My wife and I have two houses: one her parents live in and has only 4.5 years of mortgage payments left, the other we live in and is only 2 years into a 30 year mortgage. She has been making extra payments on the 4.5 year house for many years, hence it'll be paid off about 10 years early. Most of the monthly payment is now principal, and I estimate if she continues the extra payments it will only pay it off in about 4 years. Both mortgages are a similar interest rate. Should we put those extra payments towards the 2nd house ? Does it even make any difference ?
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1Are you in the US? Do you itemize? If not, your mortgage is the gross interest rate, but the rental interest offsets rental income. This can make a difference.– JTP - Apologise to Monica ♦Commented Jan 5, 2015 at 13:05
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@JoeTaxpayer OP seems to be from Atlanta, so US I presume.– DumbCoderCommented Jan 5, 2015 at 14:08
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@JoeTaxpayer what makes you think they have rental income? Poster said her parents live in the house. Maybe they're paying rent and maybe not.– JayCommented Jan 6, 2015 at 19:49
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@Jay - I did ask if they were in the US. In the US, if I own a house and family lives in it, as Tim described, there's imputed rent regardless of money transfering. And for a rental house, there's depreciation, etc. It's a rental whether or not he wants it to be. Or at least the IRS would say so.– JTP - Apologise to Monica ♦Commented Jan 6, 2015 at 20:12
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@JoeTaxpayer Hmm, I don't think that's true. IRS publication 527 goes into excruciating detail about determining when you are using a rental property for "personal use", and says that you cannot deduct expenses incurred during personal use, including rules for pro-rating things like insurance and mortgage. Personal use is explicitly defined to include use by a parent or grandparent. (Section 5 of this pub.) I don't see anything in this pub about imputed rent. Of course that might be in some other IRS pub, but it seems paradoxical to say that you have to pay taxes on imputed rent but can't ...– JayCommented Jan 6, 2015 at 21:40
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3 Answers
What are the interest rates? if they are from 10 years ago they could be very high. I would check with a credit union for a 5 year loan at 2.8% interest. Pay off both mortgages with it. And pay the 5 year loan over 5 years or less. I wouldn't pay it early because at 2.8 its almost a free loan due to inflation and the return you can make on your extra money buying low risk assets.
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Ok that's a great number. Personally I have 4% on two mortgages on two houses, I am in my 3rd and 2nd year on them. I will not pay one cent over minimum. Last year I made 17% on my investments and I just saw this year I made 9.69% In don't expect to make 4% on my investments every year but I don't have to. In 10 years I might make more than 4% on CD's or inflation will be 2% to 3% Compounding for decades. This really doesn't effect you because you do not have much time left on these mortgages but more for other people to read. Lets not forget that your interest in a write-off too. Commented Jan 9, 2015 at 18:51
Provided the interest rates are similars, and you still want to make overpayments on mortgages, then the best option is to put all the capital (available for overpayment) in the mortgage which has the longest term left.
In most cases this is going to be the mortgage with the most principal left, as in your case it is the 30 years mortgage.
The reason for it is:
if you overpay $1,000 dollars on your mortage with 4 years left. Since it's an overpayment the full $1,000 is paying the principal. So you will save the interest rate (3.8% from your comment) on $1,000 for the next 4 years: $1,000*0.038*4= $152
if you overpay $1,000 dollars on your mortage with 30 years left. Again the full $1000 is paying the principal. This time you will not pay the interest rate on $1,000 for 30 years: $1,000*0.038*30= $1,140
So by paying the same sum on your longest mortgage you already saved the equivalent of one or two monthly payments on this mortage. The saving on the shortest mortgage is not that attractive.
Since your interest rates are similar, you can apply a simple factor to compare any overpayment over the two mortgages: the ratio of time left on the mortgage. R = 30(years) / 4(years) = 7.5
This means that any overpayment on the long mortgage will save you 7.5 times more money than a similar overpayment on the short mortgage. Now take your pick ;-)
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2You are ignoring that in your first scenario, the smaller loan will be cleared earlier and its payments can then be applied to the larger one. If you take that into account, you will see that both scenarios are equivalent.– WerKaterCommented Nov 2, 2019 at 6:13
If the interest rates are identical, it does not matter, assuming the mortgages have identical tax treatment (if you get a tax break on one but not the other, the situation changes). And: Once the smaller loan is paid off, you must apply its payments to the other.
No matter where you put an extra 1000USD, it will always save you 38USD per year for each year until both mortgages are paid off.
