Thoughts about overpaying a home loan?

[Goldy]

What do you guys and gals think about overpaying a home loan? In the past I have heard that if the loan is under 5% you can think about investing the money you would have used to over pay and invest it. We are looking at a 3-3.5% loan and I am wondering if you think it would be better to invest the moeny in a vanguard S&P 500 type fund or just pay more on the loan.

If we overpay the loan its essentially saving us the 3.5% but its possible to make more than that in a fund. Maybe a mix of the two is the best option. Thoughts?

[disneysteve]

I think prepaying a mortgage should be last on your investment priority list.

First, save your 6-month EF.
Then, be putting 15% to retirement.
Then, be putting 5% to non-retirement savings.
Then, be funding college if you have children.

If all of the above is in place and you still have excess funds available for saving/investing, throwing money at the mortgage is reasonable IMO and is exactly what my wife and I currently do.

Could we earn more with that money elsewhere? Yep, but I'm okay with that. I'm willing to take the lower return on that portion of our savings in order to prepay the house. We have plenty of other money going into more aggressive and hopefully more lucrative investments.

[bjl584]

What term loan are you looking into? Instead of overpaying, you could just get a mortgage with a shorter term.

[disneysteve]

What term loan are you looking into? Instead of overpaying, you could just get a mortgage with a shorter term.

There are pros and cons to that. Shorter loan generally has a lower interest rate but it locks you into the higher payment. The longer term has a higher rate but gives you more cash flow flexibility. You can make the bigger payments when you want to and are able to but you can drop back to the lower payment if money is needed for other things.

We recently refinanced to a 15-year loan. We could have done a 10-year and could probably even swung a 5-year loan but I thought 15 was a good balance of lower rate and lower payment without tying us to the higher payment of a shorter term. Still, in the 3 months we've had the loan, we've already paid an extra $5,000 in principal. I don't anticipate having this loan for any more than 7 years and probably less than that.

[littleroc02us]

What do you guys and gals think about overpaying a home loan? In the past I have heard that if the loan is under 5% you can think about investing the money you would have used to over pay and invest it. We are looking at a 3-3.5% loan and I am wondering if you think it would be better to invest the moeny in a vanguard S&P 500 type fund or just pay more on the loan.

If we overpay the loan its essentially saving us the 3.5% but its possible to make more than that in a fund. Maybe a mix of the two is the best option. Thoughts?

I would make sure that your investing 15% of your income in Roth IRA's and 401k's, have no debt besides the mortgage and have an EF fund. If you have extra money I would throw it at the mortgage because when you have a paid for house you have a gauranteed 5% return, whereas if you invest that additional money you may not make 5% or you may make more. It's less risky to own your home than to invest....

[MonkeyMama]

I agree with the advice of the others.

Yes, you probably will earn more investing, which is why 15% to retirement is a good goal. Also, ample liquid savings, as mentioned.

Beyond that, I would absolutely pay down the house. Pay it down while you are young, healthy, able bodied, and making good money.

A twist on that is to invest the money, and pay the house off once your investments are enough to pay off the house. Or keep the money and let it grow - extra insurance. That said, this can get a lot more complicated tax-wise, etc. I like the mortgage pay down for tax simplicity.

[GREENBACK]

With mortgage rates as low as they are ever likely to be I don't believe in prepaying a mortgage at all. As has been stated, if you have no room to invest any of it at all then I suppose it's an idea to consider. Even then, I like the idea of having liquidity versus paying to much at once. It comes down to personal preference. Some love the idea of paying off their mortgage as quickly as possible. Others, like me, are happy to keep a 4% percent mortgage forever.

[MrPolarZero]

I agree! Getting a mortgage is much better than overpaying a loan

[littleroc02us]

I agree! Getting a mortgage is much better than overpaying a loan

I haven't heard anyone calculating for risk? When you pay off a mortgage it's a guarenteed return on your money because you aren't paying interest and have freed up cash, plus 100% of foreclosures occur when someone has a mortgage. When you invest (which I totally believe in) you can lose or gain.. It's a risk and you must calculate for it.

[bjl584]

I haven't heard anyone calculating for risk? When you pay off a mortgage it's a guarenteed return on your money because you aren't paying interest and have freed up cash, plus 100% of foreclosures occur when someone has a mortgage. When you invest (which I totally believe in) you can lose or gain.. It's a risk and you must calculate for it.

Not all the time. Not a foreclosure, but the Sherrif can toss you out of your home is you fail to pay the taxes even if you have no mortgage

[littleroc02us]

Not all the time. Not a foreclosure, but the Sherrif can toss you out of your home is you fail to pay the taxes even if you have no mortgage

True, but I would hope that if you have no mortgage payment that you can afford the taxes, otherwise your a complete idiot with money, which doesn't make sense since you were smart enough to pay off your mortgage. I'll change the 100% to 99% then.

[bjl584]

True, but I would hope that if you have no mortgage payment that you can afford the taxes, otherwise your a complete idiot with money, which doesn't make sense since you were smart enough to pay off your mortgage. I'll change the 100% to 99% then.

I don't have stats on it, but it unfortunately probably happens more often than you think for one reason or another. But, I will go with 99%

[MonkeyMama]

People regularly seem to gloss over the risks of paying down a mortgage more rapidly. Once its paid there is probably little risk. BUT, in some scenarios, you may risk losing your home equity in a lawsuit, etc. (sometimes retirement funds have more protection from creditors than your home - just depends on the state). As such, there will always be some measure of risk. Financial hardship and missed property taxes was mentioned. In some states, property taxes can be VERY high - happens more than you think.

Of course, the BIG risk comes from the time you are over-paying your mortgage and it is still not paid off. If it takes 20 years, you risk losing your home still if you miss a payment. You don't get kudos for paying extra, and it can affect your liquidity. I've seen plenty of people regret early mortgage payments when they saved very little (or nothing) and had a setback like a job layoff. Suddenly they risk losing their home, and all that equity, and they have no backup plan. But everyone told them there would be *no risk* with that plan.

Of course, when you pay down a "guaranteed 5%" mortgage you may lose 10% in the stock market. Just because it's "guaranteed" doesn't mean you aren't taking a risk by choosing the mortgage over other investments. that historically have far better returns.

[disneysteve]

I've seen plenty of people regret early mortgage payments when they saved very little (or nothing) and had a setback like a job layoff.

I don't think anyone here has suggested prepaying a mortgage instead of investing. See my post above. I said to only prepay the house after you have your EF in place and are already saving 20% to retirement and other needs. And, of course, you should have no other debt besides the mortgage. At that point, I think paying extra on the house is reasonable but not before that point.

[ColinWalker]

I definitely think investing where you can potentially grow your money instead of simply prepaying an existing expense should be prioritized... From the above posters and the brilliance of their collective logic that's the way to go. (as long as you have retirement/ college fund and the like in order...)