Increasing downpayment v.s. Prepayment

4 thoughts on “Increasing downpayment v.s. Prepayment”

1. DJClayworth November 30, -0001 at 12:00 am

   Leaving aside the purely numerical calculations of the other answers, you might find there are other benefits of making a 30% down payment rather than 10%.

   • Larger down payments often attract better interest rates than smaller ones.

   • A larger down payment might remove your requirement to buy mortgage protection insurance

   • A larger down payment can make more lenders interested in lending to you resulting in more competition and better rates.
2. Hart CO November 30, -0001 at 12:00 am

   I think you’ve got fine answers here, but thought the following might help, I assumed you meant a $110,000 house so my numbers are based on that. The big difference in your two scenarios is that as a down-payment the extra 20k would reduce your monthly payment significantly, while as an extra principal payment it reduces the loan duration significantly. You’ll notice that putting 30k down but making payments at the 10k down payment rate is pretty comparable to making a 20k extra payment after 2 months.

   

   As noted by others, when you are putting less than 20% down you’ll be faced with private mortgage insurance (PMI) that adds extra cost until you have 22% equity (based on original appraised value), not super significant here given the plan to make the significant extra payment so early, but going for 20% down payment will save you a little money and a little hassle.
3. quid November 30, -0001 at 12:00 am

   It seems you meant a $100k loan not a $100k property, it takes too long to reformat so you can get the general idea from this table.

   Here’s a rough amortization table, showing a monthly breakdown of year one, A/B testing a $20,000 payment in Month 4. Typically interest is charged on the average daily balance of the principle as early as you can make payments, it has a cascading effect through the remainder of the loan. The $20,000 payment saves you about $12,700 over the life of the loan and completes the loan about 4 years early, assuming it’s made on month 4. If it’s made in month 8 or 29 it would have a lesser effect.

   Here are the forumulas if you want to build yourself an Excel (or whatever) sheet.

   1st month Principle = Plug this in
   
   Interest = principle * (0.04/12)
   
   Payment = pmt(0.04/12, 12*15, principle)
   
   2nd and on Principle = Prior Month Principle + Prior Month Interest + Prior Month Payment
   

   Once you have your sheet you can play with the numbers.

                          Principle    Int     Pmt     Principle    Int    Pmt
   
   Month 1                 -90,000     -300    666     -90,000     -300    666
   Month 2                 -89,634     -299    666     -89,634     -299    666
   Month 3                 -89,267     -298    666     -89,267     -298    666
   Month 4                 -88,899     -296    666     -88,899     -296    20,000
   Month 5                 -88,530     -295    666     -69,196     -231    666
   Month 6                 -88,159     -294    666     -68,760     -229    666
   Month 7                 -87,787     -293    666     -68,324     -228    666
   Month 8                 -87,414     -291    666     -67,886     -226    666
   Month 9                 -87,040     -290    666     -67,447     -225    666
   Month 10                -86,664     -289    666     -67,006     -223    666
   Month 11                -86,287     -288    666     -66,563     -222    666
   Month 12                -85,909     -286    666     -66,119     -220    666
   Year 1 End Balance      -85,530                     -65,674     
   Year 1 Int. & Pmt                   -3,519  7,989               -2,997  27,323
   
   Year 2 End Balance      -80,878                     -60,213     
   Year 2 Int. & Pmt                   -3,337  7,989               -2,528  7,989
   
   Year 3 End Balance      -76,036                     -54,529     
   Year 3 Int. & Pmt                   -3,147  7,989               -2,305  7,989
   
   Year 4 End Balance      -70,997                     -48,614     
   Year 4 Int. & Pmt                   -2,950  7,989               -2,074  7,989
   
   Year 5 End Balance      -65,753                     -42,458     
   Year 5 Int. & Pmt                   -2,744  7,989               -1,833  7,989
   
   Year 6 End Balance      -60,295                     -36,051     
   Year 6 Int. & Pmt                   -2,531  7,989               -1,582  7,989
   
   Year 7 End Balance      -54,615                     -29,383     
   Year 7 Int. & Pmt                   -2,308  7,989               -1,321  7,989
   
   Year 8 End Balance      -48,704                     -22,444     
   Year 8 Int. & Pmt                   -2,077  7,989               -1,049  7,989
   
   Year 9 End Balance      -42,551                     -15,221     
   Year 9 Int. & Pmt                   -1,836  7,989               -766    7,989
   
   Year 10 End Balance     -36,148                     -7,705      
   Year 10 Int. & Pmt                  -1,585  7,989               -472    7,989
   
   Year 11 End Balance     -29,484                     0       
   Year 11 Int. & Pmt                  -1,325  7,989               -166    7,871
   
   Year 12 End Balance     -22,548                     
   Year 12 Int. & Pmt                  -1,053  7,989               
   
   Year 13 End Balance     -15,330                     
   Year 13 Int. & Pmt                  -771    7,989               
   
   Year 14 End Balance     -7,818                      
   Year 14 Int. & Pmt                  -476    7,989               
   
   Year 15 End Balance     0                       
   Year 15 Int. & Pmt                  -170    7,989               
   
   Grand Interest& Payments         -29,829  119,829           17,091       107,091
   
4. void_ptr November 30, -0001 at 12:00 am

   Plugging these numbers into mortgage calculator. 15 year term, 4% interest rate.

   1. $10,000 down payment, $90,000 loan, paying no extra principal: $666 monthly payment, $29,829 interest paid.

   2. $30,000 down payment, $70,000 loan, paying no extra principal: $518 monthly payment, $23,201 interest paid.

   3. $10,000 down payment, $90,000 loan, paying $20,000 of extra principal on the 3rd month of the loan term: $666 monthly payment, $16,628 interest paid, loan paid off in 131 months.

   Option #1 is for reference of what would happen without the extra $20,000.

   The question, the way I read it, is comparing options #2 and 3. Option #2 is to pay extra $20,000 upfront as part of down payment, whereas option #3 is to take out a bigger loan, and to include extra $20,000 of principal in the 3rd monthly payment.

   As can be seen, the difference between #2 and 3 is substantial:

   • Option #3 has higher minimum monthly payment: $666 vs $518, an increase of $148.

   • Option #3 has shorter actual loan term: 131 months vs 180 months, a difference of 49 months.

   • Option #3 has lower lifetime interest paid: $16,628 vs. $23,201, a reduction of $6,573.

   Analysis of the difference:

   • Taking out a bigger loan increases the minimum monthly payment.

   • Paying extra principal does not reduce the monthly payment – instead, it reduces the actual loan term.

   • Shorter actual loan term means lower lifetime interest paid.

   Essentially, we are looking at a trade-off between minimum payment and the loan term / lifetime interest paid.

   Finally, I would caution against getting too hung up on the lifetime interest amount. This number, while not meaningless, is not as important as it may seem. $100 now and $100 ten years later is not the same thing, and not just because of inflation. Extra flexibility that comes with lower monthly payment can go a long way in case of cash inflow becoming lower.