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Started By
Message
Should I pay extra towards my mortgage every month?
Posted on 6/30/18 at 8:38 pm
Posted on 6/30/18 at 8:38 pm
I was paying an extra $500/mo towards my principal, until recently when I heard it's not the best idea. Can someone here explain to me why I shouldn't do this?
10
Posted on 6/30/18 at 8:41 pm to indytiger
What’s your interest rate
Posted on 6/30/18 at 8:45 pm to indytiger
Depends on your circumstance.
Oversimplified bar napkin example: If your interest rate is 2% and you are passing up a 10% investment.... well, clearly you see you’d be better off getting the dime earned instead of the two pennies saved.
Also, is your mortgage your highest interest debt?
Oversimplified bar napkin example: If your interest rate is 2% and you are passing up a 10% investment.... well, clearly you see you’d be better off getting the dime earned instead of the two pennies saved.
Also, is your mortgage your highest interest debt?
Posted on 6/30/18 at 9:00 pm to jimbeam
quote:
What’s your interest rate
3.375%
Posted on 6/30/18 at 9:04 pm to indytiger
quote:
3.375%
No, as long as you have the discipline to invest the difference.
Posted on 6/30/18 at 9:12 pm to indytiger
Let's say you have 300k at 4.5 for 30 years
costing 247k in interest over the life of the loan
The extra 500 ends up costing 139k in interest.
What! You save/make 108k!
Let's look at that closer.
If this was a 401k what return would it be?
6k a year for 30 years, or 180k with a return of 288k is a 2.86 return.
People compare their loan rate to an invested earning and they are not the same.
Paying off a 4% loan is not as lucrative as investing the extra payments.
One is compounding, and other is decompounding.
costing 247k in interest over the life of the loan
The extra 500 ends up costing 139k in interest.
What! You save/make 108k!
Let's look at that closer.
If this was a 401k what return would it be?
6k a year for 30 years, or 180k with a return of 288k is a 2.86 return.
People compare their loan rate to an invested earning and they are not the same.
Paying off a 4% loan is not as lucrative as investing the extra payments.
One is compounding, and other is decompounding.
This post was edited on 6/30/18 at 9:15 pm
Posted on 6/30/18 at 9:16 pm to Rust Cohle
What you're saying is correct but you'd have to account for the fact that he'd no longer have a mortgage payment at any point sometime well before the 30 years is up and that would allow him to then take that 500 plus the mortgage payment amount and invest it.
Posted on 6/30/18 at 9:31 pm to Powerman
$300,000 at 4.5% for 30 years = $1,520 a month.
Paying an additional $500 per month on principal shortens the repayment by 11 years 10 months.
$500 per month for 30 years at 8% is $734,075
$2020 per month for (rounding up to) 12 years at 8% is $496,805
So in scenario 1 after 30 years you have a paid for house and $734,075
In scenario 2 after 30 years you have a paid for house and $496,805
Paying an additional $500 per month on principal shortens the repayment by 11 years 10 months.
$500 per month for 30 years at 8% is $734,075
$2020 per month for (rounding up to) 12 years at 8% is $496,805
So in scenario 1 after 30 years you have a paid for house and $734,075
In scenario 2 after 30 years you have a paid for house and $496,805
Posted on 6/30/18 at 9:48 pm to indytiger
I’ve said this a million times before: I can’t find a formula in any textbook for peace of mind. If paying your house off early provides that, let er rip. I am and my house will be paid off in 2.5 years and I can’t wait for everyone who’s still paying their mortgage to tell how stupid I was for doing that while I have thousands extra each month to do with as I please. To each their own
Posted on 6/30/18 at 10:11 pm to LSUstudent2006
quote:
I can’t find a formula in any textbook for peace of mind. If paying your house off early provides that, let er rip. I am and my house will be paid off in 2.5 years and I can’t wait for everyone who’s still paying their mortgage to tell how stupid I was for doing that while I have thousands extra each month to do with as I please.
I can find quite a few formulas for how much extra I made by investing the difference into something better.
I'm still paying on a mortgage and have much more money than if I'd paid it down early. Never forget that bankers get rich by borrowing cheap and lending dear.
Posted on 6/30/18 at 10:44 pm to indytiger
I pay extra.
I also max my 401k, nearly fully fund a ROTH, contribute to three 529s, and also an HSA.
I would make sure you're at least partially doing some of this before throwing everything extra at the house.
I also max my 401k, nearly fully fund a ROTH, contribute to three 529s, and also an HSA.
