Quote:
Originally Posted by bossku69
Since you seem to be on the ball with finances and money, I'm questioning what my accountant told me (and this does not mean I need a new accountant).
I have a 30 year mortgage at 5.125%. If I pay an additional $94/mo it will get paid off 4 years and 1 month sooner. $194/mo will get paid 7 years 5 months sooner.
Personally, I think it would be best to pay it off quicker, no? I don't plan to live in this place until I die, most likely selling it in 7 or so years to move to a bigger place so I'd want to have as much equity as possible.
However, my accountant told me in doing so, I loose interest that I can claim each year, but I don't think that really matters unless I plan to live here for the next 29.5 years right?
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Don't think of this as paying it off sooner, you need to look at it as if I pay "X" number of years it will cost me "x" in interest payments. You have to pay principle no matter how long or slow you pay it back, you still going to pay 100% of principle. However, you can control how much damage they bank will do to you by charging you interest. You can control how much you will pay in interest by adjusting the length of time you borrowing the money and paying it off.
"loosing interest" that you can claim for taxes isn't a bad thing, because it means you paying less in interest. You don't want to pay more money in interest payments just to get write offs. An accountant is wired to think on how to help you reduce your tax burden, not help you save,invest, make money.
Being able to use the tax deduction is a benefit to owning a home (vs renting) but not a reason to paying tons of money in financing if you don't have to.
I would do this, go to
http://calculators.interest.com/cont...ly-payment.asp and play with the numbers. Put in the loan amount and interest rate you paying. Try it at 30 years and make sure it confirms what you paying now so you know you got it right. Then put in 25 years, 20 years and look at the monthly payment. Also click "Show Amortization Table". This will show you how much you pay back in interest depending on how many years it takes you to pay off the mortgage.
200K - 30 year mortgage at 5.125% = monthly payment: $1089 total interest paid: $192,252
200K - 25 year mortgage at 5.125% = monthly payment: $1184 total interest paid: $155,313
200K - 20 year mortgage at 5.125% = monthly payment: $1334 total interest paid: $120,235
It comes down to this... how much are you comfortable a month paying. In the example above if you can swing $1334 a month vs $1089 you will save 72K over the next 20 years in interest payments.
99% of the time it is not wise to spend money just to get a tax DEDUCTION. Send me $1 I will give you .25 cents back ;) You would be better off not spending the $1. Now tax CREDITS are a different story.
The other thing to take into account since your interest rate is pretty low is.... do you feel confident that you can take that extra money and make more than about 8% return with it ? If you can then pay the min a month and invest the difference. If not, the safest and easiest thing to do is pay as much as you feel safe doing each month, save a ton on interest payments, and build equity in your house faster. If you need a loan in 5 years you will be able to get a HELOC if you been paying it off on a 20 year amort schedule, vs a 30 year. 5 years in on a 30 year repayment schedule you will have very little principle built up and likely wont be able to get a loan unless the value of your house shot up a lot.
Accountants are rarely the best people for financial advice, they look at things in the past mainly, and only look at one component, how to save you taxes and not a holistic approach taking everything into consideration.