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stupid to pay extra on low interest mortgage?

A

Austin Carpenter

Member
I am 31yrs old and I am already sick of my mortgage. It is a 15yr at 3.25%. I owe about 12.5 yrs yet. Is it wise to pay extra on it to get it played off sooner? I have an emergency fund with about a year stashed away.
 
Don't spend down the emergency fund to do it.

But if you can swing a little extra now and then--on a SEPARATE check, marked "FOR PRINCIPAL ONLY--then by all means, do it!
 
It's also stupid to have money is a savings account that, if you are lucky, is paying you 0.25%.
 
Emergency funds aren't there to pay huge returns; they're in place to be available when you need them, should an emergency arise. Say your washer dies, or your fridge...you don't want that money tied up. Funds that are expected to draw a decent rate of return are NOT your emergency fund. You don't want to "unplug" your investment money if your transmission goes out; that's what the SEPARATE emergency fund is for.

Now, if you have an actual year's worth of expenses sitting in your emergency fund, you're set...on that end. THEN your extra money goes toward either reducing/eliminating debt or building your SEPARATE investment account(s).

As far as debt goes...are you down to ONLY the mortgage? If not, GET THERE FIRST. If you have other, higher-interest debt, you're effectively taking that monthly payment AWAY from what you have available to invest. So you're costing yourself the interest on the debt, PLUS the rate of return the investment WOULD'VE made you...which makes that debt VERY expensive. Once THAT debt's paid off, and all you owe is your mortgage, apply what your other debt WAS to your mortgage principal and watch that sucker disappear.

When you're completely debt free, no one can take your home or possessions away from you. And you can live your life the way YOU choose.
 
I paid mine off in eleven years. It was tough row for a while but I had it paid off before the 2008 down turn. I sleep better not owing money.
 
Doing what you want with your paycheck, and not letting the good old banker have about half of it is always the best way to live. Alot of different things can factor into what is best for you personally. Like, do you live from pay check to pay check, is this your only loan, and so on. No need to starve to death while trying to pay the banker everything you can. What your doing now could be in your best interest. Kinda depends more on what other situations your in for whats right for you.
 
Never a bad idea BUT I wouldn't use your emergency fund.

It takes money to make more of it.

Take the extra money that you'd put towards your 3.25% mortgage and invest in something that makes more than that.

Discover your inner entrepreneur and start a small business. Buy a rent house etc.

I have several friends, with full time jobs, that started small businesses. One has a shredding business, another builds custom cabinets, one sells garage sale junk on ebay. Not huge money makers but the extra income is sure nice.
 
Some people very much like to be debt free and there is much to be said for that. However, you have a loan at a very nnalert and also an emergency fund. As you get old it will be nice to have a paid off house however, you will also need savings - unless you want to spend your house. You might want to consider a IRA account, at your age it can grow to a considerable amount when you retire. Your bank or they can suggest someone who can advise you on how to invest. Note: you are looking for an investment that grows faster than the 3.25% your mortage is taking from you. You can"t go wrong paying off debt but IMO it is also important to start saving.
 
(quoted from post at 18:38:43 03/17/14) Never a bad idea BUT I wouldn't use your emergency fund.

It takes money to make more of it.

Take the extra money that you'd put towards your 3.25% mortgage and invest in something that makes more than that.

Discover your inner entrepreneur and start a small business. Buy a rent house etc.

I have several friends, with full time jobs, that started small businesses. One has a shredding business, another builds custom cabinets, one sells garage sale junk on ebay. Not huge money makers but the extra income is sure nice.
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That interest rate is nice and low and not nearly as bad as 20 years ago. I remember being happy to assume a 7.5% mortgage on my first house when the going rate was 12! Google "amortization schedule" and plug in your numbers to see what your actual interest expenses are. That will help you decide. If you pay part of it down and interests rates climb in 5 years to 10% or higher, you will be happy to be paying that rate. I recently cashed out my car (title loan) at the credit union because I was a little short on $$$ to keep the in-laws out of foreclosure. I could have scraped up the money, but a $12,000 loan for three years cost me only $600 in interest....about a days work for me when I'm out brushhogging.....it's all relevant.
 
