I thought most mortgages are compound interest, so pay additional money towards mortgage monthly is a bad idea if that additional money can be used for other investment (not, say, spend on dining out). but many financial advisors always recommend to do. I thought this is the worst investment idea bcause bank makes the most money because the that additional payment will apply towards the last payments of the loan first, in that payment, only tiny portion is interest. Is this correct?
2006-08-30 15:27:22 · 10 answers · asked by Maxy 1 in Business & Finance ➔ Personal Finance
Pay off items with higher interest first, but don't get behind in anything.
2006-09-03 02:43:07 · answer #1 · answered by Jeremy D 5 · 0⤊ 0⤋
On most mortgages, any additional payments go directly toward principal so for your next payment, interest is lower than it would have been. Check your mortgage papers to see how yours works. When I had a mortgage, early in the mortgage I could pay an extra $100 and cut out a couple payments.
If you don't have other debts at a higher rate than your mortgage, paying ahead on it can make sense. Depends on your mortgage rate - if it's say 6% and you can get 7% from a new investment of the same money, then no, don't pay it off.
The other thing to look at is tax considerations. Mortgage interest can be taken as an itemized deduction. You'd have to figure out how much that is worth to you to see whether losing that would hurt you much, or if the standard deduction would pretty much make up for it.
2006-08-31 16:21:39 · answer #2 · answered by Judy 7 · 0⤊ 0⤋
Paying ahead now is probably not a good idea.
If you got your mortgage within the last few years and had good credit your interest rate is probably in the low 5% range.
Currently you can earn interest on money market and checking accounts up to 5%.
The interest you're paying on the mortgage is tax deductible(probably- depends on how you file and other personal financial factors).
In effect you're paying say 3.75% in interest. If you can earn more interest by leaving the money in the bank then you should do that.
In addition you are keeping a nice nest egg in case of a financial hardship arises. If you put the money into the mortgage and need to take out a home equity loan you'll be paying close to 8%.
See where I'm going with this?
2006-08-30 22:38:45 · answer #3 · answered by scooba 4 · 2⤊ 0⤋
In addition to all the maths done above.. ask yourself, how do you see your house as? If you see it as a good investment... If you see it as a place where you are living, at the same time making equity with regular payments, and at the same time making money by its cost appriciation... Then in this case, I would say, paying extra is a bad idea. As mentioned by all the maths above, you are better off putting that money in some mutual fund or say CD which gives you more than what you pay for your house mortgage interest (considering tax deductions)..
In other case, you might see your house as something more of emotional asset. You might want to own more and more of it. And when you own more and more of it, you get a peace of mind.. Then go ahead and pay more (I do this).
Also, if you are kind of person who will spend that extra cash if you do not pay your extra mortgage, then please go ahead and pay it.
2006-08-30 23:13:32 · answer #4 · answered by NapWala 2 · 0⤊ 0⤋
every situation is different. don't pay off your 6% home loan if you are paying 12% on credit cards. your mortgage (and even equity loans) will give you tax deductions. you are better off having a 15 year loan than a 30 year loan. you would want your home paid off before retirement income... housing is the major part of your budget. but again each person is different by their situations. and you can specify to apply payment to the principal and bi-monthly payments will apply extra payments to pay off your loan 7 years earlier I think the ratio is.
2006-08-30 22:33:50 · answer #5 · answered by Anonymous · 0⤊ 0⤋
extra payments go towards the principal, not the interest... by including extra on the payments, the bank has to charge less interest... you are saving LOTS of money by doing this... you will cut the term of the loan down by years... the bank charges you based on the total outstanding balance, so the lower it is the less you have to pay over time... use this calculator to demonstrate how this happens
http://www.decisionaide.com/mpcalculators/ExtraPaymentsCalculator/ExtraPayments1.asp
2006-08-30 22:34:21 · answer #6 · answered by misterlyle 3 · 0⤊ 0⤋
yes, banks are businesses and that's how they make money, by charging the interest at the beginning
pay it down but insist the payments be applied to the principal
2006-08-30 22:33:51 · answer #7 · answered by metallhd62 4 · 0⤊ 0⤋
Wow -- READ your Mortgage agreement first -- it will tell you how your interest is calculated, and what you can do (like add additional amounts that you can SPECIFY are to be APPLIED DIRECTLY to Principle Paydowns).
(PS --- I did this and paid my mortgage off early -- save me LOTS of $$$$$$)
2006-08-30 22:37:48 · answer #8 · answered by sglmom 7 · 0⤊ 0⤋
If you have the money to pay it off now, then pay it off.
2006-08-30 22:32:09 · answer #9 · answered by Anonymous · 0⤊ 0⤋
No debt is the best debt.
2006-08-30 23:58:53 · answer #10 · answered by pattycake 3 · 0⤊ 0⤋