains should be factored.  But most folks on this forum may be in a position to liquidate taxable investments an incur LTCG in a year when they'll pay 0% federal on it.

And paying down the mortgage vs. investing in tax advantaged accounts is a different story altogether.


But with state capital gains tax averaging about 6% and as high as 13% (California), added on top of potential federal capital gains tax, the average that most people should count on is a whopping 28% or so.

http://taxfoundation.org/article/high-burden-state-and-federal-capital-gains-tax-rates

That's not even including the fact that the way accounts are taxed are not guaranteed to be taxed the same way by the time one retires.  Public policy changes can and do occur, and may or may not be disadvantageous/advantageous, and/or grandfathered to existing accounts. 

Counting on future tax breaks as a sure thing based on how they work today seems a bit like putting your entire paycheck into lotto tickets.

This doesn't even go into the subject I mentioned before about marital property division in the event of a divorce (it's usually much more clear cut with a RE purchase than it is with stocks and pension plans who is entitled to what).

If that's true, then a 30-year mortgage in the hands of a homeowner who has the discipline to make large payments toward the principal of the loan is onto an even better idea, because not only do they benefit by lowering their total interest paid to the approximate same range as the guy with the 15-year mortgage, they have the flexibility to greatly reduce their mortgage payment (to the actual required payment based on 30-year) if they should encounter some "lean years" due to bad economy, job loss etc., thereby putting themselves in a better position to absorb risk.

Anyone care to try to change my mind?

Yes, the 30 year will always provide more "flexibility" in terms of lower payments.... but the 15 year vs the 30 can be had for a lower rate!   If the plan is to pay it down faster than 15 years anyway and even the higher payments of the 15 year note leave enough room to make you feel safe, why pay the higher rate?

Because, if you pay down a 30 year mortgage in around 10 years, you can get a lower effective APR over the life of the loan than if you got a 15% which has a lower APR, yet with the ability to basically cut your mortgage payment in half if you wanted to.  Let's say something comes along that increases your faith in the stock market, or you want to start putting some money into some stocks for shorter term investments. 

Without doing anything more than taking about 60 seconds to make a quick edit your regularly scheduled online banking payments, you could change the amount you've been paying (let's say $2k a month on a $250K house) to $1k a month.  Now, you have an extra $1k a month to play with, plus the $1k a month that you are still putting toward the home is working for you rather than against you because more of it is applied toward principal (because of all the prior over-payments you've made).

You are joking, right?!  Your argument is, that in a scenario where plan A is to pay off the loan in 10 years, a 30 year mortgage is superior to a 15 year mortgage with a lower rate because you can make your "effective" rate on the 30-year lower than than the 15-year by paying it off in 10 years!! 

Oh I'm not moronic enough to try to imply that this particular method is "superior" to all other methods, unconditionally in every case.  I'm pointing out the advantages of one method.  It is superior in some ways, particularly in the sense that the total amount of interest paid (if things go according to plan) can be lower with a 30 year mortgage that is paid down more aggressively than it will be with a 15 year that is paid on schedule.  Will it be by default?  Of course not, because the general rate on a 15 year fixed is lower (not much though) than a 30 year fixed, but if you pay it off in 10, the difference in APR becomes completely moot, so you've not only pretty much crapped all over whatever the logic might be for going for the 15-fixed APR over the 30-fixed APR, but you've bought yourself a nicety that the 15 year cannot offer -- the ability to systematically cut your out-the-door payment in half during hard times, if needed, without any extra fees (except for a small amount of extra interest, depending of course on at which point over the 10 year period the hard times occur.

So, now that you have called this "absurd", I'd like to understand which part of that argument, exactly, do you disagree with or find difficult to understand, before getting your dispute about the actual state and federal capital gains tax rates?

oneiota

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #20 on: May 14, 2015, 01:41:17 PM »
Because, if you pay down a 30 year mortgage in around 10 years, you can get a lower effective APR over the life of the loan than if you got a 15% which has a lower APR, yet with the ability to basically cut your mortgage payment in half if you wanted to.

What does this mean?  As johnhenry said, the second half of your statement is correct (a 30-year mortgage will provide more "flexibility" in terms of payment amounts), but the first part of your statement is incorrect -- a 15-year mortgage can be obtained for a lower interest rate than a 30-year mortgage, which means that if you pay them off in the same time frame the 15-year mortgage costs you less.  The incremental interest margin on the 30-year is your cost of obtaining the increased flexibility, so if you end up not exercising that flexibility (i.e., you pay off the 30-year mortgage using a payment schedule at least as aggressive as what would have been required by a 15-year mortgage), then it turns out you've paid that cost for nothing.

You're not reading what I wrote.  Once again, I said the EFFECTIVE APR over the life of the loan.  This relates to the amount of interest actually paid as expressed as a percentage and has nothing to do with the APR the loan officer quotes you.  By paying the principal faster you are reducing the percentage of the total that is being paid.

oneiota

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #21 on: May 14, 2015, 01:43:22 PM »
As a general rule I take anything that that particular institution says about taxes.  They promote the rather silly idea of the "Tax Free Day." IMO all they do is get people riled up and angry using shady math and biased conclusions.  It isn't constructive.
http://www.mrmoneymustache.com/2014/06/16/mr-frugal-toque-on-why-tax-freedom-day-is-bullshit/

The point was not to inspire faith in the source of the web article itself.  Are you saying you dispute the published federal and state capital gains tax rates in that article?  Do you realize those numbers are available from other sources?

