As a precursor, I am going to say that I will do my best to frame this in the most understandable way possible. My thoughts sometimes come off as jumbled to anyone I know, though I understand them perfectly, but let me know if you need further explanation. I am in a debate with my boss and he is trying to say the amounts of money do not matter, only the percentage points. I may be wrong, but I'm looking for some helpful advice for the argument, unless I am wrong of course.
Here is my questions about banking: If I were to take a 15 year loan on $125,000 at 4%, I am looking at a total of $200,000 for the loan. If I wanted to make double payments, do they recalculate the rates based on that? As far as I can tell, the banking institutions around me only offer set lengths of time for loans. In this case it's a mortgage for a house. The only options they seem to offer are 15 and 30 years.
The other part of my argument kind of hinges on this. He is arguing that if someone can take that extra money of paying a mortgage in doubles, and invest it into a portfolio that has an annual growth rate of 11%, they would be better off doing that.
My side of the argument (and I may be over thinking this, so feel free to tell me if I am) comes out something like: If they can half the amount of time to pay off the loan, then they are cutting the interest by $37,500.
So, it's only worth it if:
Total interest acrued after 7.5 years > $37,500
The other advantages would be getting a loan payed off earlier because outstanding debt is a negative asset.
Neither of us are financial experts. Just a random debate we got into. Only, I have zero experience with a mortgage because I have little interest in owning a home in the current economic state, and he has a home he is currently paying a mortgage on. This is just something I have been working over in my head. Thanks for any help. Tell me if you need more info.
I answered my own question while pondering something else. He is correct, as far as I can tell, that the percentage points are what matters. The difference is 7%, which is the amount of annual growth he would have on that money after taking into account the 4% loss due to the interest against the loan.
In the words of a gamer buddy of mine, "I herpederped".
Thanks