fbpx

Should You Pay Extra to Your Mortgage?

This topic contains 10 replies, has 0 voices, and was last updated by  Bainc 2 years, 9 months ago.

  • Author
    Posts
  • #177871

    norules
    Participant
    • Topics - 91
    • Replies - 530
    • Total Posts - 621

    Should you pay extra to your principal of your house loan or save it? One thought, yes you should pay off your mortgage. However, if you do not have extra cash around for emergency, you should build up your emergency cash before paying extra money to the mortgage. Another thought, you could invest it and make a better rate of return on the investments than paying off your mortgage. If your mortgage interest rate is about 4%, then you have to find investments that pay better than 5% to make it worthwhile(consider taxes on gain). Question would be, would you invest the money or go buy a car and put yourself in deeper debt?

    Others may say don’t forget the write off of the interest payment from your taxes. I say, why pay the bank more money than you need to. All that interest you pay goes to the bank. Why let the bank get richer of you ? You can always put your money into IRA and 401K to get write offs from taxes after you pay your house down.

    Here is a calculator you can use to see how you can pay off your loan quicker. It takes about 30 seconds to enter your loan info and it will do the calculation. Play around with it, put in $100 extra/month, put in $200 extra/month.

    http://www.bankrate.com/calculators/mortgages/mortgage-loan-payoff-calculator.aspx

    Here is an article with some ideas about this discussion.

    http://www.obliviousinvestor.com/when-does-it-make-sense-to-prepay-a-mortgage/

    When Does It Make Sense to Prepay a Mortgage?

    A reader writes in (in reply to last week’s article about calculating the after-tax interest rate on a mortgage), asking:

    “I get that the point of calculating an after-tax interest rate is to determine whether it’s better to prepay your mortgage instead of investing. But where do you draw the cut-off? How high does the interest rate have to be in order for it to be better to pay it down rather than invest? Would looking at historical returns for the funds I own would be useful here?”

    Prepaying a mortgage provides a safe rate of return. That is, you know that the return you’ll get from paying down the mortgage is equal to the after-tax interest rate on the mortgage.

    As such, generally speaking, what you want to do is compare the after-tax interest rate on your mortgage to the after-tax expected return on the safe investments (e.g., bonds or CDs) that you hold or that you are considering buying.

    For example, if your mortgage has an after-tax interest rate of 3%, and you are holding fixed-income investments that have an after-tax expected return of 2%, you’re essentially borrowing money at 3% in order to lend it back out at 2%. In most cases, that doesn’t make sense.

    Conveniently, it’s fairly easy to get a decent estimate of the expected return for a fixed-income investment. In most cases, just look at the yield.*
    Look at After-Tax Expected Returns

    A key point here is that, just like we looked at the after-tax interest rate on the mortgage, we have to look at the after-tax expected return for the investments in question.

    In the case of tax-sheltered retirement accounts, the calculation is easy. Specifically, if you would be liquidating assets from retirement accounts (or choosing not to contribute to retirement accounts) in order to prepay the mortgage, the return on the investments in question wouldn’t be taxed, so the after-tax rate of return is the same as the before-tax rate of return.

    In a taxable brokerage account, however, determining the after-tax return can be somewhat trickier. It’s simply calculated as the before-tax expected return multiplied by (1 – your marginal tax rate). But your marginal tax rate will depend on your tax bracket, what type of investment we’re talking about (taxable bond? muni bond?), and on other factors such as whether or not you’re subject to the 3.8% tax on net investment income.
    A Reason Not to Prepay

    Regardless of the above comparison of rates of return, it definitely does not make sense to prepay your mortgage if doing so will cause you significant liquidity problems.

    For instance, if you have an “emergency fund” sitting in a savings account earning little to no interest (and you truly would need that money in the event of a large unexpected expense), it’s not a good idea to use that money to pay down your mortgage, despite the fact that doing so would earn you a higher rate of return than the savings account is earning.