I would make sure you're at least partially doing some of this before throwing everything extra at the house.
Posted on 6/30/18 at 11:30 pm to foshizzle
I get that but my point was sure, numbers wise you could probably outgain that money spent paying down principal. But the comfort of knowing your house is paid for and you don’t owe anyone anything is worth a lot to some people. It just can’t be quantified. Like I said to each their own
And as others have mentioned, you could invest your old note+principal after it’s paid off and do just fine
And as others have mentioned, you could invest your old note+principal after it’s paid off and do just fine
Posted on 6/30/18 at 11:40 pm to Huey Lewis
Good stuff! Better than I even realized. Some will say that 8% is not gaurenteed though, that's why I like to focus on the minimum return to pay the interest. A CD is guaranteed and can be found at 2.9%
Posted on 7/1/18 at 12:32 am to Huey Lewis
Where do we put the payments for 8% return?
Posted on 7/1/18 at 12:40 am to LSUstudent2006
quote:
I’ve said this a million times before: I can’t find a formula in any textbook for peace of mind. If paying your house off early provides that, let er rip. I am and my house will be paid off in 2.5 years and I can’t wait for everyone who’s still paying their mortgage to tell how stupid I was for doing that while I have thousands extra each month to do with as I please. To each their own
There's not a formula for peace of mind but the opportunity cost are financially quantifiable. In the example I gave, 12 years peace of mind costs $237,270.
I've been listening to Dave Ramsey for almost 15 years and used to wholeheartedly agree with his advice to pay off mortgages as fast as possible after 15% in retirement. But back then the average 30 year rate was around 7%. His arguments about putting a price on risk and the grass feeling different when it's paid for and so on..well, somewhere from 7% interest rates down to the 3.5% or less territory there's a point where the risk vs. reward assessment is just too enticing for me.
Posted on 7/1/18 at 12:53 am to LSUstudent2006
quote:Amen to this. Proud dumbass checking in.
I’ve said this a million times before: I can’t find a formula in any textbook for peace of mind. If paying your house off early provides that, let er rip. I am and my house will be paid off in 2.5 years and I can’t wait for everyone who’s still paying their mortgage to tell how stupid I was for doing that while I have thousands extra each month to do with as I please. To each their own
Posted on 7/1/18 at 1:14 am to meeple
quote:
I also max my 401k, nearly fully fund a ROTH, contribute to three 529s, and also an HSA.
I max my 401k. I thought of a second question for this board I've been meaning to ask though. According to what I've read, I don't qualify for a Roth due to the limit. Is there something I'm missing here? Bc I don't think I make THAT much, and I see a lot of people on this board talk about contributing to a Roth IRA.
Posted on 7/1/18 at 1:26 am to indytiger
You can always backdoor ROTH regardless of income. Google the mechanics of it.
As for if you qualify or not for a simple direct ROTH contribution without needing to backdoor, that too is pretty white and black based on AGI.
As for if you qualify or not for a simple direct ROTH contribution without needing to backdoor, that too is pretty white and black based on AGI.
This post was edited on 7/1/18 at 1:27 am
Posted on 7/1/18 at 1:32 am to indytiger
Look at your amortization schedule and find a point on it you don't mind your interest/principle ratio. Pay extra until you get to that point and then do something else with that money. That's what I'm doing.
I took a 30yr mortgage at 4% instead of a 15 because I like the peace of mind of low minimum payments and am fine with paying a moron tax to obtain that. I'm paying double payments (minimum + same amount all towards principle) monthly, plus whatever is left over every month above a certain amount in my checking account.
My personal goal is to get the payments to where most of the payment goes towards the principle instead of interest, and then back off.
I took a 30yr mortgage at 4% instead of a 15 because I like the peace of mind of low minimum payments and am fine with paying a moron tax to obtain that. I'm paying double payments (minimum + same amount all towards principle) monthly, plus whatever is left over every month above a certain amount in my checking account.
My personal goal is to get the payments to where most of the payment goes towards the principle instead of interest, and then back off.
Posted on 7/1/18 at 2:45 am to foshizzle
quote:
I can find quite a few formulas for how much extra I made by investing the difference into something better.
I'm still paying on a mortgage and have much more money than if I'd paid it down early. Never forget that bankers get rich by borrowing cheap and lending dear.
Right. I don't currently pay extra but I've considered doing it in the future and still debate about it.
I don't think I'd ever do it very aggressively but I've contemplated throwing a yearly lump sum amount to shorten the loan duration
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