Asked by wkrogmeier  |  Submitted February 11, 2017

If I make extra payments towards the principal of my mortgage, am I getting as many benefits as I think I am?

The shock of looking at your first amortization schedule is quite amazing. I've decided to pay down my mortgage. Retirement is ~5 years out. I look at the extra payment as a double positive. Not only do you drop the balance, but the normal payment has a better ratio towards principal as well. I have a difficult time looking at the interest rate all by itself when comparing a HELOC that is not on an amortization schedule, nor like simple interest. Or in other words, if all else is equal and you have a mortgage and a HELOC at the same interest rate both fixed. I think you kill it with paying down the mortgage.

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  Answers  |  2

February 14, 2017

That totally depends on your situation. If your mortage interest rate is, say 4%, then making extra payments is benefiting you the same as if you took that same money, invested it, and earned a 4% return. If you could earn more than that in an investment (which you almost certainly can in a diversified investment), then you would be better off investing the extra money.

$commenter.renderDisplayableName() | 09.25.20 @ 01:02


February 21, 2017

There's more to consider than just the interest rate in any discussion on the benefits of making additional principal payments on a first mortgage, compared with using the funds to pay down a HELOC, or elsewhere.

Are you carrying non-tax deductible consumer debt elsewhere, at higher interest rates? Are your liquid savings adequate to cover 3-6 months of living expenses? Are you fully funding your retirement savings, at least enough to receive all your employer's 401(k) match?

Your HELOC almost certainly has a floating interest rate tied to the prime rate, which is going up. Just because the rates on your first and HELOC match today is no guarantee they'll continue to do so.

Lastly, remember that home equity (achieved by paying down your first mortgage early) is non-liquid. You can't easily access it, unlike available credit on a HELOC.

wkrogmeier | 02.21.17 @ 17:56

Ted, Thank you for being more focused on the question. I have zero non-tax deductible debt, I have the 3-6 months emergency money. From a risk assessment perspective I'm pretty solid. As far as retirement goes with Pension, 401(k) and Social Security, I'm in the green as indicated by Financial Engines. My question is with in reason focused having an acceptable foundation to your questions. I've even started contributing to the 401(k) catch-up option to lower my taxes slightly as the mortgage interest decreases. Yes the HELOC is variable and the mortgage is fixed in the low 3's. At the moment to my question the rates are about the same. I understand that the climate we are in that this rate will likely climb and your liquid piece of this as well. I will flex accordingly. I just never read or hear anyone talking about the advantage of paying on an amortization schedule other than the shock of a first-time homebuyer seeing for the first time principal to interest ratios. I figure it has much to do with that there isn't any money in it for those who sell financial products to pontificate about the mortgage unless moving from a 30 to a 15-year when there is money to be made. Or on the other hand, I've got it all wrong. Just looking for some validation. Regards,

$commenter.renderDisplayableName() | 09.25.20 @ 01:02