    *Specifically, you’ll want to look at the yield to maturity for most bonds, the yield-to-worst for callable bonds, and the SEC yield for bond funds.

  • #295185

    LC
    Participant
    • Topics - 640
    • Replies - 7,150
    • Total Posts - 7,790

    The alternatives are well and good, except you still have debt on a non-performing asset. We’re picking up a new car this week, offer is 0% 60 months. We’re writing a check. We just don’t want debt. I think any debt that doesn’t provide for positive leverage on the debt expense should be paid off as quickly as possible.

    We have one shopping center where the debt is about equal to an average size home loan. We’ve paid that loan down every chance we’ve had and can withstand having only one tenant if it ever came to that. I like being in that position.

  • #295187

    norules
    Participant
    • Topics - 91
    • Replies - 530
    • Total Posts - 621

    The surest way to save money is to pay your debts and stay debt free. We paid off our house in 11 years. No way we were going to give the bank more money with the interest.

    “We’re picking up a new car this week, offer is 0% 60 months. We’re writing a check. We just don’t want debt.” I probably would do the 0% 60 months, but probably pay it off sooner. That way, I could use the money to invest. I like your thinking though. Pay cash.

  • #295192

    Anonymous
    • Topics - 18
    • Replies - 1,250
    • Total Posts - 1,268

    If I remember correctly, If you make one additional payment a year, you can pay off your loan in approximately 22 years. If your loan is $1600, pay $1733 a month and that will equal to an extra payment a year.

  • #295194

    Bainc
    Member
    • Topics - 9
    • Replies - 892
    • Total Posts - 901

    Many factors but in general a paid off house feels good. Most wouldn’t take their paid for house and take out a loan to invest. Some would and can do well but most wouldn’t take the risk.

    However, if I’m 65 and have 25 years left on my mortgage I’m probably not paying extra. Hard to get excited about extra cash flow and no mortgage at 80 instead of 90. I’d instead look to get a new 30 year mortgage and lower my monthly payment to increase current cash flow.

  • #295188

    norules
    Participant
    • Topics - 91
    • Replies - 530
    • Total Posts - 621

    These are just ideas on how to save money. If you have a $400.000 loan at 4% for 30 years, you will pay the bank $687,478 in 30 years time. If you put an extra $100 every month, you will pay the bank $657,677 in about 27.3 years. You will have saved $30,000. If you pay an extra $200 every month, you will pay the bank $633.769 in about 25 years. You will have saved about $55,000.

    You may say I don’t have an extra $100. Well, do you need the premium package for satellite TV? Can you cut part of the bill? Maybe make your own coffee instead of buying Starbucks. Do you need to buy your kids the latest video games? Do you go out to lunch everyday? Maybe brown bag it. Have a garage sale. Resist the urge to buy the latest gadgets. It is hard to do, but you have to start somehow. Sometimes saying “No” can pay you back in a good way.

  • #295195

    Bainc
    Member
    • Topics - 9
    • Replies - 892
    • Total Posts - 901

    It’s tough when you do all those things and there’s still not much left to invest or prepay your mortgage. I’d also add to your list driving used cars.

  • #295191

    loonyman
    Participant
    • Topics - 2
    • Replies - 160
    • Total Posts - 162

    Why does every bit of financial advice start with slamming Starbucks? (Suze Orman comes to mind) A lot of us figured out a long time ago if you can’t beat them, join them. I’ve done very well with Starbucks stock and only occasionally go into the Stores. But please, keep buying your soy-pumpkin Spice Venti Latte! Some of us are depending on you in our retirement years!

  • #295189

    norules
    Participant
    • Topics - 91
    • Replies - 530
    • Total Posts - 621

    @loonyman 127848 wrote:

    Why does every bit of financial advice start with slamming Starbucks? (Suze Orman comes to mind) A lot of us figured out a long time ago if you can’t beat them, join them. I’ve done very well with Starbucks stock and only occasionally go into the Stores. But please, keep buying your soy-pumpkin Spice Venti Latte! Some of us are depending on you in our retirement years!

