Is the idea of extra payments to your mortgage a placebo? Please educate me

[bigmike23]

Pay off higher interest loans first, regardless of principle balance. It's not wizardry, it's math.

Aside from your house, don't take on any debt that doesn't generate income or project to appreciate in value. You can use some mental gymnastics there, but pay for toys in cash.

I disagree. Getting into debt is not a math problem. Its a you problem.
I believe in the debt snowball method. It keeps people motivated to keep it going.
Paying off the higher interest loans first is math wise smarter, but Its hard for people to stick with it when they see no progress

 

[BuffaloBill]

I disagree. Getting into debt is not a math problem. Its a you problem.
I believe in the debt snowball method. It keeps people motivated to keep it going.
Paying off the higher interest loans first is math wise smarter, but Its hard for people to stick with it when they see no progress

Yeah on my student loans, for instance, the smallest loan isn’t necessarily the lowest interest rate but it’s easier to knock out a $2K loan vs $10K and that gives you extra money to put towards the bigger loan. My employer is also contributing $100 a month towards them. So that’s $100 extra that I can throw at them.

 

[Dcomer55]

So true, especially because the value of that “asset” depreciates so readily. So you’re paying interest on something that decreases in value. That’s why I never buy a brand new car, I can’t get over how much you lose just driving it out of the showroom. It’s like lighting $5-$8k on fire, and then paying interest on that to boot!?!? At least with a mortgage your asset appreciates in value over time, assuming proper maintenance. A much sweeter pill to swallow for sure. Finally, if you’re considering refinancing your house and have debts, consolidate them in a HELOC and you can at least claim the interest you pay on this on your income taxes.

you might want so do some research. TCJA changed the rules to where interest on a HELOC is only tax deductible if the loan is used to buy, build or substantially improve your home.

 

[Anobody]

This is all too complicated. All on black and let it ride baby!!!!!

 

[DanSalam]

This post caught my eye and I decided to jump in. Awesome on closing that auto loan chapter! Regarding the mortgage dilemma, it boils down to goals. If you're aiming for mortgage freedom, those extra payments can trim time and interest. But if flexibility is key, consider investing or college savings for the kiddos. Think about your long-term plans and risk tolerance.

 

[CaidenCase]

The idea of making extra payments to your mortgage is actually quite beneficial. While TCJA did bring some changes regarding interest deductions, paying down your mortgage faster can still save you money in the long run by reducing the overall interest you pay. It can be a wise financial move.

If you're looking for more personalized advice or guidance on mortgages and home financing, especially in Shrewsbury, you might want to consider reaching out to a Mortgage Broker in Shrewsbury. They can provide expert insights tailored to your specific situation.

 

[katiesmom]

See Dave Ramsey. Internet, YouTube. Some good info.

 

[kyler1945]

I would love for someone to explain how a person who can afford their day to day expenses, including their mortgage payments, would be better off paying down 3% debt, instead of putting that cash into any number of investment vehicles earning well north of, but definitely not lower than, 4%.


What is Dave Ramsey seeing that I’m missing?

There may be some general principles that could apply to life with high mortgage interest rates (like we have today, and like way back when).

But 25% or so of mortgages are below 3%, 60+% of mortgages are below 4%, and 80% are below 5%.

It’s basic math here folks.


Also, a less intuitive way to think about this, but that is much more helpful: your house is NOT the asset. Your mortgage at 3% is the asset. If you have one of these, and you pay it off faster than the bare minimum, you’re abusing a golden ticket to financial well-being.

Please, if you’re going to give the advice to pay down one of these mortgages faster than is required, show your work.

 

[HuskerInIowa]

I thought this thread died but here we are again. Here are a couple illustrations I hope people will find helpful to make their own decisions if they are contemplating things. I’m not interested in debating points people have made previously, I don’t think that’s helpful in this case since people spend and save money differently.

The first 3 show a basic mortgage. At a 4% rate by making one extra payment per year (selecting a bi-weekly payment option does this) assuming you never move, refinance, etc you save 4 years and approximentally 16k. Great savings, 4 years quicker out from under a mortgage, and you never feel like you made an extra payment.

The second 2 photos show what you could do by starting an investment with the same $716 and then contributing monthly 59.67, the equivalent of that 716 annually, over that 26 years assuming the 4% rate of return mentioned earlier in the thread. If you’re a good little saver and can stick to a plan perhaps this is a better choice.

This isn’t financial advice, just meant to serve as a visual aid to help people that understand better from that than seeing math thrown at them. It is also not meant to serve as a statement of where rates are, some have lower and some have higher rates for their mortgages, some are just starting out, and investment opportunities are different for many people. My only actual advice is anything you do is better than doing nothing.

