Pay extra on mortgage or no?

[Erik88]

I have a financial question for the more knowledagble here. I was speaking to my boss last week who is big info personal finance and he told me he doesn't recommend paying exra on my house. His reasoning is that he would much rather have that money in a bank account or invested in something. He pointed out that the housing market could crash again and that I could always "walk away" from the house.

 

My logic for paying $50-150 extra each month towards the principle of my mortgage is that if I pay it off early the amount of money I will save in interest is pretty significant. Clark Howard says that extra $100 a month can save tens of thousands in interest.

 

The stock market isn't doing too hot. If I leave that $100 in my savings account it's really not earning any interest. I could put it in my Roth IRA I suppose. To me it just makes more sense to try and get my 30 year note reduced to 15-20.

 

Thoughts?

 

Also, I should add that we currently live off my income and save 100% of my wife's income so it's not like we are not putting money aside.

Edited February 14, 2016 by Erik88

[Lumber_Jack]

If you are out of debt completely except for the house I'd pay extra if you can afford it. "Walking away" from a house is a horrible idea. And you'd only have to do that if you owe more than it's worth. One sure fire way to keep that from happening....pay down the principle. Most people who stayed in their houses through the crash have recovered pretty well. Now, it's not the overinflated prices of 2007 but the value is coming back.

[enfield]

I also was advised to not pay off the mortgage early, but to enjoy that low interest loan and put any extra money into the market for long-term gains.  This is a good time to invest in the market - stocks are "on sale".

[Erik88]

If you are out of debt completely except for the house I'd pay extra if you can afford it. "Walking away" from a house is a horrible idea. And you'd only have to do that if you owe more than it's worth. One sure fire way to keep that from happening....pay down the principle. Most people who stayed in their houses through the crash have recovered pretty well. Now, it's not the overinflated prices of 2007 but the value is coming back.

 

I agree with you. Not only is it a horrible idea but I have issues with it morally. I agreed to pay for this house and would have a hard time just walking away. I paid off my student loans years ago, we have no credit card debt and our Rav4 will be paid off this year leaving only my truck payment.

[Erik88]

I also was advised to not pay off the mortgage early, but to enjoy that low interest loan and put any extra money into the market for long-term gains.  This is a good time to invest in the market - stocks are "on sale".

 

Interesting advice. My 401K has lost 10% or more since January 1st. I'm not sure now is the right time to throw MORE money into that arena.

[MrJones79]

Having money in your bank account is wasting your money's earnings power. So don't take that route if you have extra laying around. At least put it into something with a low yield return so you get something for it, and also have access to it if you need cash quickly.

As far as investing it, if the present value of your mortgage interest savings is greater than the estimated return on the investments, then mortgage is way to go. If vice versa, the opposite is true.

Basically, in my opinion, you're not going to hit it in out of the park investing about an extra $1200 a year in equities at the market return (and you may even lose money).

I'd throw it at your mortgage, but that's just me. That's not to say you shouldn't have some money I the market. If you're saving for retirement that is also a consideration.

Finding a good financial advisor helps as they do these calculations all the time. Trick is finding a good, honest one who isn't just trying to sell you their funds and actually cares about your future. They do exist, just need to do your due diligence. Edited February 14, 2016 by MrJones79

[enfield]

Interesting advice. My 401K has lost 10% or more since January 1st. I'm not sure now is the right time to throw MORE money into that arena.

 

I had a significant paper loss last month also.  I'm letting it ride and rolling the dice again this month.

[10-Ring]

How is your boss doing financially?  My first rule of taking financial advice is I don't take it from people who have less money than I do.  I agree that walking away from a house is a horrible idea.  You and your wife are out there killing it socking back an entire income, congratulations!  If I were you guys I would be paying that house off as quickly as possible.  Like, have a years worth of expenses in the bank and use every bit of the rest of your money to pay off the house.  Then you can invest that money in whatever you like and have a ton of financial freedom at a fairly young age. 

 

Which situation would you rather be in in 10 years...

A)  Have 20 years remaining on a mortgage but you have some investments that may or may not pan out?      or

B)  Own your home free and clear with an extra income that you can do whatever you want with? 

[Lumber_Jack]

I agree with you. Not only is it a horrible idea but I have issues with it morally. I agreed to pay for this house and would have a hard time just walking away. I paid off my student loans years ago, we have no credit card debt and our Rav4 will be paid off this year leaving only my truck payment.

So if it were me. I'd take the extra money and pay off the vehicles sooner. You'll save money on interest there too, and they depreciate faster. Then once they're paid off take the money you were paying in payments and put all of that extra on the house. This way the budget stays balanced.

[TripleGGG]

How is your boss doing financially? My first rule of taking financial advice is I don't take it from people who have less money than I do. I agree that walking away from a house is a horrible idea. You and your wife are out there killing it socking back an entire income, congratulations! If I were you guys I would be paying that house off as quickly as possible. Like, have a years worth of expenses in the bank and use every bit of the rest of your money to pay off the house. Then you can invest that money in whatever you like and have a ton of financial freedom at a fairly young age.