I agree, it's about debt. Stay out of it. Pay cash for your next car, truck, tractor, house. I've never paid credit card interest or late fees. However I pay everything I can with a card, have it auto paid from checking and make rebate money, 1,2,3,and 5%. I make hundreds, a year using plastic. It's has a better returns than a bank savings.
 
That confuses me!! What do you mean?? The only place you can pay extra is on the principal because at the instant that you make your regular payment you are up to date on interest and any extra MUST apply to principal. There is no "end of loan" until it"s all paid off.
 
I have never seen a rich man say he got rich by paying someone interest on money. Your 31. So double up on some payments and you can have that loan knocked out in under 10 years or so. Then take the money you had been paying in payments and save/invest it. By the time your ready to retire you will be setup fairly well.

There are other things to keep in mind on owning your home. If you have a loan you can lose your home. You never know for 100% what will happen. If you suddenly are unable to work having your home paid for means you can ride it out for a longer period.

We paid off our first home in under 10 years. The farm in 12 years. It made things tight at time but later on we where able to ride out the rough times while others went broke.

So I would keep a good emergency fund and then pay off the house ASAP, regardless of the interest rate.
 
(quoted from post at 19:46:28 03/17/14) I have never seen a rich man say he got rich by paying someone interest on money.


quote]

I guess I'd have to disagree with you on that statement. Many businessmen have said never use your own money to start a business. There are many stories of millionaires who started out with the change in their pocket and a plan....and a banker or friend. The idea is, if there is a risk, let someone else bare it.

The fact is it takes money to make money. If you can put that money to a better use (depending on your abilities) you should be further ahead....especially with these historically low interest rates. No wonder banks aren't anxious to lend money...who wants to take the risk for 15 or 30 years that rates won't skyrocket?

Now if you are just going to waste the money on frivolous crap...by all means throw it at the mortgage.
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This is a good idea, a credit card also has better fraud protection then a debit card in most cases. Used wisely credit cards can actually be a good idea ( no balance, cash in reward points ).
 
I'm receiving 1.4% on my 401K funds in cash reserves and 0.9% for normal/accessible savings in a corporate money market fund. The local bank 5 year CD is a miserly 0.75%. Suspect that you aren't doing much if any better. Yet you are paying 3.25% on the borrowed funds. If your job is secure and the savings isn't intended to further your education or provide better employment opportunities, also assuming you don't anticipate the need to increse your debt, I would strongly consider applying a good portion of it to the current low interest mortgage.
 
Depends on how the loan is set up. And how the interest is applied. When we paid two principals in one month the second principal came off of the end of the loan. Shorten the time of the loan. Interest can be base on time. I think with most loans today you can pay off early without penalty.
 
The answer to the original question is pretty simple.

Just for illustration, if your savings pays 10% and your Mortgage charges 5%, you want to keep the mortgage as long as possible as you are in a positive cash flow situation. Paying off the mortgage in this scenario would cost you money in the long run.

If your savings pays 5%, and the mortgage charges 10% then you pay it off as soon as possible, as you are in a negative cash flow situation.
 
OK, for the third time.

It is never "stupid" to pay down debt, but it's pretty tough to make a case for paying down a 15 year, 3.25 percent fixed rate mortgage. Ultimately, it's whatever you are comfortable doing, not what a bunch of old pharts say is the "right" thing to do.

If your mortgage company gives you a monthly statement, look at your statement and see how much you paid in principal. That's how much additional you'll have to pay to knock one month of the mortgage. If you had 27.5 years to pay on a 30 year mortgage, you'd find it to be a fairly small number. But since you have only 12.5 years to pay, it's going to be a pretty hefty number. And the more you pay down the principal, the bigger that number becomes.

So do a quick calculation in your head: How much sooner do you really want to pay off the mortgage? If you want to cut the time in half, you'll have to pay at least as much extra as you're currently paying in principal. In fact, you'll probably need to do that just to pay it off 5 years sooner.