Sorry for a lengthy one.

 

[GeoFish]

I would love for someone to explain how a person who can afford their day to day expenses, including their mortgage payments, would be better off paying down 3% debt, instead of putting that cash into any number of investment vehicles earning well north of, but definitely not lower than, 4%.


What is Dave Ramsey seeing that I’m missing?

There may be some general principles that could apply to life with high mortgage interest rates (like we have today, and like way back when).

But 25% or so of mortgages are below 3%, 60+% of mortgages are below 4%, and 80% are below 5%.

It’s basic math here folks.


Also, a less intuitive way to think about this, but that is much more helpful: your house is NOT the asset. Your mortgage at 3% is the asset. If you have one of these, and you pay it off faster than the bare minimum, you’re abusing a golden ticket to financial well-being.

Please, if you’re going to give the advice to pay down one of these mortgages faster than is required, show your work.

Real simple. You are correct IF.
I had a financial crook tell me not to go into retirement with a paid for house. Invest the money with him and he can get me better returns.
That may be if everything goes as planed. Problem is he was wrong, sonetimes things dont go as planed.
Market crash in 2008!
Bond market crash in 2023!
Are two examples.
If I would have listened to that idiot, I would be up the creek. Instead I am retired with NO WORIES. The #1 goal of my retirement.
Investment advisors are in it for them self. Fiduciaries are just big ____!

 

[bodark]

I’d finance a house for 100 years at 3% if I could find a bank that’d let me.

 

[VASteve]

I would love for someone to explain how a person who can afford their day to day expenses, including their mortgage payments, would be better off paying down 3% debt, instead of putting that cash into any number of investment vehicles earning well north of, but definitely not lower than, 4%.


What is Dave Ramsey seeing that I’m missing?

There may be some general principles that could apply to life with high mortgage interest rates (like we have today, and like way back when).

But 25% or so of mortgages are below 3%, 60+% of mortgages are below 4%, and 80% are below 5%.

It’s basic math here folks.


Also, a less intuitive way to think about this, but that is much more helpful: your house is NOT the asset. Your mortgage at 3% is the asset. If you have one of these, and you pay it off faster than the bare minimum, you’re abusing a golden ticket to financial well-being.

Please, if you’re going to give the advice to pay down one of these mortgages faster than is required, show your work.

My specific example is, I paid my 30 year (4.625%) mortgage off in 15 years. 4 months after I made my last payment, I did a cash out refinance of my house (took 150K at 3.75%) and paid cash for a nice townhouse in my local town/city. I rent out the townhouse for $1600 a month and use all of that income to pay off the new mortgage. In 4 years, the townhouse has increased in value by 50K. In the end this was the better plan for me.

 

[GeoFish]

My specific example is, I paid my 30 year (4.625%) mortgage off in 15 years. 4 months after I made my last payment, I did a cash out refinance of my house (took 150K at 3.75%) and paid cash for a nice townhouse in my local town/city. I rent out the townhouse for $1600 a month and use all of that income to pay off the new mortgage. In 4 years, the townhouse has increased in value by 50K. In the end this was the better plan for me.

That's great. Again their are IF's.
When the goverment tells you the renters do not have to pay the mortgage because of Covid!
My brother had a nice house in Denver. He lost his job along with alot of other people in the oil industry crash in 82. He had to move to Texas. The Denver housing market crashed. People were walking away from their houses because they owned more then they were worth. Empty houses were everywhere.
Most of the time investments do well, but their are no guarantees.

 

[BTaylor]

I would love for someone to explain how a person who can afford their day to day expenses, including their mortgage payments, would be better off paying down 3% debt, instead of putting that cash into any number of investment vehicles earning well north of, but definitely not lower than, 4%.


What is Dave Ramsey seeing that I’m missing?

There may be some general principles that could apply to life with high mortgage interest rates (like we have today, and like way back when).

But 25% or so of mortgages are below 3%, 60+% of mortgages are below 4%, and 80% are below 5%.

It’s basic math here folks.


Also, a less intuitive way to think about this, but that is much more helpful: your house is NOT the asset. Your mortgage at 3% is the asset. If you have one of these, and you pay it off faster than the bare minimum, you’re abusing a golden ticket to financial well-being.

Please, if you’re going to give the advice to pay down one of these mortgages faster than is required, show your work.

Everyone's situation is different. Whether you are talking about different types of investments, insurance products or debt reduction strategies, there is no right, wrong, best, worst. They are all just tools. The right tool is the one that best fits the individuals specific goal and/or risk tolerance.

