I really keep meaning to subscribe to CR, but I’m worried that I’ll use it as an excuse to go buy what they review!

Need more self discipline. Need more self discipline. Need more self discipline . . .

Liquid fabric softener makes clothes wear out faster as they break down the fibers in the material - hence, making them softer. You may want to take this into account when determining the best “bargain”. Sheets are not as bad.

Pizzeria Uno’s deep dish pizza is so yummy. Have you ever had a deep dish pizza? The crust is *supposed* to be buttery. And there is *supposed* to be lots of cheese. I’m sure you make a fine traditional pizza that is lower in fat (but pizza needs some fat–don’t use fat free cheese!), but it is impossible to make a good deep dish pizza without loading it with fat. Just don’t eat it all the time (I have it maybe twice a year, if that) and eat only half and take the rest home (seriously, deep dish pizza is filling).

As someone who grew up in Chicago, I can tell you that if you are making deep dish pizza at home with very little fat, it doesn’t taste as good as the real thing.

It is foolish to take that mortgage advice. The return on mortgage prepayment is risk free and pays much better return than ING accounts and Treasuries. It breaks the diversification curve.

Also, mortgage prepayment saves more on taxes due to the standard deduction. Say the standard deduction is $10,000. If one’s deductible expenses exceed the standard in a certain year, it’s best to exceed the standard by as much as possible since it “costs” $10,000 in deductible expenses for the privilege.

Example One: Joe owes a $60,000 mortgage and pays $15,000 per year for four years. Each year he deducts $15,000 for a cumulative deduction of $60,000.

Example Two: Joe owes a $60,000 mortgage and pays $30,000 per year for two years (ignoring interest saved.) He deducts $30,000 in years 1 and 2, and takes the standard $10,000 years 3 and 4 for a cumulative deduction of $80,000.

If Joe’s somewhere in the 25% bracket, that’s a $5,000 bonus return on top of the interest saved by prepayment.

Kilz is not the WalMart brand. Kilz is a specific brand of paint that W-M happens to sell. It is formulated to cover better and sometimes to be anti-fungal.

I can attest that there is little to no difference to paint quality between name brands and the store brand, particularly on interior paint. I started a room with name brand paint. The store ran out so I had to finish it with a store brand. Five years later you could tell no difference - they both needed repainting. :)

Best Wishes,
D4L

Last October you wrote about Kenmore Progressive Direct Drive in Comsumer Reports. I was in desperate need of a good vacuum (two dogs, two cats, inside)so I saved my money and bought one. I have never regretted the $300 dollars spent because it does such a fine job even after a year of heavy use. I had only had the cheap (less than $100) models before and I can tell you there is no comparison and the Kenmore will last much longer than 3 years and do a better job.

I have a comment about TVs…..note that when you see them displayed in stores in all their High-Def glory, remember that they are either showing you a HD/Blue Ray DVD, HD Satelite/Cable program, or HD computer video.

If you aren’t will to spend the money each month to receive HD programming through digital cable/fiber optic or satellite, or buy an HD antenna to put in your attic, and HD tv is going to look the same as one without that.

Also the bigger the screen, the more grainy the picture will be when watching non-HD programs. At first it looks like crap, but you get used to it with time. Digital cable looks a little better, but nothing like HD.

Great tip on the silverware handle-down in the dishwasher. Might not work with sharp knives as my kids like to help unload the dishwasher. Yikes on the deep-dish pizza! Pizza Hut used to serve a triple cheese pizza with cheese in their crust that had similar calorie/fat counts. At one point it was the single worst food you could ingest, per serving.

The advice for beef doesn’t really apply. Bacteria inhabit the surface of muscle meats, so cooking a steak to medium rare with a nice sear on the outside will sufficiently kill anything. I concede that there is a chance that something could inhabit some cut in the meat that runs down to the medium rare or rare part of the steak, but that is a long shot on top of the already very slim chance of infection. Ground Beef is a different matter entirely.

My retirement investments are completely in stock mutual funds. I use my house as a balance for the risk of stocks. Houses go up in value an average of 2.5% per year and my mortgage is 6.125%. This means every dollar I prepay on my mortgage is netting me 8.625% per year. It is a little on the fuzzy math side but it creates a nice balance in my portfolio until I can expand into real estate.

