What advantage is there to paying extra on an interest only mortgage?

Question

I took out a 5/1 interest only home loan last year for $400,000 (I could not get approved for a fixed loan at the time) and pay monthly payments of $2,000. Since then, our household income has gone up considerably, and I am thinking about increasing my payment to $2,500 a month, hoping that the extra $500 will go towards principal. I don't want to think about re-financing yet because we just purchased less than a year ago, but I would like to put my extra income to good use. Good idea, or bad?

Answer 1

Depends what the interest rate on your mortgage is. If it's higher than what you could earn on the money in other investments, then absolutely. If you can earn more on the money than you would save by paying down your mortgage then do it. If you're on a 5/1 ARM, then it's probably likely your money is better invested somewhere else.

Answer 2

Considering you have to refinance in 5 years again because your rate will adjust. You should try and do the math.

If you put $500 towards your principal in a month, then you will deduct $6,000 a year. At the end of 5 years you would have reduced your mortgage by $24,000 (considering you only have 4 years left)

When you refinance you have to cover all the costs through your loan. On a $400k loan we will say a rough of $6-10 or more, depending where you get it done and depending if you have taken care of your property taxes. So lets just say it came to $10k.

$400,000- $24,000 =$376,000
Original balance - paid towards principal= $376k

now we add the closing costs of $10k to your balance which will give you a new balance of $386,000.

So you tell me... was it worth paying the extra $24k to reduce $14k?

When you get into a fix loan, then I would suggest it. But until then, I personally would hold off, and save that extra $500 or invest it in something else. (401,IRA, money market, etc..)

Another thing to remember is if all you pay is interest at the end of the term you will still owe $400 and still add the $10 for closing cost.

So its up to you really what you want to do.

Let me know if you need any help.

Answer 3

There are a few potential financial advantages to owning a home. One is that the interest is deductible from your income for tax purposes. So your mortgage serves that purpose. Another is that the house will appreciate in value over time. RIght now, most homes will not do that for a few years, because housing has topped out. So then the question becomes "do you plan to stay in this house?" so that paying the mortgage down to nothing by retirement makes sense. Also, when you pay down the $500, it is money that you do not have to pay mortagage interest on, but also no deduction.
You might be better served putting the extra into some mutual funds where it grows at about 8 to 12 percent.

Answer 4

None! Yes it will go toward principle, but you would be further ahead to invest that $500.00 in something that would return between 6% - 8%. At the end you probably will have more money saved and profit from that, than you would save by paying the mortgage down faster. Have your money make you money. Also remember your mortgage interest is tax deductible so when you run the numbers you have to take that into consideration as well.

Answer 5

It is always a good idea to put more money into your house (house payments or upgrades). Call your mortgage company and ask them to make sure that any extra you pay will go to principal and not interest.
Check to see if you have a prepayment penalty before you refinance. We got stuck with a little one that we didn't know about when we refi'd.

Good Luck!

Answer 6

nicely the extra you pay down the critical, the fewer interest you will owe, so as that must be maximum appropriate. whether, with expenses of interest nonetheless rather low, in maximum situations, your money could be extra perfect utilized in making an investment than paying off debt. In different words, you need to apply that additional funds with investments, and doubtlessly earn 10-15% interest, that's a much extra perfect use of your complicated earned $$, as unfavorable to paying off a loan the place the fee is 5%-7%. whilst expenses of interest are intense paying down the critical is the extra perfect technique. in case you have an adjustable fee, then refinance till now the fixed fee era expires.

Answer 7

If it were me, I would put the extra on the principal.