Your BuDi

Interesting. Simple but interesting. Most of the best advice seems to be come in and be the simplest of all ideas. A lot of times people always try to over analyze a situation and it gets them into trouble. A simple gesture as easy as writing things down will almost always give you the clear understanding.

Moneymonk

There is no right or wrong answer.

That’s why it’s “PERSONAL” finance

SpotOn

Historically the stock market will give a better return than many investments, plus the mortgage payment is usually a great tax write off.

Rick Francis

For your particular situation running the math will give you the “right” answer based on your assumptions. But are your assumptions right?

Unfortunately, the future is pretty uncertain… so you won’t really know if those assumptions are good until it’s too late!

If your mortgage rate is low it’s a pretty easy decision- I’ve got a at 5% rate so even a very conservative investment strategy will yield more than paying off the mortgage early.

If your rate is higher it becomes a question of what you believe your investment return is going to be. However, no one really KNOWS.

When there isn’t a clear winner I would favor the investment route because pre-paying the mortgage doesn’t reduce your monthly expenses until the house is completely paid off!

The investment route lets you build up cash immediately which could go toward living expenses in an emergency. The Investment should be much more liquid- especially if the portfolio includes some % cash and bonds.

What if you have been paying extra on your mortgage and lose your job before you have it completely paid off? If you don’t have any cash reserves you could face foreclosure and lose ALL of those extra payments unless you can sell. Would you like to HAVE to sell a house in the current market?

If you had invested the money, even if you lost the house you would still have the investment money. That would make life a whole lot better wouldn’t it?

-Rick

Jason

From a purely analytical perspective using my current scenario. 30 year fixed at 6%. If I pay 100 into my mortgage every month, I will end up paying off my house 3 years earlier and saved ~$50,000 in interest paid to the bank. If on the other hand I invest that $100 in a good growth stock mutual fund, and average the return to a modest 9%, at the end of the 30 years my mutual fund should be worth ~$ 195,000. To me it makes more sense to invest it and let it build up so the compounds starts making some real money.

mh

Jason – did you take into account that you can invest your would-be mortgage payment once the mortgage is paid off? You should compare the same amount spent each month over 30 years.

This might make more of a difference with a bit more money applied per month, so the mortgage gets paid off faster, and you end up with more to invest in the end.

Again, it’s about running the numbers – but doing it properly. Make sure your assumptions are correct (like supposed “tax savings”).

Roman

I believe that you should spend the extra money and pay off any old debts. But you should never pay it off completely. If you do you will lose the tax credits.

Chris H.

Jason and mh got to what I was going to say. If you get the house paid off early and then invest the extra 100 plus your mortgage payment, you end up with a much better situation. As always, to each his own, but that 3 or 4 years of mortgage payments invested early will add up real quick further down the road.

Shelly

Simple, pay it on the mortgage. By making 1 extra payment per year, you shave off 7 years of interest to your lender. Double that and you cut your time in half. You build equity faster and then you can spend that extra money on things you really want, and save yourself hundreds of thousands of dollars in interest. Simple table. Take the price of the house, triple it, and that’s the true cost of owning a home. Cut that time/interest down, and you really have a bargin. Check out the mortgage calculators on any site.

Matt

This supposed tax write-off advantage to the mortgage is killing me.
The taxes saved are significantly smaller than the interest paid to make it happen.
Would you really like to pay interest to a lender in order to get a significantly smaller tax advantage?

Jess

It would be interesting to hear what the results on consumer reports analysis would be under present market conditions. Home values in CA have dropped 30% while many of the money market funds are down as much as 45% and more.

Matt

Maria: The interest you pay for each payment is calculated once a month on remaining principal.
So, if you pay extra on the principal, you will see a (very slightly) lower interest amount on the very next payment.
This keeps building and building over the months and years.
Keep paying down extra on the principal, and save interest the whole way.

Shelly

Mehul,
You won’t be paying your mortgage for 27 years, only the next 15 years,(applying the extra $150.00 monthly to the PRINCIPLE) and as for making that kind of return (6.5) on a mutual fund in the next 15 years is anyone’s guess… but doubtful.

I don’t know where someone came up with a 3 yr change but that is incorrect.

Your interest rate doesn’t change unless you refi, but the principle of your loan changes(goes down), thus reducing cost of dollars/time.

I would like to mention, that if your intest rate isn’t at about 5% right now, I would encourage you to refi. You will make up the cost of the refi, in the 1st year, of payments vs paying a higher rates. Then, I would encourage you to make extra payments towards the principle. You might also check the payments for a 15 yr, vs 30 yr. Sometimes it’s only about $100 more for the difference, but still less than if you have a higher rate, and the interest saved is huge. Then continue to make as many extra payments to shave that to a 7yr payoff.

You can check out these figures on http://www.af24-7.com on the calculators.

Thanks Shelly

Curtis

Matt and Ramit… Your right, It always blows me away the number of people who say don’t pay off your mortgage just to keep your interest / tax deduction… if you do the math it doesn’t make sense… Example… $100,000 mortgage at 6% interest = about $6000 of int paid that year… if your income is $50,000 /yr and your income tax bracket is 20%… so your tax due is $10,000… $50k subtract your tax deduction of 6,000 is now $44,000 adjusted income at 20% = $8800 tax due …….You saved $1200 in taxes by paying $6000 in interest…. wouldn’t you rather NOT pay the $6000 in interest? You would then be $4800 ahead…. You know who says” keep your mortgage for the tax write off”? Banks and mortgage companies… If I’m wrong on this show me how…

Ken

The problem in this example is that the stock market period is between 1986 and 1996 during a large portion of the market’s largest up swing in history. It would be interesting to see the same comparison during 1997 though 2009.