How often do you make additional principal payments?
I am a new home owner and i make monthly mortgage payments. I am left with some additional money after all bills are paid and investments are made. I was curious to know if it will be a good idea to pay down the principal on the house.
Always pay extra, especially at the beginning of the loan
Please explain.
Most of the mortgage you're paying at first is interest. If you start paying that + a little extra to cut away at the principal, over the 30 year term you'll pay much less interest as less principal will be available to compound. Look up amortization schedules which might help clear it up further.
curious to understand why people pay extra? lets say if u can get a return of 6% on ur avg investment and u have to pay 4% interest to mortgage. You will gain 2% by not paying extra in principal. Am i missing anything? If S&P index gives u more return than your mortgage interest rate, is it not profitable to put ur money in index funds than paying extra to mortgage?
yeah, that's true assuming perfect conditions. however, stock market returns aren't necessarily linear growth. on average it grows, but you get some shitty years and some good years. also there's the additional benefit of reduced stress that you can't quantify. by reducing principal amount, you minimize the feeling of being shackled to your mortgage. also, in case you lose your job or something crazy happens, you won't be as stressed
Why does the volatility of the stock market matter. By paying extra mortgage, you are trapping money until you sell your house. Likewise home values rise and fall just like stocks. You could sell your home at the bottom.
Generally: no. Mortgages usually have a rate lower then what you can gain in other investments. You can take that money, invest it elsewhere (stock market, down payment on rental property, REITs, etc.) and gain greater returns than what you'd save by paying down principal. However, everyone is different, and if your risk tolerance is low, paying down principal is a safe bet. Either way, my best investments have been financial books (Rich Dad Poor Dad and Millionaire Next Door come to mind), and a good financial planner. (Disclaimer: I am not an expert and you should consult an expert before taking any advice)
Oh, and to answer the question: I do not pay down my principal at all.
Financial planners are useless. Here: buy vanguard index funds (tracking the S&P 500 index are the most stable ones) and park your money there until retirement and / or until you need the money. I just saved you hundreds of dollars from paying some “expert” and you don’t even need to read rich dad poor dad.
Cash is king. Make money work for you. Why trap it in the mortgage. After tax deduction I bet your interest ends up being around 3%. Its damn easy to beat 3%. People have a tendency to focus on their monthly expenses and not their net worth. Paying down mortgage barely impacts your net worth. Take your cash and buy a better asset. Stocks or rentals come to mind.
Will new tax law affect mortgage tax deduction if your balance is < 750k? Will there be cases where you can't itemize and have to take the standard deduction of 12k for unmarried ppl?
Possibly. Dont forget you can claim 10k of state/property taxes. Add that plus interest plus charity and you can probably still hit it.
Never.
Only pay down in lump sum amount and do a recast, which will lower your principal and interest payment without refinancing or changing the current loan term. Otherwise save the money and invest in something else.
^ this. Put your extra money in some investment that gives a decent return like index funds. Use that money to recast and lower the monthly payment, but do so only when you have a decent amount to put down which'll make a material impact on your monthly payments.
It’s principal
Thanks...corrected it