Which loan to add extra payment to
Which loan to add extra payment to
Please help me decide the most logical placement of $100k.
There are three loans. One is $800K at 5.1% and matures in 2028 just making the standard P&I payments. The other two are both for $290K each at 4.8% interest and also mature in 2028 as is. I have $100k extra.
The question is: Should I place it on the $800k loan, in which case it'd drop the time by about a year and save 35k interest or on one of the $290k loans, thereby decreasing the time by 2.5 years and saving $30k in interest?
Though it'd make sense to save an extra $5K interest (money being fungible and all), I don't know if the earlier payoff, in real-world experience, is more significant. I suspect that this scenario is not novel and I assume that if there is some financial or psychological principle that comes into play, the bogleheads would be well versed and able to enlighten me. I also assume that it is better to make the payment to one loan versus spreading it around.
Hope you all had a happy Thanksgiving and thanks for your time.
There are three loans. One is $800K at 5.1% and matures in 2028 just making the standard P&I payments. The other two are both for $290K each at 4.8% interest and also mature in 2028 as is. I have $100k extra.
The question is: Should I place it on the $800k loan, in which case it'd drop the time by about a year and save 35k interest or on one of the $290k loans, thereby decreasing the time by 2.5 years and saving $30k in interest?
Though it'd make sense to save an extra $5K interest (money being fungible and all), I don't know if the earlier payoff, in real-world experience, is more significant. I suspect that this scenario is not novel and I assume that if there is some financial or psychological principle that comes into play, the bogleheads would be well versed and able to enlighten me. I also assume that it is better to make the payment to one loan versus spreading it around.
Hope you all had a happy Thanksgiving and thanks for your time.
Re: Which loan to add extra payment to
xyzzy
Last edited by mary1492 on Tue Oct 04, 2022 3:13 am, edited 2 times in total.
Re: Which loan to add extra payment to
The interest rate is the cost of the loan. I would put the money towards the highest interest rate.
Re: Which loan to add extra payment to
That depends what "significant" means to you.
Some folks feel it is more significant to get a satisfying sense of accomplishment by completely paying off one loan, even if the rate is lower.
Other folks feel it is more significant to save the most in interest payments.
Still others feel it is more significant to keep their money in the market, thereby earning more than cost of the interest paid.
Once you decide your personal definition of "significant" the path forward should be clear.
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Re: Which loan to add extra payment to
At any given moment, I can convince myself that either of these options yields the best outcome. Hence my question as to whether there is some settled principle that one would use when making a decision such as this. (Though my consideration of the first option you list is to sooner have funds that are not obligated to pay off a loan).That depends what "significant" means to you.
Some folks feel it is more significant to get a satisfying sense of accomplishment by completely paying off one loan, even if the rate is lower.
Other folks feel it is more significant to save the most in interest payments.
Still others feel it is more significant to keep their money in the market, thereby earning more than cost of the interest paid.
Once you decide your personal definition of "significant" the path forward should be clear.
Re: Which loan to add extra payment to
No settled principle, other than to figure out what brings you the most long-term job and maximize that.
Does that mean if you paid off one of the smaller loans you would not continue and pay off the bigger loans? Otherwise, until all the loans are paid off, you won't have funds that are not obligated to pay off a loan right?Though my consideration of the first option you list is to sooner have funds that are not obligated to pay off a loan
Perhaps I don't understand your consideration.
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Re: Which loan to add extra payment to
I tend to be overly logical, like Mr. Spoc on Star Trek.
I ask one question: "Do you want to save more money with this extra payment or do you want to save a smaller amount of money with this payment?".
I ask one question: "Do you want to save more money with this extra payment or do you want to save a smaller amount of money with this payment?".
Bogle: Smart Beta is stupid
Re: Which loan to add extra payment to
I would put the money towards the highest interest rate. The Interest-rates are so close, that you can’t go wrong with any of the loans.
"I started with nothing and I still have most of it left."
Re: Which loan to add extra payment to
Ithrive,
Why would you pay down any of those loans if they are "cash flow positive" and making you money?
Are all those 3 loans for your own residential houses? Or, are they commercial properties that you rented out?
Why pay down commercial loans that are making you money?
In the grand scheme of things, pay down 100K over 800K + 290K + 290K = 1.38 million of loan is insignificant. But, losing the liquidity of 100K is significant when things go bad.
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Re: Which loan to add extra payment to
I think your "settled principle" would be something like:
If you're most concerned about the cost of debt, payoff the highest rate first. If you're most concerned about the number of debts, payoff the smallest total first.
Essentially, it's a choice between mathematics and emotions.
If you're most concerned about the cost of debt, payoff the highest rate first. If you're most concerned about the number of debts, payoff the smallest total first.
Essentially, it's a choice between mathematics and emotions.
“Adapt what is useful, reject what is useless, and add what is specifically your own.” ― Bruce Lee
Re: Which loan to add extra payment to
If there is no legal advantage to any of these loans then always pay the highest rate back first.Ithrive wrote: ↑Sat Nov 27, 2021 4:11 pmAt any given moment, I can convince myself that either of these options yields the best outcome. Hence my question as to whether there is some settled principle that one would use when making a decision such as this. (Though my consideration of the first option you list is to sooner have funds that are not obligated to pay off a loan).That depends what "significant" means to you.
Some folks feel it is more significant to get a satisfying sense of accomplishment by completely paying off one loan, even if the rate is lower.
Other folks feel it is more significant to save the most in interest payments.
Still others feel it is more significant to keep their money in the market, thereby earning more than cost of the interest paid.
Once you decide your personal definition of "significant" the path forward should be clear.
If they do not present equivalent liabilities for you then we would need more details.
Re: Which loan to add extra payment to
I think that's it..I think your "settled principle" would be something like:
If you're most concerned about the cost of debt, payoff the highest rate first. If you're most concerned about the number of debts, payoff the smallest total first.
Essentially, it's a choice between mathematics and emotions.
Though klangfool brings up a good point: Invest and let the markets provide more return than the interest will cost over the same time period.
Re: Which loan to add extra payment to
Why interest rate is so high? Commercial? Both interest tax deductible?
I assume liquidity is not an issue then I would pay towards the higher interest rate.
I assume liquidity is not an issue then I would pay towards the higher interest rate.
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Re: Which loan to add extra payment to
I, like most others, would just throw it against that loan with the highest interest rate.
Alternatively, paying them off one by one starting at the smallest provides an emotional win and may help with cashflow if you are having cashflow problems.
Alternatively, paying them off one by one starting at the smallest provides an emotional win and may help with cashflow if you are having cashflow problems.
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Re: Which loan to add extra payment to
Will any of the loans do a recast if you make a large payment? Will any become eligible for a lower rate refi? I'd look at those questions before deciding.
Re: Which loan to add extra payment to
How does that help with cashflow problems?PeaksAndValleys wrote: ↑Sun Nov 28, 2021 1:01 am Alternatively, paying them off one by one starting at the smallest provides an emotional win and may help with cashflow if you are having cashflow problems.
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Re: Which loan to add extra payment to
When you have paid off a loan, you no longer have payments due on that loan, which improves your cashflow. When you only pay down a loan, your cashflow does not improve because the same payment is still due each month; you can improve cashflow only if you recast or refinance,JoeRetire wrote: ↑Sun Nov 28, 2021 6:49 amHow does that help with cashflow problems?PeaksAndValleys wrote: ↑Sun Nov 28, 2021 1:01 am Alternatively, paying them off one by one starting at the smallest provides an emotional win and may help with cashflow if you are having cashflow problems.