Financial ramblings about mortgages

As I mentioned in a post a few days ago I see 2011 as the year I my finances in order,  develop my comprehension of personal finances in general and a  get a sound understanding of the investment strategy options available to me.   A few years ago the very idea would have bored me to the bone, but having been forced to reassess my income vs outgoings with a fair amount of scrutiny and weigh up the true worth of any savings I have over the last couple of years due to state of world economics, I’ve had the kick up the butt I needed.

My first conundrum that I am wrestling with is that I am expecting to have a bit of extra cash come my way over and above my regular salary and I am trying to decide whether or not I should put some of it straight into my mortgage.  Putting it straight at my mortgage principal seems like straightforward way to reduce my overall debt and to actually own more of my house.

However there seems to be conflicting advice all over the internet.  Some people say that due to low interest rates you can make more from your money by investing rather than by using extra cash paying off your mortgage.  What I have found though is that these articles talk about that ‘low interest rate’ and concentrate on the interest charged only in the short term (as in over a year) where as the way I see it as I am at the start of my 25 year amortization period any money I can put in now will have huge implications further down the line. In doesn’t just save me money now, but it will continue to save me money every consecutive year here after.

As it stands each of my monthly mortgage payments has a portion going to interest and a portion going to paying off principal, the lower the principal the less interest I can be charged and the more of my monthly payment goes straight to paying off principal.

As I have had my mortgage less than a year, if I pay an extra months rent now in Year 1 I save the equivalent of 5 months worth of mortgage payments over the life of the mortgage.

A good website that helps to illustrate this is you can put in all the relevant details and hey presto it gives you an idea as to how much money you could be saving. For example if I had a $100k mortgage at a rate of 4%  with an amortization period of 25 years and at the end of the 1st year I decide I can drop an extra $5k onto the principal the savings over the full length of the mortgage is a pretty staggering $7549.

It may not been money earned but its money saved at a return rate I wont get from any other investment, with zero risk.



2 Responses to “Financial ramblings about mortgages”

  1. 1 Ben January 6, 2011 at 5:14 pm

    The advice I tend to agree with is to pay off any debt you have first before thinking about doing other things with any extra money you may have.

    I think people tend to think about mortgages differently than other types of debt because of the time scale involved (I’m glad I don’t have to think about it). I imagine that interest rate could vary quite a bit over the next 25 years, so paying some off while you can seems a good idea to me.

  2. 2 thethoughtherder January 7, 2011 at 9:00 am

    Yeah I agree, people seem to think as a mortgage as something alien to debt, when it is just that, only with a different name. The extra income is getting dropped on the mortgage, and being that I don’t have a clue about the stock market its probably a good idea!

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