Adding extra $$$ towards mortgage?

Question

I currently have 29.5 years left of my 30 mortgage at a rate of 6.5% and was considering adding about 3k a year extra towards my principle. Some people say its good/bad to add extra? Any thoughts would be appreciated.
Thanks!

Answer 1

It depends on you. Are you willing to take on some degree of risk, or not. Paying off a mortgage may feel good and yes you are saving on interest expense. However if you are willing to except the fact that you have a great interest rate on the mortgage and are willing to take on some degree of risk, investing that money in even a moderate portfolio will pay off much more in the long run. It is simple numbers, if you can earn a higher % investing, on an after tax basis, on your $3000 you are better off investing than paying down your mortgage.

It depends on your tax bracket because most people can write off the interest expense on their income taxes. If you can and you are in the 25% tax bracket your after tax interest on your mortgage is only 4.875% (75% of 6.5%). That means that if you make more than 4.875% after tax by investing the $3,000 you will have more dollars at the end of the original mortgage. A moderate portfolio of stocks and bonds over the last 40 years has averaged about 9%.

If I loan you $10,000 at 5% and you invest that money and make 10% you pocket the difference, 5% per year. If you think the stock market will return much less over the next 29.5 years than it has in the last 40 years, then you should pay down your mortgage.

If you are not maxing out your 401K or IRA contributions history shows you are better off investing your extra money there. Even if you are maxing these out investing in a standard taxable account will be better than paying your mortgage down.

The one risk you have is that the investment portfolio does not beat your after tax interest rate, but history shows that the odds are greatly in your favor that you will.

Answer 2

It's a good idea as long as you still have a cusion left incase of unexpected expenses. Some people not to put down the money on your mortgage for this reason or because they may feel that you can get a better return by putting it somewhere else. Unless you want to put into something that is a bit more risky like a mutual fund or stocks, thats the only way that I see exceeding the 6% return but you have a potential of a loss with any of those investment avenues. If you like to play it safe and have more money set asside in case of emergency, then I say put it down on your mortgage.

Answer 3

If you can pay additional principal, your interest expenses will decrease. One approach is to make 13 house payments per year. Another way is simply to make a larger payment when you can. A third way is to divide the $3000 by 12 and add $250 to each mortgage payment throughout the year.

To give you an example, a $100,000 6.5% 30-year loan has payments of $632 per month. Adding just $10 to each payment pays the mortgage 18 months sooner. Adding $20 pay it off 30 months sooner. Adding $100 makes it into a 15-year loan.

Answer 4

Unless you have a fixed-rate mortgage, the current mortgage interest rates are very important to deciding how much you should pay every monthcompanies offer different interest rates so it is a good idea to shop around for the best deal before settling on one particular lender.

Answer 5

BAD IDEA!

Well, its a bad idea if you aren't maximizing your retirement plans. If you invest that extra $3,000.00 a year into a traditional IRA (max for 2008 is $5,000 under 50 1/2, $6,000 over), you will come out with much more money than putting it towards principle. Not only is it tax-deductible, but if you get a good mutual fund that has an average earning of 15% (there are plenty of them out there), you'll clean up in 30 years.

Answer 6

During the first several years the payment is mostly interest. The ratio of the part of the payment that goes to principal and interest slowly changes throughout the life of the loan until there is almost all principal and very little interest paid on the final payments. This is why extra principal payments made early in the life of the loan can have some great payoffs in saved interest if you keep the loan for 7 or more years.

Answer 7

This is a fantastic idea! I'm not sure why anyone would tell you its a bad idea. You'll end up cutting down your term, and paying less interest to the bank overall! For example, if you pay one extra principle and interest payment per year, you'll cut off 6.667 years off of a 30 year loan. Use this link to see what adding 3k a year to your mortgage will reduce your term down to!

http://www.eloan.com/s/amortcalc?context=purch&sid=-RHcDTgamZDoWUroR8xlX3eulEQ&user=&mcode=

Also, check with your lender. Sometimes if you pay your mortgage down by 10% at once, they'll reamortize your monthly payments. So your payments will be calculated over the lower balance and remaining term on your loan!

If you got the extra 3k, put it against the principle of your loan!!

Answer 8

If you have the extra money and you are earning less than about 7% on that money, I would pay towards the principal.

You have to figure that if the money is earning interest, you will be paying taxes on that interest so it reduces the effective rate of return.

Even if you sell the house in 5 years, you will have more equity.

Answer 9

Agree with James C for the most part.

Don't put all of your eggs in one basket.

Mortgage allows you to itemize the interest on your taxes, true rate is probably dropped to approx. 4.5% (depending on your tax rate). Some on-line savings pay this amount.

First option would be to max out 401K plan. Rule of 7 - money historically doubles every 7 years. Time is your best friend. (plus it reduces your tax debt)
30 years you would have your home paid plus all of the 401k savings.
Additional avenues
Roth IRA
IRA
Mutual Funds
Other investments
Seek a investment professional or study all of the great options.
Diversify!!!

Answer 10

The rule of thumb is if you pay 1 extra P&I payment a year of the course of your loan you will knock 5-7 years of a 30 year note...

Note knowing what you owe, by adding 3k a year over the next 29 years you would have paid down your note by approx. 87K That is a good chunk off your your note..

I wuold say go for it it also saves you interest...