10 Additional

[bones72]

Does anyone else pay an additional 10 dollars or some other minor principal reduction on their mortgage? I can't stand the thought of not doing that, while realizing that it does not reduce the loan period by any significant amount. But I am curious as to what this community thinks?

[disneysteve]

If you have a fully-funded emergency fund, are saving 15% for retirement and are debt-free except for your mortgage, I think prepaying your mortgage is a great idea. Personally, we are pretty aggressively prepaying our loan, putting hundreds of dollars each month toward principal. We just refinanced to a 15-year loan and I'm hoping to pay it off in half that time.

[ukgaz]

I think every dollar extra you can put away makes a difference. It may not dramatically pay down your debt/loan but it will give you that "feeling" that you are on top of your debt. My Car loan is 185 a month but some months I overpay by 10 to 150 more depending on how that month has gone. Every amount over the 185 makes me feel like I am gaining more momentum towards eliminating this debt. You could say the small amounts have the placebo effect

[snshijuptr]

I personally think prepaying your mortgage is a trade off with retirement. Ideally you should finish your mortgage and retire at the same time. In practice, you first need to assess your rate of return on your retirement versus your after tax APR on your mortgage.

If mortgage APR > 6% - pay down mortgage
If mortgage APR between 3-6% & mortgage payoff is father from happening - pay down mortgage
If mortgage APR between 3-6% & retirement is father from happening - put money in retirement
If mortgage APR < 3% - put money in retirement

My numbers are just estimates. A lot depends on your expectations for the market, your allocation, your risk tolerance, your employer match/pension, your tax bracket, etc. I would also argue that if you cannot foreseeably retire by the time you are 75 (or earlier in a physically-demanding job) you should focus exclusively on your retirement.

[GREENBACK]

I pay the absolute minimum I can towards my mortgage. At 4% I'm certain I can take that extra money and earn twice that rate in the longhaul but everyone has there opinion on this subject. I certainly never intend to give a bank anything extra.

[disneysteve]

Originally Posted by GREENBACK

I pay the absolute minimum I can towards my mortgage.

I certainly never intend to give a bank anything extra.

Not to argue but these two statements are contradictory. By paying the minimum, you are giving the bank more interest. They would earn less from you if you paid extra.

That said, I do struggle with my decision to prepay our mortgage given our low rate. I'm pretty confident that I could do better investing the money but I tend to consider the money being used to prepay the loan as part of our fixed-income investing. When you think of it that way, 4% doesn't sound so bad.

I had the same dilemma years ago with my student loans. Rates were low. I could have earned more investing in the market. But I hated having the loans. Had I just paid the minimums, I would have still been paying off my own education when my daughter was in college and I just couldn't deal with that.

We could actually have the house paid off before our daughter goes to college, although it would be a stretch. At the very least, we'll knock the balance down a lot before she gets to college and during the college years, go back to paying the minimum and use that additional cash flow to help pay for college.

[ukgaz]

so the extra money I use to pay off debt COULD be put towards earning more than I am saving by investing that money in stocks, bonds, funds or sports gambling all of which I have done well in.

But the key here is COULD. By investing that extra money my profits could go through the roof. Or I could lose all of that extra money. By doing over-payments I am GUARANTEED a return. It is a just a question of balancing it right between the two and your risk tolerance.

[GREENBACK]

[quote=disneysteve;277163]Not to argue but these two statements are contradictory. By paying the minimum, you are giving the bank more interest. They would earn less from you if you paid extra.

QUOTE]
I'm speaking strictly in terms of giving "extra" in the form of more money than I'm required to. I know they earn more interest when I pay the minimum and I'm satisfied with that but simple math suggests to me that the 4% loan (closer to three after the tax deduction) is nothing to get excited about. I take the money I could be applying towards this loan and, even conservatively invested, I'd expect twice that rate of return.

I do say this knowing that if I had to, for whatever reason, I could pay it off in full very quickly. The bank will earn more in interest from me over the life of the loan than if I paid extra but I will earn more(maybe 8-10% returns)over time by investing those extra payments I'm not making to them.

If I was paying a higher interest rate then my philosophy might be different. Hopefully I don't sound contradictory.

[GREENBACK]

Originally Posted by ukgaz

so the extra money I use to pay off debt COULD be put towards earning more than I am saving by investing that money in stocks, bonds, funds or sports gambling all of which I have done well in.

But the key here is COULD. By investing that extra money my profits could go through the roof. Or I could lose all of that extra money. By doing over-payments I am GUARANTEED a return. It is a just a question of balancing it right between the two and your risk tolerance.

I look at the historical rates of return in the market as my guide. I personally don't see any great risk of loss beyond the short term. Over time I think you'll gain far more by investing versus paying extra on a 4% mortgage (IMO). At 13% or more, like what my parents paid, I'd have a different view. When you look at how home values have fallen is there really a "GUARANTEED" return there anyway?

[jpg7n16]

Originally Posted by GREENBACK

I'm speaking strictly in terms of giving "extra" in the form of more money than I'm required to.

If I was paying a higher interest rate then my philosophy might be different. Hopefully I don't sound contradictory.

How it read to DS:

"I don't want to pay them any more money than I have to"; which contradicts itself since you have to pay them back in the end regardless, and they're just earning interest on you for a long time. The longer you take to pay off the loan, the more money you have to pay the bank

How you meant it:

"I don't want to pay any more than I'm required to by the terms of my mortgage, so that I can invest my extra cash at a higher rate of return than my mortgage loan is charging me"; where you're actually in favor of paying the bank more interest, on the condition that your investment returns outweigh that interest cost. Gladly pay 4% if you earn 8%. (which paying extra on the 4% would prevent you from being able to invest at the 8%)

[jpg7n16]

Originally Posted by ukgaz

so the extra money I use to pay off debt COULD be put towards earning more than I am saving by investing that money in stocks, bonds, funds or sports gambling all of which I have done well in.

