Posted on: 20th Feb, 2008 09:35 am
Just want to throw out a general question to get some opinions.
Let's say you take out a 30 year fixed mortgage on your home at 6%. In your monthly budget you usually have an extra $300.
1. Let's also assume you have no other debt than your home mortgage.
2. You already contribute 10% of your income to retirement.
3. You have good size emergency fund.
Would you apply the $300 to the principal on the mortgage or invest the $300 into other retirement accounts, stocks, etc? I know the smart financial thing to do would be to continue paying the regular mortgage payments and invest the $300 because more than likely your return will be better. You will also get the advantages of tax breaks on the interest. However, for some reason I just think it would be great to be mortgage free. Any comments/suggestions?
Let's say you take out a 30 year fixed mortgage on your home at 6%. In your monthly budget you usually have an extra $300.
1. Let's also assume you have no other debt than your home mortgage.
2. You already contribute 10% of your income to retirement.
3. You have good size emergency fund.
Would you apply the $300 to the principal on the mortgage or invest the $300 into other retirement accounts, stocks, etc? I know the smart financial thing to do would be to continue paying the regular mortgage payments and invest the $300 because more than likely your return will be better. You will also get the advantages of tax breaks on the interest. However, for some reason I just think it would be great to be mortgage free. Any comments/suggestions?
Dcrum,
I would calculate the interest savings through early mortgage payoff by making extra principal payments. Then I would also get an estimate from the return on investment (if I invest the extra $300) from a financial advisor. I would compare them and then decide whether to pay off a mortgage or invest the extra poayments otherwise into some kind of investment scheme.
I would calculate the interest savings through early mortgage payoff by making extra principal payments. Then I would also get an estimate from the return on investment (if I invest the extra $300) from a financial advisor. I would compare them and then decide whether to pay off a mortgage or invest the extra poayments otherwise into some kind of investment scheme.
Hi Dcrum,
If you have good cash amount in the emergency funds, and can put down 10% of income into retirement plan, you need to find out if you are comfortable making extra payments into the mortgage. If yes, then there shouldn't be a problem making the mortgage payment faster. But you need to consider the prepayment penalty also just in case you pay off the loan early.
It is up to you to decide whether you'll be happy investing in one or more retirement accounts. What's more important is how much you can invest and the cash amount that you expect to have in your retirement accounts.
Take Care
If you have good cash amount in the emergency funds, and can put down 10% of income into retirement plan, you need to find out if you are comfortable making extra payments into the mortgage. If yes, then there shouldn't be a problem making the mortgage payment faster. But you need to consider the prepayment penalty also just in case you pay off the loan early.
It is up to you to decide whether you'll be happy investing in one or more retirement accounts. What's more important is how much you can invest and the cash amount that you expect to have in your retirement accounts.
Take Care
adonis' suggestion makes a great deal of sense. if your return on investment is greater than your savings in interest costs resulting from prepayments, then you would likely want to invest rather than prepay.
given a 6% rate, i would think that this would likely be the case. with home equity loans drying up in many cases, recouping the prepayments by borrowing again, if that was a desire at some point in the future, would be a difficult thing to do. better to save it - make a few extra (or a lot extra) dollars in your investing and you'll always have the ability to use those funds down the road.
given a 6% rate, i would think that this would likely be the case. with home equity loans drying up in many cases, recouping the prepayments by borrowing again, if that was a desire at some point in the future, would be a difficult thing to do. better to save it - make a few extra (or a lot extra) dollars in your investing and you'll always have the ability to use those funds down the road.
