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I have been putting extra money toward the principal of my mortgage since we purchased our home last summer. However, due to circumstances, I have reason to believe we will already be moving in the near future. Is there any reason to continue paying the additional principal each month? If so, what are the benefits?

  • 6
    Possible duplicate of Avoid paying off a mortgage early? – Grade 'Eh' Bacon Feb 8 '18 at 16:22
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    Note that the duplicate listed there does not indicate anything about you moving soon - however the result is more or less the same: should you pay off your mortgage, or use the money for other things? – Grade 'Eh' Bacon Feb 8 '18 at 16:23
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    Unless the wording of that question has me confused, that poster seems to have enough money to pay off the rest of the balance of his mortgage, but I just started payments on mine. The result may be the same but i think the circumstances are completely different – wizloc Feb 8 '18 at 19:30
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    You're right; the difference in time scale has a notable impact on the benefits of using the cash for other purposes, as outlined by D Stanley. I have removed the suggestion to close. – Grade 'Eh' Bacon Feb 8 '18 at 21:38
  • You bought a house and are planning to sell it within two years? Or are you planning to rent the first house out as part of this upgrade? – corsiKa Feb 9 '18 at 21:55
50

You will probably be better off keeping the cash to pay for moving costs, putting down earnest money on the new house, etc. The monetary savings you will get by paying down more principal is roughly the interest rate times the extra principal you pay times the number of years until you sell, but you won't get it back until you close on the sale of your house. To me, it's probably not worth tying up those funds.

If for some reason you don't move, you can always take that saved cash and pay down the mortgage in one big chunk.

  • 1
    Good answer. I'd just swap "keeping the cash" with *"investing the cash in a low liquidity risk investment" (investopedia.com/articles/trading/11/…). – Mindwin Feb 8 '18 at 17:30
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    @Mindwin I don't know exactly how much money or what time frame we're talking, but I'd guess that both are small enough that investing the money in any way would be more effort than it's worth. – Justin Lardinois Feb 8 '18 at 18:41
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    Right so if you are paying 4%, you save $4 for every 1000 you put towards it. Often as part of selling a house, you are asked to fix issues. I probably spent a couple thousand before I closed on my last home sale. If you need a few extra bucks a month, pack your lunch. Don't lock up your cash. – JimmyJames Feb 8 '18 at 22:17
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    4% means 4 per 100, not 4 per 1000. And that's also per year. – WBT Feb 9 '18 at 2:08
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    @JimmyJames: That's completely wrong. If you pay $1000 now, you'll save $40 after a year, and $480 after 10 years. – Eric Duminil Feb 9 '18 at 9:35
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The balance on your mortgage won't stop accruing interest just because you might move Real Soon Now. Thus, continuing to pay extra continues to build up equity and save you interest.

Of course, you might need that extra cash for moving expenses, down payment, etc, which would be a reason to keep your cash.

There's no formula we can give you to make that decision for you.

  • This is incorrect. Mortgages do not "accrue" interest. It is calculated upfront and then spread across the life of the mortgage in a process called amortization, the interest is front loaded. You get a table with a mortgage that shows how much of each payment is principal and how much is interest. Later payments have a much smaller interest component, and by paying additional principal you save later payments. Therefore, your interest savings is not so easily calculated. – cornbread Feb 9 '18 at 16:45
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    @cornbread Interest expenses are front loaded only because that's how the math works. The table they give you when you get the mortgage is only for convenience, since it doesn't account for extra payments on principal. Making those extra payments causes a ripple effect on the rest of your payments. – RonJohn Feb 9 '18 at 16:56
  • @cornbread: Wait what? The only reason mortgages are hard to calculate is because they don't use continuous compounding therefore we have to sum the series. – Joshua Feb 9 '18 at 19:39
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    @cornbread You're wrong, your interest is based on the outstanding principal. The amortization schedule you see up front is just based on the payments necessary to reduce principal to zero in 30 years (or whatever your term may be). If you make additional principal payments, it will reduce the total interest you will pay over the life of the loan. – iheanyi Feb 9 '18 at 23:03
  • @cornbread I don't see anything to indicate OP's location, or their type of mortgage. Assuming US-style long-term fixed-interest mortgages in such a situation appears premature. – a CVn Feb 11 '18 at 13:31
5

The reality is that is is likely to lose money on your home purchase due to the cost of transacting real estate. This may be mitigated or even eliminated if this is a company sponsored move and the company reimburses some of the costs associated with moving such as closing cost and even real estate commissions.

How will this loss be realized? Well it may be a bit invisible in that you will receive less at closing on the sale of your home then what you put down when you purchased your home.

