Paying House Off Early

KTMan

Twelve Pointer
Contributor
I want to pay my house off within the next 5 years. Just a personal goal that I have set. It is the only thing that I owe money on. I basically have two options that I'm trying to figure which is best.


I want to put an additional $2500 each month toward the house. Interest rate on house is roughly 3.5.

So here are my two options:

  1. Make a principal payment on house each month.
  2. Put the $2500 in mutual fund and let it ride for the 5 year period and cash out and pay one lump sum.

This is going to be very aggressive on my part. Especially being daughter will be a freshman at ECU next fall. So this will have a factor on my decision.

I do have a nest egg of about one year for emergency that will not be considered toward my decision. As this will not be touched except in an emergency.

What would you guys suggest? Pros and Cons of each.
 

waitup

Button Buck
I have a question regarding this strategy. Wouldn't it most likely be better for your long term financial health to invest that $2500/month and keep paying the house per the mortgage agreement? Your mortgage is costing you 3.5% annually and even conservative estimates have the average market return at 7% annually. Would investing that money instead have you 3.5% ahead in the long run? I'm not saying you're doing it wrong, and I understand you may have other motivations than purely financial, I'm just trying to understand the thought process.
 

Mr.Gadget

Old Mossy Horns
Zero risk to pay the house of. Higher risk to invest and hope you make money to use to pay house of.
Then you have fees, capital gain tax and time frame to deal with.

When I did it it was easier and better for me to pay off fast then invest more money after.
It put me in a lot better place after the fact. Also have that piece of mind to know it is paid off.
 

KTMan

Twelve Pointer
Contributor
I have a question regarding this strategy. Wouldn't it most likely be better for your long term financial health to invest that $2500/month and keep paying the house per the mortgage agreement? Your mortgage is costing you 3.5% annually and even conservative estimates have the average market return at 7% annually. Would investing that money instead have you 3.5% ahead in the long run? I'm not saying you're doing it wrong, and I understand you may have other motivations than purely financial, I'm just trying to understand the thought process.

I've decided I want to retire in 4 years. I know if I don't have the burden of a house payment that I am all good. Really just a piece of mine. I realize financially probably better to invest. With low interest rate vs. inflation a mortgage actually not a bad deal. I will only be 52 when I retire (if i meet my goal). Just one thing I do not want to worry about.
 

KTMan

Twelve Pointer
Contributor
My father never owned a dime after I was 16 years old. Including putting two kids thru college. Pays cash for everything he buys. Said it has always been very rewarding not to owe anyone. I have kinda followed his advice for most part. The only thing I financed was my house. Looking back I should have took his advice on that. To say the least he was pissed when I built the size house I built. Said he thought he raised me smarter than that.
 

aya28ga

Old Mossy Horns
Contributor
If your goal is to pay it off in 5 years, then by all means put whatever extra you can every month towards lowering the mortgage, and make sure your mortgage holder is applying the extra to principle, not interest.

You could do the mutual fund route, but you'd be gambling that we won't have another year like 2007 - 2008, when the market went south big-time.

The wife & I did this, sacrificed big-time to make extra monthly principle payments and paid off a 30 year mortgage in seven years. It's been one of the biggest reasons we were able to retire early.
 

DBCooper

Old Mossy Horns
Contributor
I have a question regarding this strategy. Wouldn't it most likely be better for your long term financial health to invest that $2500/month and keep paying the house per the mortgage agreement? Your mortgage is costing you 3.5% annually and even conservative estimates have the average market return at 7% annually. Would investing that money instead have you 3.5% ahead in the long run? I'm not saying you're doing it wrong, and I understand you may have other motivations than purely financial, I'm just trying to understand the thought process.

The problem with this, in my head, is......will a 7% return on the monthly investment outweigh the 3.5% interest on the mortgage principal?

I know it would at some point. I just haven’t run the TVM.
 

Homebrewale

Old Mossy Horns
For your time frame of 5 years, there is risk putting it into the stock market. The market is volatile over those time frames. If your time frame was 10 or more years, investing it will be better most of the time.

Personally, I never put an extra dime towards my mortgage until last Friday when I paid it off completely.
 

Homebrewale

Old Mossy Horns
The problem with this, in my head, is......will a 7% return on the monthly investment outweigh the 3.5% interest on the mortgage principal?

I know it would at some point. I just haven’t run the TVM.
Yes. An even lower rate will. I have run the numbers before. Pretty easy with online mortgage and savings calculators today.
 

snakeskinner

Twelve Pointer
I am in a situation where I have almost 0 interest in my mortgage payment. My advisor says to bite the bullet every month and get it paid off. Since we are mostly paying principal I am reluctant to do that. My house needs exterior paint and some window repair. I don't feel like taking what extra I have and going poor every month for the next few years.
 

ellwoodjake

Six Pointer
One more tip. Keep an eye on your amortization table. After you make your monthly payment (principal and interest), look at the principal for your next payment, and the next one, next one, etc. do the math and make whole principal payments.(as many as you can afford) This allows you to skip entire payments. Every time you do this, just cross out the interest side of the column; you just SAVED this. Obviously, you can skip more payments at the front end rather than the tail end since the principal is smaller. In any case, it gave me a great deal of satisfaction to just ex them out, and say "cha-ching"
 

Homebrewale

Old Mossy Horns
I don't know one mortgage where you can skip payments. You can get a $200k loan, pay it faster with extra payments, have $5k left on the loan, decide not to make the next payment, and the mortgage company can foreclose on your home for missing that payment.
 