My example is too crude. Take a $100,000 mortgage over ten years, $5,000 of other deductions, a $10,000 standard deduction, and a 25% tax bracket. Ignore interest savings by prepaying.

$10,000 per year: taxes saved = $37,500
$15,000 per year: taxes saved = $41,250
$25,000 per year: taxes saved = $45,000
$40,000 per year: taxes saved = $46,250

You can see the normal curve at work. Taxwise, additional prepayments are worth less and less. But remember that mortgage-interest-wise, additional prepayments are worth more and more: RISK FREE.

First, thanks for the Consumer Reports summaries. I really appreciate them.

To Michael, I think your calculations are off. You can only deduct the interest you pay to the mortgage company, not your total payment. If you prepay, you are usually paying off principal directly, which is not eligible for a deduction.

I’ve been thinking about that question for years, and I agree with Consumer Reports. By saving up your money and then paying off the mortgage all at once, you gain security! Say you paid extra each month to your mortgage for 5 years, and then you have a financial crisis. The only way to get access to that money is by borrowing it back…and who knows how easy or expensive that will be. And you still have to make monthly mortgage payments! If you save up the money, you’ll have a great emergency fund until that day when you write the fat check; and then you have NO mortgage payments, which means you’ll need less emergency money to meet your monthly expenses.

The Saving Freak,

Incorrect, you would be getting the 2.5% appreciation whether you prepay or not. Also, the 6.125 would be 5.25 to 5.5 if you refinanced and with tax deduction, 4.something percent.

Michael,

You are incorrect at the end when you talk about the 2 examples. Only the interest is deductable on the mortgage, not additional principle payments.

Pizza! MMMMmmmm, pizza fritta in Naples absolutely the best! The pizza is folded so the absolutely freshest ingredients are inside and then deep-fat fried! Probably a million calories but it isn’t for every day . . .

I really enjoy your Consumer Report reviews. You almost always pull out the best points and I don’t feel too guilty about not reading it on a regular basis.

My wife used to receive an e-mail newsletter that included a monthly column “Food Porn”. Items such as Hardee’s Triple-Burger with a 6 slices of bacon and 6 slices of cheese typically topped the list (and should have had a Surgeon General’s warning). Sounds like the Pizzeria Uno item would have made the list as well. (That said, there was a Pizzeria Uno in the town I used to live in. I went about every 2 months - awesome, flaky crust pizza.) Last Sunday I heard a lecture by the Director of the Mayo Clinic Department of Sports Medicine. Poor-eating caused illnesses (heart disease, type 2 diabetes, etc.) have overtaken smoking-caused diseases. Probably old news, but it was new news to me.

My lovely wife cruises the “oops” paints at Home Depot and will often find several gallons of an appropriate paint in an acceptable color for about $5 per gallon. The best selections are at stores located in ritzy neighborhoods; those consumers are pickier about having the exact color and will return the “wrong” color in a heartbeat. A too dark color can always be lightened up by adding it to white. Don’t add white to the dark, you’ll end up with gallons of paint. How I know, one gallon of “Pumpkin Pie” interior eggshell ended up tinting about 25 gallons of antique white. Walls were repainted various shades of Dog Food tan for years.

Love Kenmore appliances! Look for great sales and chose only the features that you will use. Sears also has appliance outlet stores that sell customer rejects (wrong model delivered), scratch ‘n dents, overstock and close-outs at greatly reduced prices.

I prefer to prepay all debts. Seeing each payment going more to principle and less to interest is a fantastic feeling. But do whatever makes you sleep best at night.

Michael, I am at a loss to understand your logic behind tax deductability of home payments. One can deduct only the INTEREST paid, not the entire payment.

Your example of “Joe’ deducting 15,000/yr is completely wrong. If one assumed an interst rate of 10% on a 60,000 mortgage, interest would be around $5575/yr. THAT would be the deduction, not $15,000.

Increasing the payment to 30K/year would result in the interest being about $4868/year. A decrease in interest paid of $707.

