[iron]

an idea popped in my head a few weeks ago. let's say you had 300 people with 300 home loans. each loan is $300k. each monthly payment is $2000. let's the say group of people decided to pool together extra money to make accelerated payments on the mortgages, paying off one house at a time. so, if everyone put in an extra $1000 principal payment in the first month, one house would be completely paid off. this process would repeat until all loans were paid off. obviously, as each house is paid off, the extra monthly loan payment amount for the paid off home would then also be taken and applied to the principal payoff plan. would something like this be possible? do you think it would be an incredible legal hassle to form that kind of agreement with that many people? obviously, you have risks of defaults, foreclosures, and people not abiding by the agreement. the paperwork agreed upon would need to be quite thoroughly reviewed for loopholes. in general, i think it could really work and piss of banks in the process. the math behind it is more than i care to calculate, but without accounting for interest or the amount of principal (from regular payment) paid down: month 1: 1.0 houses paid off / month (300,000 extra principal) month 11: 1.07 houses paid off / month (300,000 extra principal + 10 x 2000 (former monthly payments) = 320000 / 300000 = 1.067) month 151: 2.0 houses paid off /month (300,000 extra principal + 300,000 former monthly payments = 600,000 / 300,000 = 2.00) that means, that the average # of houses paid off in the first 151 months would be 1.5 house/month. 1.5 x 151 = 226.5 houses (12.6 years). my guess is that # is closer to 300 if you acct for the other principal paid off from normal monthly payments. or, is my thought logic flawed? is 300 people paying down 1 loan (1 at a time) the same as 300 people paying down 300 loans, assuming interest rates and extra payments are the same in both cases???

[flatsqwerl]

haha...can't sleep at one in the morning?

[Daryl]

There would be savings as each loan gets killed because that interest burden gets erased, assuming the money that would have gone to that interest now goes to the principal of another loan. Wouldn't work though, too many opportunities for corruption and a lot of math. Two things people run away from.

[Tom]

Is there a reason to complicate it? If everyone wants to pay down their mortgage sooner then why not just pay their own mortgage? Or are you assuming paying off early will piss off banks? Not really. Let me be the bank. You can pay me all those up front fees for the loan, then you can pay it off tomorrow. I'm happy.

[iron]

i'm mostly just curious if there is a net efficiency gained in collectively paying it off vs. individually. it seems that if you eliminate interest entirely from one house at a time (each month at a minimum), you could gain efficiency. but i'm not positive. i think an elaborate spreadsheet would be needed.

[Tom]

No, there is no efficiency gained. About the only thing that would increase or reduce the efficiency is if additional payments were counted early or late. A collective effort to extract the embedded option value might be more valuable. You have the option to prepay or refinance if rates fall. You have the option to walk away if the market value falls below your loan balance. These are options an individual can exercise (although many do not exercise them efficiently so a collective effort could help here). You also have the option to not pre-pay if interest rates rise. This is not necessarily an option an individual could exercise if they wanted to move (without a collective effort).

[Backpacker Joe]

There was an activity in the early 90's that sounds exactly like this, but I cant remember what they called it. Massive amounts of people would put in money that one person would get. Then they'd do it again and another person would get it. This went on and on until everyone involved got a large payout. It was a sham that a lot of people fell for.

[Daryl]

yep, ran the math. interest on 300 loans of 299K = interest on 299 loans of 300K. No efficiency to be gained. Your best bet is to get on the every 2 week payment plan (or just do it yourself). basically pay half your monthly payment every 2 weeks. it knocks your 30 year loan down to like 23 years without paying much more.

[iron]

[Tom]

Or just pay off as much as you can every month to save more interest if that's your end goal. Of course, you need to make sure you have enough liquidity in case something goes wrong. Also, probably not a good idea to forego retirement savings to pay down a mortgage, particularly if it means not maximizing employer matching contributions. From a risk/return perspective it is theoretically better to leverage. At the extreme, borrow all you can. Invest the money in the riskiest ventures. Keep the upside if it goes well. Walk away if it goes south.

[Daryl]

righto! the every 2 weeks thing makes paying a little more part of the plan plus it shaves off a little interest (basically half of every payment is 2 weeks early). A friend recently told me his daughter cashed out her 401K to buy a house. I screamed "WHAT!" and he said he suggested it...

[boot up]

[iron]