This is a good strategy depending on what you would do with the money if you weren't maxing out your home payments. If you paid the minimum monthly balance and spent the difference on a jet ski or beer or some other nonsense you would be losing out in the long run (badly). If, say, you took the difference between what you would lay out for your mortgage in order to pay it down early and instead invested it in securities, you'd end up ahead with the securities even though you'd end up paying far more in interest to the bank.DrunkFace wrote:
Toenails has hinted on what I do.Varegg wrote:
There is always interest on credit, why don't you pay interest?DrunkFace wrote:
Buy everything I possibly can on credit. Saves me money.
Don't pay any interest though, except the home loan.
Firstly, all my wages go directly into my home loan, which offsets interest as its calculated daily but charged monthly. I also have a redraw facility (basically like an overdraft) on the home loan so I can withdraw money when I need it.
For all my purchases I use credit cards with interest free periods of 60-90 days. So while my cash is saving me interest on my home loan I'm using the banks money to live off. Then just before a credit card bill is due, I withdraw the money from my home loan and pay it off. In effect I am saving about 6% by using credit cards over buying stuff in cash. Then there are all the bonuses and flybys and free shit on top of that.
To illustrate what I'm saying:
Say you take out a loan on a house for $400k at a rate of 4.72% (current average).
To pay down the home over 30 years, your monthly payment would be $2,079.36. Total price of home ($748,570.46)
To pay it down in 10 years, $4,188.09. ($502,570.45)
To pay it down in 5 years, $7,497.29. ($449,837.33)
So, you would save about $300k in interest paid to the bank if you paid off the home in five years time. But let's play with the numbers some. Let's assume you have the $90k a year it would take to pay off the home in 5 years and that even after paying off the home you continue investing that amount for a full 30 years. (Let's also assume a 7% annual return on investment, low but unreasonable)
30 years, you'd have $65,015.12 to invest every year: End sum of $6,571,275.69.
10 years of $39,710.42, followed by 20 years of $89,967.47: $6,464,187.25.
5 years of $0, followed by 25 years of $89,967.47: $6,387,413.71.
As you can see, the difference really isn't that great in the long run. The lower the return, the better off you are at paying the home down early. If you do well in securities, you're better off lowering your monthly payments. Personally, I want whatever home I purchase paid down early for the intangible reasons of being able to take the hit if I ever lose my job, and making a prospective move much easier.
"Ah, you miserable creatures! You who think that you are so great! You who judge humanity to be so small! You who wish to reform everything! Why don't you reform yourselves? That task would be sufficient enough."
-Frederick Bastiat
-Frederick Bastiat
