To pay, or not to pay (extra on the mortgage)…
By: Matt Johnson, Content Editor/Writer | June 6, 2007
Today’s Wiki Wednesday Feature: A Myth about Paying Down Interest-Only Mortgages
What with the subprime mess still making headlines, you’re probably getting sick of reading about mortgages. I sympathize. Even if you’re not one of the thousands of borrowers who are facing the prospect of losing their homes to foreclosure, the thought of shutting your eyes, plugging your ears, and curling up in a fetal position is starting to sound pretty good. In the most extreme cases, you may even go so far as to consider paying down your mortgage early — after all, if you can afford to kick in a little extra each month to pay down the balance faster, then why not? As it turns out, paying down your mortgage early may not pay off (pun intended) in the long run.
Before we go any further, let me state for the record that this won’t apply to everyone, and therefore I am not recommending that you dismiss any notion you may have had about paying down your mortgage early. There are obvious upsides to an early paydown: increased equity, peace of mind, etc. — all of which are perfectly valid. Moreover, keep in mind that there are different types of mortgages, and padding your monthly payment will affect them differently. For example, paying extra on an interest-only loan can lower future monthly payments, while paying down a traditional amortizing loan will reduce the balance, but the required minimum monthly payments will stay the same — there will just be fewer of them.
So why not strive to be debt-free (or at least free of this particular debt) as soon as you can? A recent article by John F Wasik of Bloomberg News points out that your money may perform better in a tax-deferred retirement savings account (where it will compound, tax-deferred) than as a chunk of your home’s principal. While not risk-free, a decent rate of return on a retirement account can add up surprisingly fast compared to the equity in a house where the market may be flat (i.e., almost everywhere these days).
Ed: Wiki Wednesdays is a weekly feature that highlights helpful or interesting articles from the Real Estate Guide.
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Comments
3 Comments so far
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Wylie on June 6, 2007 6:54 pm
And if you have a mortgage and a few retirement accounts and a few bank accounts, you can use Yodlee.com to keep track of all your accounts in one view! Yodlee now pulls your zestimate right into the interface so you can get a sense of your estimate. I mentioned it on my blog here:
http://wyliemoney.blogspot.com/2007/06/yodlee-hooks-up-with-zillow.html
But you guys should promote this yourselves! For a laugh check out the comment I got on this post knocking you and my reply!
Keep up the good work!
Wylie
http://www.wyliemoney.com
Suma valluru on June 6, 2007 11:57 pm
Its really very exciting and useful site for Financiers…
Recently, I came across a very interesting site which is relevant to the Mortage financing…This site of
Mortgage refinancing equates various lenders to get lowest refinance rate available.
cheers,
Suma valluru
http://www.mortgagerefinancing.com
Lee Matthews -- Financial Concepts West on January 28, 2008 5:17 pm
“So why not strive to be debt-free (or at least free of this particular debt) as soon as you can?”
Yes — and the best way to do that is to use a Home Equity Line of Credit (HELOC) as an “interest cancellation” account to accelerate a home’s equity and payoff that mortgage many years ahead of the amortization schedule.
Today’s Real Estate market means that folks can no longer count on appreciation to build home equity. Those who realize that they need to pay down their current mortgage debt are looking for alternate ways to aggressively (yet safely) build equity.
And they’ve discovered a perfect online system to do that; they can focus on their wealth accumulation goals while accelerating their equity simply by using a Home Equity Line of Credit to ‘power’ the Money Merge Account™ financial solutions program.
A typical 30 year loan (of whatever type) can be paid down in 1/3 to 1/2 the time — it’s a great way to save *huge* amounts of income by eliminating a mortgage amortization front-end interest load. (On a million-plus dollar home, I’ve personally seen where the Money Merge Account™ program will save the homeowner $750,000 in interest charges!)
And the best thing – homeowners don’t have to refinance their existing mortgage or, in most cases, make any adjustments to their lifestyle.
It is unfortunate that most of us were never taught to follow three essential principles: (1) Avoid paying interest, whenever possible, (2) Use other people’s money, whenever possible and (3) Find and use a financial system that will guide you, especially if you have the tendency to go off-track. The Money Merge Account™ software and the program’s counselors use these principles to keep each homeowner focused on their wealth accumulation goals.
I’d be happy to provide further details…