Is paying a little more than what's due each month a good or bad idea on a 30 year mortgage?

Question

Over the course of a year the total amount overpaid would equal roughly one additional monthly payment.

We are currently in year four of a thirty year mortgage but don't intend to stay in this house for more than five more years (if that).

Answer 1

In my opinion I think it is a very good idea. You never know what the market is going to do.Just make sure they apply the extra to the principle.

Answer 2

Probably not. (Against the conventional wisdom I know, but conventional wisdom is often wrong).

If you have a fairly good mortgage (from the last 4 years it should be), let's assume you have a lending rate at under 6%.

What debt do you owe that is over 6% interest? Unless you owe no other debt or all other debt at under 6% (which is doubtful), then pay extra to the higher interest rate items.

I think the reason that everyone is on the pay extra principle bandwagon here is that assuming you keep a mortgage for 30 years you can significantly reduce the time of the mortgage by paying extra. Staying only 5 more years if you do the amort calculation you'll find it hardly worth it compared to paying off any other debt.

Answer 3

Unless you have a better use for the money, I'd say paying down the mortgage is probably a good idea. First, you're building additional equity in your home. Second, it helps prevent wasting money on other things. Third, in the long run, you will pay less interest.

I just paid off my mortgage last week. We had a 30-year loan, and we paid it off in 27 years. Every time we refinanced, we did not start the 30-year clock all over again, but we reduced the remaining term of the loan by a year or two. Feels way good to be largely debt free!

Answer 4

The standard answer is: as long as the interest rate on your mortage is higher than the interest you could get if you invested (or saved) that money instead, you are ahead.

The gut answer is: you'll pay off your mortage sooner and end up paying hundreds of dollars a year LESS in interest, so that's a very good thing!

This effect is especially drastic in the first years of a mortgage, when normally almost all the payment goes to interest and very little to principal. For example, I goofed and paid $90 too much one month the first year of my mortgage. That $90, applied to principal, cut more than one mortgage payment off the term of my loan! Since I don't care to work till I'm 75 to pay off my mortgage, extra principal payments are a *good* thing!

You'll also build equity in the house faster, and so when you go to sell it, you'll have more money to put towards your next house.

Answer 5

Excellent idea, as just a little extra a month can shorten the mortgage term drastically and save you unbelievable amounts of interest (which is the biggest part of any mortgage anyway).
Any excess in monthly payments is automatically applied to principal by the lender.
Staying for only 5 years should not make a difference in your savings, if you buy another (maybe bigger home) and continue this strategy.

Answer 6

Not helping if you are only staying for five years. Refinancing would be a better option to lower your interest rate and lowering your House payment (then saving or investing the difference).

Next home, try to get a 15 yr fixed. Better route to go. Then make additional payments, making sure that it is noted that it is an extra to be applied directly to the principle. If not noted, the mortgage company can just apply the payment to the interest.

Also...PMI for loans over 80%....the mortgage company will not inform you that you have reached the 80% and no longer are required to pay PMI. You have to keep up with that yourself and request that it be removed.

Answer 7

Just make sure the extra money goes to paying the principal. Even a little extra can make a difference in the balance owed when you are ready to sell.

Another idea would be to go to a biweekly payment plan. That way you are splitting your payments in half and paying every two weeks instead of every month. The beauty in this is that you are only charged interest on the money you pay mid month for two weeks out of the month instead of the four that you'd pay if you waited to make just one payment. Over time, this can add up to huge savings. That, coupled with the little extra you are paying could reap big dividends. Congratulations!

Answer 8

If you're planning to stay in a house for more than ten years it's a good idea to pay that extra against the mortgage that you talked about. In your case, however, it might not benefit you that much. You're paying mostly interest for the first 10-15 years of a mortgage, so you won't gain much ground in terms of paying off the principal balance, and you get to write off the interest on your taxes anyway. You'd be better off paying off high-interest credit cards/automobile loans or investing that money in a Roth IRA or an interest-bearing account if you need access to that money (T-Bills or CDs, etc.)

Answer 9

If you make an extra house payment on principal each year on a 30 year mortgage, you will pay off your house 7 years earlier. Make sure that you put the extra money into the principal when you pay it and make sure that you let the mortgage company know that is where you want it to go.

Answer 10

If you've got the extra money, go for it. It will build your equity faster. If you were to keep the mortgage until it was paid off, that extra one payment a year will knock off approximately 10 years from your loan. And, of course, thousands & thousands in interest.

One thought might be to keep the house when you move and rent it out, have the tenant pay off the house for you and have a free & clear home 15-20 years from now.

Answer 11

I did the math on our first mortgage amortization:

$136,000 principal
$957 payment
$209,450 interest over the life of the loan at 30 years

Additional $50 per month will cut 5 years from the 30 and save approximately $40,000 in interest.

Pretty amazing how $50 saves so much