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Pros to paying extra 1. 'psychological' peace of mind 2. reduced interest payments = cost savings 3. in some jurisdictions, greater protection from creditors (primary residence)
Cons to paying extra 1. reduced liquidity/cash flow (ie, in case of job loss or other surprises) 2. potentially lower investment returns (opportunity cost of other investments) 3. in some jurisdictions, greater protection from creditors (if used to fund retirement accounts instead of prepaying mortgage)
Message edited by: psychtobe on 2008-10-12 14:11:03 CDT
We are currently dumping a fair amount (~$1000) of extra money into our mortgage each month. After considering the fact that the interest is tax deductible, we're basically not paying about 3% interest on the money we put into our house. We're doing this because we plan to move into a new house within the next year or two. There aren't many investments that yield 3% post tax for a short period of time. If rates keep going up on MM/ING type accounts, I may have to rethink this decision.
I don't care what anyone says, there is nothing better than having a house free and clear. We bought our first home in '97 and paid it off this month. Mortgage was for originally $135,000. House is now worth $285,000.
Keeping a huge mortgage for a long time may not be the best secret in personal finance. The tax deduction on that mortgage interest is zero for many married couples. Investment returns do not consistently beat the mortgage rate. If someone justifies their argument by saying over the long run, average returns are higher. Then the question is "how long?" because you could be dead before you see the end of the long run.
There is one risk, among a few, to paying off your mortgage. If you're underinsured and your house is destroyed, you take the loss, as opposed to the mortgage holder. Many new homeowner's policies do not cover full replacement cost. Instead they cover the value of the house up to the amount specified in the policy. So if each year the cost of replacing your house increases, you need to raise the coverage value, too.
Not paying extra principal here...I'm saving up to buy a condo or house near San Jose. Current mortgage balance is $130K (7/1 ARM at 5.375%, on a 2BR condo in Central NJ, originally purchased in 2002 for $165K, similar units now selling for $250K).
We have a 5/1 mortgage with about 3 years remaining before the rate starts adjusting, and my husband plans on leaving the rat race about the same time, so we're aggressively paying down our mortgage (using MBNA billpay!) Even though our rate is currently only 4-5/8, it's still the best risk free return we can get (with a 3 year time frame.)
veryhungry said:I'm curious to how many FW'ers actually pay extra principal payments towars a NON HELOC mortgage?
wither adding money to the payment or doing a biweekly payment to generate an extra payment each 2 years or so?If somebody is willing to give away money at only 4 or 5% interest (as mortgage rates have been recently), it makes little financial sense to pay extra on the loan. Consider these two scenarios:
1) You pay as much extra cash towards your mortgage as you can. 5 years down the road, you run into financial trouble (lose your job, medical problems, etc). All of your money is tied up in the equity of your house, so in order to get to it you need it either take out a home equity loan (if you can still qualify) at the current interest rates (which may be much higher), or sell your house.
2) You invest your extra cash and pay the minimum on your mortgage. Even plain old index funds can easily beat the a 5% mortgage, so you would be earning more money than you would be saving if you were paying extra on the loan. 5 years down the road, you run into financial trouble. You have a nice little bundle in an easy to access investment account to survive on without selling your house or taking on more debt.
I know there are some people who simply do not like the fact that they are in debt for anything. If you have a low tolerance of debt, the positives probably don't outweigh the negatives for paying off your loan early, so in the end it comes down to your own personality.
The big problem with the advice from the Ric Edelman's of the world is:
1) Most people don't get big long mortgages so they can "invest the difference", they spend the difference. 2) Paying off your house isn't like stuffing money under your mattress, it's like paying for the mattress. 3) Home equity is one of the more protected asset classes in most states. 4) Mortgaging your house so that you can invest in the stock market has some upside potential and some pretty horrific downside potential.
To each his own but I think the Ric Edelman's of the world will end up burning more people than are helped.
whodini said:There is one risk, among a few, to paying off your mortgage. If you're underinsured and your house is destroyed, you take the loss, as opposed to the mortgage holder. Many new homeowner's policies do not cover full replacement cost. Instead they cover the value of the house up to the amount specified in the policy. So if each year the cost of replacing your house increases, you need to raise the coverage value, too.
