Posted on 08/17/2024 8:13:07 PM PDT by where's_the_Outrage?
If you own a home, you've probably heard the age-old advice to pay more on your mortgage so you can pay it off faster. But what happens when you don't have thousands extra to throw at your mortgage each month?
There's a really simple way to pay a little extra -- by making mortgage payments every two weeks. Don't worry, you're not doubling your costs! Instead, you pay half your mortgage payment each time. It's a great strategy for sticking to a budget since many jobs pay every two weeks. And, because there are 52 weeks in a year, you'll actually make 26 half payments in a year. That's 13 full payments each year instead of 12.
But is paying just a little bit extra worth it? It might be.
Paying even a little more toward your mortgage can shorten the life of the loan and save you money. But how much? Let's say you purchased a $400,000 home in 2020 when interest rates were around 4%. We're also going to assume you were able to save up 20% and make a down payment of $80,000, so your total loan balance was $320,000.
If you made regular payments (meaning one a month, so 12 in a year), you'd pay off your loan in 30 years and pay a total of $229,982 in interest.
If you made 13 payments in a year, you'd pay the loan off in 25 years and 11 months, and pay $193,382 in interest. You'd save $36,600 in interest over the life of your loan.
(Excerpt) Read more at fool.com ...
Depends on the interest rate. It may be better to send that extra payment to a money-market fund, allowing you to maintain liquidity, earning a similar amount of interest, and paying it all off when the numbers meet.
Of course then you have to be the type of person that doesn’t spend money just because they have money.
And enjoyment. Just after I became debt free I bought several items with that mortgage money. I continue to do so, have 2 business class tickets to Thailand over Christmas.
yep. that’s the norm if you don’t force the issue.
If you’re trying to be a billionaire, shrewd investing is a smart course. But those of us that lack that talent to make wise investments do better being debt free. I have a lousy investment history.
“yep. that’s the norm if you don’t force the issue.”
Which is the point of my 1st comment, these articles are saying make extra payments instead of saying direct extra money to the principal. People can easily understand make an extra payment, but the articles fail to tell them to look at the payment slip and direct extra money to the principal.
If the return on your 401k is higher than your mortgage rate, put all you can in the 401k and pay the minimum mortgage payment.
Over the last 40 years, the Dow has returned an average of ten percent.
Even if you open your own brokerage account, and plan for a 7.5% return, you are coming out ahead by only paying the minimum on the mortgage.
Take out a 5% mortgage and get a 7.5 to 10% return in the market, and you are winning.
And yes, the stock market could crash, but so could the value on your home.
There’s quite a few things that I disagree with Dan Ramsey about, but he’s totally right about paying off a house. Life is certainly less stressful.
Being debt free is the way to go - took my wife years to get on board, but once she was, we paid off our house very quickly - now we travel around the world at least once per year.
JMHO
I am 79 years old and have owned houses and investment properties for 52 years. In all that time I have never had a mortgage mature at 30 years. I have always ended up moving or refinancing and paying off a mortgage early. In fact in the US the average length of home ownership is 8 years and the median is 15 years.
Doing these calculations is usually nothing more than a mathematical exercise, and has very little bearing on your day-to-day financial well being. And, when moving, having paid down an extra $10k on your principal has very little bearing on what house you can afford, although it will certainly negatively effect your standard of living.
I find it far better to invest regularly (pay yourself first), get a mortgage which is affordable under that saving regime, and then either invest any money left over or spend it on necessities.
Exactly, for those of us little guys, this is way to go. Being debt free is such a stress reliver.
You’re a smarter man than me Ganga Dinn.
“Being debt free is such a stress reliver.”
Yes being debt free may relieve some stress, but on the other side of that coin is the stress of not accumulating other financial assets.
That extra cash paid on a mortgage could have been invested in the stock market and earned a return of 10%, which is a much higher rate than a mortgage.
That’s free money.
When you can earn free money, take it.
That is what I did.
1. If the interest rate on your mortgage is low, ask yourself if you really want to pay off the mortgage early. I bought my home in 2021 when interest rates were ridiculously low. I’d be a fool to pay off a 3% mortgage early when I have other options that can get me a better return on my money.
2. If you want to pay extra toward your mortgage, consider putting your extra money aside and investing it instead. Build up the balance in an investment account over time. At some point the balance in this account will exceed the remaining balance on your mortgage. Pay off your mortgage early THEN, if you’d like.
I would advise anyone considering extra mortgage payments to get a good understanding of the concept of liquidity before they do so.
He’s got a financial strategy that does make a lot of sense — but really just for an audience of people with limited financial knowledge and resources. He’s got an aversion to debt that borders on pathological, and it definitely skews his advice in a way that is not necessarily good for many people.
I sent a second check in with my mortgage payment and wrote on the second check “for principal only”
paid off a 30 year note in less than 7 years
but with inflation the way it is now, I am not sure I would do it the same these days
“There’s quite a few things that I disagree with Dan Ramsey about, but he’s totally right about paying off a house. Life is certainly less stressful.”
Agreed.
Stress is silent and does not show up on any balance sheet.
Life is more than numbers.
You’re right. Additional funds must be directed or the mortgagee decides where it goes, most often into escrow. If there is no escrow, it’ll be advance payment.
Additional payments must be directed and done with the normal monthly payment (not just sending in extra checks separately).
Also, you cannot do the 50% payments bi-weekly payments “all on your own”, this may get you a penalty. You have to set up that “plan” with the mortgagee because, if you read your contract, payments are expected monthly only.
Investing: After 7 years your expected holdings would be $445,845.79. based on a return of 10%/yr.
Your original investment of $36,000.00 plus your annual investments of $36,000.00 could be worth $445,845.79 after 7 years. This assumes an annual rate of return of 10% and all of your annual investments happen at the beginning of the year. All values are shown before inflation is taken into account.
https://www.aarp.org/money/investing/investment_return_calculator.html
if you applied the gift to the mortgage principal at 7 years 10 months you would be paid off.
If you invested the money, at 7 yrs 10 months you would still owe $325,446.20. but have 440-500K in the brokerage. You would have 120K cask left after paying the mortgage at that time or you could leave the investment to grow.
https://www.calculator.net/mortgage-payoff-calculator.html
I don’t know about about anyone else, but I was ale to pay off my mortgage a few years early by cashing in some long held life insurance policies. As far as keeping the policies & just paying extra on the principal, it sounds good, but only if you have the money to do this. Sometimes there is nothing left of your check to do this. That should be easy enough to understand, but apparently it is not. Being paid on commission, my check would vary from month to month. You can’t really figure a budget when you have to deal with something like that.
Escrow is your insurance and taxes. I never paid into escrow, I took care of it myself with three houses. Pay any extra you can monthly.
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