Paying your home off early....

[lillygator]

how much additional % towards the principle each month will actually make a difference?

 

[crisi]

Anything will make a difference. And the earlier in the loan it is, the bigger the difference it is.

 

[peacefulgirl]

I think you can find a caluclator to figure that out here. Just run the numbers...

http://www.mortgage-calc.com/

 

[bicker]

Thanks for asking this question ... it's related to a question I've had for a while.

We have a mortgage at about 6%. That means, technically, that ever dollar we pay in addition to our required mortgage payment is basically going to pay us 6% for 20 years or so, just about guaranteed. Why isn't this a good "investment"? Why shouldn't we put all money we are not likely to need for a while into this "investment"?

I know the conventional wisdom: If you're going to tie up your money like that (I suppose I could take out a second mortage later, or refinance, in order to get that "investment" back, if necessary), then investing in a riskier investment, like stocks, will pay better returns.... is that still true though? It seems that things have radically changed, no?

---------------

I just did a Google search and found some authoritative answers to my question... Motley Fool, twice in as many months, basically said paying off one's mortgage early is a bad idea.

However, that was in early 2001:
http://www.fool.com/foolu/askfoolu/2001/askfoolu010307.htm
http://www.fool.com/foolu/askfoolu/2001/askfoolu010411.htm

I wonder if their position has changed...

 

[malibuconlee]

I think the main argument I've heard about not paying down the loan quicker has something to do with the fact that many people do not stay in their homes for more than 5 years. Not as true in this area, but more so in the more urban areas.

 

[Jsme]

If you have a 30 year mortgage you can make one extra payment a year and pay it down 10 years quicker.

 

[pearlieq]

I've always felt that paying down a mortgage should be a very low priority financially. Reason being, most home mortgages carry very low interest rates, made further lower by the fact that the interest is tax-deductable. Also, a house is a very illiquid asset. This is not to say that it's a bad goal, there are just many better things to do first.

Before you consider paying down a mortgage, ask yourself the following: Are you carrying any other consumer debt (credit cards, car notes, etc.)? Do you have an emergency fund of 6-12 months of expenses? Are you making maximum contributions to all available retirement accounts? IMO, these are all better places to put your money other than extra payments on a mortgage.

If you're squared away, and still have extra money to burn, by all means, pre-pay!

 

[dvcgirl]

Thanks for asking this question ... it's related to a question I've had for a while.

We have a mortgage at about 6%. That means, technically, that ever dollar we pay in addition to our required mortgage payment is basically going to pay us 6% for 20 years or so, just about guaranteed. Why isn't this a good "investment"? Why shouldn't we put all money we are not likely to need for a while into this "investment"?

I know the conventional wisdom: If you're going to tie up your money like that (I suppose I could take out a second mortage later, or refinance, in order to get that "investment" back, if necessary), then investing in a riskier investment, like stocks, will pay better returns.... is that still true though? It seems that things have radically changed, no?

---------------

I just did a Google search and found some authoritative answers to my question... Motley Fool, twice in as many months, basically said paying off one's mortgage early is a bad idea.

However, that was in early 2001:
http://www.fool.com/foolu/askfoolu/2001/askfoolu010307.htm
http://www.fool.com/foolu/askfoolu/2001/askfoolu010411.htm

I wonder if their position has changed...

Well, I think that the major argument for *not* paying your house off early is that current interest rates are quite low, plus mortgage interest write off. And the fact that over time the market has outpaced the real estate market year over year. And then there's also the liquidity issue. Stocks and bonds are a whole lot easier to sell than your home if you need cash in an emergency. The other issue is that if you do pay cash for your house with intentions of using what would have been your mortgage payment for investments....you need to be disciplined. Plus, you don't want to put all of your investment savings into your home and put all your eggs in one basket. It's risky. If you're very diversified...well, that's different.

Having said this, we do not have a mortgage. However, our retirement funds are on track for a fairly early retirement and we sold a pretty expensive home in the NorthEast and downsized to a smaller home in Orlando Florida. We took half of our profit and bought this house and invested the other half into our retirement portfolio and we're aggressive savers. So, while I know that we're sort of not the average case, and that there's a lot of arguments to not pay off your home early, well....there's a real peace of mind that comes with knowing that you own your home.

And one of those Motley Fool articles says that the S&P has averaged 12% over the last 50 years.....is that really true? That sounds awfully high. And if you're a new investor in the last five years or so, well, real estate has outpaced the market....bigtime.