Which situation would you rather be in in 10 years...
A) Have 20 years remaining on a mortgage but you have some investments that may or may not pan out? or
B) Own your home free and clear with an extra income that you can do whatever you want with?

Debt free living is a great thing. Have a reserve for emergencies. Payoff highest interest loans first. Then pay the house off as fast as you can. Once you are debt free your life will change completely.

[Ugly]

if you have a 30 year fixed rate mortgage and make one extra payment a year toward principle, it will shave off 12 years of payments. I had a friend show me this on paper many years ago and have applied it to my mortgages. In my opinion it makes sense to do even if you don't plan on staying in the home forever. 

 

That is my recommendation and you are in good financial shape for a reason, congrats! I would do more homework and weigh out the pros and cons and make your decision. 

[i1afli]

The stock market is legalized gambling whereas paying down your mortgage is a guaranteed 3% - 5% (depending upon your interest rate and whether you itemize your taxes) return...you can't get that kind of return on any savings account.

There's also a financial peace associated with having your house paid off.

[Erik88]

So if it were me. I'd take the extra money and pay off the vehicles sooner. You'll save money on interest there too, and they depreciate faster. Then once they're paid off take the money you were paying in payments and put all of that extra on the house. This way the budget stays balanced.

 

The Rav4 has a 0.9% interest rate. Over the course of the loan the total interest was only $350. We're still paying extra on it and my Tundra. Good advice though.

 

I guess I should have specified, we have enough money in the budget to pay extra on both vehicles AND the house. The question is whether or not it makes more sense to put that house money towards my Roth IRA or something else. It sounds like most here agree with me that paying the house down is the way to go.

[Erik88]

How is your boss doing financially?  My first rule of taking financial advice is I don't take it from people who have less money than I do.  I agree that walking away from a house is a horrible idea.  You and your wife are out there killing it socking back an entire income, congratulations!  If I were you guys I would be paying that house off as quickly as possible.  Like, have a years worth of expenses in the bank and use every bit of the rest of your money to pay off the house.  Then you can invest that money in whatever you like and have a ton of financial freedom at a fairly young age. 

 

Which situation would you rather be in in 10 years...

A)  Have 20 years remaining on a mortgage but you have some investments that may or may not pan out?      or

B)  Own your home free and clear with an extra income that you can do whatever you want with? 

 

 

He's actually doing very well financially. I like your advice though. Thanks for the input.

[jpx2rk]

I think it is in a persons best interest to have some type of debt at all times, like a small car loan or mortgage.  Not anything that causes hardship in makin those payments tho. Having a current/active credit history is invaluable when things get ugly in the financial world, whether housing loans or car loans, etc., and they can get ugly quickly.  If you don't need any $$ right now or in the near future, what about 3 yrs from now (can't tell can you) but if you don't owe anything now, you'll have "old" credit history and the lenders don't necessarily like that so they may not loan the $$ you need.  Go borrow $5000 on a 90-180 day note, buy a CD with the proceeds, and when the note comes due, (the CD is tied to the loan maturity date), redeem the CD and pay it off.  You'll owe a few more $$ in interest on the loan than you'll get from the CD, but the lender reports that you borrowed $5000 and paid back $5000 timely.  And that is what you need.  Credit cards, pay 'em off in full every month, take advantage of any cash back options available but 18+% on CC balances is a horrible option for buying something on time.

 

If you have a large mortgage, pay extra on it to get the principal balance down (as much as you can w/o making life uncomfortable) until it gets down to a more reasonable amount (your opinion here) and then re-evaluate the situation.  Maybe re-finance at a lower rate if possible due to good credit history and no closing costs opportunities being offered, etc. or just start making the required amounts per the original loan documents.  

 

Take advantage of any IRA options at work, and contribute enough to get the maximum matching contribution from the company.  That's free $$, so if the company will match your contributions up to say 3%, your 3% + their 3% equals 6% savings.  If you can afford to contribute more, that's great, but take advantage of the free $$ from the company.  

 

If you have $$ left over after all of this, you're doing great, enjoy life.  

[analog_kidd]

We started doing the Dave Ramsey plan many years ago and it has worked very well for us:

 

1. $1,000 to Start an Emergency Fund

2. Pay Off All Debt but the House

3. 3 to 6 Months of Expenses in Savings

4. Invest 15% of Household Income Into Retirement

5. College Funding for Children

6. Pay Off Home Early

7. Build Wealth and Give. 

https://www.daveramsey.com/baby-steps/

 

According to that plan, the house is the last thing to pay off. Your vehicles and credit cards should be what you are focusing on, if you have an emergency fund of a couple grand put away.

