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paying extra per month on mortgage: good idea?

beefdaniel 203 62 November 17, 2015 at 04:26 PM
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I will be purchasing my first home very soon. My monthly EMI+taxes+Insurance which I will be paying the bank is about 2000. I would like to pay an extra 600 per month which would count towards the principal. Is this generally considered a good idea or are there better ways of pre paying it.

I am not very smart at investing, so investing that 600 per month isn't something I think I can do wisely.

Thanks in advance for any advice

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#2
What is the loan interest rate going to be?

As far as investing. Even a 2 year old can invest, throw it in an index fund and wait. Simple as that.
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#3
Sure, if you want to reduce the amount of interest you pay over the life of the loan then pay extra towards the principle. You can see how the extra $600 affects what you pay by entering the details of your loan here http://unbury.us/
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#4
Congratulations on becoming a new homeowner soon!

If you have other debts that have higher interest rates than your mortgage (like credits cards, car loan, etc.), you may want to pay the extra $600 a month towards paying those down first. Otherwise, you could pay the extra towards principal to minimize your overall mortgage interest.

It can also depend on how long you expect to stay in your home. If it will be for the long-term, than it's not a bad idea to build up your home equity quicker.

Also, it's prudent to build up a reasonable "rainy day" amount for unexpected larger expenses/6 months' living expenses to cover unforeseen unemployment/etc.
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#5
If you're pretty confident in having that extra $600 a month for the foreseeable future (which if you're buying a house you should be looking 5 years ahead at least) maybe look at a lower loan term which will give you a lower interest rate. Typically the rate/price on a 25 year term is the exact same as a 30 year, but you'll be saving yourself a TON of interest.

Absolutely get all of your other debts paid off if they're credit cards/etc. Car loans are so cheap these days I put my extra funds towards the house.
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#6
I think the rest of the advice here is sound: consider higher interest debts, consider what you're already saving for retirement, etc.

I would strongly second Jaz1033's rainy day fund. There's ongoing maintenance issues and big ticket items (e.g., a/c, furnace, roof, etc.) that you may have to pay. On the other hand, if you build equity in your home, you may be eligible for a home equity line of credit (HELOC) from which you could draw funds to pay for such items. Also, don't forget that taxes/appraisal may change year-to-year.
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#7
$2,000/month on taxes/insurance/emi seems very high. You must be buying quite the first home. I pay a good bit less than half of that. So first, congrats on being able to afford a fairly expensive home as your very first! Smilie

Second, are you sure you're allowed to pay more per month? I have a typical mortgage personally, so I can pay as much extra as I want. But with EMI's that isn't necessarily the case, they are usually fixed amounts per month. Make sure you actually can pay more by reading all the details.

Third, read up on investing. As has been said, it is not hard to invest and investing in an index is a fairly low risk way to make a pretty good return. I'd assume your rate is under 4%? If so, you'd have to be really unlucky to make less than 4% investing your money.

Having a rainy day fund is also very smart advice. I'd suggest if you truly have $600 of totally disposable money each month, put half into a rainy day fund and half into either an investment or your mortgage (whichever you ultimately choose). The size of your rainy day fund depends on if you're married, have kids, how much you make and how much your cost of living is in the area in which you live. The richer your tastes, the fancier your car(s), house, etc the more you need to save up in a rainy day fund just in case disaster strikes.

I'd suggest 10% of your annual salary in a rainy day fun personally, more is better of course, but not investing it might end up being wasteful in the long-run. Definitely try not to ever be under 5% of annual salary as liquid cash in the bank, you never know when you absolutely need something and need flexibility.
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#8
Guys, thanks for your responses. I truly appreciate it. My rate of interest is 3.750 fixed and tenure is 30 years. Yes I am sure I am allowed to pre-pay any amount per month with no penalty.

I am seriously a mutt when it comes to investing. I have lost some money in my 401K as well. The company has some standard fund based on my retirement age and that's what I have selected. And I really have no clue how to select another fund no matter what I read. Have always been a bad investor.

