Pay extra on mortgage or no?

[Omega]

Yes and no... While true, adding extra to your monthly payment does reduce the principle....

The Bi-weekly payment schedule reduces the balance by 50% of the monthly principle payment 14-days earlier than sending in extra at the end of the month. While not huge (maybe a couple hundred bucks for most people?), you're not paying interest on that portion of the principle for 14 days, that you would be if you were just paying extra on a monthly mortgage. It's getting the principle off quicker, that reduces the interest payment over time more greatly, than simply whacking extra on the tab? The bi-weekly schedule puts the payments on the principle faster, and more frequently, so the interest will be reduced... One reason some banks don't offer it! I had to shop around.

Yes, but if you already have a mortgage..

[rmiddle]

 

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. 

 

I agree with this one for the most part.  That is pretty much what I have been doing.  Miss the College Fund we don't have kids.  Make sure you max out your matching 401K dollars they are a gift.

 

Make sure you have a few months worth of expenses in the bank first.  That way if something goes wrong you have something to fall back on.

 

I would pay off the house before putting a large amount into retirement or the stock market. For one thing most people will be lucky to keep up with inflation for the next 2 years the stock market has a few more drops coming.  A house with just 4% interest will save you hundreds a month paying off earily.  You will generate more wealth paying off down your mortgage for the next 2 years then you will ever make in the stock market.

 

Thanks

Robert

Edited February 15, 2016 by rmiddle

[RC3]

My folks payed around $500 extra each month towards the principal only. They finished paying off their house in a little over 10 years. And now they can put that extra cash to anything else they might need.

[musicman]

Just to jump in the fray with my $.02

Wifey and I are 33 years old and blessed by our parents with debt free four year degrees. We were married and bought our house in 2007 on a standard 30 year mortgage. 2008 and 2009 were crummy years, but by 2013 were back on better footing financially and we refinanced to a 15 year mortgage. We have no other debt, and our cars are both 8 years old with 130k and 142k miles right now. I'll keep them until they become money pits, at which point they wouod be replaced with another reasonable 3-4 year old vehicle.

We try to take a balanced approach. We add to Roth IRAs, but not at tge max amount right now. I am just starting a little stash of precious metals as a small hedge. We have some funds in a general money market kind of thing, and our standard emergency fund as well.

We add between $100 and $200 a month to our principal. We're not going to break our backs to pay off the mortgage ASAP (interest is tax deductible at least) but we'd like to be done with it 7-8 years from now. The plan is at that point to save for another couple years, buy land, and build the place we'll ride out the rest of our earthly time.

Dunno if that means anything to you, but that's our plan and we're stickin to it.

[rmiddle]

Do you think this is your last house? There is probably a difference in this formula if you think you may move, or just need a bigger house in 5-15 years.

 

As someone who had paid off his last place before moving it made the math much easier.  I was able to put much more down since I know when I sold my place all the money would replace my saving.  It took my around 2 months to sell my old place but we were able to replace much of my savings at that point.  If we still has debt on the place and wasn't expecting a decent pay day it would have been allot harder to buy my current house.  Now my current house I attend to live in until they put me in the ground.

 

Thanks

Robert

Edited February 15, 2016 by rmiddle

[btq96r]

As someone who had paid off his last place before moving it made the math much easier.  I was able to put much more down since I know when I sold my place all the money would replace my saving.  It took my around 2 months to sell my old place but we were able to replace much of my savings at that point.  If we still has debt on the place and wasn't expecting a decent pay day it would have been allot harder to buy my current house.  Now my current house I attend to live in until they put me in the ground.

 

Thanks

Robert

 

How would that work if a timeline was present?  In the military, I saw guys who had to go regardless if their house sold or not, so my instinct tells me to keep a chunk of money on hand for the next down payment if I ever had to move for work unless I'm damn sure I'm staying somewhere for the next five years.

[Hershmeister]

Other possibilities include using the funds to make sure you both have sufficient life insurance policies. Term life covering 10-12 times earnings is a good place to be - especially if you have children.

Do you have an umbrella policy?

If all else fails use that $1200 a year to buy a new gun [emoji41]

[rmiddle]

How would that work if a timeline was present?  In the military, I saw guys who had to go regardless if their house sold or not, so my instinct tells me to keep a chunk of money on hand for the next down payment if I ever had to move for work unless I'm damn sure I'm staying somewhere for the next five years.

 

Have the place paid off made selling the place much easier.  I would always recommend having a few month of saving just in case.  Selling from out of state isn't that hard.  We had someone local under contract to sell the place.  Once we had a buyer we took care of everything from our new home.  I left Maryland on June 22nd of last year.  We sold the place at the end of August we handled everything though either email, fax, or overnight delivery of the paperwork.  The more you have paid off the more flexibility you would have in selling your old home and once it sold the more cash you would have in the back for the next place or saving for other stuff.

