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Are you debating whether to use your extra cash of $20,000 to put towards the principal of your mortgage? This is a common dilemma that many homeowners face, and it’s important to weigh the pros and cons before making a decision. In this article, we will explore the reasons why it may be beneficial to put the money towards your mortgage principal now, as well as the potential advantages of investing the money elsewhere. We’ll also take a look at key factors to consider when making this decision, including current interest rates, your overall financial situation, and long-term financial goals.
**Pros and Cons of Putting $20,000 Towards Your Mortgage Principal**
When deciding whether to make a lump-sum payment towards your mortgage principal, it’s essential to consider both the advantages and potential drawbacks.
*Pros of Putting $20,000 Towards Your Mortgage Principal:*
1. **Interest Savings:** By reducing the principal balance of your mortgage, you can potentially save a significant amount of money on interest payments over the life of the loan.
2. **Equity Build-Up:** Paying down the principal of your mortgage allows you to build equity in your home faster, which can provide financial stability and flexibility in the future.
3. **Peace of Mind:** Knowing that you’ve made a substantial payment towards your mortgage can provide a sense of security and accomplishment.
*Cons of Putting $20,000 Towards Your Mortgage Principal:*
1. **Opportunity Cost:** If you have other high-interest debts or investment opportunities, putting the money towards your mortgage may not provide the best return on investment.
2. **Liquidity:** Once you’ve made a lump-sum payment towards your mortgage, it can be challenging to access that money in the event of an emergency or unexpected expense.
3. **Potential Tax Implications:** Depending on your financial situation and the tax laws in your country, there may be tax implications associated with paying off a mortgage early.
**Investing the Money Elsewhere: Considerations and Potential Benefits**
On the other hand, you may be considering whether it’s more beneficial to invest the $20,000 elsewhere until interest rates come down. In this case, it’s essential to take into account various factors that can impact the potential return on investment.
*Factors to Consider When Investing the Money Elsewhere:*
1. **Current Interest Rates:** Assess the current interest rates on your mortgage and evaluate whether alternative investment opportunities offer higher potential returns.
2. **Risk Tolerance:** Consider your comfort level with investment risk and whether you’re willing to take on more risk for the possibility of higher returns.
3. **Diversification:** Review your overall investment portfolio and consider whether diversifying your investments can help mitigate risk and maximize long-term growth.
*Potential Benefits of Investing the Money Elsewhere:*
1. **Higher Returns:** Depending on the investment options available to you, you may have the opportunity to achieve higher returns than the potential interest savings from paying down your mortgage.
2. **Liquidity:** Unlike a lump-sum payment towards your mortgage, investing the money elsewhere can provide greater liquidity and flexibility in accessing funds when needed.
**Considering Your Overall Financial Situation**
In addition to evaluating the specific advantages and drawbacks of putting $20,000 towards your mortgage principal, it’s crucial to consider your overall financial situation and long-term financial goals.
*Assessing Your Overall Financial Situation:*
1. **Debt Management:** Take a comprehensive look at your existing debts, including your mortgage and any other outstanding loans, to determine the most effective way to allocate your resources for debt repayment.
2. **Long-Term Financial Goals:** Consider your long-term financial aspirations, such as retirement planning, saving for your children’s education, and other key milestones, and determine how various financial decisions align with these objectives.
3. **Emergency Fund:** Ensure that you have an adequate emergency fund in place to cover unexpected expenses, as this can have a significant impact on your overall financial security.
**Final Thoughts: Making an Informed Decision**
Ultimately, the decision of whether to put $20,000 towards the principal of your mortgage or invest the money elsewhere should be based on a comprehensive assessment of your financial situation, goals, and the potential impact on your overall financial well-being. By carefully weighing the pros and cons of each option and considering key factors such as current interest rates, investment opportunities, and long-term financial goals, you can make an informed decision that aligns with your unique circumstances.
Remember, it’s always beneficial to seek advice from qualified financial professionals who can offer personalized guidance based on your individual needs and objectives. Additionally, staying informed about changes in interest rates, investment opportunities, and financial planning strategies can help you make proactive decisions that support your long-term financial success.
In conclusion, whether you choose to put $20,000 towards your mortgage principal or explore alternative investment avenues, the key is to make a decision that is well-informed, strategic, and aligned with your overall financial goals. By taking a thoughtful approach to this decision, you can optimize the use of your financial resources and work towards securing a strong financial future for yourself and your family.
Now, I hope this answer helps you in deciding whether you should put $20,000 towards the principal of your mortgage. Let me know if you found it helpful and if you need any more information! 😊🏡💰
What is your mortgage interest rate?
More information is needed. Debt? Emergency fund? Cars running? Pregnancy? Stable job(s), Retirement fund? Monthly expenses? Just some questions I could quickly think of..
