This week we're going to figure out how much I'll still owe on my mortgage in a decade if I loaned out the inheritance I received from Aunt Matilda and used the resulting payments to pay it down faster.
If you haven't checked out the last two articles yet about paying down your mortgage and investing vs paying down, I encourage you to do so - those articles build up to this one.
THE SCENARIO:
Building off the last couple of articles, we're going to stick with my mortgage. To recap, here are the pertinent details:
I put $100,000 down and borrowed $350,000 to buy a house 34 months ago. The mortgage amortizes fully over 30 years, has monthly payments of $2,241.09,and the rate is 6.625%. I still owe $338,465.83, and thanks to a generous inheritance from my late Aunt Matilda, I have $100,000 to use to help me with my mortgage.
I'm going to imagine myself 10 years in the future, and figure out what my situation looks like if I handle things in different ways.
For these problems, I'm going to assume that I lend my inheritance to a business, and I get paid monthly at an interest rate of 12% (after taxes) for 10 years. I'll use the payments I receive to increase the payments I make to the bank, and thus pay down my mortgage faster.
a) If the loan to the business is interest only, how much does it pay me every month?
b) If I increase my mortgage payment by this amount each month, how much do I still owe at the end of 10 years?
c) At the end of an interest-only loan, the entire amount loaned is paid back. If I pay down my mortgage with that entire repayment lump-sum when I get it, how much do I owe on my mortgage?
d) If the loan to the business amortizes over 10 years, how much does it pay me every month?
e) If I increase my mortgage payment by this amount each month, how much do I still owe at the end of 10 years?
THE SOLUTION:
a) An interest-only loan is calculated with simple division: 12% annual rate divided by 12 months per year means that 1% of the loaned balance is paid to the lender each month. In this case, that means that I get paid $1,000 per month.
b) N is 120, I/YR is 6.625%, PV is my current balance of $338,465.83, PMT is $3,241.09 (my normal payment of $2,241.09 plus my received loan payment of $1,000). Solving for FV, I find that after 10 more years, I'll owe $105,750.71.
c) At the end of the 10 years, I'll get my $100,000 back. When I use that to pay down my mortgage, I'll only owe $5,750.71.
d) N is 120 (12 payments per year x 10 years), I/YR is 12%, PV is -$100,000, FV is 0 (my loan to the business amortizes fully). Therefore, the loan pays me $1,434.71 each month.
e) N is 120, I/YR is 6.625%, PV is my current balance of $338,465.83, PMT is $3,675.80 (my normal payment of $2,241.09 plus my received loan payment of $1,434.71). Solving for FV, I find that after 10 more years, I'll owe $32,041.92.
Bonus question: Does it surprise you that the interest-only option, which pays you less each month, actually helps you to pay off more of your loan?Why or why not?
Okay, that's it! No more "How much do I owe?" questions for a while, I promise! If you have any questions, please feel free to leave a comment and ask.
See you next time!
