I'm confused because based on my math this is definitely not true. Am I missing something?
Here's what I have.
1) A 10 year loan of 20k at 7%
2) A 10 year loan of 15k at 3%
3) A 30 year mortgage of 100k at 5%
If I have $1,500 a month that I WANT (I'm ignoring retirement here) to go toward loans would it not be most advantageous the put the extra almost $500 toward the mortgage each month?
Whatever I'm doing is showing like 60k less in interest over 30 years...
No.
Why?
1) I'm presuming your mortgage is tax-deductible which means it costs less than 5%;
2) It doesn't free up any cash-flow until your mortgage is paid off in full.
I agree with you that it's not always best to pay off the highest interest rate loan first, but in your situation with the information you gave, it is better to knock out the other loans first.
Math-wise, it will take you longer to get out of debt and you will pay more interest if you pay the mortgage early rather than the 7% loan.
Think of it this way: If the payment on the 7% loan is $250 and you are paying off $500/month early, that's a total of $750. So you can pay $250 on the 7% loan and extra $500 on the 5% tax deductible loan, or you can pay off the 7% loan and then pay $750 extra (not $500) on the mortgage or the other loan. That's 50% extra cash flow by knocking out one of the loans. See?
No..what you do is put the extra $500 toward the 7% loan. That $500 towards the higher interest loan saves more money (you are saving $500 * 7/12% vs. $500 * 5/12% per month). When the 10 year loan is paid (early) you then switch that $500 (plus preferably the normal payment form the 10 year loan) to the mortgage which is the next highest interest.
The problem with your calculations is that you are comparing savings over 30 years versus savings over 10 years - of course in strict dollar terms you would save more since you are saving over a longer period of time. You need to compare savings over 10 years which is a comparable length of time.
And, I ran the numbers...if make no extra payments on the 10 year/$20,000 loan, you pay $7,866 in interest over those ten years. If you apply an extra $500 per month, you only pay $1,849 in total interest (saving $6.017) and as an added bonus, you have it paid off in about 2 1/2 years. Meanwhile, over the course of the first ten years of that 5% mortgage, you pay about $46,099 in interest. Paying the means that you pay $38,134 in interest over the first ten years - a savings of $7,975. While $7,975 is more than the $6,017 you save on the loan, remember that once you pay off the loan, you can then switch that $500 to the mortgage - and over the next 7 1/2 years (the difference in paying off the loan early) you will certainly save much more than the $2,000 difference. You only screw yourself if you pay off the loan and do not switch the $500 to the mortgage.
They speak of being able to make a double mortgage payment with the extra part marked Principle Only, to more quickly pay down the loan.
I would have to fiddle with calculations to see what works best, but putting what surplus you have toward the 7% loan might save you a bit more in interest fees.
Do bear in mind you want to keep a decent amount in savings so in the event you are suddenly without a job you can continue to make all your payments on time, being over optimistic and pouring too much into extra mortgage payments instead of savings could burn you if suddenly unable to make the min payments.
7% is greater than either 3% or 5%. which part of this is unclear?
Mortgage interest is deductible if you itemize on your tax return, so the TRUE cost of a mortgage is usually VERY low. regardless, you're paying 7% on some kind of debt, I don't care what unless it is deductible. pay THAT off first.
Trust your math, not some website. They probably meant the one with the highest interest, not interest rate because yes, the principle matters.
The higher the interest rate = the more money from your payment going to the lender verses yourself.
