Thursday, April 30, 2009

Extra Mortgage Payment

Since I was feeling rather more flush with cash than usual, I decided to make an extra payment on my mortgage this month. It was so easy! I have it set up for electronic payment from my bank anyway, and if I send them an amount that doesn't match the monthly payment exactly to the penny, it's automatically taken as a payment against principal. It took about 5 seconds to send them $2,000.

There's always the debate as to whether it's better to hang onto the cash if you have a mortgage at a relatively low interest rate. Right now, I feel like interest rates are so low for savings that paying something off on my 5.85% mortgage is a very good investment. The other issue is liquidity, but I have enough cash on hand right now to cover my expenses for about a year, so I'm not too worried about shifting this $2,000 into equity I can't easily access right away.

Someone might argue that real estate values are going down and I'm just throwing good money after bad, but that's only true if I went into foreclosure and walked away from my condo-- otherwise, even if its value goes down, by paying off principal early, I have less of a mortgage balance to pay off, and will pay less interest over the life of the loan.

Another argument might be that I should put that money into the stock market-- it's been so battered lately that it may have potential for strong gains over the coming years. But I already put other money into the stock market. And who knows, the market could still go even lower. I don't want to have all my eggs in one basket-- even if paying off my mortgage could possibly be a lower rate of return, it's also much lower risk, so it's a good hedge against my other high-risk investing.

But really, the reason I want to pay off my mortgage early is so I can be like my idol, Frugal Zeitgeist!

13 comments:

sam said...

It make sense to pay off your mortgage as interest rates for saving accounts are so poor at the minute you are better off doing what you are, as you will always have to pay your mortgage off reducing your long term debt is smart. I work from home and have had the opportunity to reduce costs and pay my mortgage off quicker to cut costs in the long run.

Escape Brooklyn said...

I want to be like Frugal Zeitgeist, too! I'm already calculating how much extra I'd have to pay towards my mortgage to pay it off in 15 years instead of 30, and hope to do that once I move.

Have you considered refinancing? I know a few folks who are getting mid-4% interest rates these days. Their monthly payments dropped a couple of hundred dollars! Not sure if it would be worth it for you or not but couldn't hurt to inquire.

Anonymous said...

Last September I stopped contributing to my 401k and started putting that money towards my house payment for the same reason. I have a 5.85 interest rate and my money market pays half that. I renewed my 401k contribution in January and will stop when I reach the company match limit. Had I employed this strategy from day one, I would no longer have a mortgage and I could be putting more in the market while it's low. I thought about re-financing, but with the cost of closing, I will have the house paid off before the lower interest rate pays for itself.

Chad @ Sentient Money said...

The old saying: "A bird in the hand is worth two in the bush."

I don't think anyone can ever say that paying off your mortgage early is foolish. It might not get you your best or ideal return on your money, but it is still a solid return and might even provide a larger return for your mental well being.

MtnMama said...

I think your plan is sound, and I want to be like Frugal Zeitgeist, too!

My goal now is to buy a condo in a couple years and pay it off in 15. sooner, if I can.
The idea of no mortgage payment is very attractive!

simplesimon said...

I don't have a mortgage so I don't know what anything looks like, but does your mortgage payment decrease next month after you put $2,000 towards principal?

Madame X said...

@escapebrooklyn, I have toyed with the idea of refinancing but haven't looked into it seriously... yet!

@simplesimon, no, my monthly payment won't change. The total number of payments over the life of the loan will decrease, and I'll end up paying a bit less in total interest in the long run.

frugal zeitgeist said...

Ha! Congrats on your extra payment, and thank you!

I don't know whether being like me is a good thing or not (I think it's something of a scary prospect), but I can tell you this: Many people were very, very critical of my decision to pay off my home instead of investing my extra cash, but with two years at 6.25% and four and a half at 5.125% between 2002 and 2008, the return on paying off my mortgage early was far higher than what I would have gotten in the stock market, where my portfolio dropped nearly 40% in the last year.

Finances aside, the peace of mind that comes from owning my home free and clear is like nothing I've ever known. In these scary economic times, that's nothing to sneeze at.

That's not to say that early payoff is right for everyone, but it definitely was right for me.

Coupon Artist said...

I say pay it off early. Not having a house payment, and the freedom that will bring, is worth more than any extra interest you'd earn from doing something else with he money.

Tampaite said...

Let's say you pay $2k extra every month, how long before your mortgage-free!

I agree with your decision to pay it off early...

SavingDiva said...

While I don't know if paying off a mortgage down quickly is the smartest investment, I do know that it's something that I would like to do! I dream about living with no housing payment...awesome!

Frugal Scholar said...

Well, I guess I AM like Frugal Zeitgeist, since I paid off my mortgage 4-5 years ago. I started by putting a little extra towards the mortgage; this was so motivating, that I kept adding to it. This move really went against the common wisdom then, but I considered it my "bond" portfolio.

Notice that no one who's done it regrets the decision.

Crystal said...

I completely agree with everyone else it seems...if we had extra cash, I'd be paying off our house even faster. I'm sure you already thought about it, but we overpay our mortgage every month, which is shaving off almost 4 years of our 15 year mortgage!