Good stuff on the name brand paints! We are about to start painting a few rooms in the house and I admit to getting caught up with the name brand paints vs. store brand, lol

*GASP* @ Kenmore’s Progressive Direct Drive vacuum
You mean Dyson didnt make the list? Did they mention it? We are getting the carpets cleaned this weekend soooooo we were going to get a Dyson. I wonder what CR had to say about the Dyson brand. Ive been thinking for the longest that it is THE BEST?? Hmmm, something to research.

That personal pizza tidbit is frightening.

@ Michael
On a $100k, 30yr mortgage at 6%, putting $1000 a month extra toward the mortgage will allow you to pay it off in 7.5 years and save over $73k over the life of the loan. HOWEVER… say you take that same $1000 and put it in an interest bearing account. Then when the balance is equal to the mortgage, you pay it off in a big chunk. With an 8% return, you would pay it off in 6 years and save over $81k. Even with a measly 3% interest, you will save $3500 additional and pay it off 3 months sooner.

I disagree that you get what you pay for with TV’s beyond a certain extent. DLP technology is definitely the best quality you can get but cost far less than the LCD and plasma screens. The LCD pixels can wear out but DLP uses mirrors, which will never go bad unless they break. Also, anything larger than 42 inches is actually bad for your eyes and neck unless you have a very large room and sit very far away. I got the best TV I can imagine for $800.

Kathryn and Ryan, you are both right of course. That is basic…and I now recall the sleazy subprime, 40-year loan argument: “The longer you pay the loan, the less you pay in taxes!” Prepaying slightly decreases tax deductions, but decreases total payments much more.

New example: 15 year $100,000 mortgage, 6%, standard deduction $10,000, $5,000 other deductions.

$12,500 per yr: pay $140,356; tax savings $37,952
$15,000 per yr: pay $131,620; tax savings $37,865
$20,000 per yr: pay $122,495; tax savings $37,790
$30,000 per yr: pay $115,100; tax savings $37,750

There is the curve again. To answer Kathryn, the “insurance” an emergency fund offers should be worth the “premium” forgone by not prepaying the mortgage.

I think the “store brand paint” comparisons are a little misleading. I am not sure about the Lowe’s example, but the other two examples were/are well respected long standing brands from long before they became “store brands.” and they are generally not the cheapest paints that each store will carry. Having painted professionally and been forced in some cases to use a customer’s preferred brand, spending a decent amount of money will save you a small amount of money, but a huge amount of time. The difference I have seen in paints is not how long they last, but how well they cover initially. Behr is my current favorite as it is one coat pretty much no matter what. If you are painting white on an already white wall, none of this applies to you. But if you are changing colors, good paint and in many cases a primer will save you, if nothing else, in wear and tear on your arms.

My parents never used fabric softener when I was growing up, and I don’t use it now. Am I missing out? What does it do for you? Does it wear your clothes down faster? Fill me in! Thanks.

Trent. We want your pizza recipe. :-)

and @ Andy: Fabric softener does these things for you:

1. It makes your clothes stink of industrial perfume.
2. It gives you a rash, if you’re even slightly sensitive to weird chemicals.
3. When you put it in your wash water, it gums up your washer.
4. When you use it as dryer sheets, it gums up your dryer.

Now, wasn’t that worth the money you paid for the stuff?

@Andy
Fabric Softener makes your fabric softer ;)
Seriously, i never use liquid because it gunks up your washing machine and leaves a residue on your fabrics. I like the sheets in the winter to avoid static cling. also i like the sheets to get a good smell

I don’t use fabric softener. I bought the Sears vacuume recommended by CR to replace an old panasonic that was beyond repair. I think the Sears does a very good job of vacuuming but it is heavy and awkward compared to my old panasonic. I don’t know if I would buy it again.

I never use fabric softener. It makes me itch, no matter how natural it claims to be, it makes your sheets wear down faster and it generally stinks.
It does help with silk shirts. My S.O. uses it for his in the dryer, but other than that, it doesn’t touch the rest of our fabrics.

Hmm — I think I’ll just continue to the fabric softener. Thanks for the advice.

Hmm — I think I’ll just continue to skip the fabric softener. Thanks for the advice.

Interesting news on not pre-paying your mortgage. They are probably right - you can do better by investing instead of pre-paying. But they are missing two important factors. One is you have to wisely invest the money. A lot of people don’t do, don’t have time to do, or don’t have the inclination to do the necessary research to WISELY invest. They could lose money that would be better spent pre-paying their mortgage.