 

Thanks

Robert

[Patton]

There is some good advice here in the previous post. While I am not a banker, I am married to one. Trying to live debt free is a lucrative goal. I have heard mortgage interest is nothing lost and nothing gained. You don't need to pay significantly extra on your home if you have car loans. Those should almost always be payed off first. There are actually several reasons as to why you do that. Now you should have an interest rate of no more than say 4.5%. While it is a small percent, you should be able to write off mortgage interest and a house will not depreciate like possessions with wheels. In the event of a disaster your home can be more easily protected in bankruptcy court. Some people will even be in a situation where owing money on a home can protect it from being lost in a civil trial.

[DaveTN]

I’m not a financial expert; but my home is paid for. Four years into a 30 year loan we refinanced it to 15, then paid extra on it and got it paid off.

Now having said that, I could do that because I didn’t listen to the realtors about what I could afford and bought what I wanted to live with. I didn’t want to live to make a house payment.

When I signed on with Edward Jones my agent wanted to talk about what I wanted to invest in and how I wanted to invest it. I told him I try to be an expert in my field (and it’s not finance) and I expect him to handle that end of it; that’s why I came to him.

We then sat around and talked about guns, cars and motorcycles; the important stuff. Stuff I can buy because I’m not buried in a house payment.

[jpx2rk]

Several years ago when I was considering the various mortgage options available at the time, I discovered that one lender offering the bi-weekly payment schedule would hold the "half payment" (for lack of a better term) or 1st payment of the month in ESCROW until the full amount was available to be applied against the balance owed.  This in essence did not reduce the principal balance every 15 days or 2x/month as the payment schedule would indicate.  The lender just got the $$ early, invested it in some manner and got use of the money for FREE.  Just verify how and when the bi-weekly payments are actually handled & applied at that lender.  

[monkeylizard]

Look at it this way. If your home was paid for, would you take out a home equity line of credit at a low rate and put that money in the stock market?

 

If not, then pay off the mortgage. One thing your boss is forgetting is that when you no longer have a mortgage, you'll have the entire monthly payment as free cash flow for yourself to do with whatever you choose.

 

Besides that, anyone who would advise me that walking away is a good option doesn't have the moral foundation to give me advice on anything.

Edited February 15, 2016 by monkeylizard

[buck1032]

I am not a money guru, but my wife is. She built the house in 97 and she would pay a half payment extra a month. I don't remember when she originally planned to have the house paid off. When I came along and our monies combined she doubled the payment. The house has been paid off for almost 10 years now. Our vehicles, motorcycles and camper is paid for. We do not carry debt, period. I follow my wife's plan, she pays for everything on a credit card and pays that card off every month. We do no let that debt ride month to month, as such no interest is paid. We usually get a few grand in cash back at the end of the year. Not too shabby since we don't pay interest. And since we are debt free, she pays the max amount in to her retirement accounts. What works for other people may not work for you. Take what advise you can and apply to your needs as you see fit. Good luck.   

[MacGyver]

I've got a printed copy of our amortization schedule in my top drawer.  Every month when I pay the mortgage, I make the mortgage payment, and then find the next month's portion to principal, and pay that amount as well.  I then cross both payments off the list.  It's one of the most satisfying things I do every month.

 

To each their own, but I'd much rather be totally out of debt and make the decisions about where my money goes than to just simply be content with, "mortgage interest is deductible."

 

At the very least, print an amortization schedule on your mortgage and play around with it some.  You'll be offended when you see the interest numbers - especially in the first half of the repayment period.

 

I'd agree with others - pay off the cars first and get some rainy day savings squared away.  But following that, feel good about putting the money towards your mortgage.

[monkeylizard]

I've got a printed copy of our amortization schedule in my top drawer.  Every month when I pay the mortgage, I make the mortgage payment, and then find the next month's portion to principal, and pay that amount as well.  I then cross both payments off the list.  It's one of the most satisfying things I do every month.

 

To each their own, but I'd much rather be totally out of debt and make the decisions about where my money goes than to just simply be content with, "mortgage interest is deductible."

 

At the very least, print an amortization schedule on your mortgage and play around with it some.  You'll be offended when you see the interest numbers - especially in the first half of the repayment period.

 

I'd agree with others - pay off the cars first and get some rainy day savings squared away.  But following that, feel good about putting the money towards your mortgage.

 

This, but I'd start a mini-emergency fund first. Put $1,000 in that kitty, then pay off all debts but the house. That mini-fund comes in handy for not making your debts worse when you have an unexpected bill. Then fully fund the rainy day fund with 3-6 months of your current expenses after you finish all debts but the house. If worst cases happen, most people can cut expenses and make that last well past 3-6 months.

 

If anyone wants to see their amortization schedule and how it changes based on additional principal payments, I like this calculator: http://www.bankrate.com/calculators/home-equity/additional-mortgage-payment-calculator.aspx

Edited February 15, 2016 by monkeylizard

[fullagofast]

I haven't read all the responses so apologies if this is repeated info.

