30 Year Fixed Mortgage Payments - The Bills.com Blog

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30 Year Fixed Mortgage Payments

Question: I have a 30 year fixed mortgage. If I am only planning on staying in the house for around 5 years, would it be beneficial to pay more each month towards the principal?

Answer: There is no right or wrong answer to your question. Additional principal payments change the dollar amounts going toward principal and interest in subsequent mortgage payments, because lowering the outstanding loan balance reduces the monthlyinterest expense. The payment stays the same, but the amount going toward principal increases, reducing the length of the loan and the total interest expense.

There are three things you need to consider:

1. How much money do you invest in your retirement account?
If you have not yet reached the limit on your 401K or IRA accounts, the extra money you would use to pay the mortgage is better off contributed to these accounts. In a 401k plan, you can typically contribute up to $12,000 annually. In an IRA (individual retirement account) you can usually save up to $4,000 annually (although this amount limitation. Keep in mind that the contributions to these accounts are not taxed. Remember also that you get deductions on your mortgage

expenses.

2. What will your home be worth in 5 years time?
If you think that the property value will appreciate significantly then the increase in value will increase your equity. Home equity is the difference between the current value of a home and the amount still owed on the mortgage. As the principal of the mortgage amount decreases as a result of monthly mortgage payments, the home equity increases ? even if the home doesn't increase in value. You would want to contribute more to the principal only if you felt that the market was on a downward cycle which in turn would lead to a higher loan to value ratio.

3. Are you willing to invest in other high yield products?
You could also use the extra money to invest in other short

term high yield products such as mutual funds, but it entirely depends on the amount of risk you are willing to take. To justify the risk the after tax returns need to exceed the interest cost on your mortgage.

As you think about the 3 options above, you also need to keep in mind that paying down the principal can save you on interest and payoff your loan faster, but the deciding factor will probably be the estimated savings on doing so. For more information on mortgages please visit our mortgage resource page at http://www.bills.com/mortgage/

I hope this information helps you Find. Learn. Save.

Good Luck,
Bill
www.bills.com

Also, make sure to get a free financial health check-up with Bills IQ!

User Comments

1. Posted by Lynn on Saturday 8th March 2008 12:01

I have 27 years left on a 30 year mortgage. I am going to start making bi weekly payments, and an extra 100 per month. The original mortgage was for 157,000. When will the mortgage be paid off?

2. Posted by Nathan on Monday 10th March 2008 08:41

You forgot to mention the interest rate you are currently charged on your loan. You can use this link to calculate your early payoff: http://www.mortgageloan.com/calculator/mortgage-payoff-calculator

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Bill has answered all sorts of questions and has been able to provide those in need of financial guidance with helpful and valuable advice and information on their specific financial area of interest. If you need specific guidance on any of the above mentioned financial areas, feel free to Ask Bill your financial questions and get better informed. Also, make sure to get a free financial health check-up with Bills IQ!

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