If you have a book of amortization tables, or a spreadsheet program, you can calculate your extra payment exactly based on your current balance, interest rate, and a loan term that will pay it off by your target date.

For what it's worth, I've paid down my 15 year mortgage so it gets paid off a few years early. But what makes sense for me doesn't necessarily make sense for you. I'm an old phart who wants his mortgage paid off when he turns 60. I have a higher interest rate on my mortgage than you have. And I could easily afford to pay down the balance.

Do the calculations and make your own decision.
 
It"s all about risk. I"d pay it off as soon as possible then sock away what you where paying on the house. At your age you will be doing very well with paid for house and a nice bank account.
 
Your surest investment is paying off debt, that guarantee's an absolute return. Learning to protect yourself tax wise is the second step to becoming financially independent, it does not make much sense to make money if various taxing agencies are just going to take it away.
 
Not stupid to do - but not all that useful either.

A lot of variables at play.

Most importantly - remember that what little you're paying in interest is tax deductible - so
that lowers your actual interest rate considerably.

Then there's inflation - the value of money goes down over time. So a $2000 payment today will only be $1960 next year if there's 2% inflation. (value wise - adjusted for inflation).

So - you've basically got free money. It's not costing you a whole heck of a lot.

You HAVE to factor this in when doing an analysis. You can't just look at the interest paid over 15 years and call that figure a loss.

Then as others have said - what ELSE could you do with the money you'd want to put towards paying it off?

Do you have any credit card or higher interest debt? Get rid of that first.

Is there a better way to invest the money?
 
I'm with you I hate a payment of any kind and when you can pay extra payments on your loan against the principle then you're helping yourself get debt free.Also what would you be doing with the money otherwise if you didn't make the extra payment?Probably nothing as long lasting as a house.I know quite a few 'smart' folks that stretched out their house loan or worse got a 2nd loan against their house now they are retired or close to it and can't really retire because of their house payment they are strpped for cash all the time.Pay it off as young as you can in my opinion.The extra $$$ you have after you pay it off can then be invested in something.
 
On a 15 year 3.25% mortgage financing $100,000, you will pay $26,480 over the life of the loan in interest. Is that money better in your pocket or someone else's? As far as taxes, is it worth paying a dollar to save 17 cents? If you have no choice but to pay interest, the write of helps. If you you have a choice?
 
(quoted from post at 04:28:18 03/18/14) I'm receiving 1.4% on my 401K funds in cash reserves and 0.9% for normal/accessible savings in a corporate money market fund. The local bank 5 year CD is a miserly 0.75%. Suspect that you aren't doing much if any better. Yet you are paying 3.25% on the borrowed funds.... .
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James22, you might want to get out of having so much cash and get into the market... I made north of 10% over the past year on my 401k. That's just one good year of course and over time it's been more like 4-5% but sounds like you are cheating yourself. Even the cash I hold in the 401k is something like 3.65%, guaranteed for the next year. For me I'm better off putting money into the 401k than putting it on the mortgage. I'm almost to the age (about a year away) that I could take the 401k money to pay on the house should a job loss occur. If not then I'm making a decent return on what I keep in the investments. Everyones situation is different, this works for us.

For the original poster, the contrary view would be that you would have a big chunk of money tied up in a very non liquid asset. What if you lost your job or got transferred and had to move to find one in another state and you couldn't sell your house? Sound like a few years ago? For an old fart this may not matter, if you are younger I would think seriously about having so much tied up in one place. Limits your options severely.
 
Nailed it. Its all in what the money can do for you. If you can invest and make more (after taxes) than what your mortgage costs you then make your investments and pay the base payment.
 
Not to mention, a credit card at the end of month you get your statement. If you lose a receipt for the business, you have a backup record.

My sister uses southwest credit card for her business. In a year's time she makes enough credit to fly her kids and grandkids to florida for Christmas. Or you can turn your rebates in to gift cards. I use southwest, bank america, lowes, sears, and menards. It's really the best return on your money, especially when you are using your money to buy things you need.
 