The second factor is the psychology of owning your home outright. No matter how bad the economy or your personal situation gets, if you own you home, no one can take it away. If that doesn’t make you sleep well at night, I don’t know what will.

Oh, and I prefer fabric softener sheets. It reduces static. But I use the sheets at least twice before throwing them away. They have enough life in them for at least 1 hr. 15 mins of drying time - that’s usually 2 loads for me.

Most of yuh-all already know this, I’m nearly certain, but ripping those dryer sheets in half or quarters, depending on the type of clothes, works pretty darn good at softening and (important to me) de-staticking. So it’s an in-between solution, and much cheaper and less invasive than the liquid.

I got my huge box o’ Bounce, complete with subtle but non-offensive scent, at a year-end free box from the nearby college at moveout time in the spring, and it’s lasted me about three years now.

Hi - I’ve been enjoying your site for a few weeks now. Thanks for sharing so much great information for free! Just want to point out that neither Kilz nor Behr are store brands.

@LC

I found that paying $1,000 extra on a 6% mortgage and putting $1,000 per month in a 6% savings account finishes about the same, but here is why. Each month, I add interest based on the account value as of the first, then, I make the payment or deposit. This means the mortgage gets “paid” before you send in your payment. It also means the investment account pays you before you send in your deposit.

I was able to duplicate your results with the same mortgage system, but by depositing the $1,000 into the savings account and applying interest second.

If your method is right, then you are right, we should put our money in ING accounts. But if my method is right, we should not, because nobody can get 6% free of risk. Does anyone know which is more correct?

Ever since my cloth diapers with for a newborn with sensitive skin days (about 8 year now), we have forgone fabric softener and used plain ol’ white vinegar instead in the wash. It helps to disenfect the laundry and soften fabrics, is kind to your machinery and the environment, as well as your wallet, does not have additives that affect allergies, and is simple to use. Try it!!

CR makes assumptions with the mortgage note and savings account that aren’t realistic. I hope y’all have fixed rate mortgages, otherwise their calculations are pie-in-the-sky guesses. However, prepaying a fixed rate mortgage will save $X.XX in interest, cast in stone. However, your savings account interest rate will vary over time. Was yesterday’s rate cut already forgotten along with the declining stock market?

My mortgage rate is 6.125%. I’d be curious to know where I can get a relatively safe, liquid investment that will return more than that on an after-tax basis.

I guess I should find the CR article to get some details on their analysis, but this sounds pretty optimistic.

If you are going to buy paint it is best to buy it at a paint store as their paint offers the best value. Having a father who has been a painter for 42 years of his life, and currently owning and operating a painting company myself, I can attest that we give longer warranties with the likes of Dunn Edwards paints than any other (10 years +).

Now if you were to go to home depot and buy Behr vs. Ralph Lauren the only difference is coverage. Technically its actually cheaper to use Ralph Lauren vs. Behr because the coverage is better.

Bottom line though, a good long lasting paint job comes not from the paint, but from the prep job one does.

As far as TV’s go, HD projectors have really come a long way and if you have the right wall space, they can provide a good long lasting picture that can scale to almost any size you need. The Epson Powerlite Home Cinema 720 offers real good value at $1200.

Kat–I’d never heard that silk could be machine-dried. I usually hang mine, and wouldn’t bother with fabric softener on something that I hand-wash.

With kids, dogs, and cats, though, who wears silk anyway? I like anything that can be machine washed and either dried in the dryer or hung on the line.

I wish I could find a natural way to get rid of the static from clothes in the dryer. I don’t like the dryer sheets but hate the static even more.

Someone mentioned the Dyson line of vacuums. I bought a Dyson “Animal” a few years ago and it is great. It does an amazing job and I’ve never had any problems with it. It’s actually kinda gross seeing how much cat hair it pulls out of our rugs every week. The “Animal” version is basically the same as the basic except it comes with some extra attachments. Specifically it has a hand-held beater bar attachment that is great for cleaning the couch.

My one issue is that it is somewhat expensive (we paid around $600 Canadian) and there are a tonne of similar, cheaper brands around. With some research you can probably find a cheaper brand that is just as good, however with Dyson I knew I was going to get quality.