This has absolutely nothing to do with Canadian tax freedom days and whatever.

brooklynguy

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #22 on: May 14, 2015, 01:48:49 PM »
You're not reading what I wrote.  Once again, I said the EFFECTIVE APR over the life of the loan.  This relates to the amount of interest actually paid as expressed as a percentage and has nothing to do with the APR the loan officer quotes you.  By paying the principal faster you are reducing the percentage of the total that is being paid.

I read what you wrote, which is why I asked "what does this mean?"  Now that you elaborated, I understand what you mean, and you are simply incorrect.  You do not lower your "effective APR" by accelerating your principal payments (whatever balance remains outstanding on your loan at any time continues to accrue interest at the rate applicable to your loan), and you certainly cannot cause the interest rate ("effective" or otherwise) of a lower-rate 15-year loan to become lower than a higher-rate 30-year loan by paying it off quickly (or by any other method).

oneiota

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #23 on: May 14, 2015, 01:53:05 PM »
You're not reading what I wrote.  Once again, I said the EFFECTIVE APR over the life of the loan.  This relates to the amount of interest actually paid as expressed as a percentage and has nothing to do with the APR the loan officer quotes you.  By paying the principal faster you are reducing the percentage of the total that is being paid.

I read what you wrote, which is why I asked "what does this mean?"  Now that you elaborated, I understand what you mean, and you are simply incorrect.  You do not lower your "effective APR" by accelerating your principal payments (whatever balance remains outstanding on your loan at any time continues to accrue interest at the rate applicable to your loan), and you certainly cannot cause the interest rate ("effective" or otherwise) of a lower-rate 15-year loan to become lower than a higher-rate 30-year loan by paying it off quickly (or by any other method).

For the last time, and as a token gesture of good will to reading comprehension challenged all over the world, I did not say anything about "causing the interest rate ("effective" or otherwise) of a lower-rate 15-year loan to become lower than a higher-rate 30-year loan by paying it off quickly".

What I said is that you can lower the total interest paid on the principal.

The basic concept is not much different than lowering the on-paper APR by paying additional points at the beginning of the loan.

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #24 on: May 14, 2015, 02:02:10 PM »
Because, if you pay down a 30 year mortgage in around 10 years, you can get a lower effective APR over the life of the loan than if you got a 15% which has a lower APR, yet with the ability to basically cut your mortgage payment in half if you wanted to.

What does this mean?  As johnhenry said, the second half of your statement is correct (a 30-year mortgage will provide more "flexibility" in terms of payment amounts), but the first part of your statement is incorrect -- a 15-year mortgage can be obtained for a lower interest rate than a 30-year mortgage, which means that if you pay them off in the same time frame the 15-year mortgage costs you less.  The incremental interest margin on the 30-year is your cost of obtaining the increased flexibility, so if you end up not exercising that flexibility (i.e., you pay off the 30-year mortgage using a payment schedule at least as aggressive as what would have been required by a 15-year mortgage), then it turns out you've paid that cost for nothing.

You're not reading what I wrote.  Once again, I said the EFFECTIVE APR over the life of the loan.  This relates to the amount of interest actually paid as expressed as a percentage and has nothing to do with the APR the loan officer quotes you.  By paying the principal faster you are reducing the percentage of the total that is being paid.
Calm down, I think people are just trying to help here.
The fact is, you cannot alter the APR, even if you pay it off earlier.  If you have a 15 year mortgage and the APR is 4%, and you pay it off in 10 years, then your rate is still 4%.  You pay less interest, certainly, because you made larger payments.  But the total amount that you paid would be exactly the same as if you had had a 4% rate on a 10 year note.

Put another way, if you had a $200k note @4% for 30 years you would pay $343,739 over 30 years.  If you made bonus payments of $1070/month you would pay it off in exactly 10 years, and you would pay a total of $242,988 over 10 years.  Your rate would still be 4%.

This is exactly the same as if you had taken out a 10 year note @ 4% (total payment $242,988)

The APR does not change.

brooklynguy

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #25 on: May 14, 2015, 02:10:29 PM »
For the last time, and as a token gesture of good will to reading comprehension challenged all over the world, I did not say anything about "causing the interest rate ("effective" or otherwise) of a lower-rate 15-year loan to become lower than a higher-rate 30-year loan by paying it off quickly".

What I said is that you can lower the total interest paid on the principal.

The basic concept is not much different than lowering the on-paper APR by paying additional points at the beginning of the loan.

Ok, now bear with me because this may be my reading comprehension disability speaking, but are you saying that "you can lower the total interest paid on the principal" by obtaining (and aggressively prepaying) a 30-year (higher-rate) mortgage than by obtaining a 15-year (lower-rate) mortgage?  If so, think long and hard about what you are saying (because it is not true).  If not, go back and reread your posts, because the communication problem lies with the writer, not the reader.

oneiota

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #26 on: May 14, 2015, 02:23:14 PM »
Because, if you pay down a 30 year mortgage in around 10 years, you can get a lower effective APR over the life of the loan than if you got a 15% which has a lower APR, yet with the ability to basically cut your mortgage payment in half if you wanted to.

