Overpay on mortgage or no??

Question

Hey Everyone!

So I'm new to investing but this question is actually about my current live in home I've occupied for about 4yrs now. My question is for someone in my situation, to overpay mortgage or save the money that would have been to used overpay on the principal?

Little background. I do plan to put my home on the market to sell anytime in the next 6 months - 2 year (depending on opportunities that present themselves). I currently owe 115k and the home is valued 200-210k. My mortgage is $918 and for several months now I've been setting aside $1,100 a month to pay the mortgage then save the remaining $182.

So would it be smarter to continue saving that $182 a month for future investment opportunities or use it to overpay on the principal? To me I feel it's not worth it to overpay considering I do not plan to be there for the longterm.

Thanks!!

Allen Fletcher · Answer

@Vic Vega

The answer to your question is... it depends. If you plan to put your home on the market in the next few months and have that much equity I would put the money in another location. Do you have a rainy day fund with 3 to 6 months of expenses set aside? Do you have capital reserves ready to cover emergencies once you start investing in real estate? Do you have any other debts that are more toxic than a mortgage (i.e. credit cards, consumer loans, personal loans, car loans, student loans, etc.). I would start putting the extra in these first and if you have all of these covered you can view the increased equity as savings for future investments.

Hope this answers your question,

Allen Fletcher

Allen Fletcher · Answer

@Vic Vega

Having all of that taken care of you are free to either put the cash into a bank account to help you build up for investing or pay it towards your mortgage and be able to access it after you sell your home. If you are planning on investing before you sell your home put the cash into an account. If you are planning on starting your investing after you sell your home it is up to you whether to put it aside or into the mortgage.

If I were sitting in your shoes I personally would pay off the truck faster. A loan on a vehicle really is having a liability on a liability. Which is really not a good thing. From what I know of your situation, you are sitting very nicely and have the financial situation necessary to invest with confidence. As long as you pay your learning dues (i.e. read, study, ask questions, talk with investors, etc.) you should have a very profitable investing career.

Good luck,

Allen Fletcher

Vic Vega · Answer

Ahhh I see what you mean now. Good point! So considering the two debts I have, auto & home, it would make far more sense to overpay my auto loan if I do overpay either at all. Thanks so much guys!

Steve Vaughan · Answer

@Vic Vega I am in a similar situation, although without a vehicle payment.  I would rather earn my mortgage interest rate than basically nothing.  I can pay down older investment mortgages in the 6s (1 is even over 7%) so it's a bit more of a no-brainer for me.   If you'll get your money back in 6 months to 2 years, it's at least earning you something in the meantime.

Completely agree with @Allen Fletcher about the truck payment.  Even if it's one of those 0% interest deals, it probably just means you pre-paid in the form of a higher price at the buy.  Debts on liabilities are a poor man's game as I'm sure you know.

I think the idea of paying down debt, even at $182/mo.  I started small like that, an am now over-paying my loans down about $7k/mo.  Hopefully in a few years $182 will just be a rounding error in your monthly cash-flow as well.  I wouldn't notice a bit.

You're doing great, Vic!  Not many have $100k in the bank, awaiting opportunity.  The biggest risk with accelerating debt payments might be not having the acquisition capital to jump on something.  You sound ok there, good for you!

Vic Vega · Answer

Josh C. thank you for the input. I see where you're coming as far as how paying off the truck would save me on having to the pay the interest and removing a liability. However, from my angle I see it as losing $15,000 (amount owed on truck) of investable cash at the ready. I would think it to be better if I just continued to pay the affordable monthly car note ($360) and keep my cash for a future investments, no? Your thoughts?

Chris T. · Answer

@Vic Vega

The bottom line is - Can you find a better rate of return on your money than what you currently are earning?

e.g. what is your interest on your truck loan? If it's 0.9% interest, and  if you can get 2-4% interest in a CD, then keep the loan and invest that money in the CD. This is just an example! I know you probably cannot find that CD anywhere in the world, but you can certainty earn a lot more in the right RE investing!

Same concept as what @Steve Vaughan mentioned.

Do you have a financial advisor? If not, I highly recommend you find 1, that is a fee based. Not someone who wants to sell you certain products you might not need. Pay a small fee to get a professional look over your situation.

Some banks offer "free advisors" if you have enough money with them. Mine does, and I used that to my advantage.

Vic Vega · Answer

Hey thanks @Kevin Hunter. Just wondering where you got 75k?

Kevin Hunter · Answer

@Vic Vega, pay off the truck and save the 75k (this assumes the truck is around 25k).  Then do your research and find a smart investment for the rest.  It all depends on your short term and long term goals.  Are you looking for more real estate?  If you are, and you have a good interest rate on your current mortgage than stop overpaying and use that difference plus the original car payment to build back up the reserves.  Good debt versus bad.  Good luck.  Whatever you decide, this is a great problem to have!

Steve Vaughan · Answer

I just meant that when you pay down your mortgage, you are effectively earning your mortgage rate (4.375%) risk free and tax-free.  If you put it in the bank, you would basically earn nothing.

I have a pile sitting in the bank earning like .01%.  That's why I choose to pay-down mortgage debt while I await opportunity.  Cheers!

Overpay on mortgage or no??

Most Popular Reply