 

[bicker]

That 12% was true, at the time. I was a big Motley Fool follower back before 9/11. I think, though, that all bets are now off. Having perhaps only little to do with 9/11, itself, the stock market doesn't seem like it is heading back to that 12% average, ever.

 

[crisi]

Here is the scoop.

Lets say I own my home free and clear. I can get a 5 year adjustable rate mortgage on $200,000 for about 4.5%, no points, $2,000 closing costs.

I take that $200,000 and stick it in a five year CD - a conservative investment, paying 4.6%.

I write off the mortgage interest each year on my taxes.

In the end, over five years, I'm about $2,000 a year ahead, after the expenses of closing on the mortage, on someone else's money. I close the CD and pay off the mortgage. Almost no risk. The only downside is that I need to dedicate about $1,500 a month of cash flow to paying a mortgage.

I'm struggling with this right now. $2,000 a year for nothing is nice, but I think I'd rather have the cash flow. We will have our home paid off in a year, and I'm trying to make the "cash flow or gain" decision.

Of course, as dvcgirl implies, there are better investments, but they'd entail more risk. If five years from now your mortgage balloons just after the stock market tanks, you'll have lost money. Timing the market may not be the best bet (timing the market is, IMO, never the best bet). Course, you can play the game different ways, a 15 year fixed rate loan will cost you more in interest, so you'll need a better rate of return, but you will be able to "time" a point within a five or ten year period to cash out and pay it all off - if the market seems high five years from now, cash out.

 

[disneysteve]

the stock market doesn't seem like it is heading back to that 12% average

This is probably true, but it still doesn't make the mortgage prepayment the best option most likely. Your 6% mortgage is actually only about 4.2% when you factor in the tax deduction. It isn't hard at all to find an investment that will outperform the 4.2% you would "earn" by prepaying your mortgage. It might not be 12%, but it could certainly be 6 or 7 or 8%.

I agree with pearlieq, though. If you have zero other debt and are maxing out your retirement plans and still have money leftover, its a guaranteed return on an asset that is appreciating in value (in most cases). Nothing wrong with that at all.

Personally, though, in retirement, I would rather be drawing from investment accounts than having to cash out home equity with a reverse mortgage.

Not really a "right" answer to the question as you can approach it from lots of different angles.

 

[Chicago526]

If you read Dave Ramsey's "Money Makeover" he does encourag you to pay off your mortgage, but only AFTER all of your other financial needs/goals are taken care of. Pay off your credit cards, car loan(s), establish 3 to 6 months worth of living expenses in an emergency fund, and max out contributions to college and retirment funds. THEN start paying down the house. Since his philosophy is not to spend money when it's not nessesary, if you follow his program, you'll be staying in your home long enough to pay it off, and if you don't (job transfer or other life altering event) you have that much more equity in your home to put towards your new one, and then you pay down the new loan just as quickly. Once you own your home free and clear, you can invest that mortgage payment and really fund your retirment!!! Even though you lose the tax deduction on the interest, unless you suck at investing, you'll still be ahead!

So, paying down your home is a good idea, but only if everything else in your financial life is okey-dokey.

 

[ceecee]

It sure is nice not to have a mortgage! We paid additional prinicipal every month because we wanted it paid off sooner. I agree you should pay other debts with higher interest first, but that goes without saying.

 

[Laurajean1014]

Just add $200 a month more to each payment and this will reduce your obligation by 12 years on a 30 year mortgage.

 

[disneysteve]

Just add $200 a month more to each payment and this will reduce your obligation by 12 years on a 30 year mortgage.

Doesn't this depend on the amount of your loan?

 

[TNKBELL]

We have about 14 years left on our mortgage, I would really like to pay it off in 10 years, my Ds8 will be 18 then. I don't have a lot of extra $ to put toward it though, I was thinking I could use our tax refund and put about $2000.00 a year toward principal to get us closer to that goal. Our mortgage is our only large debt so I would really like to get that paid off as soon as financially possible. I have heard conflicting advice about paying toward interest versus principal, but I guess I always just thought paying toward the principal would reduce the overall balance more because the APR would be charged on less principal. Anyone have any thoughts on this?

 

[disneysteve]

I always just thought paying toward the principal would reduce the overall balance more because the APR would be charged on less principal.

That's correct. By prepaying principal, you reduce the repayment time and reduce the total interest you will pay over time.