What does this mean?  As johnhenry said, the second half of your statement is correct (a 30-year mortgage will provide more "flexibility" in terms of payment amounts), but the first part of your statement is incorrect -- a 15-year mortgage can be obtained for a lower interest rate than a 30-year mortgage, which means that if you pay them off in the same time frame the 15-year mortgage costs you less.  The incremental interest margin on the 30-year is your cost of obtaining the increased flexibility, so if you end up not exercising that flexibility (i.e., you pay off the 30-year mortgage using a payment schedule at least as aggressive as what would have been required by a 15-year mortgage), then it turns out you've paid that cost for nothing.

You're not reading what I wrote.  Once again, I said the EFFECTIVE APR over the life of the loan.  This relates to the amount of interest actually paid as expressed as a percentage and has nothing to do with the APR the loan officer quotes you.  By paying the principal faster you are reducing the percentage of the total that is being paid.
Calm down, I think people are just trying to help here.
The fact is, you cannot alter the APR, even if you pay it off earlier.  If you have a 15 year mortgage and the APR is 4%, and you pay it off in 10 years, then your rate is still 4%.  You pay less interest, certainly, because you made larger payments.  But the total amount that you paid would be exactly the same as if you had had a 4% rate on a 10 year note.

Put another way, if you had a $200k note @4% for 30 years you would pay $343,739 over 30 years.  If you made bonus payments of $1070/month you would pay it off in exactly 10 years, and you would pay a total of $242,988 over 10 years.  Your rate would still be 4%.

This is exactly the same as if you had taken out a 10 year note @ 4% (total payment $242,988)

The APR does not change.

As far as calming down, I'm perfectly calm but I feel like I'm having to put on my tolerance hat to deal with other folks' PMS days.  I'm not the one who starting calling others' ideas absurd, and I do find it somewhat insulting that I need to keep explaining the same thing using different terminology to folks who refuse to take the time to read it correctly in the first case.  I think I've been more than cordial considering the circumstances.

You are now talking about the APR.  I didn't say the APR, I said the "effective" APR.  That is not even a mainstream financial term, it is a term I coined for this discussion in order to illustrate a point. 

If you sign up for a 30 year fixed mortgage at 4% on $250k, the total interest paid in the original terms of the note is $179,673.77 or about 71% of the loan amount in interest.

If you pay off that same mortgage in 10 years by adding another $1300 to your monthly payment, the total interest paid is $54,790.31 or about 21% of the loan amount in interest.

Divvy those up on total number of years and let us know which scenario leaves you paying a lower percent of the total loan amount per year.



oneiota

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #27 on: May 14, 2015, 02:25:11 PM »
For the last time, and as a token gesture of good will to reading comprehension challenged all over the world, I did not say anything about "causing the interest rate ("effective" or otherwise) of a lower-rate 15-year loan to become lower than a higher-rate 30-year loan by paying it off quickly".

What I said is that you can lower the total interest paid on the principal.

The basic concept is not much different than lowering the on-paper APR by paying additional points at the beginning of the loan.

Ok, now bear with me because this may be my reading comprehension disability speaking, but are you saying that "you can lower the total interest paid on the principal" by obtaining (and aggressively prepaying) a 30-year (higher-rate) mortgage than by obtaining a 15-year (lower-rate) mortgage?  If so, think long and hard about what you are saying (because it is not true).  If not, go back and reread your posts, because the communication problem lies with the writer, not the reader.

I think I'd rather deal with one counter-productive contrarianism attempt at a time, priority goes to the least snarky.  See my most recent post for some math you may find interesting.

brooklynguy

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #28 on: May 14, 2015, 02:59:57 PM »
I think I'd rather deal with one counter-productive contrarianism attempt at a time, priority goes to the least snarky.  See my most recent post for some math you may find interesting.

Ok, I assume it was johnhenry's use of the interrobang that got you all riled up, but I honestly believe everyone here is just trying to help each other out.

As nereo said, of course it's the case that you pay less interest (both in absolute terms and as a percentage of the original loan amount) if you pay off your loan quickly.

But your original point was that you can pay less by employing a 30-year loan instead of a 15-year loan, no?  Run the numbers again (or don't even run the numbers, because it's intuitive as a conceptual matter), and you will see that it is impossible to end up paying less on a (more expensive) 30-year loan than on a (cheaper) 15-year loan if you stick with the same repayment schedule under either scenario.

oneiota

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #29 on: May 14, 2015, 03:17:58 PM »
I think I'd rather deal with one counter-productive contrarianism attempt at a time, priority goes to the least snarky.  See my most recent post for some math you may find interesting.

Ok, I assume it was johnhenry's use of the interrobang that got you all riled up, but I honestly believe everyone here is just trying to help each other out.

As nereo said, of course it's the case that you pay less interest (both in absolute terms and as a percentage of the original loan amount) if you pay off your loan quickly.

But your original point was that you can pay less by employing a 30-year loan instead of a 15-year loan, no?  Run the numbers again (or don't even run the numbers, because it's intuitive as a conceptual matter), and you will see that it is impossible to end up paying less on a (more expensive) 30-year loan than on a (cheaper) 15-year loan if you stick with the same repayment schedule under either scenario.

I want to keep things informative/helpful as much as anyone else, but when provoked I can't be expected to supplicate due to other's misunderstanding.

I don't understand how anyone could possibly even suggest I said anything about sticking with the same repayment scenario.  Despite the fact the entire thread is very clearly indicates I'm talking about paying off a 30 year mortgage in 10 years, folks are doing backward somersaults to make sure they don't read or understand what I've said at all.

