mxt_77

A while back, I made some bad financial decisions and racked up some credit card debt. Since then, I've been busting my ass to pay it all off. As I was working on that, I used Quicken to make a "debt reduction plan", and it tells me that when I finish paying off my CCs, if I take that extra money and start applying it to my mortgage, I can have my house paid off in about 7 years, instead of 27.

So, that got me to thinking... who here pays extra towards their mortgage? How much? (percentage or dollar amounts are fine)

I did an 80/15/5 loan when I bought my house. The primary (80%) loan is only 5.75%, but the secondary (15%) is at 8.375%. I'm thinking I'll pay as much as I can on the secondary and try to pay it off in 2 years, then just pay an extra 2-300 bucks a month on the primary mortgage, since it doesn't really make sense to pay off a 5.75% loan when I could be investing that money and making 6-10%.

I did a little math, though, and in the 25% tax bracket, that 8.375% loan is really just a 6.7% loan after the tax deduction... so I should really only be paying extra on that loan if I don't feel like I can make better than 6.7% in the market, right?

vtec9

Not necessarily.. you will have to pay capital gain and dividend taxes on the money you make in the market.. This is an ok site that lists the details http://stocks.about.com/od/taxes/a/Investtax.htm. So, you need to estimate the money you will be putting into the market (which might be taxed itself if you are not using a tax protected account such as 401k or IRA), the return, and the tax. If that comes out to better than 6.7% (certainly doable, but you're not guaranteed a higher return each year.. historically speaking, you can double that if you play long term), then investing in the market would be a better choice.

If you don't want to risk the money and cannot take a loss in the market, definitely put the money towards paying off the secondary mortgage.

steven975

You should check your mortgage contract.

Many lenders, ESPECIALLY the subprime lenders, have prepayment penalties. Some that don't will not apply a prepayment to principal, but only to future payments.

While customers want to lock in low interest rates, banks want to lock in high ones.

The Gasman

pay off the second. Generally the first mortgage interest is considered a good thing and refered to as a tax shelter because it's tax deductible

aklucsarits

I am in a very similar position to you. My primary mortgage is fixed at 5.625%, and my secondary is fixed at 6.625%. Initially, I had the same thought as you. I was paying $400 extra/mo on the second, hoping to pay it off early. I did that for about 1 year, and the balance was going down very rapidly. But then the yields on money market accounts went up above 5%. So I did the math just like you and decided to save the extra cash in a money market account instead of paying down the second mortgage. This way, I am coming out ahead (very slightly) financially, and I have both cash on hand and the option to pay off the 2nd mortgage early if I want to later.

Don't just look at the potential returns. There is something to be said for having the extra funds available in a liquid or semi-liquid state as opposed to being tied up in your home. It can be both a financial advantage and peace of mind to have that extra liquidity available.

Andrew

PLYRS 3

[QUOTE=mxt_77,Jul 2 2007, 10:39 PM] who here pays extra towards their mortgage?

Wildncrazy

Steven975 is right about the prepayment penalties. Over half of the 80/15/5s done were with subprime firsts.

BTW do the math, a straight 95% with MI works out to be a better deal since the MI is cheaper than the 2nd and MI is tax deductible. When lenders have a 2nd lien license they have to invent ways to do 2nds to recoup the costs of becoming a 2nd lien lender. Also they get paid on both loans and therefore make more $$$. Honest lenders offer the combo loans but don't push them.

But IF you do have a prime first then you can prepay but I'd pay the high interest rate 2nd off first.

On a 30 year loan one extra payment a year will knock your loan down to about 21 years.

While there is something to be said for liquidity I function better without a house payment.

mxt_77

Yeah, I checked that before I signed the loan papers, because I was pretty confident that I would want to pre-pay the loan (even if it was just a couple hundred bucks a year).

That's a good point, and something I've also considered. I'm pretty satisfied with my liquid assets, though, and I'll continue to put money into my savings & stocks (outside of my 401k & Roth). After my CC experience, though, I've got a strong distaste for any kind of debt, and it would be nice to be without a mortgage payment before I'm 40.

Plus, I think if I found myself with 100K in "cash" & unallocated liquid assets, it would be very difficult to keep myself from showing up at a Porsche dealership and making a salesman very happy.

QUIKAG

Get married and that will take care of your issue with buying a Porsche if you have a lot of liquid assets.

Anyway, I'd pay off the second mortgage first and then max out your 401k, Roth IRA (if eligible), and then do after-tax contributions to a brokerage account. No point in paying off a 5.75% mortgage when the effective rate is probably in 4's after you take into consideration the tax benefit.

mxt_77

Yeah, I'm convinced that if I'm ever going to own a Porsche, I'll have to buy it before I get married. But at the rate I'm going, I figure I've got plenty of time.

Your plan sounds like a good one, and probably pretty close to what I'll end up doing. I'm already maxing out my Roth, but I'm only putting enough in my 401k to max out the company match. I'll probably pay off the 2nd mortgage as quickly as possible, and then just put an extra 4-500/month on the primary mortgage. That should get it paid off in about 10-15 years instead of 30, while still allowing me to max my 401k & Roth and contributing to some other investments.