On the tax arrument I’ll say this:

I would rather not pay interest than pay interest and get a tax writeoff on the interest.

It may very well be that you can save a little money by saving up the balance and paying off a loan, but I’m going to keep making extra payments. I view my mortgage as a short term loan. (~10 years since I’m making extra payments). I can’t guarantee 7,6, or even 5 over a 10 year period, so my risk free return is the best deal for me.

Grab a CRT TV off craigslist if your TV is dying.

As for real estate, don’t let the dollars involved
(tens or hundreds of thousands) fool you into overestimating the real rate of return.

Which is only 1% to 1.5% depending on which studies you read.

Pretty low return for such an illiquid asset, but remember housing is also a consumption good.

Just my two cents:
Don’t skimp on paint or you’ll regret it - it may peel or have poor coverage. Get the best you can afford - I prefer Behr (not a store brand).

We LOVE our Kenmore canister vac. in the past, CR’s rated Dyson low, and they’re expensive, so we avoided them, even though all the Sears employees were pushing them.

Regardless of interest rates and other financial wizardry, we’ll opt to pay off our mortgage asap, as we’ve been following Dave Ramsey’s plan, and he hasn’t steered us wrong yet!

I’ll continue to take my steak rare, thank you very much. My understanding is that the bacteria stays on the outside of the meat.

@connie: To keep your clothes from getting staticky in the dryer, take them out as soon as they are dry, or even a little earlier. I have a moisture sensor on my dryer, but I have discovered that if I use it, the dry clothes tumble around for a long time, costing money and wasting energy but not getting more wearable. So now I use the timer. Your dryer may produce the opposite results, though, so it’s worth checking out.

I have never used fabic softener. Never saw the point of it, and I hate the smell and the weird, rubbery feeling it gives my clothes. I also hang my clothes as much as possible, which makes the whole thing moot.

About food safety:
The interior of the meat needs to be cooked to at least 165 degrees F if you really want to ensure you kill bacteria. Some bacteria (like E. Coli,) when given a chance to multiply, produce toxins that remain in the food even if it’s properly cooked. That’s why it’s so important to buy meat from a reputable seller!

“No matter how bad the economy or your personal situation gets, if you own you home, no one can take it away.”

Unless her name is Katrina?

Re “Oops paint” at Home Depot for $5 a gallon as mentioned in an earlier post — we always use those as our Primer or first coat. I’ve done this with outdoor paint too when I painted our fence a dark brown color last year, and saved a bundle this way.

BigRed- it isn’t 100% silk. we tried line drying them, but it was very rough. So he likes poping them in the dryer. If removed promptly, it doesn’t wrinkle much either. And the shirts have stood up pretty well to the dog.
On the other hand, my silk items(which is about two) don’t get dried in the dryer. Those get taken to the cleaners. But I only wear them once a year.

I think static is an issue based on where you live. I never get static cling on anything here, but I remember in the MidWest it happened all the time.

I love our Dyson Animal. It works great on our dog hair problem. I got it as a gift.

Hey all,

A couple comments: Fabric softener DOES break down the fibers in your clothes. In addition, both fabric softener and dryer sheets are chock-full of artificial chemicals that cause skin irritation and residual toxic fumes that are inhaled and can exacerbate lung problems, particularly asthmatic symptoms in children. If you must use these products, purchase non-toxic, biodegradable options from Shaklee or other green companies like Seventh Generation. Shaklee has a box of 80 dryer sheets (made from corn and completely biodegradable) for $8.45. That’s 10 cents a sheet– not a bad deal. If you must use fabric softener, they also have one that is fragrance free and all natural– one ultra-concentrated 32 oz bottle ($8.65) is good for 64 loads. To go a little further, their fragrance-free laundry detergent powder is $39.50 for a 14 pound box that washes 244 loads (that comes out to .16 a load). It is to the benefit of everyone’s health (and great for your wallet) when you do the research to find chemical-free, environmentally friendly alternatives to traditional household products. (www.shaklee.com/marymay/prodHou)

That was a great tip from the other reader about vinegar in the washing machine. I had heard about that but never tried it– I’ll definitely give it a whirl. My husband and toddler both have majorly sensitive skin and I’ve had to find ways to alleviate the problems which stem from traditional detergents.

