If someone can explain, why when you make an extra mortgage payment, the interest savings on your mortgage will be greater that the prepayment amounts interest rate.
For Example. I take out a convetianl of $500K 30 year mortage at 5%. If on the first day of the loan, I make an extra payment of $50K, my savings on the life of the loan is greater than $50k*5%*30 years.
This is 100% true, I just do not understand why. Any help would be appreciated.
In the above example. interest for the life of the loan with no prepayment is $466,278. With a payment of $50K on day 1, it reduces your interest by $141,490. However, A $50K investment at 5% (a la a CD) for 30 years returns only $75K.
I have 2 theories. The increase savings, is either becuase of compaond interest or becuase you prepaid off your principal you are "ahead" with teh lender so they owe interest on some money.