I have always thought it was smart to make extra principle payments to my mortgage each month, retiring the loan sooner thus saving in interest. But now I am not so sure. My parents did this and they were able to payoff the house in less than 15 years on their 30 yr mortgage - but this was back in the early 80s when interest rate was double digit.

Given the current low interest rate climate should I make extra principle payments each month? A little background info: I am about 2 years into my 30 year mortgage with a fixed rate of 5 3/8. I plan on living in the same house for a while ,at least 2-3 years and perhaps more, maybe for the duration of the mortgage. Since 5 3/8 is a relatively low rate should I be taking the extra payment each month and invest it in a mutual fund instead? If mortgage rates climb in the future, which means the interest I can earn in a CD will climb also, does it make sense to invest the extra payments instead of prepaying?

What are the pros and cons of prepaying mortgage?

 

If you can invest the money at a rate higher than your mortgage rate, don't pay the mortgage off early. If you cannot, do pay the mortgage off early.

Keep tax considerations in mind, but recall that mortgage interest (on your principle residence) is tax-deductable and that interest income is taxable, so the taxes are generally a wash.

 

Unless you can open a Roth IRA or even better if your company offers a Roth 401(K)

 

You'll see even professional financial analysts split on this one. The post above is right... you need to look at the investments you can make and see if they can offer you a better interest rate than what you would save by paying on the house. But remember to add in the tax savings which essentially give you a lower mortgage APR than you have on paper.

One big question... are you paying any PMI (the insurance required if you put less than 20% down)? If so, then prepaying may have its advantages since you lose all the PMI money.

Also, check out the bimonthly method advocated by some advisors. Instead of paying monthly you send a check every two weeks. Instead of 12 checks per year, you send 26 (52wks/2). This is essentially one extra month per year you pay. There are calculators that show how much faster you pay off the loan using this method.

 

One advantage is that you build up equity a little faster by paying extra principle. This really only helps if you aren't in an area where homes appreciate rapidly. This would also factor in to whether or not you may be eligible for a PMI refund.

 

At some point the itemized deductions start to get phased out.... so that is something to take into consideration..... the interest expense becomes not so deductible....(i have no idea at what points it phases out for single vs. married, etc...)

I am paying an extra $400 on our mortgage per month..... I could probably do better in a mutual fund but i like the idea of having no debt....

The PMI that someone brought up is a very good point. I think after 2 years though, you can have your home re-appraised and as long as you have the 20% equity they will get rid of the PMI without you having to actually pay down the loan to 80%.

 

PMI is not an issue since my downpayment was almost 30%.

Scot, like you, one of my motivation is not to be in debt - hate the idea of owing somebody, even an institution, any money. But I don't want to let that motivation cloud my financial judgement. I started thinking about this issue when I read a Q&A in Smart Money where a person was asking about paying a student loan off early even though that particular student loan had a riducolously low rate of 1 or 2% interest. I think the columnist recommended her to not try to pay it off early when she could invest her extra payment and over the long term it's a better financial decision.

 

It is a good idea to pay a little more each month if you can afford do that. Not sure how much longer these mortgage intrest tax shelters will be around seeing Bush wants them limited. I am a Realtor and have been receiving info on this on a weekly basis.

Sam

 

The majority of your payments are being applied on the interest due on the mortgage right now because you are still early in paying it. Typically, when you are halfway through paying on the term of your mortgage, you have only paid 25% of the principal balance. Applying any amount over the payment will be applied towards the prinicipal. The interest is then compounded every month according to the remaining principal balance.
Your 5.375% 30 yr fixed is a very good rate and there is no forecast as to when rates will be that low again. If you do plan on moving in the next few years, you may want to consider keeping that property as an investment property and renting it out.

 

this applies to secondary mortgages, not primary mortgages. Basically you have people socking their money in real estate to get out of taxes.

Bush isn't contemplating revoking the tax advantages to owning a home.