All Forum Posts by: Chris May

Awesome, that makes a lot more sense. That's what I've been asking forever. Ok, so I understand that technically the rate of return is the rate that you borrowed the money at, but how do you reconcile that with what we said earlier about the real life results? If I pay $10,000 extra per year for ten years and save/make $100,000 off of it over that time, it comes out to 10% per year and 100% total ROI over the ten years from the layman's perspective. I think it goes back to the idea that I'm looking at the time I'm in the game and you're looking at the full 30 years, correct? Remember how that went? Wal-mart closes some stores, the future savings are added to their bottom line, and the stock goes up because shareholders can expect better performance going forward and all that. When I save the $100,000 over the next ten years, that's a real world result of avoiding liability and my "account" is at $200,000 in the sense that I kept my original $100,000 in equity and saved $100,000 in interest. I guess what I'm getting at is how do you reconcile the 4.5% thing with the layman's perspective I'm describing? Which piece am I not accounting for and why does it matter in terms of the real world results? Are you saying that it's just not happening or is it your whole "you must collect savings over the following 20 years" thing?

And there's no magic savings account with 4.5% interest, so let's come back to real life with that, too. If I put $10,000 per year for ten years into the stock market at 9% compounded monthly it comes out to $170,230.41. I have to hope I can get 9% to come close to my guaranteed $200,000 above. I get what you're saying that the rates of return are supposedly the same, I really do, but what I'm saying is that I can see my mortgage company (and amo calcs) telling me that I'm saving $100,000 with a $100,000 investment and paying my mortgage off in ten years, so are you saying that this real world result isn't actually happening or are you saying that it's happening, but I'm calculating it wrong?

Awesome, that makes a lot more sense. That's what I've been asking forever. Ok, so I understand that technically the rate of return is the rate that you borrowed the money at, but how do you reconcile that with what we said earlier about the real life results? If I pay $10,000 extra per year for ten years and save/make $100,000 off of it over that time, it comes out to 10% per year and 100% total ROI over the ten years from the layman's perspective. I think it goes back to the idea that I'm looking at the time I'm in the game and you're looking at the full 30 years, correct? Remember how that went? Wal-mart closes some stores, the future savings are added to their bottom line, and the stock goes up because shareholders can expect better performance going forward and all that. When I save the $100,000 over the next ten years, that's a real world result of avoiding liability and my "account" is at $200,000 in the sense that I kept my original $100,000 in equity and saved $100,000 in interest. I guess what I'm getting at is how do you reconcile the 4.5% thing with the layman's perspective I'm describing? Which piece am I not accounting for and why does it matter in terms of the real world results? Are you saying that it's just not happening or is it your whole "you must collect savings over the following 20 years" thing?

And there's no magic savings account with 4.5% interest, so let's come back to real life with that, too. If I put $10,000 per year for ten years into the stock market at 9% compounded monthly it comes out to $170,230.41. I have to hope I can get 9% to come close to my guaranteed $200,000 above. I get what you're saying that the rates of return are supposedly the same, I really do, but what I'm saying is that I can see my mortgage company (and amo calcs) telling me that I'm saving $100,000 with a $100,000 investment and paying my mortgage off in ten years, so are you saying that this real world result isn't actually happening or are you saying that it's happening, but I'm calculating it wrong?

Chris, the problem with this is that in number one your savings - or what the $10,000 hypothetically grew into in this comparison - is just under $26,000. That's what I've been trying to say / understand. The savings is $26,000 ($136,000 - $110,000) in your scenario, but by your own admission none of your bank account calculations match up with that, yet you're saying it's the same. How can $10,000 save you $26,000 on the mortgage and net you $22,879 in the bank and those two things be the same?