I know what newsletter a previous reader mentioned that runs the monthly column called Food Porn. It is published by the Center For Science in the Public Interest (http://www.cspinet.org/), one of the few organizations in Washington which is willing to stand up against the big dogs and show what the FDA and food manufacterers are putting in our food. Their newsletter is packed full of incredible information and costs only $10 for a year’s subscription (pass your old copies on to friends who eat take-out every night and chalk up that $10 to helping save someone’s life). It really is foohardy and extrememly hazardous to your health NOT to pay attention to what fast-food and many restaurants are putting in our food. Men’s Health published a study on the 20 worst foods in America– you’ll be shocked– check out the link: http://www.menshealth.com/20worst/

PAINT: Hasn’t anyone heard that regular paint contains harmful chemical solvents and VOC’s (Volatile Organic Compounds) which are harmful to inhale? Why do you think your eyes water and lungs burn when you paint all day and end up with a splitting headache? Why do you think pregnant women are told not to be around paint fumes? Pay the $10-$15 extra (you can also dilute the paint with water to make it go furthe without compromising quality) and use your buying power to purchase low VOC paint and take responsibility for your health even if it costs a little more.

Love the column, love the discussions, always look forward to the Simple Dollar in my inbox every morning. Keep up the good work, Trey!

It’s not true about the hardware paints. We had the exterior of our house painted with the best Behrs and the painter prepped the house properly and was very careful. After 4 years in the Florida sun it was peeling and faded in spots. When we called in other painters for a price they all said that Behrs does not work as well as Sherwin Williams and Benjamin Moore in this climate. They said it was the paint, not the painter. We had it redone using Sherwin Williams and have not had any problems. By the way, for myself, in painting the interior of a home, I find that if you use the best grade of paint you get the best results.

For the past 30 years I’ve never used fabric softener or dryer sheets. I just hang synthetics to dry so they don’t cling and they dry very quickly. If something tends to need ironing, I just dry it for about 5 minutes and then quickly hang it, which saves lots of labor and electricity with the dryer and iron. Give it a try!

I think Consumer Reports is WAY off regarding the paint. All paint may be the same if you paint a bare, spankin’ new interior wall with a neutral color. Most people don’t have this luxury. You need to invest in paint and by far the best is Sherwin Williams. After FOUR coats of Lowe’s paint Valspar on my cupboards, I can still see the previous color (which was a light grey) AND I used their primer. Spend the money on the paint, save yourself a SIGNIFICANT amount of time and effort!

Wow! I had exactly the same experience with Lowe’s paint–covering WHITE, for heaven’s sake, with a medium shade of blue.

But that was a few years ago. Within the last six months I bought a pint of it just to get a test color and found it covered better.

@Michael - my calculations come out ahead even if you don’t earn ANY interest on the money you sock away.

Out of the box things to think about regarding mortgage prepayment:

1. The money you pay toward your mortgage is guaranteed during the time frame you do so. For example, I got my 6 percent mortgage in 2000 and paid it off in 2005. The S&P 500 during that time had a slightly negative return which made a guaranteed 6 percent rate of return pretty darn nice!

2. Not having to make a mortgage payment is imputed income. What’s imputed income? It’s money you don’t have to earn and pay taxes on. Not having to pay $1,000 a month on a mortgage is the same as making $1,333 (before taxes in the 25 percent tax bracket). Did you ever wonder how many retirees can make ends meet on just Social Security? They own their houses free and clear.

3. Building on #2, not having to pay a mortgage gives you a very precious non-monetary commodity…and that is freedom of choice. Want to take a lower paying but more satisfying job? Do you desire to cut back on your work to help take care of children or grandchildren? Fed up working for “Da Man” and want to start your own business? No mortgage=less monthly expenses=more choice in life.

4. And finally, life is never either/or. Everybody should have several months of liquid emergency money and everyone who works for a company which matches money in a 401(k) needs to do that before thinking about paying off the mortgage.

@LC

That’s not what I get. Here is my method. Please tell me how yours differs.

$100,000 loan at 6% compounded monthly, $600 loan payments. Each month the spreadsheet subtracts $600 from the previous month’s balance, then multiplies that by 106%/12.

