Sunday, May 27, 2007

to pay extra on my mortgage

we moved into a new home (with a brand new mortgage, to boot) last month and i have been setting up the auto pay options with my lender. we secured a 30 year loan at 6% and i figured i could pay a bit extra each month and trim about 10-15 years off the note. well, when i initially set up the auto pay, i figured instead of paying extra principal i could take it and invest that money elsewhere. if i'm borrowing at 6% (really, somewhere around 4% because of the interest deduction), i reasoned, i could put that money into the market, which historically returns around 10%. so, that's how i set it up.

then, a few days later, i reasoned a bit differently and reset my auto pay options so i was paying extra. i would be saving the guaranteed 6% (or the effective rate after applying 25% or 33% or whatever depending on my tax bracket) and i wouldn't have to worry about putting that money at risk in the stock market.

but now, i'm back to thinking that i should just pay the monthly payment, invest the extra, and sit back and relax. right now, it makes the most sense to me. yeah, i'll end up paying about twice the price of my house over 30 years. but in 30 years, my extra investments should easily return a double. so, absolute worst case, it's a toss up. best case, my monies that would have otherwise reduced the price of my loan will end up beating out those gains.

4 comments:

I am a pharmacist said...

I have recently refinanced to a 15 year mortgage and created a "mortgage" account, where I have 55% of the payment transferred to my ING electric orange checking every two weeks.
Then on the 10th of each month I pay 110% of my mortgage payment.
When I have enough for the 13th payment, I will make that or just spend it on something else. I haven't decided.
Even though I could possibly earn a higher rate investing it in the market or in an EFT, I FEEL much better knowing that my mortgage will be paid off before I am 60 y.o., if I paid the minimum.
I figure I could drop to part time work if my house was paid for and my kids were grown and self sufficient.
That is the plan for now.
All I know is I have less than 14 years and 10 months left ;-)

aggressive saver said...

pharmacist,

i guess that's the big thing -- i'm trying to decide how i *feel* about having 360 more payments to go to pay off this thing. i guess what it comes down to in the end to me is math, and i should feel better about which one makes more sense financially speaking.

it's not easy, though.

Q at $1 Million to My Name said...

I am going to "FEEL" just awesome when my mortgage statement won't even fit in the envelope.

lol, but seriously, INVEST INVEST INVEST. Your home is not an investment - it is a place to sit, eat, and sleep. Your retirement accounts are the only way (besides being related to a Rockefeller) you will ever be able to retire. Owning your house does not allow you to retire - a $5 million brokerage account does.

To give yourself the very best chance to get there, you have to MAX out saving now.

Cheers!

aggressive saver said...

i came around to this way of thinking, too. but, that begs another question, then. taken to an extreme, i should get the longest term possible on a mortgage, then. or, refinance my 30 every few years.