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Should we take our excess cash at the end of the month and put it in savings or put it towards our mortgage payment? We've been in our home 3 years and we already have some emergency money saved up.

I would be paying towards the principal of my mortgage. My mortgage interest rate 5.75 is the higher than our other debt (cars). My saving account interest rate is about 1%-2%.

  • 7
    Do make sure that your emergency fund is adequate. For some definition of "adequate." :) – George Marian Feb 21 '11 at 6:58
  • @GeorgeMarian To add to your point on emergency fund adequacy, I'd like to highlight this question: money.stackexchange.com/questions/83/… – Chris W. Rea Feb 21 '11 at 13:34
  • I just know this has been asked before, but I can't find it. – JohnFx Feb 21 '11 at 13:59
  • More info needed: Interest rate on Mortgage, Return you think you can get from investing, what you are saving for, and how soon you will need to spend the savings. – JohnFx Feb 21 '11 at 14:00
  • @JohnFX - I asked a somewhat similar question on down payment versus investing, which might have pertinent information but is a different sitiuation - might not be what you are thinking of. – justkt Feb 21 '11 at 14:06
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I'm assuming when you say "…put it towards our mortgage payment?", you mean make additional payments on top of your scheduled payment. Strictly speaking, if the interest on your mortgage is higher than the return you can expect by saving, then yes, your excess savings should be put toward your mortgage.

This assumes that there are no pre-payment penalties, that you really won't miss that money in the short term (i.e. you say you have enough savings for emergencies, so that's good), and that both choices would use after-tax dollars (i.e. mortgage payment vs RRSP contribution in Canada is a huge discussion).

  • We've been using excess to pay down the principle of our mortgage and are very happy with the results. – jacook11 Oct 25 '17 at 15:22
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First, what country are you in? Canada doesn't offer a mortgage interest tax deduction, the US does. This changes the math a bit, and in the US, the current after tax cost of a mortgage is below our long term inflation rate.

Is the mortgage your only debt? I've seen people religiously pay extra each month to their 6% mortgage while carrying 18% interest debt on credit cards. Next, there are company matched retirement plans, in the US, a 401(k) plan, where if you put up to 6% or so of your pay into the account, it's effectively doubled upon deposit. I'd be sure not to miss such an opportunity.

After these considerations, prepaying is equal to buying a risk free fixed instrument. If that appeals to you, and you've considered the above first, go for it. Keep in mind, money paid to the mortgage isn't easily borrowed back, short of a HELOC. I'd strongly advise that your emergency fund be fully funded (6 months worth of spending) before starting to make extra mortgage payments.

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Do you have any other debt besides your mortgage such as credit card debt, student loans, or a car payment? Unless those are lower interest than your mortgage, pay them off first.

There are a lot of other considerations besides just mortgage and emergency fund. Do you have some money for the things in life that happen - car repairs, unexpected medical bills, your next vehicle purchase, and the eventual replacing of those big ticket items in your home that will break eventually? A bit of savings towards each of those each month is not a bad idea.

Then there is your retirement. Are you on track to make enough to support yourself in retirement plus pay for the cost of health care as it applies in your country (more in some countries, less in others)?

There is also the cost of higher education for your children if you have any or are planning on having any. If so, were you planning on contributing to their higher eduction? Do you have a savings plan in place for that?

Paying off the house is a great thing to do - in my mind it's great even if it reduces your mortgage deduction, although others disagree. It's just not the number one financial priority anyone should have.

  • You brought up a bunch of very good points. We decided to use the excess to pay off our mortgage and we are very happy with the results. Just to answer some of your questions. The mortgage was/is/has been our only remaining debt. We have an emergency/savings fund. We already save for retirement. And we save for college. All the excess money after all this was put to the principal of our mortgage. – jacook11 Oct 25 '17 at 15:23
4

First of all, you should absolutely put money into savings until you have at least a 6 month cushion, and preferably longer. It doesn't matter if you get 0% interest in your savings and have a high interest rate mortgage, the cushion is still more important.

Once you have a nice emergency fund, you can then consider the question of whether to pay more towards the mortgage if the numbers make sense. However, in my opinion, it's not just a straight comparison of interest rates. In other words, if your savings account gives you 1% and your mortgage is 5%, that's still not an automatic win for the mortgage.

The reason is that by putting the money into your mortgage, you're locking it up and can't access it. To me, money in the hand is worth a lot more than money that's yours on paper but not easily accessible.

I don't know the math well enough, but you don't really need the math. Just keep in mind that you have to weight the present value of putting that money into savings vs the future value of putting it into your mortgage and paying less interest at some point in the future. Do the math and see how much you will save by paying the mortgage down faster, but also keep in mind that future money is worth less than present money. A LOT less if you suddenly have an emergency or decide on a major purchase and need the money, but then have to jump through hoops to get to it.

To me, you need to save a considerable amount by paying down the mortgage, and also understand that your money is getting locked away, for it to make sense.

  • I would mention that some mortgage arrangements allow you to take repayment holidays if you have overpaid in the past, and so in those cases your money isn't strictly tied up. – Daniel Kelley Apr 16 '14 at 16:24
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Another thing to consider is how much longer you wish to stay in this home & what you will do with it when you move.

I had planned on doing exactly this, but we are more likely to keep our home when we move out and use it as rental property. If we went down this route, we would have a lot of equity (perhaps even paid off) in our home, but would have little left to save towards the next home down payment.

1

The other answers have offered some great advice, but here is an alternative that hasn't been mentioned yet. I'm assuming that you have an adequately-sized emergency fund in savings, and that your cars are your only non-mortgage debt.

Since you still have car debt, you probably don't have anything saved for buying a new car when your current cars are at the end-of-life. Consider paying off your car loans early, then begin saving for your next car. Having cash in the bank for a car is very freeing, and it changes your mindset when it comes time to purchase a car, as it is easy to waste a lot of money on something that depreciates rapidly when you aren't paying for it immediately.

This approach might be counterintuitive if your car loan interest rate is less than your mortgage rate, but you will probably need another car before you need another house, and paying cash for a car is worth doing.

  • Our mortgage is our only debt. No Car/Student/CreditCard loans of any kind. We are also saving up for our next car and plan to pay cash. We did this with the last car we bought. Thanks for the great advice. – jacook11 Oct 25 '17 at 15:29

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