Save LOTS of Money in the Long Run

[kilcher]

My fiance purchased our home nearly 3 years ago. Since then she's paid an extra $250 toward the principle each month. That's something we plan on continuing. Anyway...

Tonight she used an online calculator and determined by paying an extra $250 toward the principle each month we're cutting our 30 year mortgage down to 14 years and saving $50,000 in interest!

Run your numbers, you might be surprised by what you find. I know this is no secret but most people either forget to do it and/or underestimate the cost savings. If you're not paying at least one extra mortgage payment per year (apply an additional 1/12th of your montly payment to prinicple each month) you might want to consider starting.

[sweeps]

Very good point. But some people will say the $250 is better invested since mortgage interest is relatively low compared to what you can earn in stock funds. (Personally I prefer to both whenever the extra money is there. )

[jIM_Ohio]

I agree with sweeps, that $250/month would earn well more than $50,000 in interest if invested in equities over same 15 year period.

[buzz]

Actually, investing $250 per month for 15 years at a 9% return would yield, oddly enough, about $50,000. Perhaps the OP miscalculated or needs a refi.

Many analysts say that the market is quite overvalued at present and warn of sluggish performance for the foreseeable future. Even so, odds are the return would be better than paying extra on a low-rate, tax deductible mortgage.

[Ingtar17]

Of course some people are not comfortable having a mortgage hanging over thier heads for years and years. It's definitely better to pay more on your mortgage than to spend it on things. Long term stocks are better though.

[simpleyme]

I say good job you will not regret owning your home,if you do you can borrow against it ;-)

[disneysteve]

Actually, investing $250 per month for 15 years at a 9% return would yield, oddly enough, about $50,000.

Actually. $250/month for 15 years at 9% would grow to $95,560.95, so it would beat prepaying the mortgage by over $45,000. At 7%, it grows to $80,000. Even at 6%, it would result in over $73,000. Of course, unless it is in a tax-free account, those earnings would be taxable, but the point is it isn't hard at all to outperform what you'd make by prepaying your mortgage, assuming you have a standard mortgage rate.

Prepaying may give you peace of mind, but it comes at a steep price.

[puck36]

Why would you stay in debt to save money? Wouldn't you want to pay off the mortgage and then save? I guess I would pay off my mortgage ASAP, then take that payment and save it.

[InDebtInDC]

Why would you stay in debt to save money? Wouldn't you want to pay off the mortgage and then save? I guess I would pay off my mortgage ASAP, then take that payment and save it.

When making a financial decision, one of things we look at is the effective rate of return on each investment.

For a mortgage, you would be paying off the principle more quickly and thus save on interest expense, but when you compare the extra payment with the opportunity cost of what that extra money would earn in the market, the rate of return for the investment outweighs the interest savings.

Option 1 - put all your money in the mortgage. Savings 4-7%.

Option 2 - pay the minimum on the mortgage and invest the rest. Average rate of return, 10% pretax.


With option 1, you get piece of mind that your house is debt-free, but like steve said, that piece of mind comes at a steep price.

With option 2, since your savings grows more quickly than your debt, at some point in the future you can empty your savings account and pay off a significant amount of your mortgage. So with #2, you pay off your debt more quickly.


Which do you want?

1 - be debt free, own a home, but have no money
2 - have a mortgage, but have a lot of cash in savings

With 2, you have the benefit of knowing you can pay your minimum payment should you lose your job, or you can pay a big chunk any time you want to.

I personally choose 2.

[Ima saver]

I paid my mortgage off when I was 32. At that point, I did not know really how to invest money. I have never regretted owning my house free and clear for 30 years and have been able to save a lot of money, even tho we have never made that much money.

[buzz]

Actually. $250/month for 15 years at 9% would grow to $95,560.95, so it would beat prepaying the mortgage by over $45,000. At 7%, it grows to $80,000. Even at 6%, it would result in over $73,000. Of course, unless it is in a tax-free account, those earnings would be taxable, but the point is it isn't hard at all to outperform what you'd make by prepaying your mortgage, assuming you have a standard mortgage rate.

Prepaying may give you peace of mind, but it comes at a steep price.

Exactly my point. $250/month for 15 years at 9% would grow to about $95,000, yielding about $50,000, with $45,000 in principal. $45,000 of mortgage prepayment would save $50,000 in interest (OP's numbers). There is no advantage.

It sounds to me like the OP has a 9% mortgage, which is why I suggested a refi.

[InDebtInDC]

Most people are risk averse so take it easy on them. Plus the average person doesn't understand much about investing like a typical person on this forum would.


My biggest concern is most people don't make informed decisions. They make up their mind before understanding all their options. That's like playing chess without knowing all the rules.

If they already know and choose to pay off, then that's their choice. As long as it's an informed decision I think it beats investing just for the sake of investing.

[Staceyy]

There is a lot of peace of mind in knowing you own your home free and clear, no matter what anyone says! Kudos to your girlfriend!

[puck36]

With 2, you have the benefit of knowing you can pay your minimum payment should you lose your job, or you can pay a big chunk any time you want to.

If you lose your job, thats what an EMERGENCY FUND is for.

[LivingAlmostLarge]

Um, if you read some blogs Puck36, one comes to mind Boomie, her husband could not find a job for almost 3 years after the tech boom. So they pretty much lost their house. Their EF was stretched for 1 year. She even said it might have been wiser to have been saving a ton in cash Puck36.

Sounds good, 6 month EF. But what if you become disabled or are stricken with a life long disease? And need to change careers. Things happen that need longer than 6 months.

Personally I'd rather have a ton in cash. Also if you aren't maxing out your retirement accounts 401k and Roth/Regular IRAs, then you're leaving money on the table. And instead of prepaying your mortgage you should be saving $250/month in either or. The tax benefits are huge in either of those accounts versus paying off the mortgage.