Mr.Gadget

Old Mossy Horns
Maybe someone can plug in the numbers but the way I look at it it would take long term to break even.
In other words.
If you Loan is at 100k and you are paying a 3.5% APR
Vs
You invest 2.5k each month with a 7% return

Where is the point you would be making what you are paying in interest?
Then factor in the capital gain and fees?
 

JONOV

Ten Pointer
I don't know one mortgage where you can skip payments. You can get a $200k loan, pay it faster with extra payments, have $5k left on the loan, decide not to make the next payment, and the mortgage company can foreclose on your home for missing that payment.
I think he means on the back end of the mortgage. So if you paid $5K extra at year 2 of a 30 yr mortgage for $150K you only shorten it by 2 years or so, ergo 24 payments you don’t make.
 

Dolfan21

Eight Pointer
Homebrew was right, 5 years is not a long term by any stretch so assuming you get 7%, or even beat 3.5%, is risky. We've been on hell of a run...will it last 5 more? I hope so but my gut is saying its not likely.
 

waitup

Button Buck
Maybe someone can plug in the numbers
You can't compare the return on just the $2500 vs the cost on the whole $100k though because making that payment would only reduce that balance by $2500, not the whole thing. Meaning $2500 invested this month would be worth $2675 in a year (assuming 7%). Paying $2500 to mortgage would save you $87.50 in that same year, so the investment theoretically would put you ahead bye $87.50/mo. As OP and others have mentioned, there are taxes, fees, and lots of other (non financial) factors though.
 

Homebrewale

Old Mossy Horns
Maybe someone can plug in the numbers but the way I look at it it would take long term to break even.
In other words.
If you Loan is at 100k and you are paying a 3.5% APR
Vs
You invest 2.5k each month with a 7% return

Where is the point you would be making what you are paying in interest?
Then factor in the capital gain and fees?
I could easily run the numbers but the starting amount has to be a lot higher than $100,000. 5 years of extra $2500/month payments add up to an extra $150,000 in extra payments. The spreadsheet I am using shows that a $200,000 loan 30 year, 3.5% interest loan is paid off in 5.5 years.

Spreadsheet
https://www.mortgagecalculator.org/excel-mortgage-calculator.xlsx

Now if you don't have Excel, here is an online calculator.
https://www.bankrate.com/calculators/home-equity/additional-mortgage-payment-calculator.aspx
 

dc bigdaddy

Old Mossy Horns
Contributor
We've had this discussion before on here and there's an equal number of opinions on whether you make extra monthly mortgage payments or investments.

They'll both right and wrong way of doing it.

But, when I sent that last payment to Wells Fargo, that was the best feeling I had had in a long time.

Good Luck to you .
 

MJ74

Old Mossy Horns
You could always just take the extra money and put it in a CD so you make a little something off of it until you have all the money needed to pay it off.
I doubled up on my payment and it didn't take long before it was done. The best part about paying it off is freeing up money to invest or whatever else you want to do with it.
 

Southern

Eight Pointer
Your cost of money is cheap especially if you benefit from deducting home interest. No right or wrong answer but I think I would gamble even if for short term and invest that extra money but again I may be less risk averse since I dont have kids etc.
 

KTMan

Twelve Pointer
Contributor
I could easily run the numbers but the starting amount has to be a lot higher than $100,000. 5 years of extra $2500/month payments add up to an extra $150,000 in extra payments. The spreadsheet I am using shows that a $200,000 loan 30 year, 3.5% interest loan is paid off in 5.5 years.

Spreadsheet
https://www.mortgagecalculator.org/excel-mortgage-calculator.xlsx

Now if you don't have Excel, here is an online calculator.
https://www.bankrate.com/calculators/home-equity/additional-mortgage-payment-calculator.aspx

I originally put in what we owe. I know all factors effect answers.

We have about $250000 left on loan. Our equity on the house is around $225000. I could use this in an emergency I guess if needed. One reason I was considering mutual funds is the money is there if I need it. I am concern 5 years could be to short of a term with the market.
 

UpATree

Six Pointer
Contributor
With the 2018 tax reform, the standard deduction is now $24,000 for married couples. Unless you can find more than $24,000 in mortgage, property tax, charity, and a couple of small things, your mortgage interest no longer reduces your tax bill.

You aren’t talking about a lump sum investment, either, right? It’s $2500 a month, sixty times. So only one month will be for five years. The rest of it will be for periods as short as a month. No financial professional would assume a 7% return—or even a positive return—in such short time frame. And the part that’s held less than 18 months is taxed at the higher rate of ordinary income, not capital gains.

Paying the mortgage is a guaranteed 3.5% instant tax-free return, which is a lot better than a highly speculative return that will be taxed at a much higher rate.
 

Homebrewale

Old Mossy Horns
I originally put in what we owe. I know all factors effect answers.

We have about $250000 left on loan. Our equity on the house is around $225000. I could use this in an emergency I guess if needed. One reason I was considering mutual funds is the money is there if I need it. I am concern 5 years could be to short of a term with the market.
The problem is that some emergencies, such as loss of job, don't allow you to access your home equity unless you already have an HELOC already set up before job loss. Also hard to refinance a loan if you want to pull cash out in that situation. A mutual fund, a CD, or a money market account can be accessed quickly if needed.

I have a friend whose husband came down with lung cancer. She still states to this day that she was happy to have the money she would have used to pay down her mortgage in an account during his last year of life than having a paid off the mortgage.
 
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