I disagree that it works the same and don't see any comparison between this situation and a CD. One big problem with this is that you guys keep saying if you pay off $10,000 you are only saving the interest CREATED by that $10,000, but it's simply not true. When you make your normal payment, it includes interest from the entire balance, correct? So, when you pay early why wouldn't it cancel out some of the interest from the entire balance? Your way makes no sense. The $10,000 in question contributes about $33 of interest per payment ($400/year / 12), ie. a drop in the bucket, but the rest of the interest you are paying in each payment is from the balance of the loan. Just pause and think about that for a second. The interest being "charged" or "created" by the $10,000 is $400, but the amount it is "costing" you to pay on their schedule is around $20,000, because you are paying interest on the entire loan at the same time. These are two different things.

So, get your amortization table out and consider where you are now vs all the payments you would skip if you dropped $10,000 on the loan today, ahead of schedule and no longer owe that higher amount. The savings is not $400 or even $4000, it's around $20,000 because to pay that $10,000 via regular payments (on schedule) means to pay interest from the entire loan with every payment. And conversely, to give them $10,000 early (ahead of schedule) means you no longer have to make those scheduled payments and you save all that associated interest - not just the $33/month the $10,000 was "charging" you, but the $20,000 it was "costing" you to pay it back slowly.

Anyway, you are saying that paying $10,000 early saves $400/year, but that doesn't even work out. Pretend for a minute that the amo calculators, although not necessarily perfect have teams of people behind them and all match up within a neat margin of error, so I'm not crazy to trust a hundred professionals and their calculators vs a few people on a random forum post. Just pretend that for a minute. When you put a $10,000 early payment onto bankrate, for example, it says your savings is $20,000 and about 21 months. This lines up exactly with the way I'm explaining the idea of skipping payments. On the other hand, saving $400/year for the remaining 28 years equals $11,200 and the last 21 months average $48/month in interest or about $1000 total. $11,200 + $1000 = $12,200 and does not match up with the $20,000 savings. Do you get what I'm saying? You can't say that an early payment of $10,000 saves $400/year and then ignore the fact that it doesn't add up to the savings quoted from a bunch of independent sources. Either you're wrong or the calculators are and it's not the calculators. Not only that, but you don't even have an alternate explanation other than to say the calculators "aren't perfect". If this is wrong, explain it.

Right, so coming back to the mortgage all told I made an average of $10,000/year on a total investment of $100,000 for an annual return of 10%. Or 100%, 50%, each year, etc. depending on how you break it down, but my point is that it never comes even close to being "4%". The 4% is a cloud that you're both having trouble seeing through. 

The bottom line is what I'm showing on the calculator. I can pay $10,000 chunks extra into my mortgage - GET TO KEEP IT IN THE FORM OF EQUITY - and save / make 100% total ROI or annualized ROI of 10% over ten years. That's as good as most other investments and it's guaranteed.

Sorry, I thought of this after I posted it, but was hoping you guys would accept it in good faith knowing what I meant. With my mortgage, the money is not gone, it's in the form of equity, which I keep / get back. So, to make the analogy correct my daughter gives me back my original investment plus 100% total return. In that case what is the total annualized return? 10%?

Originally posted by @Chris May:

No, your ROI was 0%. You sank $100,000 into a business that returned $100,000 to you.

No. You invested $10,000 in year one, got $10,000 back in year one. You invested $100,000 over 10 years, and got $100,000 back over 10 years. ROI is 0%. You just said (above), using the same numbers, that your ROI was 100%. Now you're saying it's 10%. Which is it? (It's 0%).

@Joshua S. - In your above scenario your "return" on the $100,000 invested would in fact be $100,000. But that implies extremely high annualized returns, depending on the timing of the cash flows. You put in $10K in year 1, $10K in year 2.....etc. etc..  and you receive $100K all at once in year 10?  That would be about 20% annualized on your money invested. And I'm assuming that you retain ownership of the stand after year 10 so your $100,000 pure return, not just returning your capital.

This is where the comparison with the 30 year amortizing mortgage fails. With each $10,000 chunk, you are just "avoiding" the accrual of 4%/yr. on your mortgage, hence paying it off earlier, but you do not "get" your $100K back in year 10, you just save $400 a year on each $10K you put in....and only from the date you put it in.