Not many mortgage holders are going to let you insure your home for less than the amount of the mortgage. If you are underinsured then it is YOU who is taking the risk, not your mortgage holder. Being underinsured is the risk, not whether or not you have a mortgage.
dweick said:The big problem with the advice from the Ric Edelman's of the world is:
1) Most people don't get big long mortgages so they can "invest the difference", they spend the difference. 2) Paying off your house isn't like stuffing money under your mattress, it's like paying for the mattress. 3) Home equity is one of the more protected asset classes in most states. 4) Mortgaging your house so that you can invest in the stock market has some upside potential and some pretty horrific downside potential.
To each his own but I think the Ric Edelman's of the world will end up burning more people than are helped.
I absolutely agree. It seems like he thinks people can find guaranteed 10% returns all the time.
workindev said:veryhungry said: 1) You pay as much extra cash towards your mortgage as you can. 5 years down the road, you run into financial trouble (lose your job, medical problems, etc). All of your money is tied up in the equity of your house, so in order to get to it you need it either take out a home equity loan (if you can still qualify) at the current interest rates (which may be much higher), or sell your house.
2) You invest your extra cash and pay the minimum on your mortgage. Even plain old index funds can easily beat the a 5% mortgage, so you would be earning more money than you would be saving if you were paying extra on the loan. 5 years down the road, you run into financial trouble. You have a nice little bundle in an easy to access investment account to survive on without selling your house or taking on more debt.
I know there are some people who simply do not like the fact that they are in debt for anything. If you have a low tolerance of debt, the positives probably don't outweigh the negatives for paying off your loan early, so in the end it comes down to your own personality.
1) No need to wait until you run into financial trouble to get a HELOC. Having to pull money from an investment account when you run into financial trouble can mean having to sell an asset class at a time that may be inoportune.
2) The Nikkei index has taken 30 years to double. It's trading at the same level it was 20 years ago. Of course the US markets are different but anyone who says something can "easily beat a 5%" return is wet behind the ears. The S&P 500 has had about a 0% return over the past 7 years, real tough luck for someone who might have started "investing the difference" in 2000 and needed to liquidate some assets due to financial troubles since then.
dweick said:workindev said:veryhungry said: 1) You pay as much extra cash towards your mortgage as you can. 5 years down the road, you run into financial trouble (lose your job, medical problems, etc). All of your money is tied up in the equity of your house, so in order to get to it you need it either take out a home equity loan (if you can still qualify) at the current interest rates (which may be much higher), or sell your house.
2) You invest your extra cash and pay the minimum on your mortgage. Even plain old index funds can easily beat the a 5% mortgage, so you would be earning more money than you would be saving if you were paying extra on the loan. 5 years down the road, you run into financial trouble. You have a nice little bundle in an easy to access investment account to survive on without selling your house or taking on more debt.
I know there are some people who simply do not like the fact that they are in debt for anything. If you have a low tolerance of debt, the positives probably don't outweigh the negatives for paying off your loan early, so in the end it comes down to your own personality.
1) No need to wait until you run into financial trouble to get a HELOC. Having to pull money from an investment account when you run into financial trouble can mean having to sell an asset class at a time that may be inoportune.
2) The Nikkei index has taken 30 years to double. It's trading at the same level it was 20 years ago. Of course the US markets are different but anyone who says something can "easily beat a 5%" return is wet behind the ears. The S&P 500 has had about a 0% return over the past 7 years, real tough luck for someone who might have started "investing the difference" in 2000 and needed to liquidate some assets due to financial troubles since then.Valid points. I guess it comes down to 3 things: You personal tolerance for debt, your confidence in beating a 5% mortgage rate with your investments, and your discipline to actually invest the money and not spend it.
We just got a new (first) home, and we pay about $900 extra principal per month (and max out IRA contributions, and have money going into investment accounts). We just want to get out of debt, even if it's 5.5% fixed.
I max out my company 401K with 10% pre-tax plus pay an extra $3-4K a month in principal on my mortgage. I almost have my place paid off with the agressive principal payments. I have a 3/1 ARM at 3.75%.
I hope to purchase a larger second house soon so will start banking more for a large down payment.
Not many mortgage holders are going to let you insure your home for less than the amount of the mortgage. If you are underinsured then it is YOU who is taking the risk, not your mortgage holder. Being underinsured is the risk, not whether or not you have a mortgage. This may be a local thing, but many homes in CA are only insured for 25-35% of the mortgage balance, and the lenders dont have a problem with it.
Message edited by: SUCKISSTAPLES on 2005-01-17 22:57:35
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