Should I continue putting additional money towards principal of mortgage?

5 thoughts on “Should I continue putting additional money towards principal of mortgage?”

1. JimmyJames November 30, -0001 at 12:00 am

   The accepted answer is good but, as usual, on questions like this, you see a lot of fundamental disagreement on whether paying down the interest early makes a big difference. Typically the arguments (on both sides, myself included) are over simplified. To get a better feel for this, I put together a schedule for the first year of a $200K mortgage. To get the payment I cheated and used this site.

    total principal  payment    rate interest    principal 
    $200,000.00      $954.83    4%   $666.67     $288.16 
    $199,711.84      $954.83    4%   $665.71     $289.12 
    $199,422.71      $954.83    4%   $664.74     $290.09 
    $199,132.63      $954.83    4%   $663.78     $291.05 
    $198,841.57      $954.83    4%   $662.81     $292.02 
    $198,549.55      $954.83    4%   $661.83     $293.00 
    $198,256.55      $954.83    4%   $660.86     $293.97 
    $197,962.57      $954.83    4%   $659.88     $294.95 
    $197,667.62      $954.83    4%   $658.89     $295.94 
    $197,371.68      $954.83    4%   $657.91     $296.92 
    $197,074.76      $954.83    4%   $656.92     $297.91 
    $196,776.84      $954.83    4%   $655.92     $298.91 
   

   Now lets say you pay an extra $100 more on each payment:

    total principal  payment    rate interest    principal 
    $200,000.00      $1,054.83  4%   $666.67     $388.16 
    $199,611.84      $1,054.83  4%   $665.37     $389.46 
    $199,222.38      $1,054.83  4%   $664.07     $390.76 
    $198,831.62      $1,054.83  4%   $662.77     $392.06 
    $198,439.57      $1,054.83  4%   $661.47     $393.36 
    $198,046.20      $1,054.83  4%   $660.15     $394.68 
    $197,651.53      $1,054.83  4%   $658.84     $395.99 
    $197,255.53      $1,054.83  4%   $657.52     $397.31 
    $196,858.22      $1,054.83  4%   $656.19     $398.64 
    $196,459.59      $1,054.83  4%   $654.87     $399.96 
    $196,059.62      $1,054.83  4%   $653.53     $401.30 
    $195,658.32      $1,054.83  4%   $652.19     $402.64 
   

   If you then sell after that first year, we assume you get the principal back, so that’s no different than putting it in a bank account. How much did you save in interest?

   Normal payments: $7,935.89 interest paid

   +$100 payments: $7,913.65 interest paid

   Total savings on interest: $22.25

   If you did something like put $1000 on the first payment, you’d pay $7898.61 in interest for a savings of $37.28 for the year.

   Another thing that I think is often misconstrued or misunderstood is how much extra earnings you get for a few extra percentage points on your savings. It might seem logical to think that getting a double interest rate mean double interest. But this is way off. If you put $1000 extra up front, you save about $2300 interest over the life of the loan. But if you were able to invest that in an instrument that doubles that rate, you would earn over $9000 over that same period. 8% is a pretty good rate but even something more modest makes a big difference. At 6% you end up with twice as much at the end of the 30 years. The S&P has had an annualized return of %10.5 over the last 30 years which turned $1000 into around $19,000. Even at a lower rate of growth, you are potentially leaving a lot of money on the table if you settle for paying off a low (fixed) interest rate mortgage.
2. D Stanley November 30, -0001 at 12:00 am

   You will probably be better off keeping the cash to pay for moving costs, putting down earnest money on the new house, etc. The monetary savings you will get by paying down more principal is roughly the interest rate times the extra principal you pay times the number of years until you sell, but you won’t get it back until you close on the sale of your house. To me, it’s probably not worth tying up those funds.

   If for some reason you don’t move, you can always take that saved cash and pay down the mortgage in one big chunk.
3. Pete B. November 30, -0001 at 12:00 am

   The reality is that is is likely to lose money on your home purchase due to the cost of transacting real estate. This may be mitigated or even eliminated if this is a company sponsored move and the company reimburses some of the costs associated with moving such as closing cost and even real estate commissions.

   How will this loss be realized? Well it may be a bit invisible in that you will receive less at closing on the sale of your home then what you put down when you purchased your home.

   To me it is a coin flip of paying toward your mortgage or putting the money in the savings account provided you already have sufficient emergency fund savings. Paying toward the mortgage, you will earn a bit better interest rate but will not have the money until the sale of the home. By putting it in a savings account you will have money readily accessible for costs associated with moving.

   A better decision can only be made understanding more about your situation. If this is a company sponsored move and you have a nicely padded savings account then there is no harm in paying toward the mortgage. If you are likely to need extra cash then park the money in a savings account.
4. RonJohn November 30, -0001 at 12:00 am

   The balance on your mortgage won’t stop accruing interest just because you might move Real Soon Now. Thus, continuing to pay extra continues to build up equity and save you interest.

   Of course, you might need that extra cash for moving expenses, down payment, etc, which would be a reason to keep your cash.

   There’s no formula we can give you to make that decision for you.
5. Acccumulation November 30, -0001 at 12:00 am

   The benefits are the same as they are in general: the less the outstanding balance, the less interest you pay. The only relevance moving has is if you are underwater on the mortgage, and you’re planning on defaulting or using the threat of default as leverage to get the bank to accept a short sale (which is a rather dangerous thing to do). Otherwise, everything you pay towards the principal you will get back when you sell (plus you get to keep the interest you would have paid on that amount). For instance, suppose you have a house that you sell for $500,000 and you have a $350,000 mortgage. The bank will claim $350,000 from the selling price and you will get to keep $150,000. If you pay an extra $50,000, reducing your mortgage to $300,000, then when you sell you get to keep $200,000. The equity in your house is a little bit like a bank account, albeit one that it can be difficult to take money out of. Everything you put into the principal is added to your “account”, and “earns interest” in the sense that it reduces how much interest you owe (that is, reducing the amount of interest you owe by X dollars is, in some ways, the same as getting an extra X dollars).