Disclaimer

This blog contains some simple tips and advice from two regular guys. We're not accountants, financial advisors, or brokers, so follow, ignore, or discuss our ideas as you see fit.

Wednesday, October 17, 2007

One View On Paying Off The Mortgage Early

Posted By Paul

Matt posted an article called The mortgage prepayment conundrum, but I wanted to share one other viewpoint I heard when talking to a friend.

The idea was this:

The main arguments against taking extra money and applying it to the mortgage are:

1) Any money you put towards paying off your mortgage early can only be accessed by a home equity loan or by selling the house. It can't be accessed easily in case of emergency.

2) Any money you put towards paying off your mortgage early could be put in an investment that can beat the interest rate you're paying on your mortgage. (You can make a greater amount of money by investing a dollar than you can save by applying that dollar to your mortgage). This argument also includes the fact that mortgage interest can be deducted from your taxes so your interest rate is effectively less.

The view I heard addressed both of these arguments by saying:

1) If you have an emergency fund built up, the need to access money you put towards your mortgage becomes less important (you won't need the money you gave the mortgage, that's what your emergency fund is for).

2) Yes you can POSSIBLY make more money investing that dollar than you save by applying it to your mortgage, but that generally assumes some sort of investment that involves some risk (like a mutual fund or stocks). The super safe investments (like Savings Bonds, CD's, savings accounts) give you smaller returns, but a dollar put towards paying down the mortgage is guaranteed to save you money.

I thought these were both valid points which made me think about my own finances. As I mentioned in the article A Simple System For Saving Money I periodically transfer money from my checking account to savings. My wife and I decided that for the next few months we're going to try transferring half of the money into savings and the other half to our mortgage, and see how that works out for us.

1 comment:

sweet apple said...

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