Do the math I indicated above.  Do not rely on "intuition as a conceptual matter" as proof of the theory, because clearly that kind of "common sense" has caused a catastrophic meltdown of logic and financial accuracy in this thread so far.  The banks will not accept intuition as payment, and neither will the tax man, so it has very little intrinsic value to someone trying to understand the pros and cons of mortgage vs stock market.  My dad retired at 41 years old using the methods I've described (on multiple properties), and lives comfortably today, which is more than I can say for everyone I know who has banked on the stock market for retirement.  That doesn't mean I'm trying to forcefeed my ideas on others, it just explains why I plan to keep doing what I'm doing.  Other's may have their own strategy and I'm not calling their strategy inferior.

On a 15 year fixed, in my previously mentioned scenario depending on where financed from and rates at time of lock, the total interest paid (making some guesses about the discount available for 15 year versus 30 year new loans which of course varies) would be somewhere around $74k total interest paid, and a loan term that is 50% longer than the 10 year plan.

To quote what I actually said:  " ..the general rate on a 15 year fixed is lower (not much though) than a 30 year fixed, but if you pay it off in 10, the difference in APR becomes completely moot, so you've not only pretty much crapped all over whatever the logic might be for going for the 15-fixed APR over the 30-fixed APR, but you've bought yourself a nicety that the 15 year cannot offer -- the ability to systematically cut your out-the-door payment in half during hard times, if needed, without any extra fees (except for a small amount of extra interest, depending of course on at which point over the 10 year period the hard times occur".

And no, I'm not "riled up".  I'm assuming that when folks attempt to challenge my line of thought, they aren't expecting me to simply go "derp derp derp" off into the ether without making a valid attempts to re-communicate my point (again and again unfortunately).  It is a tad bit annoying when folks seem to be struggling to NOT understand, and it does invoke a bit of a sympathetic feeling, but the fact that I've kept trying should be an indication that I care enough to do so.  Surely there is a point at which it's just deemed futile.  Maybe we're getting close to that point.
« Last Edit: May 14, 2015, 03:23:49 PM by oneiota »

dandarc

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #30 on: May 14, 2015, 03:34:48 PM »
So the point is that it is cheaper to pay off a 30 year mortgage in 10 years than it is to pay off a 15 year mortgage in 15 years?  Depending on the interest rates, this is in all-likelyhood true.

But it would be cheaper yet to pay the 15 year mortgage off in 10 years.  So that flexibility of the lower payment on the 30 year does come at a cost.

nereo

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #31 on: May 14, 2015, 03:39:44 PM »

As far as calming down, I'm perfectly calm but I feel like I'm having to put on my tolerance hat to deal with other folks' PMS days.  I'm not the one who starting calling others' ideas absurd, and I do find it somewhat insulting that I need to keep explaining the same thing using different terminology to folks who refuse to take the time to read it correctly in the first case.  I think I've been more than cordial considering the circumstances.

You are now talking about the APR.  I didn't say the APR, I said the "effective" APR.  That is not even a mainstream financial term, it is a term I coined for this discussion in order to illustrate a point. 

If you sign up for a 30 year fixed mortgage at 4% on $250k, the total interest paid in the original terms of the note is $179,673.77 or about 71% of the loan amount in interest.

If you pay off that same mortgage in 10 years by adding another $1300 to your monthly payment, the total interest paid is $54,790.31 or about 21% of the loan amount in interest.

Divvy those up on total number of years and let us know which scenario leaves you paying a lower percent of the total loan amount per year.
Ok, I have read your posts, and then read them a second time.  I'm relieved to hear you say that "effective APR" is not a mainstream term, because it is not one that I am familiar with.
I am still struggling to understand what precisely you mean by this term.  For starters, APR stands for Annual Percentage Rate.  It is the rate that you pay on an annual basis.
Certainly, if you pay off a loan in 10 years you pay less in total interest.  By extension you pay less overall, because the principle does not change.
But your Annual rate does not change.  In your example, you are giving the percentage of interest on total amount paid.  I agree, it is a lower amount.  You would get the same result taking out a 10 year mortgage and paying the minimum, or taking out a 15 or 50 year mortgage and paying those off in 10 years.

If i may be so bold, I'm afraid that you are being tempted by the siren's call of lowering the total interest amount paid on a large loan.  Certainly, when you look at paying down a 30 year note in 10 years, and you run it through a mortgage calculator it's easy to say "wow!  I'll save $50k in interest on every $100k borrowed!  That's a crap-ton of money!"  And that would be true. But it is interest paid off over a 30 year period, and you are paying the exact same rate in interest every year, and the principle is not indexed to inflation.  If I believe that my excess money invested would earn more than the 4% - inflation over 10 years, then it makes sense for me to invest it regardless of the term of my mortgage.  If I could stretch it to a 60 year mortgage, I would. (note, after 60 years the value of $100k at 2% inflation would be just $29k.  The power of inflation!)
OTOH, if it makes sense to you to pay off your mortgage earlier because you are not confident that investments will not have better returns, then it makes sense to pay it down as quickly as possible.  This is a valid point too, and there have been 15 year historical periods when the market HAS returned less than 4%. 

