Extra Mortgage Payments-To Do or Not To Do?
I recently bought a house
Interest rates were low. The price was right. The emotional attachment was there. I jumped in.
However, in one of my recent posts I pointed out that I may have made a mistake.
...I put down over the "ideal" 20%. On the surface, I should be proud, but this is eating away at me. Interest rates are low. I could be making a better return on my money if I was invested in stocks. Should I have done that? Should I have risked that potential return?
Could of. Should of.
One thing I, like many homeowners, contemplate after the purchase of the home, is "does it make sense to put down extra payments?"
Here is an example of the potential savings...
Say Bob took out a $200,000 30-year mortgage at 4%. (pretty average numbers)
If Bob paid a one-time payment of $100 a year, he can cut off six months of repayment and $$2,967.37 of interest.
If Bob put an extra $100, every other month, so six times a year, he would cut the repayment time down by 3 years and 4 months and save $12,000.21 in interest.
If he put an extra $100 a month, he would cut down the mortgage repayment by 4 years, 11 months and save $$26,683.56
If Bob could afford to double that, at an extra $200 a month, he could save myself 8 years and 4 months and $$44,656.45 in interest!
Extra money may be hard to come by when thinking about adding more to the already dreaded mortgage payment, but it can pay off. Even if Bob only put an extra $10 a month, he would still save himself $$3,247.58 over the 30 years.
Sounds like the way to go, right? Well maybe...
Here are some things Bob may want to consider:
Does he have any other debt that needs to be paid down? Car loans? Student loans? Credit card? All of these may be debt with potentially higher interest rates. Bob could put the extra money towards the higher rate debts first, and then focus on his mortgage.
Does Bob have an emergency fund? Many financial experts say that a person should have a minimum of $1000 in an account for emergencies. Once that $1000 mark is hit, it is ideal to save till you hit the amount that is equal to 3-6 months of expenses.
What about a retirement fund? Does he contribute the maximum amount into his IRA? Does he have a 401K? If so, is he to the point where he is getting the most from the employer contribution? Is he maxing out the 401K? Depending on Bob's age, he maybe be invested in a high-percentage of stocks, which stock performance has historically outpaced the 4% interest rate he is paying on the mortgage.
Obviously everyone's situation is different. It may make sense for Bob to put extra money towards his mortgage, but it may not. That is why it is critical for everyone to look at their whole, personal situation...and not just do it because on the surface it sounds smart.