To me it is a coin flip of paying toward your mortgage or putting the money in the savings account provided you already have sufficient emergency fund savings. Paying toward the mortgage, you will earn a bit better interest rate but will not have the money until the sale of the home. By putting it in a savings account you will have money readily accessible for costs associated with moving.

A better decision can only be made understanding more about your situation. If this is a company sponsored move and you have a nicely padded savings account then there is no harm in paying toward the mortgage. If you are likely to need extra cash then park the money in a savings account.

4

The accepted answer is good but, as usual, on questions like this, you see a lot of fundamental disagreement on whether paying down the interest early makes a big difference. Typically the arguments (on both sides, myself included) are over simplified. To get a better feel for this, I put together a schedule for the first year of a $200K mortgage. To get the payment I cheated and used this site.

 total principal  payment    rate interest    principal 
 $200,000.00      $954.83    4%   $666.67     $288.16 
 $199,711.84      $954.83    4%   $665.71     $289.12 
 $199,422.71      $954.83    4%   $664.74     $290.09 
 $199,132.63      $954.83    4%   $663.78     $291.05 
 $198,841.57      $954.83    4%   $662.81     $292.02 
 $198,549.55      $954.83    4%   $661.83     $293.00 
 $198,256.55      $954.83    4%   $660.86     $293.97 
 $197,962.57      $954.83    4%   $659.88     $294.95 
 $197,667.62      $954.83    4%   $658.89     $295.94 
 $197,371.68      $954.83    4%   $657.91     $296.92 
 $197,074.76      $954.83    4%   $656.92     $297.91 
 $196,776.84      $954.83    4%   $655.92     $298.91 

Now lets say you pay an extra $100 more on each payment:

 total principal  payment    rate interest    principal 
 $200,000.00      $1,054.83  4%   $666.67     $388.16 
 $199,611.84      $1,054.83  4%   $665.37     $389.46 
 $199,222.38      $1,054.83  4%   $664.07     $390.76 
 $198,831.62      $1,054.83  4%   $662.77     $392.06 
 $198,439.57      $1,054.83  4%   $661.47     $393.36 
 $198,046.20      $1,054.83  4%   $660.15     $394.68 
 $197,651.53      $1,054.83  4%   $658.84     $395.99 
 $197,255.53      $1,054.83  4%   $657.52     $397.31 
 $196,858.22      $1,054.83  4%   $656.19     $398.64 
 $196,459.59      $1,054.83  4%   $654.87     $399.96 
 $196,059.62      $1,054.83  4%   $653.53     $401.30 
 $195,658.32      $1,054.83  4%   $652.19     $402.64 

If you then sell after that first year, we assume you get the principal back, so that's no different than putting it in a bank account. How much did you save in interest?

Normal payments: $7,935.89 interest paid

+$100 payments: $7,913.65 interest paid

Total savings on interest: $22.25

If you did something like put $1000 on the first payment, you'd pay $7898.61 in interest for a savings of $37.28 for the year.

Another thing that I think is often misconstrued or misunderstood is how much extra earnings you get for a few extra percentage points on your savings. It might seem logical to think that getting a double interest rate mean double interest. But this is way off. If you put $1000 extra up front, you save about $2300 interest over the life of the loan. But if you were able to invest that in an instrument that doubles that rate, you would earn over $9000 over that same period. 8% is a pretty good rate but even something more modest makes a big difference. At 6% you end up with twice as much at the end of the 30 years. The S&P has had an annualized return of %10.5 over the last 30 years which turned $1000 into around $19,000. Even at a lower rate of growth, you are potentially leaving a lot of money on the table if you settle for paying off a low (fixed) interest rate mortgage.

0

The benefits are the same as they are in general: the less the outstanding balance, the less interest you pay. The only relevance moving has is if you are underwater on the mortgage, and you're planning on defaulting or using the threat of default as leverage to get the bank to accept a short sale (which is a rather dangerous thing to do). Otherwise, everything you pay towards the principal you will get back when you sell (plus you get to keep the interest you would have paid on that amount). For instance, suppose you have a house that you sell for $500,000 and you have a $350,000 mortgage. The bank will claim $350,000 from the selling price and you will get to keep $150,000. If you pay an extra $50,000, reducing your mortgage to $300,000, then when you sell you get to keep $200,000. The equity in your house is a little bit like a bank account, albeit one that it can be difficult to take money out of. Everything you put into the principal is added to your "account", and "earns interest" in the sense that it reduces how much interest you owe (that is, reducing the amount of interest you owe by X dollars is, in some ways, the same as getting an extra X dollars).

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