Look at what is being suggested by the OPs boss from another angle. By prolonging debt (saving/investing that extra payment) you are effectively borrowing money. That is to say the money you are saving is costing you interest.

If you were debt free, would you go borrow any amount of money to put in the bank or invest? Most of us would not -exception- you are a large corporation where you may find benefits like using payments to reduce taxable income.

[Hershmeister]

I haven't read all the responses so apologies if this is repeated info.

Look at what is being suggested by the OPs boss from another angle. By prolonging debt (saving/investing that extra payment) you are effectively borrowing money. That is to say the money you are saving is costing you interest.

If you were debt free, would you go borrow any amount of money to put in the bank or invest? Most of us would not -exception- you are a large corporation where you may find benefits like using payments to reduce taxable income.

Heck yes I would borrow at a net interest rate of 2-3 percent - this is called leverage and is the only way you can generate returns greater than the market average.

[rmiddle]

Heck yes I would borrow at a net interest rate of 2-3 percent - this is called leverage and is the only way you can generate returns greater than the market average.

 

And it can turn around on you and start costing you for the payback cost plus whatever capitol you lost in the investment.  Always remember you are taking a bet in an investment.

 

Thanks

Robert

[monkeylizard]

Heck yes I would borrow at a net interest rate of 2-3 percent - this is called leverage and is the only way you can generate returns greater than the market average.

 

Except that the 3-4% interest rate on the HELOC is constant, but the return from the market is not. It works.....until it doesn't. Maybe you can beat the market, but 2015 was one of those net-loss years which would be made worse by the interest payments on the HELOC to have made it a very bad year. even beating the market in 2015 wouldn't have been enough. You'd have had to beat the hell out of the market then gone back for more. 2016 is shaping up to be more of the same. It would suck to have a payment due and be sitting on an investment that has already lost 20%+ since Christmas. If you can ride out the downturn, that's one thing, but when the payment's due, that's not an option.

Edited February 15, 2016 by monkeylizard

[gregintenn]

Heck yes I would borrow at a net interest rate of 2-3 percent - this is called leverage and is the only way you can generate returns greater than the market average.

Where would you have beating that thus far this year? All you borrow to invest guys aren't calculating risk into your business plan.

[Wingshooter]

... One thing your boss is forgetting is that when you no longer have a mortgage, you'll have the entire monthly payment as free cash flow for yourself to do with whatever you choose.
 
...

It's also one step closer to not needing a boss at all (depending on investments and other income)

[monkeylizard]

Oh, yeah! It really is your Johnny Paycheck insurance policy.

 

It also frees up more cash to throw in an IRA or other retirement vehicle and either get there sooner, have a better retirement, or both.

Edited February 15, 2016 by monkeylizard

[fullagofast]

this is called leverage

Yes,

In theory... this should work every time.

In practice... This thinking had folks with a $30K income buying a $1M house and just paying interest since the growth on the real estate "investment" was outpacing their interest giving them more than 2-3 points leverage. Hello downturn, all this goes on its head.

 

In all fairness, if you can leverage and sleep at night, go baby go. I hope you make so much money you can't spend it all. I just don't think it's for me.

[gregintenn]

Yes,

In theory... this should work every time.

In practice... This thinking had folks with a $30K income buying a $1M house and just paying interest since the growth on the real estate "investment" was outpacing their interest giving them more than 2-3 points leverage. Hello downturn, all this goes on its head.

 

In all fairness, if you can leverage and sleep at night, go baby go. I hope you make so much money you can't spend it all. I just don't think it's for me.

I've seen Wile E. Coyote use leverage to move a giant boulder. He usually ends up under it. :biglol:

[Hershmeister]

Except that the 3-4% interest rate on the HELOC is constant, but the return from the market is not. It works.....until it doesn't. Maybe you can beat the market, but 2015 was one of those net-loss years which would be made worse by the interest payments on the HELOC to have made it a very bad year. even beating the market in 2015 wouldn't have been enough. You'd have had to beat the hell out of the market then gone back for more. 2016 is shaping up to be more of the same. It would suck to have a payment due and be sitting on an investment that has already lost 20%+ since Christmas. If you can ride out the downturn, that's one thing, but when the payment's due, that's not an option.

You misunderstand me - i am NOT saying get a heloc and bet the house. I would not be that bold.


What i am saying is that its better to borrow for the house and then invest your other dollars in the market. You have a fixed rate of borrowing now at ultra low rates and a long time horizon to grow your invesment.


I compare this strategy with one which pays the mortgage down quickly.

Yes the latter will get you "out of debt" faster but you miss the opportunity cost of those "extra" payments.


I understand the value of getting out of debt, but unleas its your "last house" the reality is most people move every 7 years, and if you are that average person you'll never notice the impact of that extra payment other than having more of your money tied up in an illiquid investment of a house