Is it smart to pay your mortage in advance?

Question

I have 500k mortgage at 6% for 10 years. I could make now an extra payment of 100k principle only. Would it be smart? Pros & cons?
Inflation affect on the mortgage?
This is commercial rental property, tax advantages of the mortgage?
Would the 100k payment be applied to the year one or the year 10? Meaning that the year 1 I am paying a lot more of interest than the year 10. Or how does that work...I am confused :-)
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My thinking about this is: I could put this 100k bank and get risk free 6% interest.
Inflation is about 4 % yearly and after 10 years 500k mortgage ‘’value’’ would be about 320k because the inflation eats it away. (I hear that the inflation is much more, 4% is the ''oficial'' number??)
The main reason for my 100k payment would be to save on the interest on the year number 1, because that is when the interest payments are the greatest. And of course the sooner the property is free and clear the better. Current rent covers the yearly mortgage etc costs
Thaks Tim

Answer 1

prepaying the interest would go to year 1, reducing the total outstanding to 400k, cutting 2.5 years off your mortgage essentially making it a 7.5 year note saving you 166k in interest.

6% interest in the bank if it personally held and subject to taxes to you'd net about 4%, if the money is in the business then it would wash with the mortgage as they are the same interest rate so the money you make is the extra you would save if you paid the mortgage early.

Since it would be a wash I'd prepay the mortgage as it guaranteed 6% return for 10 years, while the bank it is not guaranteed unless you lock in into a CD which isn't worth it.

From a business tax point of view it is a wash as the extra income from the bank would negate the extra saving from the higher interest payments on the mortgage.

So unless you can find a way to make more than 6% it doesn't really matter.

Answer 2

I think maybe a hybrid version of what you want is maybe the way to go... So apparently you have an extra 100k, what are the stipulations of your loan if you make an principle only payment every month? So instead of once a month payments, you pay bi-weekly and every other payment just goes to principle? That way you can pay the loan off much, much faster - get around the "is it the first year or the last year whammy" and still maintain a specific amount of money in a interest bearing account just my thoughts.

Answer 3

Well Tim,
If you have 100 k to invest why not make an appointment with a broker who could show you on paper the pros and the cons. There is a point where you money makes more money being invested because of the Tax breaks. That kind of money let a pro give you suggestion not the internet.

Answer 4

I would suggest you keep the money and invest it. With 100k you should be able to find some stable funds which will provide much more than 6%. You might want to talk to your financial analyst or strategist about this. But I would expect much closer to 10%. Plus this way you will be able to maintain the tax benefit of the mortgage.

Seek additional advise from a professional, Good Luck

Answer 5

The ASngry hen is regrettably living in a dream international lower back. even though it would be tremendous if all human beings had or ought to shop up 9 months of fees this is a fantasy for many no longer basic working individuals with young infants. The others are precise in spite of the incontrovertible fact that in the time of evaluating what you pay in interest as adversarial to what you additionally could make on that money is a stable Mutual Fund etc. for many whose abode values are no longer even on the fringe of the loans it may additionally be unwise to sink much greater in a sinking deliver in case you will pass with the subsequent 5-10 years as you could in no way get that money lower back.

Answer 6

It would be better if you use the 100k to pay off other things like your higher rate credit cards, and car loans. the property is paying for itself, and you have good tax breaks as long as you have a mortgage on it. but if you want to pay the property off sooner, you can knock several years off by making advance payments. but always pay higher interest rates off first.

Answer 7

If it were me I would not pay it in advance. You could take that 100k and invest it in more real estate or other investments to grow your money. Right now is a buyers market, at least it is here in California.

If done right you will have a lot more money then you would if you paid extra on your mortgage now.

Answer 8

I don't think so..

Answer 9

Stupid idea.