mortgage lump-sum doesn't save money?

You are reducing the principal on your mortgage by $12,000 that reduces your interest by $10,000 over the life of the loan so your future payments are reduced by $22,000 (principal and interest).

-- Ron

you have to give the bank that $12,000 in principal sometime. If you give it early, you save interest.

It works, in your example, because the $12K pays off the outstanding balance (principal)on the loan. The $10K interest would be in addition to the $12K, so at the end of your 10 years you would have paid $22K total. (BTW be careful of any pre-payment penalties.)

Don't fall for the income tax deduction argument either. Why pay $1.00 in interest, to only get a .25 cent return, **if you don't have to** !!!

Also, watch for the time when, because the interest deduction decreases over life of mortgage, your total itemized deductions can become less than the Standard Deduction. That happened to me about 12 years into a 30 yr mortgage.

Your math isn't right. You are prepaying *principal* and as a result will be paying less *interest*. You'd still pay the principal in addition regardless of whether you pay it now or later.

ie. if you prepay $12000 and save $10000 over the life of the mortgage, you are paying $12000, period. If you didn't prepay it, you'd pay $22000 over the life of that mortgage, the same $12000 in principal *plus* the additional $10000.

What I find annoying about this kind of math is that, while correct, it's less than half the picture. What they leave out are opportunity cost and time-value-of-money.

What if, instead of prepaying that $12000, you use it for something more urgent like, say, a more reliable car so you can get to work with less hassle, repairs, lost time? Or if you invested that $12000 in something with a higher return than your rate of mortgage interest?

And re: time-value-of-money, saying $10000 over the "life of the mortgage" is pretty meaningless. What's the rate per *year*? Quick back of the envelope says that $12,000 amortized over 30 years at 4.6% annual incurs a total cumulative interest paid of just over $10,000. The $10,000 number is nowhere near as important as the 4.6% number and the standard documentation's insistence on highlighting that less relevant number just irks me.

The other thing not necessarily discussed here is how the prepayment affects your future payment schedule. It could shorten the life of your mortgage, or it could lower your monthly payments. In 99% of the case, a partial principal prepayment like that goes to shorten the life of your mortgage. That's great - you save on the interest over the lifetime of the mortage, and you are done paying off your loan a lot faster, but until the loan is paid off, it doesn't lower your payments - in fact, your payments stay the same and you simply have less liquidity since it's a lot harder to get that money back out if you needed it for something else.

Another commonly occurring situation is where someone already has a good car to get to work and no urgent needs, but receives a windfall that can be used either to pay off the mortgage or invest in something else. Finding an investment with a higher rate of return than the mortgage interest rate is not as easy as it sounds. Better a guaranteed 6% than an uncertain and risky possibility of 8% (less the cost of finding and investing in the alternative product). And if you are thinking of 10% or more the risk goes way up! I would pay off the mortgage.

Given the investment options these days, I would pay off ANY debt before investing into anything. Even a guaranteed 4% saving on the lowest mortgage out there is better than almost assured losses on stocks.

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Agreed. Hoping for investment returns greater than the interest paid on any form of debt seems to me very risky, not just these days but any time. But after all debt is paid off and tax-advantaged government plans, company pensions, etc. are in place, I would not be averse to some investment in stocks, as well as taking advantage of the depressed prices of real estate in some areas.

I struggle with this response. At 3.5% my after tax cost is 2.52%. The DVY (Dow Dividend ETF) yields about 3.4% or after 15% div rate, or

2.89. You can say that on $100K this is only a net $370, so why risk it? I'd reply that I don't expect the next ten years to yield zero, and even at zero, I am a tiny bit ahead. At a normal growth of 6-8% 10 years could see the money double, and a $100K gain is the potential.

My bet is the next ten will be 5-6%, but my confidence isn't high as to that accuracy. Why are you "almost assured losses on stocks?" It seems to me when people are as scared as you appear to be, I should be backing up the truck and loading up. Do you really see the ten year downside as significant?