$100,000 loan at 6% compounded monthly, $1600 loan payments. Same method as above, except more is subtracted before each month’s interest is applied.

Several savings accounts paying 0%, 1%, 2%, etc., all compounding monthly. In each one, $1,000 is added to the previous month’s total, and then the sum is multiplied by (100%+I%)/12.

Using this method, if you pay $1,600/month into the mortgage, you pay off the loan in March of the 7th year with $524.97 to spare.

If you pay $600/month and put $1,000/month into a 6% savings account, the savings account wipes out the remaining principle in March of the 7th year, with $524.97 to spare. It makes no difference. This would be a good option if 6% savings accounts existed.

With 3% interest, it happens in September of the 7th year — six months later than if the loan were prepaid, or $9,600 in extra payments. By my method, that $9,600 is the cost of Kathryn’s security.

Clarifications:

Paragraph 4: “I%” is a variable, not a 1. It could be 1%, 2%, 3%. I ran it up to 100% for fun.

Paragraph 7: By “$9,600 in extra payments”, I mean six months of $600 regular loan payments and six months of $1,000 additional payment to the savings account.

Also, I switched my method since the “Michael @ 12:57 pm January 31st, 2008″ post, but it makes no difference because so long as either method is consistently applied to both the loan and the savings account. I just tried it to be sure.

Michael,
Here is how I calculated it and it takes away any irregularities of whether you add the interest before or after the payment. I also neglected the effect of any tax deductions.

PREPAYING:
By paying $1000/mo extra to the principal of our mortgage example, you would pay it off in 89 months, and the total amount paid on the $100k loan would be ~$142,235.

SAVING OUTSIDE THE MORTGAGE:
Say you took that $1000 cash each month and stashed it under your mattress and didn’t put any extra toward your mortgage. In month 89, your loan balance would be $88,875. During those 89 months, you would have saved up $89,000 (assuming no interest). Send a check to the lender for the remaining balance. The total amount you pay on the loan is ~$88875+(89*600)=142,235

Add the effect of interest and you will come out ahead. Until very recently, I was a big proponent of prepaying. From these calculations it doesn’t seem like you make a 6% return by paying into a 6% mortgage, which doesn’t make sense. Is there something wrong with my calculations?

I like CR for many things, but they are way off on the prepayment issue (I hold a Ph.D. in economics).

If you have a mortgage at x%, then prepaying is indeed a risk-free way to earn x% (if you want to factor in the tax deduction, go ahead, it doesn’t make much difference as long as you compare it to an after-tax rate on other investments, but beware the phase out of deductions at higher incomes!).

Sure, you might earn more x% over the course of the mortgage in an alternative investment such as a mutual fund, but that usually comes with taking some risk.

The correct comparison is whether you can earn more than x% on a comparable risk basis. So, can you get a Treasury security or insured CD that yields more than x%? If yes, invest. If not, prepay.

If CR was right, then you must ask yourself why banks lend for mortgages. They can “borrow” from depositors at a rate lower than mortgage rates. For example, they borrow at 3% and lend at 6%. But why don’t they borrow at 3% and invest, as CR suggests, in a mutual fund? Because they need to have the security of low risk (in the form of collateral — the house), in case the depositors come and want their money back.

quick ? on the mortgage:

while you “save up” and invest additional $ to eventually pay off the mortage with a lump sum,

– aren’t you paying TAXES on the interest you’re earning through investments in the “saving-up fund”?

seems to me you’d need to consistently beat the whatever percentage your fixed mortgage is at, in order to compensate.

any people handy with a spreadsheet out there to comment?

@Doc Econ,

I would respond that I’m willing to take on more risk (hold a mutual fund, which is not risk-free) for 1) the probability of higher returns (I need to earn about 6% to come out ahead after taxes) plus 2) the flexibility of having funds available until I am able to pay off the mortgage balance. This seems similar to being willing to hold small value stocks over market weight — additional risk for the probability of additional return.

I would also argue that many people prepaying their mortgage have not maxed out their tax-advantaged accounts, and some may not be getting full company match on 401Ks. I personally would not pass up the ability to contribute to my 401K or Roth IRA to prepay my mortgage.

