I would (and actually am) doing both and I even have a larger nest egg already. I will be doing more than one extra payment probably but it will be more, and I intend to take a bite out of the new mortgage when the former place sells.
One thing I saw though, before rushing out to make a principal only payment test making a regular payment twice: principal reduces principal sure but it doesn't do anything to your due date and that is another financial defense move in that if you are paying ahead and your due date reflects that, you can skip a few payments when times get tight... basically same function as a reserve and it lowers your interest paid.
Even just straight pay, mortgages are simple interest loans not compound, so a regular payment just whacks accumulated interest, and the rest comes out of principal. You will pay less in interest the next time if doing extra payments because it won't have as much so really you aren't losing much and you might gain a huge benefit when paid ahead if your due date pushes out.
If it doesn't sure principal winds up being slightly ahead mathematically but the ability to skip payments later is totally clutch if you have it.
@tacpoly wrote:
@Anonymous wrote:Thanks for all of the advice so far. This has given me a lot to think about. In my area, housing prices have continued to skyrocket so paying off my home seemed like a great way to create flexibility in the future. I don't plan to retire in this area so selling this home is part of the plan.
That said, it makes a lot of sense not to put all my eggs in that basket. I like the idea of just paying an extra 1-2 payments per year to pay off the mortgage faster without really digging into my other available funds. I do have a generous employer match on my 401k, which is part of why I also favor that option. My goal has been to get to the maximum match and then put remaining funds into other investments.
The emergency fund is also very much a priority. I'm also considering a career change that will reduce my income significantly so having a larger emergency fund is becoming very appealing. I often hear people advised to have an emergency fund of 6-12 months salary but that would put me at 96,000-192,000, which seems like an excessive amount to have sitting in an account not performing. My expenses are nowhere near that high, so when considering emergency fund amounts, should you go off what you need to survive or salary?
To be clear, while 1 extra payment towards principal will whack 8 years off your 30-year mortgage, making 2 extra payments towards principal will cut something like 10 years, not 16 (I calculated this a while ago and can't remember exactly how many years). So there is a diminishing benefit with additional payments.
As for using your extra payment to push the next payment due date back, why would you do that? Would you rather pay off your mortgage 8 years early or have a few months float? I guess the latter may be good to have if your income isn't secure or steady, but why not just save those dollars, invest them conservatively, and have them be available should you need to use them to cover the mortgage? Considering how low mortgage interest rates have been, it's not hard to make more with investments.
HSA is a great savings vehicle. You don't have to spend all your contributions every year. If you have enough extra money, I'd recommend contributing.
A rainy-day fund isn't meant to just sit in your savings doing nothing. They should be invested safely, but still be growing. Money should always be working. The bigger your savings, the more risk you can take (if you have only 50k saved, you won't want to lose any of it, but if you have 5M, losing 50k doesn't hurt as much).
It's not either or, just because your due date is pushed out is irrelevant to how quickly you pay off the loan assuming you continue making payments which I think both of us would argue is clutch. Your term stays basically the same regardless of principal only vs. regular payment if you're continuing to throw money at it, but take my auto loan for example: It's due date is Dec 2021.
I'm not *using* that right now during my cash flush period, actually I am already aggressively paying it down to yuppie food stamp levels but I can still pay it off from that point immediately and still be nearly identical in terms.
The reason to test it is to take a semi-recent personal example from 11/2017 - 9/2018: I've was out of work before running up 27K on a HELOC for my expenses ~10 months including my mortgage payments. If I had been paid ahead though, not only would I still be saving interest and if everything were fine it'd still be paid off at nearly the same term (like you state diminishing returns with further additional payment and that reduces time differential too) then literally it would have been $18180 / $27000 = 67% reduction in my cash outflow if I had needed it.
Most of the finance blogs teach always pay your mortgage when times get tight, but when times are flush and if using that period to pay ahead.... suddenly you can float your mortgage payment if required, no forbearance needed and better it's still current the ENTIRE time until that actual future due date.
It's a powerful tool for financial planning too, vis a vis this COVID market downturn if I were paid ahead, redirect every available dollar towards throwing it into the market and over two months that would've been an extra $400 in my pocket or so.
The point is it gives you flexibility, if you just do pricipal payments no matter what your payment is due every 30 days and sometimes life just goes sideways... always set yourself up for the best financially defensible position possible and that's why making a regular payment is clutch, assuming the lender pushes the due date out into the future.
Oh, and how could I forget my reindeer games, using the installment utilization strategy on a shared secured loan over 5 years is priceless.... but what if you could do the same on a 30 year mortgage? GODLIKE!
Financial planning win and credit win to boot if the mortgage due date gets pushed out on a regular payment, why wouldn't you at least test it and if it works, not do it?
