UT Reader Asks: Does It Make Financial Sense To Pay Down My Mortgage Faster?

• February 14, 2013
• 15 Comments

by Shilpi Paul

In this installment of UrbanTurf Reader Asks, a DC homeowner with a growing cash flow inquires about the pros and cons of paying down his mortgage faster as opposed to investing elsewhere.

I’m a homeowner and recently got a pretty significant raise at work. I’m wondering if it makes sense to use some of the additional cash to pay down my mortgage faster. I am about three years into a 30-year mortgage and have refinanced to an interest rate of 3.75 percent. I should probably ask a financial planner, but I’m wondering what UrbanTurf readers think. Does it make more sense to take a chunk out of my remaining mortgage payment or should I invest it somewhere else? What are some of the pros and cons?

Readers, what do you think? Post your thoughts in the comments section. If you would like to submit a question for UrbanTurf Reader Asks, send an email to .(JavaScript must be enabled to view this email address).

This article originally published at http://dc.urbanturf.com/articles/blog/ut_reader_asks_does_it_make_financial_sense_to_pay_down_my_mortgage_faster/6655

15 Comments

1. Scott said at 5:03 pm on Thursday February 14, 2013:

   I have often thought about doing this, too, as the amortization figures for a 30-year mortgage can look pretty daunting. If you have diversified your investments beyond real estate, I would say it makes sense. But if you haven’t done that, I would look into other investments before putting a significant chunk of money towards your mortgage.

1. Oso said at 5:14 pm on Thursday February 14, 2013:

   Are you planning on retiring soon? If not, then I’d say no. You have a very low interest rate on your mortgage. The money you’d spend on paying down the mortgage could probably generate greater than 3.75% interest if properly invested in other asset classes. Also, with the increase in income, you’ll likely want to take advantage of the mortgage interest deduction.

1. elky said at 5:16 pm on Thursday February 14, 2013:

   I read this article last year, which offers a lot of options for things to do with that extra money other than paying off your mortgage early:

   http://www.huffingtonpost.com/2012/08/30/mortgage-payments-why-doing-faster-doesnt-pay-off_n_1842499.html

1. LaShawn said at 5:16 pm on Thursday February 14, 2013:

   I think you also have to consider what your long term objectives are. Do you plan on owning this home for 20+ year? Do you plan on renting it out at some point in the future? If so, how much can you rent it for. If you can rent it for more than your mortgage, is it enough to assist in paying off the mortgage sooner?

   For example, if you don’t plan on owning it for a significant amount of time, then it doesn’t make sense, financially, to pay it off faster (your monthly payment isn’t going to change). That’s more liquid cash in your pocket while hoping the market continues to improve.

1. Q-Street said at 5:54 pm on Thursday February 14, 2013:

   I don’t understand the benefit of doing that, unless you have the cash to pay off the entire principle. I’d personally rather save the money, or invest it in a retirement account.

1. WM said at 6:03 pm on Thursday February 14, 2013:

   Also, if you have PMI or MIP it could be wise to accelerate payments to principal to get rid of it…. But any further will require more information. A lot of decisions are based on expectations.

1. Limited Info said at 6:04 pm on Thursday February 14, 2013:

   Without knowing other factors, some cited above, it’s tough to say.  But one thing that is safe to say is you will NEVER have an interest rate as low as you have now.

   I would save most of it, invest some of it in things that can provide a larger return than 4% and bank the rest to use on thing to save interest payments in the future (e.g. future car, housing, vacation home, etc.)

1. Will said at 8:45 pm on Thursday February 14, 2013:

   There are many factors, a lot of them personal. But I would argue one of the most important (already touched on in previous comments) is the alternative rate of return you could get if you put that money in another investment. If you can get significantly better than 3.75%, you should put your money there instead.

   For example, if you could get, say, 7% in a safe investment, you should definitely do that. By doing so your net benefit would be 7 - 3.75 = 3.25% on your money. Say your new extra cash is $25,000. That’s .0325 * 25K = $813/yr.

   Now, admittedly safe 7% investments simply don’t exist in 2013. They did historically, though. Throughout most of the 90s the yield on a 30-year treasury was over 7%—and that’s the safest investment asset there is.

   So it’s very possible that you will see safe 7+ rates again sometime over the life of your 30-year mortgage. When that happens, put your money there rather than toward your principal.

