In theory you can make more by putting the money in something with higher returns. Plus, you get to deduct a portion of the interest from your taxes, and in theory putting the excess money somewhere else is additional diversification.
AKA instead of paying your mortgage at 4% interest, you invest it in something that make 5.5% and gain an additional 1.5%-a few percent in taxes+a few tents of a percent in taxes on the 4% interest.
Frankly, its a good theory, but given the volatility of the markets, its hard to guarantee your going to actually come out ahead. Particularly since interest rates are generally computed by people who are looking at the risk/reward factors, and the interest rates have to be high enough to attract the risk adverse capital.
The one thing that is for sure, is that you should never really be sending early payments to your mortgage company despite all the financial advisors telling you to to do so. If you want to pay your mortgage off early your better off putting the money in a low risk investment and then paying it off when the outstanding mortgage balance falls below the value of your savings. That is because overwhelmingly your just giving your mortgage company an interest free loan due to the fact that they apply the over-payment to the final payments and don't adjust the amortization schedule.
Recasting works sort of like refinancing .. but your rate doesn't change and neither does your mortgage term.
Instead, a lump sum that you provide is deducted directly from your principal. Your monthly payment is then recalculated based on that reduced principal amount.
The financial institutions usually impose limits (minimum lump-sum amount, how many times per year you can do it, etc.) And they don't advertise it or make it easy, because there's no money in it for them.
And since the principal/interest ratio is front-loaded (so that much of the money that they make from you is in the first seven years or so of a 30-year loan), then if you can recast early in the life of the loan, the benefit is increased. (And that's the real reason why the industry advises upgrading every seven years - that 30-year, front-loaded clock gets reset in their favor.)
> That is because overwhelmingly your just giving your mortgage company an interest free loan due to the fact that they apply the over-payment to the final payments and don't adjust the amortization schedule.
I'm pretty sure this is NOT how it works with my mortgage company (BofA) I make principle-only payments that reduce the principle, which immediately affects the amount of my monthly check that goes toward principle/interest.
Ah ok thanks. Here in Australia we can't deduct the interest portion from our taxable income unless the loan is for an investment property.
My mum drummed into me from a young age that it's better to not be in debt, but she was no financial whiz. I kind of understand what you're saying but I think I really just need to do some spreadsheet calculations to work out the scenarios. It isn't immediately obvious to me.
Given that we just left a period of very low rates, paying off a low interest mortgage might not make the best financial sense if you can put the money to work elsewhere.
There is also a diversification problem. Paying off a mortgage could tie up a large part of someone's wealth in their house.
Related to the point right above, paying off a mortgage ties up a large portion of cash in a fairly non-liquid investment.
Random conversations, Reddit personal finance, podcasts. Reason is, the interest is low and by investing the money elsewhere you can get a higher rate of return.
For most people, a house payment also represents a direct impact to their ongoing cash flow. If your house payment is $2000 a month, paying off your house automatically increases your cash flow by that amount.
What else could you do right now with that cash flow - not only in direct alternative financial investments, but in indirect investments in your own well-being and quality of life?