Regardless, theh Annual Percentage RATE never changes, regardless of whether it is actual, effective, imaginary or chocolate.

waltworks

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #32 on: May 14, 2015, 03:42:04 PM »
Ok, OP:
Scenario 1: You get a $100k 30 year loan at 4%. You pay it off in 10 years ($1012/mo). In that time you will have paid a total of $21,494 in interest.
Scenario 2: You get a $100k 15 year loan at 3%. You pay it off in 10 years ($966/mo). In that time you will have paid a total of $15,873 in interest.

It's certainly true that your minimum amortizing payment is lower with the 30 year loan, and hence you can decide whether or not to pay that full $1012/mo (minimum would be $477 on the 30 year) if you need to if you lose your job or want to spend the money on something else. None of that, however, makes the 30 year loan cheaper in terms of how much interest you pay in those scenarios. The lower interest rate loan will always, always, always win if you are comparing apples to apples and assuming the same payoff timeframe. This "effective APR" term you've coined is confusing everything, but I think what you were trying to argue is that the 30 year is cheaper/you'll pay less interest. That's incorrect.

-W

tomsang

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #33 on: May 14, 2015, 03:46:05 PM »
If you want to calculate how much it is costing you to pay off your mortgage early, here is a calculator.  If you want to see what has been discussed regarding this topic here is the forum link.

http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/

brooklynguy

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #34 on: May 14, 2015, 03:47:56 PM »
Ok, I think we're actually all on the same page.  Using the self-coined and misleading term "effective APR" didn't help, because speeding up your payment schedule does not "effectively" change your APR.  Obviously accelerating principal payments has the effect of decreasing the amount of interest you pay (but not the interest rate), and obviously a cheaper rate is a cheaper rate.  Now I see that your point was that the incremental margin on a 30-year over a 15-year could be considered worth paying even if you intend to pay the mortgage off in less than 15 years, as a premium for the insurance policy of having the flexibility to lower payments if that becomes necessary (which makes sense, but is different than what it initially sounded like you were arguing with the "effective APR" statement).

oneiota

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #35 on: May 14, 2015, 03:48:21 PM »
So the point is that it is cheaper to pay off a 30 year mortgage in 10 years than it is to pay off a 15 year mortgage in 15 years?  Depending on the interest rates, this is in all-likelyhood true.

While it is true (as stated) to say depending on the interest rates, the real world difference between 30 and 15 is usually around half or 3/4 of a percentage point, it's not like a 4% 30 year is going to be available for 2% as a 15 year.   In fact if I can finance something at 2% over such a short term I don't think I want to pay it early at all.  But, 2% rates aren't the reality, so without disputing what you've said, I think it's fair to say "always has been true and always will be".

But it would be cheaper yet to pay the 15 year mortgage off in 10 years.  So that flexibility of the lower payment on the 30 year does come at a cost.

And this is true too, but part of the strategy I highlighted is about saving money and the other part is about risk mitigation.  With a 15 year fixed, you cannot just cut your mortgage payment in half for a few months if you lose your job, you get cancer, or some other unfortunate event occurs.  The moment you revert to the planned schedule, you will of course start paying a bit more interest than if you were handcuffed to the higher 15-year payment, but in the big scheme of things you could look at that very small amount of money as "disability insurance" on your mortgage or something similar.

Also, once you calculate the similarity in the EFFECTIVE APR between the 15 and 30-paid-in-10 scenario, keep in mind that most folks would get a tax writeoff on the slightly higher interest of the 30 paid in 10 on any given month where they did not pay it down on a 10 year schedule.

Even sticking to the 30-paid-in-10, they've already saved about $20,000 and paid the loan off 50% faster at the same time than opting for the 15 year option.

So getting back to my point, all of these Howard Clark types (not picking on him particular) often say "paying down a mortgage early is a bad plan", and then almost in the same breath recommend a 15 year mortgage over a 30, completely dismissing all the advantages I've highlighted of the 30 paid in 10 strategy.

oneiota

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #36 on: May 14, 2015, 03:52:07 PM »
Ok, OP:
Scenario 1: You get a $100k 30 year loan at 4%. You pay it off in 10 years ($1012/mo). In that time you will have paid a total of $21,494 in interest.
Scenario 2: You get a $100k 15 year loan at 3%. You pay it off in 10 years ($966/mo). In that time you will have paid a total of $15,873 in interest.

It's certainly true that your minimum amortizing payment is lower with the 30 year loan, and hence you can decide whether or not to pay that full $1012/mo (minimum would be $477 on the 30 year) if you need to if you lose your job or want to spend the money on something else. None of that, however, makes the 30 year loan cheaper in terms of how much interest you pay in those scenarios. The lower interest rate loan will always, always, always win if you are comparing apples to apples and assuming the same payoff timeframe. This "effective APR" term you've coined is confusing everything, but I think what you were trying to argue is that the 30 year is cheaper/you'll pay less interest. That's incorrect.

-W

Your whole scenario is prefaced on the notion that a 30 year is always a full percentage point higher than a 15.  I've never observed that to be true when I applied for mortgages.

And my assertion was never that paying a 30 year in 10 saves you interest over paying a 15 year in 10, I said that getting a 30 and paying it early achieves mostly the same purpose of a 15 (lowering the total interest paid and the duration of the loan) while allowing you to reduce your payment if needed in lean times.

oneiota

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #37 on: May 14, 2015, 03:58:19 PM »
If you want to calculate how much it is costing you to pay off your mortgage early, here is a calculator.  If you want to see what has been discussed regarding this topic here is the forum link.

http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/

Problem is this, like anything involving the stock market is based on projections and guesswork.  Guesswork about what stocks will return, guesswork about what the capital gains tax will be, etc.