 

If you got the mortgage recently, it's probably a fairly low interest rate, and almost certainly higher than your other debt, so the other debt just makes sense to pay off. Plus the other debt is a smaller chunk, so it will pay off quicker. The satisfaction of knowing you have no debt but the house is amazing. Then use what you were paying on the debt to pay down the mortgage. It'll be more than $100 a month, so you'll get caught right up to where you would have been if you started on the mortgage first.

 

If you look into how paying off early works, you'll find that it pays off the tail end of the mortgage. If you look at an amortization schedule you'll see that the portion of your mortgage that goes toward principal increases over time. So, a $1000 mortgage payment in the first month pays maybe $5 of principal, and $995 of interest. The opposite is true of the end of the mortgage: your last payment will be $995 of principal and $5 interest. So paying $100 a month extra will take 9 months just to save one mortgage payment. (I made up these numbers because I am too lazy to go look them up, but the point remains, and I'm probably not too far off)

 

Now I'm not saying you shouldn't pay early, but you definitely should take care of the earlier baby steps first. If you have not read any of Dave Ramsey's books, you owe it to yourself to go get one.The Total Money Makeover is one that I read, and it changed the way we look at money. It's taken a while, but we are on step 6. All debt is paid, including two cars, and we are paying down the house as fast as we can. I'm 15 years away from retirement, and I want the house paid for way before that. I can't imagine making a mortgage payment on retirement income.

[enfield]

Do yourself a favor and talk to a professional investment advisor.

[Wingshooter]

There is a loan amortization template in MS Excel that I find to be pretty accurate. You can find it under Templates. We use this to figure additional payments on investment houses. Plug in some numbers there, and watch the years fall off your mortgage.

I'd loose all other debt first as someone suggested, then pay down the mortgage. Even if you want another house down the road, having more equity in your home can put that money and more right back in your pocket. Edited February 14, 2016 by Wingshooter

[NextExit]

Interesting advice. My 401K has lost 10% or more since January 1st. I'm not sure now is the right time to throw MORE money into that arena.

I'm not a financial adviser (tho I did stay at a Holiday Inn ;)  ) but I'm still putting into my IRA.  Let it tank, it won't stay down forever and the returns will be great (hopefully)  Look at most mutual funds.  They're taking a beating for the past year but when you go back 10+ years, most are showing a decent return.  And just about any fund will return more money than what the interest rate is at a bank.  :2cents:

 

Which situation would you rather be in in 10 years...

A)  Have 20 years remaining on a mortgage but you have some investments that may or may not pan out?      or

B)  Own your home free and clear with an extra income that you can do whatever you want with? 

Tough part is determining what life might throw your way in 10 years... will you still have a job? will you have to move? need a bigger/smaller house?

Paying down helps free up equity to keep your options open for whatever happens.

(Tin foil hat on mode) I'd rather keep some debt so in case someone tries to sue me and take everything, they get all my debt. :biglol:

[NRA]

I say absolutely pay off the principal as much as possible. By doing this you will decrease your monthly interest payments dramatically, you will also pay off your home much sooner.  Unless you enjoy making most of your payment go towards interest that is. 

Edited February 14, 2016 by NRA

[RED333]

We paid off a 30 year loan in 10 years and NEVER looked back. Our place has been paid off for 10 years

now and aint nothing like walking in "your" grass.

[Jonnin]

Pay extra.   The stock market is pretty frustrating right now (theres money to be made, always, but when one person makes money, another loses it!)  and interest rates / return on investments are low.  Conversely,  the interest you pay on a large loan is HUGE over time.   If you can pay down the principle a bit EARLY the amount over time decreases significantly.

 

Just do the math.

Go to your home loan folks and have them calculate the total interest paid if you pay the agreed payments for all those years.

Then run a what-if you put 100 bucks more per payment into the principle each month.  

Look at the numbers.

 

Now take that 100 bucks a month and do a what-if based off current average returns from having a stock market account. 

 

Which one is better?  (I already told you,  but you should see it for yourself).

[peejman]

I also was advised to not pay off the mortgage early, but to enjoy that low interest loan and put any extra money into the market for long-term gains. This is a good time to invest in the market - stocks are "on sale".

Agreed. Unless you live in a growing housing market, a house is no longer your "best investment" as it was once called, especially since mortgage rates are so low. If you can afford to pay extra, do so. If the extra you pay would otherwise go into other (retirement) investments, then I'd invest it.

[owejia]

Nothing is too big to fail.Being debt free is low stress living.Remember you have to live somewhere,so is it better to live in your own home,, or pay someone else to live there,[bank, mortage co.,rent]. Once you are debt free you will want to stay that way.

[Grand Torino]

So if it were me. I'd take the extra money and pay off the vehicles sooner. You'll save money on interest there too, and they depreciate faster. Then once they're paid off take the money you were paying in payments and put all of that extra on the house. This way the budget stays balanced.

Yup..I agree. Pay off those vehicles, credit cards and stuff like that. Before you know it you'll have hundreds more every month.