We are paying extra on our mortgage but our strategy was planned and calculated ahead of closing. We only have one car payment at a time if we have one, do not carry credit card debt, and planned our mortgage strategy to have the house paid for a couple of years before our planned retirement dates. The thought process there is a hedge against future market performance of retirement investments and/or significant market decline at or early into retirement. It takes less retirement income to maintain standard of living if post retirement expenditures are less than pre-retirement.

 

[kyler1945]

That's great. Again their are IF's.
When the goverment tells you the renters do not have to pay the mortgage because of Covid!
My brother had a nice house in Denver. He lost his job along with alot of other people in the oil industry crash in 82. He had to move to Texas. The Denver housing market crashed. People were walking away from their houses because they owned more then they were worth. Empty houses were everywhere.
Most of the time investments do well, but their are no guarantees.

What exactly is it that your prescribing?

I just hear that everyone is out to get you(maybe true) and that you should go through life assuming you’ll get got(scarcity mindset).

Are you saying rent(maybe you won’t have to pay!), and put all other money you make into coffee cans in the woods somewhere? Can’t those get stolen? Couldn’t you get shot in your rent house?

You can’t predict everythjng. You make decisions based on as good of information as is available. And leave yourself options and manage risk as best you can, with your particular risk tolerance in mind.

Of course bad things can happen, and exceptions can occur. What are you suggesting folks do about it?

 

[ImThere]

Every small bill you pay off gives you more money to pay off the mortgage. At 2.25% I would not worry about paying it off. Invest after you only owe the mortgage and utilities and you both have 10 year cars.


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[elk yinzer]

Yep, arbitrage is a beautiful thing. We (generationally speaking) may not have the cheap houses our parents did, but they didn't have 10 years of banks lending free money either.

The downside is we are basically stuck in our house now. Wife wants to upgrade, but paying 3% interest I just can't. If I were to pay principal on top of my current payment, I should be instituionalized.

That's going to be a problem for the housing market for a long time. Not a good time to be getting into the real estate biz.

 

[thedutchtouch]

This is not a black and white yes or no decision, and how lucky we are to be having this conversation is one of the first thoughts I keep trying to bring myself back to. Pretty sure I posted similarly already but:

Given the assumption that there are no other debts (car payment, credit card, loans etc), First step is contributing to 401k, second maximizing an employers 401k contribution/match(if you have one), third maximizing your annual contributions to IRS limits. Then the debate gets to continued investment in IRA/ portfolio/etc vs house payoff. keep going back and forth about this, trying to balance the long term investment vs tax rewards, unpredictable stock market vs fixed mortgage rate etc. ultimately it's a risk/reward and a personal priorities decision, and on my opinion age/working years until retirement factors in as well, roughly as: if you're 15 years or less til retirement, it makes more sense to pay off that house, decrease cost of living expenses for retirement, as you don't have as much time to reap the compound interest benefits or ride out market volatility to achieve historical averages anyway. More than that, it makes more sense to invest now/for a few years, and let the mortgage ride, let your money grow and/or ride out some ups and downs, and hold off paying off the house until later. I'm currently still in the 15+ years left to work category so that's what I'm doing. Don't quite have my 401k contributions maxed out at the moment either, so that will be my next step before any mortgage payment increase as well. There is definitely something to be said, however, about the security of fully owning my own house. Thats something it's hard to put a $ value on, because it's worth more (to me) than the total of my monthly mortgage payments for the year.

 

[HuumanCreed]

Yep, arbitrage is a beautiful thing. We (generationally speaking) may not have the cheap houses our parents did, but they didn't have 10 years of banks lending free money either.

The downside is we are basically stuck in our house now. Wife wants to upgrade, but paying 3% interest I just can't. If I were to pay principal on top of my current payment, I should be instituionalized.

That's going to be a problem for the housing market for a long time. Not a good time to be getting into the real estate biz.

Yup. There is also a lot of cultural pressure that goes in 'getting your own house' as a sign of 'success' or 'adulting'. I grew up in a small Asian community in Los Angeles, where children became adult but never left their parent's house unless there was a good reason. EVEN when they get marry, most still live with parents, expand the house and contribute to finance. I was surprised when I left the state and realized this is not more common. That 2 income household is basically the requirement now since mortgage take a bigger chuck of your income.

 

[yoda4x4]

For anyone asking this question, I'd suggest you take a look at Dave Ramsey's 7 baby steps. While I don't follow his principles to the T, I follow 90+% of them.

David

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