This week we're going to figure out how much I'll still owe on my mortgage in a decade if I make payments that are a bit bigger than the bank requires. If you missed it, don't forget to check out last week's blog about refinancing your mortgage to get lower payments.
Note the new name of the series: Money Blog! We thought that would mean more to more people than 'Weekly TVM'. Let's dive in!
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, the rate is 6.625%, and I still owe $338,465.83.
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.
a) How much will I owe on my mortgage if I don't change anything, don't pay any extra, and continue making my normal monthly payments for the next 10 years?
b) If I scrimp and save and pay down an extra $100 per month for the next 10 years, how much will I still owe on the mortgage?
c) If I scrimp and save and pay down an extra $350 per month for the next 10 years, how much will I still owe on the mortgage?
THE SOLUTION:
Okay, there's a lot here, so we'll just take it step-by-step.
The important thing to understand right up front is that today's present value is the amount I currently owe, or$338,465.83, and that my monthly payment is still $2,241.09. I've got 326 months to go before the end date on my mortgage paperwork, but that's not super-important to solving these problems, as the timeframe I'm talking about is relatively short.
a) N is 120, I/YR is 6.625%, PV is my current balance of$338,465.83, PMT is$2,241.09. Solving for FV, I find that after 10 more years, I'll owe $275,309.25.
b) The setup for this is the same, except that I increase my payment to $2,341.09. When I do that and solve for FV, I find that I'll owe $258,353.39 in 10 years. Comparing this number with the answer to problem a), I find that making those extra payments makes me owe $16,955.86 less. The amount I paid out, though, is only $12,000 ($100 x 120 months). So that extra $100 per month saved me $4,955.86 ($16,995.86 - $12,000). That seems like kind of a lot of savings for a pretty low increase in my payment. It makes me curious to find out what my savings will be if I make even bigger extra payments.
c) The setup for this is the same, except that I increase my payment to $2,591.09. When I do that and solve for FV, I find that I'll owe $215,963.76 in 10 years. The amount of my extra payments totaled $42,000 ($350 x 120), but that $42,000 made me owe $59,345.49 less. That means that that $42,000 saved me $17,345.49 ($59,345.49 - $42,000). Bonus question: is that a better or worse rate of return on my extra payments than in part b)?
I hope you enjoyed this week's TVM article. Next week, we'll go into ways to use a lump sum of money to pay off the mortgage even faster. If you have any questions, please feel free to leave a comment and ask.
See you next time!