Takes your liquid 20k and turns it into less liquid home equity. Pros would be, will save on how much interest you pay over the life of the loan, and you will pay your mortgage off sooner.
The con would be, you cannot access your home’s equity quite as easily, and doing so might entail additional costs like a Home Equity Loan or LOC, negating some of the interest you save.
Pros of lump sum now: You save on interest.
Cons of lump sum now: Less liquidity for other stuff
If your interest rates on the auto loan are higher you might want to look there. Unless your down payment[on the house] was less than 20% and you are paying pmi.
I would pay off the cars.
Keep in mind that once you make a principal reduction payment on your mortgage there is no getting that back. It’s gone. If you pay off the cars, worse case you could refi the cars fairly easily — much cheaper than refinancing the house to get your money back.
Also, if you pay off the cars, you increase your cash flow noticeably. The payment goes away. If you pay a principal reduction on your home loan you get no reduction in payment and do not improve your cash flow. You just reduce the amount of time you have to pay on your mortgage. Sure that’s a great long term benefit, but it doesn’ help you today.
I’d pay off the cars. We paid ours off and now any extra money goes into the mortgage every month. For us this typically results in an extra payment each month. We still have some nice excess cash flow every month too.
Even at a 3.5% rate I put all bonuses into paying off equity, paid off mortgage in 5 years that way.
At 6.5% the only reason not to is if you have other debt at higher interest to pay off first – do that first.
Its possible that investing 20k might pay better. For me the comfort of not having a mortgage hanging over my head was effing huge, especially when covid hit and wife and it thought we were both going to get laid off. I sleep well at night.
If the loan is over 5-ish percent, it would make sense to pay it down, because that’s how much one could get in a HYSA.
Whatever you decide to pay, make sure you call them and make sure it’s applied to the principal. Else they’ll just put it towards the overall loan, which initially is mostly interest.
If you decide to do this, ask your mortgage servicer about a recast – this is a reamortization and will reduce your monthly payment while keeping the rate.
if you have any revolving debt I’d pay that off first. You can also max out your retirement accounts and use the 20k for expenses. just a thought.
Pay off one or both the cars and start putting that extra monthly savings towards the mortgage.
you can do a mortgage recast, it will lower your monthly payments if that’s something you’d be interested in doing.
If you pay off the cars and apply that monthly payment to the mortgage as a principal payment, then if you are squeezed down the line you can stop the extra monthly payments to meet your bills at the time. If you dump the money into the mortgage without refinancing, you’re stuck paying the same higher amount every month even if things get tight.
Do you plan on paying your mortgage off early? If so, this is a good start.
Someone below suggested recasting. Don’t do it. The bank wants the guaranteed income from your interest. Don’t them have it.
I’m calling my mortgage company (wintrust) tomorrow for a 30 day pay-off letter. January 2024 is gonna be a crazy year. I am not getting caught with my pants down. F- Capitalism BS.
What is your interest rate on the Mortgage?
Do you have any other debts with a higher interest rate?
You need to compare this to the interest rate you’re paying. If you can get 5% in a HYSS and your interest rates for these loans are 4%, then yes, there is a reason to wait.
What’s the interest rate on the mortgage?
What other debts do you have?
You can make a safe 5% right now and it’s high interest accounts. If your mortgage is under 5% I’d probably keep the cash on had for emergency or pay other higher rate/shorter term debts first.
I just 1 year, Put the 20k in a 5% CD dividend = 1k interest
Put the 20k in a dividend stock (3M) = 1.4k interest
Paying down principal doesn’t get you anything but early repayment.
Payoff car loans if interest payments on cars are higher than interest that would be paid.
Also can hold for rainy day then put it in money market which are all 4%+
You also reduce your tax deduction
If you put that money into a qualified plan invested in a S&P500 index fund which should earn 7% annual, you would have $152k 30 years from now which is about $62k adjusted for inflation. Of course, this assumes you don’t go over your max contribution to contribute tax-free. You could of course spread the contribution over 2023 and 2024 if that’s a problem but you’re not already maxing it out.
Another thing to consider is the interest rate on the mortgage. You should always pay off the debt with the highest interest rate first. If you have a low rate mortgage, you might more putting the money in a CD
What are the interest rates for your mortgage, cars, credit cards?
Use it to max out your Roth IRA and HSA (if applicable) contributions then use the rest toward paying off cars.
Several things to consider here.
First, start with any bad debt. If you have any credit card balance that you carry on your cards and don’t pay off completely, start with that first. The 20-30% interest on those will impact you way more than your house loan.
Second, look at any secured/unsecured loans above 10% interest. I would put money towards those first.