There is no guesswork in a fixed mortgage rate, even public policy cannot change it on you.

Again, a bird in the hand is worth two in the bush.

There is no correct answer or the debate would not live on like it does.

oneiota

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #38 on: May 14, 2015, 04:00:13 PM »
Obviously accelerating principal payments has the effect of decreasing the amount of interest you pay (but not the interest rate)

What numbers did you come up with when you did the division I mentioned a few posts back?  (reply 26)

tomsang

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #39 on: May 14, 2015, 04:07:29 PM »
If you want to calculate how much it is costing you to pay off your mortgage early, here is a calculator.  If you want to see what has been discussed regarding this topic here is the forum link.

http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/

Problem is this, like anything involving the stock market is based on projections and guesswork.  Guesswork about what stocks will return, guesswork about what the capital gains tax will be, etc.

There is no guesswork in a fixed mortgage rate, even public policy cannot change it on you.

Again, a bird in the hand is worth two in the bush.

There is no correct answer or the debate would not live on like it does.

I guess with logic like that, then you would never retire.  We all are making educated guesses as we plan for our retirement.  If you don't think that you can get 4% over a 30 year period, then you should not retire until your Safe Withdrawal Rate is below 1%.  Some other areas where people are making educated guesses relate to Social Security, longevity, stock market returns, inflation, future spending, etc.  You can say that is all guesswork, which would require you to work until you die.  Or you could make educated guesses based on the past.  As one example, there has never been a 30 year stretch of time where the US stock market has returned less than 4%.  By investing with the expected results being greater than the current 30 year fixed mortgage rates you are speeding up your time to retirement.  You can go slow and steady, or you can take an educated risk and retire earlier.  If for some reason the stock market tanks right before your expected retirement date, you could work another year or two.  That scenario would be in the less than 5% risk area based on the several hundred years of stock market history. 

Everyone will get there one way or the other, but don't kid yourself that you are being safer by paying off a 30 year fixed rate mortgage that is 4% or less. Read the forum link for significant debate, discussion, and knowledge.

oneiota

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #40 on: May 14, 2015, 04:30:25 PM »
If you want to calculate how much it is costing you to pay off your mortgage early, here is a calculator.  If you want to see what has been discussed regarding this topic here is the forum link.

http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/

Problem is this, like anything involving the stock market is based on projections and guesswork.  Guesswork about what stocks will return, guesswork about what the capital gains tax will be, etc.

There is no guesswork in a fixed mortgage rate, even public policy cannot change it on you.

Again, a bird in the hand is worth two in the bush.

There is no correct answer or the debate would not live on like it does.

I guess with logic like that, then you would never retire. 

That statement simply makes no sense.

I haven't said in this thread that a person should throw all their money toward their mortgage and stop saving once that's paid off.  Having a roof over your head free and clear leaves you a lot of extra income to invest in other ways after it's paid off (assuming you don't just give up and stop working because you own a home).

And yes, paying a mortgage is definitely "safer".  It could be argued that it's not as good (if the stock market does what folks want it to do), but there is definitely less risk when you are dealing with an interest rate that cannot change, and all the numbers are known and poured in concrete (versus the fluctuating stock market).  If you don't see the safety advantage there, then I don't know what to tell you.
« Last Edit: May 14, 2015, 04:32:35 PM by oneiota »

dandarc

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #41 on: May 14, 2015, 04:36:48 PM »
Starting to think we're feeding the troll here, but what's another few crumbs?

In Excel, plugged in a half percent spread from a 4% (which is pretty close to the low end of what I'm seeing on bankrate today) 30 year loan.

30-pay-in-10 total interest (4% rate): $21,494.17
15-pay-in-15 total interest (3.5% rate): $28,676.86
15-pay-in-10 total interest (3.5% rate): $18,663.04

So by taking the 30 year initially, you are paying $2831.12 more in interest, if you stick to the plan and pay the loan off in 10 years.  That is what the lower payment is costing you.  You're planning on paying $280 / year more, if things go to plan.  If the interest is deductible, costs less -  Roughy $280 X (1 - marginal tax rate).  Maybe as low as half that cost if you're paying high taxes and itemizing already - $140 / year.  Clearly some people think the added flexibility is worth that.  Others disagree.

This is already assuming you're on the pay off the mortgage early side of the pay mortgage vs. invest more argument - the math is pretty clear that at low rates, paying the mortgage off as slowly as possible and investing more is the best way to go. 

For the record, I'm actually paying our mortgage off possibly by the end of this year, for sure by the end of 2016.  That's 1.5 to 2.5 years from buying the house.  We got sufficient payment flexibility for us another way - we bought a much less expensive house than we could have, and did it on a 15 year mortgage so we got a lower interest rate too.  Given how fast we paid this thing off, we could have gone with a 5-1 or 3-1 ARM and done even better than that.
« Last Edit: May 14, 2015, 04:38:21 PM by dandarc »

oneiota

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #42 on: May 14, 2015, 04:40:05 PM »
Starting to think we're feeding the troll here, but what's another few crumbs?

So you start your post with a combative statement, then want the rest of your post to be taken seriously?   Assuming you were gawking in the mirror when that thought occurred to you, I'll proceed.