Apart from this home loan which I will soon understand I only have my car payments per month which is 379 bucks and I will be done with it in a years time.
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#9
Unless you're in a huge rush to pay it off, I'd just make one extra mortgage payment a year towards principal and use the extra on a rainy day fund and retirement (and a nice vacation). nod Congrats and good luck!
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#10
Quote from Joe Davola View Post :
Unless you're in a huge rush to pay it off, I'd just make one extra mortgage payment a year towards principal and use the extra on a rainy day fund and retirement (and a nice vacation). nod Congrats and good luck!
i agrree with this...btw way how much should be in a rainy day fund...ive heard 3months to 1yr salary..is their a good rule of thumb?
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#11
I would say 3 months of SPENDING, not salary. Figure out what your fixed costs are (mortgage, car payment, utilities, groceries, etc) along with what I call "Fixed Wants" (like internet, TV, weekend cash) and multiply that by at least 3.

When you talk about getting started in investing you will get a thousand opinions, all of which probably work for that individual or else they wouldn't be suggesting it. There are a lot of circumstances that dictate how your money is set up to grow. Over the last 2 or 3 years I've tried to learn as much as I could on the subject and am now to the point where I can set up my 401K allocations, and keep them at the levels I want.

I found Paul Merriman (probably from SD) and downloaded his free books and used that for a model off the bat, then have tweaked my diversity a bit here and there. Some of the best advice is to look at the available options your employer provides and if there are similar funds (like 2 Large Cap Blend funds) choose the one with the lower fees.

John Bogles "little book of common sense investing" is one I've purchased and read twice. there are lots out there, read some amazon reviews and see what other people are referencing and look into those. that should keep you busy for awhile.

Good Luck!! 3.75% on a 30 year term is great by the way, how would your payment change on a 25 year term? Have your lender look it up, for you and then have them tell you the total cost of the loan on that and the 30 year to compare, you could save $100K.
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#12
Quote from barebones View Post :
I would say 3 months of SPENDING, not salary. Figure out what your fixed costs are (mortgage, car payment, utilities, groceries, etc) along with what I call "Fixed Wants" (like internet, TV, weekend cash) and multiply that by at least 3.

When you talk about getting started in investing you will get a thousand opinions, all of which probably work for that individual or else they wouldn't be suggesting it. There are a lot of circumstances that dictate how your money is set up to grow. Over the last 2 or 3 years I've tried to learn as much as I could on the subject and am now to the point where I can set up my 401K allocations, and keep them at the levels I want.

I found Paul Merriman (probably from SD) and downloaded his free books and used that for a model off the bat, then have tweaked my diversity a bit here and there. Some of the best advice is to look at the available options your employer provides and if there are similar funds (like 2 Large Cap Blend funds) choose the one with the lower fees.

John Bogles "little book of common sense investing" is one I've purchased and read twice. there are lots out there, read some amazon reviews and see what other people are referencing and look into those. that should keep you busy for awhile.

Good Luck!! 3.75% on a 30 year term is great by the way, how would your payment change on a 25 year term? Have your lender look it up, for you and then have them tell you the total cost of the loan on that and the 30 year to compare, you could save $100K.
The metric is generally X months of expenses - meaning if you lost your job tomorrow, you could theoretically live X months while getting a new job. While you are UE you're not going to be paying taxes or contributing to a retirement fund. Saving will also be suspended so going by X months expenses is the way to go.

BTW 25 yr rates are usually the same as 30 (I found that out recently) so while the 25 yr payments will be more, you're not saving any $$ due to a lower rate, just the shorter amortization. In this case, you sacrifice nothing to go with the 30 and make the 25 yr payments - but you gain the flexibility of the 30 yr payment fallback.
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#13
I agree with Dr. J. I recently calculated difference in payment with a 30yr vs 15yr refi and I decided that the 30yr is just a much better choice. P&I on a 30 yr + difference to match P&I on a 15 yr would only be slightly more than 1 year of payments. That insurance of being able to fall back on a lower payment if needed (or if I plan to rent it out and want to generate a profit) is worth it in the long run then paying a little more in interest at the end.

Anyway to the OP it depends on your situation and weighing the pros/cons for you. Good luck.
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#14
Everyone's situation is different, but I paid off my first house in 3.5 years. Not having to make a monthly mortgage payment is a great feeling. Assuming you don't have other high interest debts, you are funding a retirement account, and you can build up that three month cushion, make the extra payments. You can make more money investing, but making extra payments has a guaranteed return and is passive.

As far as the 15 vs 30 year choice, unless you plan on living paycheck to paycheck and having no savings and no rainy day fund, I'd go with the 15 year. If you lose your job and it takes 6 months to find a new one, you can work part time at walmart or whatever and make up the difference in payments between the 30 and 15 year.
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#15
Appreciate all your inputs. I surely will take a look at this thread when I start making my payments and when I start living in the home.
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