@LC — I show that $1,000/month in a 0% account equals the remaining principal at 89 months, yes. But if you apply that $1,000/month as a prepayment, you should finish in the 75th month. I just double-checked my cells, and the monthly prepayment formula and regular (non-prepayment) formula are identical except that one uses $1,600 and one uses $600. Since my formulas are consistent and we are getting different results, you might have set up two different ways of calculating mortgage payments.

@Doc Econ — I like that thought. I see prudent banks trading their own accounts some, but when trading gets to be too much of the earnings disaster’s imminent.

@k — That is a good point. When people pay taxes, they usually do it out of their paycheck or their checking account, not a savings account like this one. That means compounding isn’t affected — if I earn $500 in interest and am taxed 10%, that $50 is not coming out of the $500, it’s coming out of something else. The full $500 earns interest the next year.

At a 25% rate, 3% savings account, using my above calculations and the tax payment assumptions, putting $1,000 extra into a savings account instead of prepaying costs about $2,200 in taxes. I think you’re right.

@Michael
For the amortization with the prepayment, in the first month, your payment total is $1599.55. Only $1099.55 goes toward the principal and $500 goes toward interest. In the 2nd month, $1100.05 goes toward principal. Therefore you wouldn’t pay it off until month 89. Are your calculations for principal and interest correct?

Here are my monthly amounts going to principal for year one:
$1,108.00
$1,113.54
$1,119.11
$1,124.70
$1,130.33
$1,135.98
$1,141.66
$1,147.37
$1,153.10
$1,158.87
$1,164.66
$1,170.49

In my second month principal paid increases by $5.54 and continues to accelerate. In your second month the increase is fifty cents. That can’t be right. If you pay off $1,100 of principal in the first month, that $1,100 can’t earn interest in the second month. Interest not earned by that $1,100 in one month is:

$1,100 * (.06/12) or $5.50. Since you should have had that much less interest to pay you should have paid off that much more principal.

Are you subtracting $1599.55 every month? Perhaps the number is falling. Also, you might have a decimal off, or some other error, in your interest calculator.

The monthly payment is:
=PMT(0.06/12,360,-100000)=599.55

The interest payments are:
month 1=IPMT(.06/12,1,360,-100000)=500.00
month 2=IPMT(.06/12,2,360,-100000)=499.50

The principal does not decrease in these interest payment calculations

There is the problem. You are pre-paying the loan, but IPMT is calculating the interest portion of each payment as if you were not. In Month 2, IPMT thinks you paid $599.55 in Month 1, not the $1,599.55 you actually paid. Notice IPMT doesn’t ask if you are prepaying the loan — it can’t know and that’s why it gives the wrong numbers in a prepayment scenario.

I have duplicated your Month 1 results using this formula:

Month 1: (100,000+(IPMT(6%/12,1,360,-100000)))-599.55-1000
(should equal 98,900.45)
Month 2: (98,900.45+(IPMT(6%/12,2,360,-100000)))-599.55-1000
(should equal $97,800.40)

You need to calculate the interest portion manually, so that the remaining principal includes the extra $1,000. I suggest this:

Month 1: (100,000*(100%+6%/12))-599.55-1000
(should equal 98,900.45)
Month 2: (98,900.45*(100%+6%/12))-599.55-1000
(should equal 98,795.40)

If you put these side by side, make the obvious adjustments and fill across 90+ rows or columns, you should see how paying too much interest affected your results.

Thanks. I wasn’t sure if the interest ever adjusted.

Baba Ghanoush,

If you like to take more risk, that’s fine. It is a personal decision. The problem with the CR piece is they don’t adequately disclose the risks involved, so the comparison is not as straightforward as they make it seem.

The same is true as to having the funds available. The liquidity you would like to have is also a personal decision.

I have no idea if people who are prepaying mortgages are not taking full advantage of other investments, so I won’t comment on that.

Michael,

You definitely have it right. Great work explaining it all out. I have an amoritization spreadsheet I obsess over (a little :) and right now in the first year of a 100% loan, it’s insane not to prepay. I get a 500% return on any payment I make. I’d have to get a 7-8% guaranteed return EVERY YEAR to beat that over 30 years.

The only point I’ve seen that’s given me something to think about is Trent’s point that once that’s paid forward I can’t use it for anything else.