I never said 15 pay in 10 was cheaper than 30 pay in 10.  I said pundits always decry early mortgage payment as the worst move you can make out of one side of their mouth, then recommend 15 year mortgages out of the other side of their mouth.  Paying a 30 early gives you much of the benefits of a 15, but with added flexibility. 

Now if I only had a hundredth of a percentage point of one of those mortgages for the number of times I've repeated myself and watched it fail to sink in, I could have retired hours ago.
« Last Edit: May 14, 2015, 04:41:38 PM by oneiota »

brooklynguy

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #43 on: May 14, 2015, 06:05:11 PM »
Obviously accelerating principal payments has the effect of decreasing the amount of interest you pay (but not the interest rate)

What numbers did you come up with when you did the division I mentioned a few posts back?  (reply 26)

I don't know what point you are trying to make here, so please explain it instead of being evasive.

And yes, paying a mortgage is definitely "safer".  It could be argued that it's not as good (if the stock market does what folks want it to do), but there is definitely less risk when you are dealing with an interest rate that cannot change, and all the numbers are known and poured in concrete (versus the fluctuating stock market).  If you don't see the safety advantage there, then I don't know what to tell you.

Paying off the mortgage is not necessarily "safer"; it just depends on how you define "safety" (i.e., what risk you are trying to protect against).  Carrying the mortgage and investing the proceeds mitigates inflation risk, for example.

Now if I only had a hundredth of a percentage point of one of those mortgages for the number of times I've repeated myself and watched it fail to sink in, I could have retired hours ago.

You've got a lot of very smart people responding to you who all interpreted your posts the same way, yet you don't think the responsibility for the misunderstanidng may at least partly reside with your posts?  As a few of us have said multiple times, your "effective APR" phrase makes no sense, was misleading, and is what initially caused the confusion.

oneiota

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #44 on: May 14, 2015, 06:40:58 PM »
Obviously accelerating principal payments has the effect of decreasing the amount of interest you pay (but not the interest rate)

What numbers did you come up with when you did the division I mentioned a few posts back?  (reply 26)

I don't know what point you are trying to make here, so please explain it instead of being evasive.


Nice deflection attempt.  I gave you a very simple math example and asked you multiple times for some evidence that you even read the scenario (which you can prove to me by answering the 3rd grade level division problem), and you chose to ignore it, multiple times, and are now accusing me of being evasive.  Nice.  You might have even fooled a couple of folks.

The purpose of the math was not to confuse anyone or sell anyone on my way of thinking -- I was genuinely trying to illustrate my point and did so in the simplest way that came to my mind.

brooklynguy

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #45 on: May 14, 2015, 07:38:12 PM »
Nice deflection attempt.  I gave you a very simple math example and asked you multiple times for some evidence that you even read the scenario (which you can prove to me by answering the 3rd grade level division problem), and you chose to ignore it, multiple times, and are now accusing me of being evasive.  Nice.  You might have even fooled a couple of folks.

The purpose of the math was not to confuse anyone or sell anyone on my way of thinking -- I was genuinely trying to illustrate my point and did so in the simplest way that came to my mind.

But what is your point?  That's what I'm asking.

Here's my answer to your arithmetic question:

If you sign up for a 30 year fixed mortgage at 4% on $250k, the total interest paid in the original terms of the note is $179,673.77 or about 71% of the loan amount in interest.

If you pay off that same mortgage in 10 years by adding another $1300 to your monthly payment, the total interest paid is $54,790.31 or about 21% of the loan amount in interest.

Divvy those up on total number of years and let us know which scenario leaves you paying a lower percent of the total loan amount per year.

Under scenario 1, if you divvy up the total interest paid over 30 years, that's $5,989.13 per year, or 2.40% of the original loan balance per year.

Under scenario 2, if you divvy up the total interest paid over 10 years, that's $5,479.03 per year, or 2.19% of the original loan balance per year.

Now, what's your point?  If your point is that you pay less interest overall when you prepay your loan, then obviously that is true, and I don't understand why you replied to my post in which I stated that I now see we are on the same page asking me to perform this math.

If your point is that it makes any kind of sense to say that your "effective APR" or "effective interest rate" differs under the two scenarios, then I strongly disagree -- the interest rate is exactly the same under both scenarios, and it is totally misleading and inaccurate to characterize the two scenarios as having different "effective" rates.

If your point is something else, then please explain.

oneiota

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #46 on: May 14, 2015, 07:44:52 PM »
Nice deflection attempt.  I gave you a very simple math example and asked you multiple times for some evidence that you even read the scenario (which you can prove to me by answering the 3rd grade level division problem), and you chose to ignore it, multiple times, and are now accusing me of being evasive.  Nice.  You might have even fooled a couple of folks.

The purpose of the math was not to confuse anyone or sell anyone on my way of thinking -- I was genuinely trying to illustrate my point and did so in the simplest way that came to my mind.

But what is your point?  That's what I'm asking.

Here's my answer to your arithmetic question:

If you sign up for a 30 year fixed mortgage at 4% on $250k, the total interest paid in the original terms of the note is $179,673.77 or about 71% of the loan amount in interest.

If you pay off that same mortgage in 10 years by adding another $1300 to your monthly payment, the total interest paid is $54,790.31 or about 21% of the loan amount in interest.

Divvy those up on total number of years and let us know which scenario leaves you paying a lower percent of the total loan amount per year.