Third, I’m assuming you got a good rate on your cars/house and it’s in a ball park of 3-7%. This is where it will be a judgement call. An investment is unlikely to yield more than 10-15% APY on average, if you invest in a low-risk funds like S&P500 index.
Consider whether your are paying PMI on your mortgage. If paying 20k will get rid of it, some PMI adds 1-2% of the principal to your payment, in which case I would definitely put money towards the house.
If your house mirtgage is around 3-5% APR and you can easily afford it, invest your 20k and not worry about putting money towards them. It’s a lot more difficult to get money out of a house when you suddenly need it. Over 5-10 years, the interest you pay in extra 20k of mortgage will cancel out by the APY your investments get you.
Finally, if your loan APR is around 6-10%, you can either invest the money, so you have access to it later (major break down or another emergency), or put it towards the house (less interest, quicker payoff)
I would use the same logic for a car loan: 3-5% APR – invest it, 6-10% APR – judgement call between cash availability and paying interest, anything above 10% – put 20k towards the loan.
if you have the luxury of timing your refinance, then you are probably better off investing that $20k. use your mortgage rate as your own personal “risk free rate” to guide the asset allocation of your investment. it usually comes out with some mix of stocks and bonds with a heavier writing towards bonds than you would normally use for retirement. alternatively, if that sounds like too much work: hysa and chill…
You should already know this if you did any research into what a mortgages was in the first place.
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Use a mortgage calculator to see what the entire life payment of your mortgage looks like with interest versus principal. Then see how a principal payment effects it at the point you’re at
You didn’t mention the interest rate. Without knowing how much the money costs to borrow, you will not a get an accurate answer. Your best course of action depends.
If you have debt, consider that $20k *as* that debt. You’re paying mortgage interest, car interest, maybe credit card interest, on that debt. If you use that money to pay off some of that debt, what interest would you be eliminating?
If you didn’t have that money, and someone offered you $20k in cash structured with the interest you’re paying on your debt today, would you take that loan? What could you do with that loan that would make you more money than what you’re paying in interest? Is there some self investment you can make? Is there a high yield savings account that would make you more interest? Even investing in ETFs? If so, you should accept the debt and use that money to make more money. Otherwise, consider paying down some of your highest interest debt.
To the people suggesting car. I dont think paying down the car gets the same return as putting it towards your home or the markets. Sure it frees up some monthly cash flow, but that doesnt seem to matter for you at that moment. 20k towards your hone loan will save you thousands in interest charges over the years.
I too have struggled with the decision to put my funds in the market vs home loan and ultimately decided to put it in the s&p as my interest rate was much lower than yours. Then we moved and my decision flipped. I withdrew my funds and placed a large deposit on my home.
I’ve read and watched countless videos for “expert” opinions. There is no right answer for home vs market. It’s whatever decision YOU feel more comfortable with.
My strategy. The more funds you can put into your loan at the beginning matters more than putting extra on later. Do it now and then switch to markets.
How much are each of the auto loan monthly payments?
pay off the cars first if the interest rate is similar, the mortgage interest can be deducted on your taxes if you clear the standard deduction….cheers
Put the money into 529s. They will grow tax free and in 15 years you can roll them into Roths.
You should only pay off things early if their interest rate is 8% or greater considering the “time value” of money.
Making 8% annually is pretty standard with common investment strategies, so paying off debt only “saves money” if the interest accrued would outpace that standard growth on investment. If you don’t invest, then pay it early because you would be losing money to inflation with the cash just sitting in checking.
Pay off the cars. Put at least 15% of your gross into retirement savings. Then you can put any remainder into regular savings. When you have more than six months expenses in liquid savings outside of your retirement account, then you can start thinking about paying down the mortgage, or pay a big chunk toward equity if you refinance.
Pay off the cars. You can still make extra payments towards the mortgage with the money that would’ve been for car payments, but you’ll have the flexibility if you need/want to do something else with it.
I’d just use that shave off the monthly, maybe pay off cars, or anything reoccurring bills. Paying towards principle is irrelevant IMO when the fed announced multiple rate cuts next year. Just put a little aside for the refinance and you’re set
Ultimately it also depends on the interest rates. If the cars are higher interest rates than the mortgage, paying them off is certainly better, both for overall expenditures and cash flow. If you have a very low interest rate on the cars, paying down the mortgage may make sense, especially if you intend to live in the house until it is paid off. But doesn’t have the benefit of reducing cash flow immediately.
But, if you have any credit card debt, which you didn’t mention, that should be cleared first.
No way I would pay on the mortgage. I would pay off those car loans. Take a portion of the old car payment and add it to the mortgage payment going forward.
Pay off cars. Use higher monthly income / lack of car payment to max your retirement accounts yearly. 6500 in IRA. 21k in 401k