On the flip side - best financial advice I can give is "never loan money!" - especially to family unless you're a glutton for punishment.
 
My way of looking at it... if you have a floating rate, pay it down as fast as you can provided this is the highest interest rate you have. If not, pay then higher rates off first. If it's a fixed rate... I'd probably see if I could get better return on the money somewhere else rather than paying the mortgage off. You should be able to get a better return.

Rod
 
pay your highest interest rate off first, working your way down the list.
If you only owe on the house then pay it off as fast as you can.
You said you had a years worth set back so you are covered there.
Now get that house paid off and no longer worry about losing your job, getting hurt can't work etc.
Sounds like you are doing good so far.

ron
 
Unfortunately about half of the 401K is in cash, the remainder in equities which have done OK. I also have a modest IRA that is all invested in equities, approx 50% overseas. With a modest pension, SS income, and farm rent, I've not been overly affected by the low interest rates. Perhaps missing an opportunity for increasing income outside the retirement funds by not investing in equities with available cash, but I'm just not going to take that risk. Would prefer to buy more real estate but local farmers are pretty flush with cash and willing/able to bid prices well above the already high values. It would be rented to the current tenant, which results in a considerably negative nearby return. Five thousand/acre for hunting ground or ten thousand/acre for decent, but low organic matter clay soil is in my book unreasonable. Patience needs to be practiced.
 
>I'm receiving 1.4% on my 401K funds in cash reserves and 0.9% for normal/accessible savings in a corporate money market fund

James, two things:

First, you should not consider your 401k to be your "cash reserves", since 401k withdrawals are heavily penalized. (Assuming you're younger than 59-1/2.) Sure, you can borrow against a 401k, but that option goes out the door when you lose your job.

Second, investing 401k funds too conservatively is a good way to go broke during your retirement. The balance between stocks and bonds/interest-bearing accounts should be somewhere between 50-50 and 80-20, depending on how close you are to retirement. Over the long haul, stocks have always outperformed bonds and interest-bearing account. The S&P has doubled over the past five years, although that's hardly typical. If you had put just half your money in stocks, you would show a respectable 10 percent annual return rather than less than 2 percent.
 
(quoted from post at 04:02:47 03/18/14) Paid ours off 15 years ago great feeling being debt free at 31 years of age
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Okay 31-15 = 16.

Other than a rich grandparent, aunt or uncle passing on and leaving you a big inheritance, there is nothing a 16 year old can legitimately do to earn enough money to pay off any sort of mortgage.

Having no debt is nice, but unrealistic for the vast majority of us.

I never would've gotten my first vehicle without going into debt, and without that first vehicle I never would've gotten a good enough job to pay off that first vehicle. Unfortunately the first vehicle didn't hold out long enough for me to save enough money for its replacement, so I had to go into debt to buy that second vehicle. Time I get vehicle #2 paid off, it's shot so I gotta borrow to replace it too...

I suppose I could have continued living in that dumpy old apartment for $600 a month indefinitely, but I wanted a house of my own and the perfect place came up for sale in the perfect location at the perfect price. No way were the old folks that owned the place going to sit around and wait for me to save up to pay cash, so I gotta borrow it.

I suppose I could pump every spare dime I have into paying off the loans but I have 7-8 hours every day where I'm not working or sleeping, and I need something to fill the time even if it's just television and Internet. I suppose I could just get another part time job to make use of my time but that's no fun. I work to live; I don't live to work. I suppose I could sit on a bare floor and stare at the wall.

I started out behind and I'm always going to be behind no matter how hard I work, no matter how much I scrimp and save, no matter how much extra I dump into my mortgage.

By no means am I living outside my means. I am making the payments, contributing to my 401K, setting some aside for a rainy day, but by the time that is all said and done there's nothing left that would make a significant dent in my debt.

Yeah, we all know the "right" things to do. Save for a rainy day. Don't go into debt. Pay off any debt you do have immediately.
 
Depends on the wording in contract. Some mortgages have a penalty for early payoff!
Banks love this type mortgage!
 
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