   For right now, however, finding a rate of return to significantly beat your 3.75 AND be safe is probably too difficult. So I would pay down your principal until/unless the Fed raises rates considerably—which it will if the economy improves markedly over the next five years.

1. D said at 12:01 am on Friday February 15, 2013:

   Will (and others) have it pretty much nailed. If you are paying PMI then the answer is almost certainly yes, pay down what you can until you get rid of it.

   Otherwise, it depends on how well diversified you are and your alternative investment options.

   You might also consider refinancing into a 15 year mortgage if that’s become doable. Rates have ticked up a bit recently, but they were more than a full percentage point below your current 30 year rate.

1. jag said at 2:15 am on Friday February 15, 2013:

   You should easily be able to beat a 3.75% return by investing the money elsewhere. Why would you go out of your way to rid yourself of these insanely low mortgage rates?

1. JT said at 2:39 pm on Friday February 15, 2013:

   The way I see this issue is how I’ve been dealing with my own mortgage.  Any money added now will lower the amount of interest I have to pay later—and usually with huge savings in total.  As an example, a $500,000 mortgage at 3.75% will incur $333,608 in interest charges.  Just $100/month extra cuts $27,795 off that total; $200/month cuts $51,101; $500 cuts $103063; and $1000/month cuts off $156430! Hard to imagine a “safe” investment that provides those guaranteed returns.

   With the possibility of mortgage interest deductions decreasing or being eliminated, it makes sense to get rid of this debt as fast as possible.

1. Blue said at 1:38 pm on Saturday February 16, 2013:

   I’ve had a similar dilemma was heavily favoring increased payments, but I ran the numbers and knew it wasn’t the smartest choice with such a low 30-year fixed mortgage. 
   I decided to set up a separate index account that is ONLY for the additional payments I would have otherwise made.  Even dividends get sent to another fund to make my comparison easier.  At the end of each year (or any interval I choose) I can objectively measure whether I’m doing better in index funds, or whether I want to pull some or all of the cash out and make a lump sum payment.  I know exactly how much money I put into the fund and exactly what it’s worth at any point, so I can run the numbers and see the advantages of each.  So far, I’ve done this for 8 months and the CS index fund is outperforming what my return on extra payments would have been.  I still have options open.  As much as I knew logically what the “smart” decision was, my emotions just didn’t want to do it.  I think this is the smart play—once a year, ask yourself if you want to make a big lump sum payment.  The choice becomes easier when you have all that money in one place and it’s already earmarked for your mortgage.  I’m hoping in 10 or 15 years that I’ll have enough to payoff the entire mortgage, and maybe then I’ll think Hell no…this is doing great and compounding.  We’ll see!  Good luck to you and congratulations on your raise and being smart about living below your means.

1. Liz said at 12:30 pm on Sunday February 17, 2013:

   You should refinance to a 15yr mortgage (rates are still incredibly low). That is what we did, and it basically cut our interest in half over the life of a loan. Granted, you will likely pay more on a 15yr monthly payment, but you pay down the principal much faster. Also, while it’s unlikely you’d be in your place for 30 yrs, you might be in your place close to 10 yrs (hence, a 15yr mortgage makes better sense).

1. Kevin E. Connelly said at 3:34 pm on Sunday February 24, 2013:

   You can sign up for a Bi-Weekly mortgage where 1/2 of the payment is made every two weeks since there are 26 two week periods in a year this amounts to an extra month’s payment each year. the loan amortizes faster a thirty year loan will pay off in eighteen years.

1. Jim said at 1:28 pm on Friday April 12, 2013:

   The answer is…. it depends.

   Having that mortgage loan costs you 3.75%.  So you should do one of two things. 1) Apply your new money to pay off debts that cost greater than 3.75% or 2) invest your new money in areas that will likely generate more than a 3.75% return.

   Do you have a student loan that costs 4.5%? Pay that off first because the money is more expensive.

   Can you invest in something that will pay a 5% return? Then invest your money there because it will return more than your mortgage costs.

   Or…. If you have no other loans and have no desire to invest, then your money is likely to just sit in your savings account. How much interest is that getting you? Is it more or less than 3.75%?

   Lastly, it’s ultimately a mental exercise. Some people play the numbers and go where the best value is. Some people don’t like to have debt and want it paid off. Some people just like having liquidity on hand. Which one are you?

   Good luck.

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