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Should I Make Extra Payments to My 30-Year Fixed Mortgage?

I have a 30 year fixed mortgage, would it be beneficial to pay more each month towards the principal?

I have a 30-year fixed-rate 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?

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Bill's Answer
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The right answer depends on how you answer these three questions:

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 401(k) 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 five years?

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 want to contribute more to the principal only if you believe that the market is on a downward cycle that in turn will 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.

In other words, making additional principal payments change the dollar amounts going toward principal and interest in subsequent mortgage payments, because lowering the outstanding loan balance reduces the monthly interest expense. The payment stays the same, but the amount going toward principal increases, reducing the length of the loan and the total interest expense.

As you think about the three 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 the Bills.com mortgage resource page. To learn more about financial planning, see Help with Financial Planning. To learn more about investing, see How Do I Start Investing in the Stock Market?

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

Best,

Bill

Bills.com

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5 Comments

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  • RS
    Jul, 2011
    Rick
    Great answer! You couldn't happen to know what exactly a bridge loan is would you? Any information would be appreciated thanks!
    0 Votes

    • BA
      Jul, 2011
      Bill
      A bridge loan is a short-term loan, usually secured by property or collateral. Bridge loans are taken by someone who needs immediate cash-flow while working to secure long-term financing. Interest rates on bridge loans are usually quite high.
      0 Votes

  • HV
    Jan, 2011
    helmet
    Cedar Hills, UT
    I would think that yes, it is a good idea, but it does depend on what type of rate you are getting on your mortgage loans or loan.
    0 Votes

  • 35x35
    Mar, 2008
    Nathan
    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
    1 Votes

  • 35x35
    Mar, 2008
    Lynn
    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?
    4 Votes

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