To put extra money into monthly mortgage payment or not?

amother

Wed, Feb 02 2022, 2:00 pm

I've been having this question for a while now, and can't seem to figure out the answer. If I have extra money once in a while, should I throw more money into my monthly mortgage payment or not? I asked one mortgage broker, and she said that with today's mortgage rates, it's not such a great idea, why not save the extra for another property etc. But chances of me ever affording another property are not great... Another broker said it's a great idea to put extra money because that will lower the interest... So I'm not sure what's best...

amother

Acacia

Wed, Feb 02 2022, 2:10 pm

I think the answer depends.

At certain times I did pay more than the minimum amount of my mortgage.

In the long run you will wind up paying less money if you pay off your mortgage more quickly but interest rates are low and also it depends on what your financial situation actually is. Do you have at least six months of savings in a safe liquid account. Are you fully funding your retirement? It is always good to have liquid investments since your house is not a liquid form of savings.

My interest rate is pretty low and lower than what I earn through investing so I am better off financially by keeping the money invested. I have a tax deduction for my interest payments as well. At this point there is no reason to pay off my mortgage or accelerate payments. I have a low variable rate mortgage and if interest rates rose I would pay it off since it would no longer make financial sense since it would cost more than I would get from investments.

NotInNJMommy

Wed, Feb 02 2022, 2:21 pm

BetsyTacy wrote:

Dave ramsey would say 100% yes, because there is no feeling like the feeling of being debt free.

Dave RAmsey does say to pay off other debts (except mortgage), build up an emergency fund, fund retirement, etc. before paying off the mortgage, and Dave RAmsey also recommends only a 15 yr mortgage max with at least 20% down (to not have to pay PMI).

If throwing money at your mortgage would get you out of a >15 yr mortgage or PMI, then it may be worthwhile.

lfab

Wed, Feb 02 2022, 7:59 pm

I think the advice to pay off extra on your mortgage comes from a time when interest rates were much higher. So paying off some extra every so often and putting it toward principle could save a lot over the life of the mortgage. But nowadays with interest rates so low it's usually not worth it. For example if you have an interest rate of 3% or you could take the extra money and invest it with a return of 7% you'll make more money investing it than you'll save by paying off the mortgage early.

jellybelly94

Wed, Feb 02 2022, 8:05 pm

I think the only reason it makes sense today to pay off toward your mortgage is if you know for a fact you won't use that money to invest in anything that'll make more than 3 percent, or if you know that you'll use the money if it's sitting around. Otherwise ur not really gaining much. Ppl r so quick to do this bec jst want to see the numbers go down but it's set for 30nor 15 yrs and so it rly is smarter to put ur money elsewhere....

amother

Firebrick

Wed, Feb 02 2022, 8:09 pm

We got a new mortgage last year with a lower interest rate. Our monthly payment is 300 less, but we have decided to continue paying those 300 extra a months in order to shorten the years of our mortgage (about 6 years) which is important for us because we were already in our early 40s when we bought our house.
When you do so you invest your money, but do not have the option to withdraw money a few years from now the way you would do with other types of investments. Also you have to ask yourself if it will be advantageous for you to shorten your mortgage and how shorter it will be with the money you put in. If it is a one time think it might not be that worth it on the ling run.
Also keep it mind that because of inflation, your monthly mortgage will not be as heavy a financial load in lets say 20 years as it is today.

lfab

Wed, Feb 02 2022, 8:22 pm

amother [ Firebrick ] wrote:

You may have decided to pay off more each month because you don't like the idea of a mortgage hanging over your head. But from a purely financial perspective it's not worth it. I just ran some numbers in an online calculator as an example.
If someone has a $500,000 mortgage and pays off an extra $200 per month on their mortgage with a 3% interest rate they would shave off just under 4 years and save about $38,000 in interest payments.
But, if they take that same $200 per month and invest it every month for the next 30 years, making an average interest rate of 6% they would make almost $125,000 in interest! That's an extra $87,000! And then you have much more flexibility for what you can do with that money. If you decide as you get older that they're would be benefits to paying off your mortgage sooner you can pull the money from investments and use it for that later on. But meanwhile you'll have earned money on it. And this way of you need the money for other things (weddings, medical expenses, unemployment...) you'll have it

harriet

Wed, Feb 02 2022, 8:36 pm

lfab wrote:

Where are investing your money that earns 6% monthly interest?

causemommysaid

Wed, Feb 02 2022, 8:42 pm

BetsyTacy wrote:

Dave ramsey would say 100% yes, because there is no feeling like the feeling of being debt free.

That's not a financial reason. It's an emotional reason.

Dave Ramsey talks to the financially illiterate masses. For them it makes sense.

Someone who is disciplined and knows a drop about finances and interest would never take this advice. It makes zero sense financially.

amother

Magenta

Wed, Feb 02 2022, 8:53 pm

From a purely financial perspective, if you have a low interest mortgage, you will probably do better by investing your money elsewhere.

On the other hand- The stock market rises over time, but it's had an amazing run and we might be seeing returns flattering out for a while. Can you afford to wait out a dry spell if that's what's coming?

And you have to know yourself. If you're likely to blow through your earnings, then maybe the discipline of paying off the mortgage early is better for you.

In the US, where mortgage interest is tax deductible, having a mortgage is less burdensome than other kinds of debt. But it is debt, secured by your house. So tread carefully and make sure to have enough savings on hand to keep paying it.