@tacpoly wrote:
@Revelate wrote:
@tacpoly wrote:
@Anonymous wrote:Thanks for all of the advice so far. This has given me a lot to think about. In my area, housing prices have continued to skyrocket so paying off my home seemed like a great way to create flexibility in the future. I don't plan to retire in this area so selling this home is part of the plan.
That said, it makes a lot of sense not to put all my eggs in that basket. I like the idea of just paying an extra 1-2 payments per year to pay off the mortgage faster without really digging into my other available funds. I do have a generous employer match on my 401k, which is part of why I also favor that option. My goal has been to get to the maximum match and then put remaining funds into other investments.
The emergency fund is also very much a priority. I'm also considering a career change that will reduce my income significantly so having a larger emergency fund is becoming very appealing. I often hear people advised to have an emergency fund of 6-12 months salary but that would put me at 96,000-192,000, which seems like an excessive amount to have sitting in an account not performing. My expenses are nowhere near that high, so when considering emergency fund amounts, should you go off what you need to survive or salary?
To be clear, while 1 extra payment towards principal will whack 8 years off your 30-year mortgage, making 2 extra payments towards principal will cut something like 10 years, not 16 (I calculated this a while ago and can't remember exactly how many years). So there is a diminishing benefit with additional payments.
As for using your extra payment to push the next payment due date back, why would you do that? Would you rather pay off your mortgage 8 years early or have a few months float? I guess the latter may be good to have if your income isn't secure or steady, but why not just save those dollars, invest them conservatively, and have them be available should you need to use them to cover the mortgage? Considering how low mortgage interest rates have been, it's not hard to make more with investments.
HSA is a great savings vehicle. You don't have to spend all your contributions every year. If you have enough extra money, I'd recommend contributing.
A rainy-day fund isn't meant to just sit in your savings doing nothing. They should be invested safely, but still be growing. Money should always be working. The bigger your savings, the more risk you can take (if you have only 50k saved, you won't want to lose any of it, but if you have 5M, losing 50k doesn't hurt as much).
It's not either or, just because your due date is pushed out is irrelevant to how quickly you pay off the loan assuming you continue making payments which I think both of us would argue is clutch. Your term stays basically the same regardless of principal only vs. regular payment if you're continuing to throw money at it, but take my auto loan for example: It's due date is Dec 2021.
I'm not *using* that right now during my cash flush period, actually I am already aggressively paying it down to yuppie food stamp levels but I can still pay it off from that point immediately and still be nearly identical in terms.
The reason to test it is to take a semi-recent personal example from 11/2017 - 9/2018: I've was out of work before running up 27K on a HELOC for my expenses ~10 months including my mortgage payments. If I had been paid ahead though, not only would I still be saving interest and if everything were fine it'd still be paid off at nearly the same term (like you state diminishing returns with further additional payment and that reduces time differential too) then literally it would have been $18180 / $27000 = 67% reduction in my cash outflow if I had needed it.
Most of the finance blogs teach always pay your mortgage when times get tight, but when times are flush and if using that period to pay ahead.... suddenly you can float your mortgage payment if required, no forbearance needed and better it's still current the ENTIRE time until that actual future due date.
It's a powerful tool for financial planning too, vis a vis this COVID market downturn if I were paid ahead, redirect every available dollar towards throwing it into the market and over two months that would've been an extra $400 in my pocket or so.
The point is it gives you flexibility, if you just do pricipal payments no matter what your payment is due every 30 days and sometimes life just goes sideways... always set yourself up for the best financially defensible position possible and that's why making a regular payment is clutch, assuming the lender pushes the due date out into the future.
Oh, and how could I forget my reindeer games, using the installment utilization strategy on a shared secured loan over 5 years is priceless.... but what if you could do the same on a 30 year mortgage? GODLIKE!
Financial planning win and credit win to boot if the mortgage due date gets pushed out on a regular payment, why wouldn't you at least test it and if it works, not do it?
You can have a year's worth of mortgage in a (high-yield) savings account and come out even, or invested in Amazon and come out ahead. We have our mortgage on autopay from our checking account, so it gets paid even if incapacitated.
If you had to take a HELOC when you were unemployed for 10 months, then you clearly didn't have a big enough rainy-day fund. If you had 12 months of expenses saved, there have been no need for the loan.
I really haven't seen a scenario outside of "I can't control my spending" where pushing the mortgage due date farther away is more beneficial than having it saved.
@iced In my experience, the banks have to be told to apply excess payment to principal (back in the old days, there was a check box in the voucher sent in with the mortgage check). Makes sense on their part -- they want you to pay them first (mortgage interest) vs you paying off your house first (principal).
Apologies if I have done something to offend you but it would help at least if you thought maybe I had a reason for doing something. Also where have you found a 3.25% savings account ever in the last decade for 25K? Different financial plans for different people, just because I store my reserves differently than you doesn't mean it is flat wrong.
Anyway this is why I floated my balances at 4% APR.
