I bought a house this year. It is less than I can afford. I have been funneling 0 a month into an S&P index. Long term it has performed 9-11% over the time frame it would take to pay off a house. My interest is 4.75% with no tax write off because we don’t make enough to get that benefit.
What I want to know is if I should divert 0 a month towards the house…that would equal around 3.5 extra mortgage payments a year. I imagine it might shave over a decade off our payments, though I haven’t consulted a table or mortgage calculator.
On the other hand…s&p has a pretty impressive return for its safe feeling track record, and putting it in there makes my money semi-liquid in the event of necessity.
So which is it, put 0 in the house each month, or let it ride for semi-liquidity in the stock market.
All this is still early, so I have the opportunity to get it right from the get go. Thank you for considering my question.
Brian…
I am not worried about bi-monthly stuff…I would just send in regular payments…In the end the numbers work out to be about the same.
I have no prepayment penalty on my loan. I made sure of that. My mortgage guy gave me a dvd about why I should invest the money and not pay down my house. In these times, I’m not so sure that is good advice.
I can’t believe I’m explaining this. My wife, mother in law, and I live in the same house. My M-I-L is retired and pays us her share of the living costs. My wife and I both have solid part time jobs. The three of us have a quiet existence and we believe there is more to life than working a full time job. Its cool to be able to do anything you want with more time in your life. Time with each other is more valuable than money to us. Therefore we end up paying no taxes, and there is no additional write off to claim from mortgage interest. We have a good amount of extra left over each month–something that we feel can make a difference if we make the right choice.
I quit reading after the first paragraph, because my advice is the same regardless of your details.
1. Put 3 to 6 months of expenses into a SEPARATE money market account for EMERGENCIES.
2. Contribute 15% of your income into retirement accounts.
3. If you have children, start a college fund.
4. If you have extra left, pay off your mortgage ASAP.
You will always need SOMEPLACE to live, and 100% of foreclosures involve a mortgage. Once your mortgage is gone, you can use the payment to rapidly build your investment portfolio.
Big Don misstated his point. Making a half payment every 2 weeks is equivalent to 13 payments a year, and will cut your term. a half payment twice a month won’t make enough difference to notice.
If you cut you payment in half and pay twice a month you will knock 10 yrs off. Or, you could pay 1 extra per year and do the same.
The choice is yours. We’re headed for another or double digit inflation so you might need that extra money so keep some of it liquid. Also, look at your mortgage as if it’s not specifically written that you can pay your home off early then could hit you with a fee for making those extra payments.
I am estimating your numbers here. If 2400.00 per year is 3.5 extra payments, your mortgage is probably about 685/mo. 30 years at 4.75% gives your home a value of approximately 130,000. If you add 200.00/mo to this, you’ll pay off your mortgage 11 years, 4 months early.
edit: it would also save you about 48,000 in interest. If you can make 48,000 in interest in the stockmarket over 20 years, which is a 100% return as you’re paying 48,000 in extra payments for 20 years, you’re golden. It’s so unlikely, obviously.
Prepay ftw.
You say "My interest is 4.75% with no tax write off because we don’t make enough to get that benefit."
If you don’t make enough to get this benefit, then you don’t have the money to pay extra. What are you trying to feed us here………………..???