    Ha ha. My apologies. I didn’t realize I put Starbucks. I meant to put coffee shops. Kudos to your smart investment. I do partake on Starbucks plain coffee sometimes when I am on the road, I just can’t pay $5 for the specialty coffee and there is no way in heck am I trying the so-pumpkin Spice Late. Ha ha.

  • #295186

    LC
    Participant
    • Topics - 640
    • Replies - 7,150
    • Total Posts - 7,790

    @norules 127845 wrote:

    These are just ideas on how to save money. If you have a $400.000 loan at 4% for 30 years, you will pay the bank $687,478 in 30 years time. If you put an extra $100 every month, you will pay the bank $657,677 in about 27.3 years. You will have saved $30,000. If you pay an extra $200 every month, you will pay the bank $633.769 in about 25 years. You will have saved about $55,000.

    You may say I don’t have an extra $100. Well, do you need the premium package for satellite TV? Can you cut part of the bill? Maybe make your own coffee instead of buying Starbucks. Do you need to buy your kids the latest video games? Do you go out to lunch everyday? Maybe brown bag it. Have a garage sale. Resist the urge to buy the latest gadgets. It is hard to do, but you have to start somehow. Sometimes saying “No” can pay you back in a good way.

    If you do a few of these things, it can turn into a game. That’s what happened to me during the recession. I didn’t have much choice during a few periods, yet I still wanted toys, so I made it my rule to finance toys by selling something else. We’re beyond those days, but I still stick with it. I want another fly reel right now (I have about 20) but can’t sell the one I have listed, so I make myself wait. It’s actually fun, and you start weighing one perceived net benefit of an expenditure against another. We spent $500 last weekend for an overnighter and a concert. Would I have preferred to buy another fly rod instead? Yes. The weekend before about the same money spent, it was worth more to me than another toy.

    My wife buys green tea every day at Starbucks. I see that as a giant waste of money; she sees it as a treat. That’s OK, she’s not a huge spender. I probably spend $10 per month on Peet’s and Starbucks.

    It’s lucky I’m not a car guy. Aside from a couple of BMWs and Caddies back in the day I’ve never had a fancy car, never had the desire for one. Boats–that’s my big vice but I don’t have many spending vices and out of 17 boats I’ve only lost money on two so I justify my throwing money in a hole that way. I’ve acquired a ton of fly fishing gear since 2010 and have not spent a penny out of pocket–all from buying and selling. As I said, it’s a game and a good one.

  • #295190

    norules
    Participant
    • Topics - 91
    • Replies - 530
    • Total Posts - 621

    LC, you bring up a good point about looking for ways to save money. It is a game, but it didn’t start out that way. You did it out of necessity during some tough times. Then when things got better for you, you continued finding ways to save money and figured out a way to enjoy doing the things you want to do without breaking the bank. That is along the same idea for us.

    A lot of people don’t get that. They want what they want. They will go into financial trouble to get it, they don’t care. Sometimes you just can’t get what you want. Some people can afford it. If you can’t afford it, they why get it?

  • #295193

    Anonymous
    • Topics - 18
    • Replies - 1,250
    • Total Posts - 1,268

    @norules 127862 wrote:

    A lot of people don’t get that. They want what they want. They will go into financial trouble to get it, they don’t care. Sometimes you just can’t get what you want. Some people can afford it. If you can’t afford it, they why get it?

    I feel like many people shop and buy material things based on the job that they want or the raise that they want/need. People think, “I should get a raise or a promotion soon, therefore, I will buy this car/new phone/ house, etc… because eventually I will have money to pay it off. That is dangerous and that is one reason many people get in debt then can never get out.

You must be logged in to reply to this topic.

Privacy Policy