Under scenario 1, if you divvy up the total interest paid over 30 years, that's $5,989.13 per year, or 2.40% of the original loan balance per year.

Under scenario 2, if you divvy up the total interest paid over 10 years, that's $5,479.03 per year, or 2.19% of the original loan balance per year.

Now, what's your point?  If your point is that you pay less interest overall when you prepay your loan, then obviously that is true, and I don't understand why you replied to my post in which I stated that I now see we are on the same page asking me to perform this math.

If your point is that it makes any kind of sense to say that your "effective APR" or "effective interest rate" differs under the two scenarios, then I strongly disagree -- the interest rate is exactly the same under both scenarios, and it is totally misleading and inaccurate to characterize the two scenarios as having different "effective" rates.

If your point is something else, then please explain.

You seem to be either be saying that 2.40% per year is equal to 2.19% per year, or that neither number qualify as effective interest rates.  I'm not sure which.

Are you perhaps confusing the issue of what annual interest rate was assigned to the note by the lender, versus what annual interest rate was actually paid by the homeowner?

Hopefully it goes without saying I never suggested the original terms of the note could be modified by more aggressive paydown?
« Last Edit: May 14, 2015, 07:50:38 PM by oneiota »

brooklynguy

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #47 on: May 14, 2015, 08:01:46 PM »
You seem to be either be saying that 2.40% per year is equal to 2.19% per year, or that neither number qualify as effective interest rates.  I'm not sure which.

Are you perhaps confusing the issue of what annual interest rate was assigned to the note by the lender, versus what annual interest rate was actually paid by the homeowner?

Hopefully it goes without saying I never suggested the original terms of the note could be modified by more aggressive paydown?

I am saying that neither number qualifies as an "interest rate" (and it therefore doesn't make sense to call either one an "effective interest rate").  In both cases, the interest rate that was assigned to the note by the lender (4%) is also the interest rate that was actually paid by the homeowner.  In scenario two, less total interest was paid because the principal was repaid on an accelerated basis (just like a loan with a 25% interest rate will accrue less interest than either of these scenarios if the loan is only outstanding for one day).

oneiota

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #48 on: May 14, 2015, 09:15:51 PM »
You seem to be either be saying that 2.40% per year is equal to 2.19% per year, or that neither number qualify as effective interest rates.  I'm not sure which.

Are you perhaps confusing the issue of what annual interest rate was assigned to the note by the lender, versus what annual interest rate was actually paid by the homeowner?

Hopefully it goes without saying I never suggested the original terms of the note could be modified by more aggressive paydown?

I am saying that neither number qualifies as an "interest rate" (and it therefore doesn't make sense to call either one an "effective interest rate").  In both cases, the interest rate that was assigned to the note by the lender (4%) is also the interest rate that was actually paid by the homeowner.  In scenario two, less total interest was paid because the principal was repaid on an accelerated basis (just like a loan with a 25% interest rate will accrue less interest than either of these scenarios if the loan is only outstanding for one day).


The basis of your disagreement has now morphed into the notion that paying a particular amount of interest annually does not qualify as any sort of interest rate.  I never defended my term as being the best choice of words, but it is still the best description of what is occurring.  A lower rate of interest per year is being paid.  The bottom line is that you have made up your mind that annual percentage rate can only mean the interest rate assigned to the note, failing to understand that because this is how you view things does not turn it into fact.

On any truth-in-lending disclosure statement, the APR is defined as "the cost of your credit as a yearly rate".   

I have already proven conclusively here that the APR, by the very definition in this document, can be reduced by early pay down.  In one of my scenarios, the "cost of credit" (whether you want to use the qualifier "effective", or perhaps more accurately "ACTUAL" cost of credit as a yearly rate), was ~2.40% annually according to the original note terms, but in the second scenario the effective or actual cost of credit was ~2.19% per year.

You can split hairs over whether you like the terms used or not.  It doesn't change the facts that have been conclusively proven here. 

I really don't care to continue trying to teach when you've made it your priority goal to be sure not to learn, so I won't be responding to you with regard to this particular facet of the discussion.  It's been gone over enough times.

If you or anyone else would like to discuss or even debate some other aspect of the strategy that hasn't already been explained a dozen times and openly proven to be true, then I would certainly be happy to consider taking the thread down a different path.



brooklynguy

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Re: Paying off 30-year mortgage in 10 years or less
« Reply #49 on: May 14, 2015, 09:48:09 PM »
A lower rate of interest per year is being paid.  The bottom line is that you have made up your mind that annual percentage rate can only mean the interest rate assigned to the note, failing to understand that because this is how you view things does not turn it into fact.

No, a lower rate of interest is not being paid.  The same interest rate of 4% per annum is being paid in both cases.  Your calculation of what you are describing as the interest rate being paid ignores the fact that principal is being repaid prior to maturity in both scenarios (and at a faster rate in the second scenario).  Earlier you got annoyed by the use of the word "absurd" to describe your argument, but there's no better word to describe what you are now arguing - that the "interest rate" (or "cost of credit" or whatever else you choose to call it) of a loan with a 4% per annum rate is actually 2.4%, or, if you repay really quickly, 2.19%.  So if you repay the loan in full the instant you receive it, I guess you've now turned it into a 0% loan!

This isn't about semantics or hairsplitting.  You are simply misunderstanding how the accrual of interest on a loan works.