19 April, 2010

Math and Money Monday

I'm not really good with interest rates, so I'm hoping someone can check my math here:

Scott and I have been bouncing around the idea of taking $4,000 of our new home buyer tax credit and dumping it straight back into our mortgage. Our interest rate is 5%. So 5% of 4,000 is 200. Now this is the part where I'm fuzzy. That's 5% annually, right? So $200 per year over 30 years is a savings of $6,000?

That's a lot of money!

A quick look at our most recent mortgage statement shows me that only $172 of our monthly mortgage payment actually goes to the principal, with 4x that much going to interest and the rest going into the tax/insurance escrow account. So $4,000 is like 23 months of principal payments. Right? Wow, that's insanity!

Plus, when we can afford to do so, I over-pay by $150-200 each month, and that goes to principal. So...if I do that every month, does that mean our 30-year mortgage would be paid off in 15? That can't be right!

I'm done geeking out with numbers. If I'm way off, will someone please let me know I shouldn't be so excited? Thanks!


wickedmess said...

For all your math geeking needs

You're pretty much on target with the prepaying toward your principal. I know people who have done this and they have paid of their mortgages 10 to 15 years early. VERY IMPORTANT: First make certain that there's no prepayment penalty from your bank and then make absolutely certain that it's clear with the bank that you want whatever extra paymenst you decide on to go the the PRINCIPAL. A lot of times people try to make prepayments and the bank mucks it up and you end up not getting all the benefit you could from your money.

And on another note: Dave Ramsey is really good on stuff like this. Check out his site and his book 'Total Money Make Over'. I've been reading his stuff and listening to his radio show and now Golf Guy and I are going on a STRICT budget next month.

wickedmess said...

Another mortgage prepayment calculator, this one actually from Dave Ramsey's site: Mortgage Calculator for comparison purposes. There's an advanced version that may give you more info.

Jamie the ParkHopper said...

I checked the calculator out. looks like my estimates weren't that far off. it still blows my mind. if I ever have a LOT of money, I think I'll have to go into private mortgage lending. 100+% profit on your investment? that's awesome!!