Author Topic: Strategy for paying mortgage early  (Read 2215 times)

shanaling

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Strategy for paying mortgage early
« on: May 21, 2017, 04:11:49 PM »
I've heard that a good way to pay down mortgage is: Instead of actually paying extra principal each month, earmark this money in a savings account and only pay down when you have enough to pay off the entire mortgage or right before the interest rate will adjust if you have an ARM. This helps to maintain the liquidity of funds during the process. Any thoughts on the pros and cons of this method?

Psychstache

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Re: Strategy for paying mortgage early
« Reply #1 on: May 21, 2017, 04:58:59 PM »
Con: if you have an interest rate that is typical for the environment today (3.5-4.5%), you will likely end up with less money than if you would have invested it and kept the mortgage for 30 years.

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waltworks

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Re: Strategy for paying mortgage early
« Reply #2 on: May 21, 2017, 10:36:25 PM »
Pro: you have cash.
Con: it will actually take *longer* to pay off a mortgage if you're paying ~4% interest on the loan and earning ~1% in the bank.

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SeattleCPA

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Re: Strategy for paying mortgage early
« Reply #3 on: May 22, 2017, 06:51:14 AM »
I've heard that a good way to pay down mortgage is: Instead of actually paying extra principal each month, earmark this money in a savings account and only pay down when you have enough to pay off the entire mortgage or right before the interest rate will adjust if you have an ARM. This helps to maintain the liquidity of funds during the process. Any thoughts on the pros and cons of this method?

This doesn't really make sense to me... you're going to save (net of bank account interest or whatever) way less in interest expense.


MrsWolfeRN

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Re: Strategy for paying mortgage early
« Reply #4 on: May 22, 2017, 08:10:46 AM »
It works if you put the money in index funds, not a savings account. You will earn more than what you pay in interest, and you have liquidity to withdraw the funds if something else comes up like a job loss. You may have to pay some taxes on your gains but that is better than having no gains at all.

SeattleCPA

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Re: Strategy for paying mortgage early
« Reply #5 on: May 23, 2017, 06:41:44 AM »
It works if you put the money in index funds, not a savings account. You will earn more than what you pay in interest, and you have liquidity to withdraw the funds if something else comes up like a job loss. You may have to pay some taxes on your gains but that is better than having no gains at all.

I am all for index funds... and I hope equities beat bonds over time I have left... but if the goal is to eliminate the mortgage, I think you just pay it off rather than get fancy.

Timmm

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Re: Strategy for paying mortgage early
« Reply #6 on: May 26, 2017, 06:46:58 PM »
It's not financially optimal, but then neither is paying off the mortgage. I like it better than paying to the mortgage as quickly as you can - the loss of liquidity is a major issue to me. Maybe if you've otherwise got a lot of liquid non-retirement savings to cover the expenses and opportunities that may arise over the next 20-30 years this isn't an issue for you, but I've seen it become one for others multiple times.

nereo

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Re: Strategy for paying mortgage early
« Reply #7 on: May 26, 2017, 07:15:12 PM »
I've heard that a good way to pay down mortgage is: Instead of actually paying extra principal each month, earmark this money in a savings account and only pay down when you have enough to pay off the entire mortgage or right before the interest rate will adjust if you have an ARM. This helps to maintain the liquidity of funds during the process. Any thoughts on the pros and cons of this method?

Seems like the worst of both worlds. You keep paying interest on your mortgage while your cash slowly loses to inflation in a savings account.

Either increase your monthly payments or invest the money (you can create a separate 'sinking fund' if it helps to compartmentalize funds).

marty998

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Re: Strategy for paying mortgage early
« Reply #8 on: May 26, 2017, 07:26:57 PM »
What if you accidentally decide "ooh pot of gold, lets spend it!"

NoNonsenseLandlord

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Re: Strategy for paying mortgage early
« Reply #9 on: May 27, 2017, 04:22:11 PM »
I pay an extra $6K a month on my rental mortgage.  It is at 5.375%.  Each month I pay, it increases the amount paid t principle by $30 on the regular payment.  When I started not long ago, I owed ~$160K, not I am almost done with only $36K left.  An extra $113K in the past 20 months or so.

My cash flow of never better until I actually pay it off, but I am saving interest every day.

Pay it on the first of the month, or the last of the month, the interest savings is the same.  It is compounded monthly.

You can always use a HELOC to pay it off too, then pay as mush as you can on a HELOC, even if you borrow it back two days later.  A HELOC interest is calculated daily.

Dicey

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Re: Strategy for paying mortgage early
« Reply #10 on: May 27, 2017, 05:44:12 PM »
I borrowed this post from another thread you will find helpful. This is why you should pay the minimum and invest the difference.

Re: DONT Payoff your Mortgage Club
Reply #261 on: May 26, 2017, 10:32:26 AM
Quote
Been a while since I updated my Investment/Mortgage numbers. 


                       Investment Balance                Mortgage Balance

01/31/16 =              129,707                               204,466
02/29/16 =              137,003                               204,102
03/31/16 =              151,122                               203,738
04/30/16 =              158,218                               203,374
05/31/16 =              176,190                               203,010
06/30/16 =              183,020                               202,846
07/31/16 =              195,013                               202,482
08/31/16 =              190,813                               202,118
09/30/16 =              192,290                               201,754
10/31/16 =              190,672                               201,390
11/30/16 =              198,065                               201,026
12/31/16 =              203,004                               200,650
01/31/17 =              212,600                               203,200 <----- Refinanced out of a 5/1 ARM to a fix 30@4.125 and dropped PMI due to value increase
02/28/17 =              225,035                               202,913
03/31/17 =              240,341                               202,626
04/30/17 =              258,657                               202,338
05/26/17 =              267,698                               202,048

End of Year Goal =   300,000


Investments have been increasing at a good pace for us this year.  Aiming to break 300k invested by the end of the year!