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I am looking for confirmation of my mortgage plan. I am 2 1/2 years into a 15 year mortgage at 6.5%. Original amount borrowed was $80,000. I paid $243,00 for the newly constructed house. The balance is about 71,100. My payment is $697, P&I. I am thinking about paying an additional $700/month in an attempt to pay off the mortgage in 5 years. I also have some money in savings and looked at applying my projected tax return refund and some of my savings on the principal also. Paying a large lump-sum up front could reduce the mortgage pay-off time to 3 years. I am 49 years old and make a good salary. In Texas, where I live, the real estate market is stable, and very few forclosures in my sub-division. Our cars are paid-off, and we pay the entire amount on our credit cards every month. Our other debt is a $25,000 mortage on 12 acres of raw land at 6.5%.
Should I prepay my current mortgage, or save the money? If you suggest I save the money, where could I safely earn more than a 6.5% return.
I almost refinanced at 4.25% with 3.5 points on a 30 year fixed mortgage (the interest rate was lower than a 15 year), and would have rolled the refinance costs into the mortgage. The amount of the new mortgage would have been $77,000. When I looked at the numbers, this method seemed like I would be paying more money ($5500 closing costs), and the amount of time in pre-payment (adding $700/month) would take longer. I stopped the processing of this scenario.
I'm an X Texan living in the Big Apple, about the same age. One extra payment a year on a 15yr loan, reduces your term to 12.5yrs - if you started when you first took out the loan.
Using a mortgage calulator;
180mth loan x 6.5% x $697 paymt = $79,318 Original loan amount.
Sending in $1397 a month would reduce your term to 69.35 months (if you started on your first payment).
2 1/2 years into your loan and now you want to pay extra?
You are not going to get the same results. Because on any loan you pay more interest on the front end of the loan. It depends on your lenders amortization table.
Is your method wrong - no. What this will do is drive your credit score through the roof. It's like pouring gasoline on fire. Whenever you send more then the required payment, over a 4 to 6 month period. This gets reported to the CB's, they see you as being more responsible, and your credit score goes up. Our original interest rate of 6.5% - will cause your net affective rate be much lower.
Suggestion - you do not want to pay everything off, because if you have no activity on your credit report. After 12 months your score will go to a NA rating (No Activity).
In other words - don't put all your cookies in one basket. Spread it out. Right now is a good time to invest money. Look into conservative mutual funds. I'm investing into Alternate Energy (GAAEX), the shares last year were over $16.00, now $5.00 a share. When the economy repounds, you could triple your money.........
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Last edited by Modification Specialist; 01-14-2009 at 06:39 PM..
Joli, i am a fellow texan, living in Plano. I would suggest that you refinance your mortgage into a 15 year fixed rate. As of this morning, the rate would be 4.25%, and that is with just 1 point. Even though you plan to pay it off pretty quick, as some might say dont spend money on closing costs if you are paying it off so fast, I am a fan of prepare for the worse, strive for the best. What if you cant pay it off in a few years. In today's economy, your employer could go under and you are out of a job. Life happens, things can change. If you refi to the low rate, you will have a great rate for just in case you need the mortgage longer.
Victor is 100% right -- 15 yr mortgage rates are at least 2% below what the OP has -- PAYING DOWN A 4.5% MORTGAGE HAPPENS MUCH MORE QUICKLY THAN PAYING DOWN A 6.5%!!!
Refi!!!
Further, it is NOT CORRECT to say you'd need to get the same rate on SAVINGS, as the intrest on one's principal residence is deductable to the extent that one's income allows -- saving nearly a third...
I do not know the specifics of the midterm outlook for either raw land or residential property, but over-weighting in either seems like a BAD idea, I would look to diversify my holdings before I would pay off either.
make sure you have a nest egg of at least six months of expenses. that includes the mortgages. Keep that money in a high yield money market fund. then with the extra money, invest it for the future. Mutual funds are cheap right now and could very well show a huge return as the econamy rebounds.
Do not live your life worried about your credit rating. It does not matter. Your credit rating is fine and a no activity note is not a bad thing. The credit cards will keep activity going...paid off monthly or not. You can put payments in a special account and pay cash for the next car when needed.
I would not worry about paying off the mortgage. Use the money as investment in long term gains. the cost to refi is too high to get a good return.
I would pay off the land and get rid of that mortgage.
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