But the key here is COULD. By investing that extra money my profits could go through the roof. Or I could lose all of that extra money. By doing over-payments I am GUARANTEED a return. It is a just a question of balancing it right between the two and your risk tolerance.

Exactly

Originally Posted by GREENBACK

When you look at how home values have fallen is there really a "GUARANTEED" return there anyway?

Since the home would fall in value whether you had the mortgage or not, the value of the home is irrelevant. If you didn't pay down the mortgage, not only would your house have fallen - you'd still be out more interest. If you did pay down the mortgage, your house still would have fallen just the same - but you'd be out less interest.

All other things held equal, scenario 2 is guaranteed to be better than scenario 1.

We can guarantee that if you pay down your loan, you will be charged less interest. And lowering an expense is as good as increasing income - so yes there are guaranteed returns.

[jpg7n16]

Originally Posted by bones72

Does anyone else pay an additional 10 dollars or some other minor principal reduction on their mortgage? I can't stand the thought of not doing that, while realizing that it does not reduce the loan period by any significant amount. But I am curious as to what this community thinks?

If you're beating yourself up over a minor issue - you should really change your focus. Focus on the major points of your budget. ex: sell your $55k Mercedes to eliminate $48k of debt (big deal) vs change from brand name soap to generic (minor deal)

If you didn't pay the $10, I'd be more concerned that it greatly bothered you, than that you didn't pay it down. Such an amount shouldn't emotionally impact you one way or the other.


There are things that should bother you, but this is wayyyyy down the list.

[krantcents]

As part of getting ready for retirement (in 6.5 years), I called my bank to find out how much to increase my payment to have it paid off. I increased my payment $100 to pay it off. FYI, I also max my 401K and fund an IRA for my wife and a Roth for myself.

[Slug]

I currently pay 1 1/12 payments per month. I could do more, but for me it's just a hedge. Some goes to this guaranteed return, some goes to stocks, a dollar or 2 to the lottery, etc...

[KTP]

I pay extra also, but with a 4.25% loan, I have to admit I am being stupid. Back out the tax benefit and I am paying around 3% for the money.

I could just buy a 10 year municipal bond and get 5% tax free, and pocket the 2% difference or invest it, and send the 3% on to the bank along with my principal payment. Over a 30 year loan that is some serious money.

[bones72]

Originally Posted by jpg7n16

If you're beating yourself up over a minor issue - you should really change your focus. Focus on the major points of your budget. ex: sell your $55k Mercedes to eliminate $48k of debt (big deal) vs change from brand name soap to generic (minor deal)

If you didn't pay the $10, I'd be more concerned that it greatly bothered you, than that you didn't pay it down. Such an amount shouldn't emotionally impact you one way or the other.


There are things that should bother you, but this is wayyyyy down the list.

Several things, perhaps I used overly emotional text in describing my feelings towards my only debt, which is my mortgage. I can live without that infintesimal mortqage reduction. Secondly, being a long-time career car dealer, I would sooner do something incredibly fun than own an overpriced so-called luxury status symbol that has actually mediocre performance. Tertius, in my business of selling cars, I see far too many people buying vehicles that they cannot afford. That has made me extremely adverse to debt of any kind.

[disneysteve]

Originally Posted by KTP

I pay extra also, but with a 4.25% loan, I have to admit I am being stupid.

I think "stupid" is overly harsh (especially since I'm doing the very same thing - ).

As I've said in various other discussions, not every financial decision is just about money. Getting debt-free, especially paying off one's home, is about more than just the money. It is about security and mental well-being and all of that intangible stuff.

Could I earn more by investing the money that I'm sending into the mortgage? Most likely yes. But the thought of having a paid for home 8-10 years before retirement is a powerful draw. We already max Roths for each of us. My wife puts 50% of her income into her 401k (plus gets a company match). We auto-fund a taxable investment account each month that is earmarked for retirement. And we have various other savings and investments. Part of our overall plan includes pre-paying the mortgage. I'm okay with that even if it means getting a lower return on that portion of our savings.

[GREENBACK]

Originally Posted by disneysteve

As I've said in various other discussions, not every financial decision is just about money. Getting debt-free, especially paying off one's home, is about more than just the money. It is about security and mental well-being and all of that intangible stuff.

This subject has been discussed over and over here and I'm sure it will continue be discussed in the future. It's probably not a bad idea either way as long as every other aspect of your finances are under control. I think it really does come down to the quote above. I'm satisfied with carrying a long, low cost mortgage and some aren't. It's the only type of loan I would treat this way because the numbers work in my favor in the long run.

[bjl584]

This comes up a lot on here. I would argue that paying extra is fine so long as the rest of your finances are in order. In other words, don't pay extra on the mortgage if you aren't currently saving for retirement (or saving enough for retirement.) Also, I would advise against paying extra on a mortgage if you currently have other debt. (Credit cards, car loan, etc.)

[snshijuptr]

Those of you paying extra, have you thought about investing the money in something like a savings bond and then paying off the mortgage in a lump sum when you have enough? That way you aren't tying up your money in an illiquid asset while also "paying down your debt" in an indirect way. Additionally, you can get a higher return on the money.