My mortgage rate is many times higher than the interest rate on any of my savings accounts. I can try to get better accounts like an Money Market or a Certificate but I'd have to drop like 100k, which I don't have, just to get a rate comparable to my mortgage.
My mortgage is young so its currently over twice higher than my other assets. $1k in a certificate gets me $50 in a year. $1k lump to my mortgage saves me $2k in future payments. $1k extra annually saves me $15k. If I kept reinvesting that certificate I'd earn about $4K over the same timespan.
As I see it, I should be dumping much money into my mortgage as I can afford right now. Maybe when the account gets smaller than my other assets that'll change. But for now the only thing stopping me is having some actual liquid savings.
paying off debts with higher or even equal interest rates as an investment is absolutely a better move. this is even true if the investment growth rate is guaranteed and slightly higher than the interest rate of the debt, because you pay taxes on interest income, but you do not pay taxes on avoided loan interest.
that extra principal payment is guaranteed interest savings the life of the mortgage too... few people can say they're gonna invest those extra payments and not touch them for 30 years.
play around with those amortization calculators to look at the savings in interest on extra principal payments. it's eye opening. if you look at what portion of your mortgage actually goes to principal in the beginning of a mortgage, you can imagine that if you just double that (if say your mortgage is $1000/mo and of that only $350 is to principal, to instead pay $1350/mo (so an extra $350 to principal) you will shorten the loan by probably around 14-15 years and cut out a fuckton of interest.
that doesn't even get into the psychological / material security aspect of having debts paid off for critical assets sooner.
I am a firm proponent of debt payoff over investment of that extra money unless the percent growth rate is crazy high compared to debt and it's guaranteed.
I got this idea by playing with one of the calculators from my lender. Everyone IRL tells me that investing is always the better option but I think thats just a default wisdom without considering my interest rates.
investing disposable income in stonks and financial instruments is also totally the move that serves large capital formations and "line go up" nonsense. paying down debt fucks them over. capital formations trade and speculate on mortgages as "assets" because they essentially buy them in the expectation that you will pay all the interest you owe over time, giving them a cozy ROI. they pretend the risk is delinquency or foreclosure, but in that case they get the house and can sell it, so they absolutely get theirs. the GFC was the only time they actually were in trouble because too many mortgages shit the bed at once for them to execute the logistics of foreclosure/sale and suddenly nobody was buying shit so the houses suddenly weren't worth what the loans on the books were. of course the government bailed them all out, so in the end the capital formations were saved.
anyway, another cost of not paying down the mortgage rapidly is that having low equity in the asset gives them the excuse to stack on bullshit like Personal Mortgage Insurance. typically, if your equity in the house is less than 20% they make you pay premiums to cover insuring your mortgage in case you stop paying. meaning, if you stop paying your mortgage, they are insured for the value by insurance you pay for! that's the real aftermath of the GFC, now we have to pay insurance to protect the lenders.
anyway, more calculation fun: to borrow $200k at 5% interest means paying back $386,511.57 if you pay it off on schedule over 30 years. if you throw an extra $200 to principal each month, you end up only paying back $274,351.06. also, to pay down the principle earlier in the mortgage is more effective at avoiding interest.
more often than not, if there's some investment opportunity earning interest on some security/financial interest greater than your mortgage, it is because some mass of workers / borrowers with less institutional power than you (bad credit, desperate circumstances) are getting the screws put to them even tighter than you are with your mortgage. or it's some wack "hey man, this bank in cyprus is paying 15% interest on deposits!" type of shit that is gonna implode and should be avoided anyway. to chase the larger growth over paying down your debt is typically stacking your chips on the downstream exploitation. it's literally how for profit banks work: borrow at 4% from the wealthy, lend at 5% to the poor.
Advices here have rightfully told you to pay off higher interest debts (ie your mortgage) before saving in lower interest saving accounts.
Only addendum I have is that, unlike savings accounts, money you pay into your mortgage is money you can't pull back out. Don't forget to keep at least a few months of emergency funds, and be aware of any upcoming large costs, before dumping all extra cash in the mortgage.
Paying off 6k of mortgage, then one month later having to take out a high interest loan for 6k for necessities, is not ideal.
If the interest on the mortgage is higher than the return you'd expect on anything (including reinvesting dividends etc) then yeah, put that cash into the mortgage. Maybe there's a market crash and fire sale that you'd miss by doing so, etc.
It's everyone for themselves to some extent so do your spreadsheet. It shouldn't be this way but it might save you a lot of time down the road for not a ton of time up front.
Also factor this in:
There is zero guarantee that the interest rate on your mortgage won't go up, unless you're on a fixed rate that you are on track to repay in full in time.
Yes, your investments may bring in some cash and you might do well out of it but if your mortgage interest rate increases that gain could quickly be gobbled up.
Paying your debts can be better than investing the payment money. If you're in danger of missing payments, can barely make the monthly, or your credit usage is too high, then it is better. If you can afford to make smaller payments and you have a better investment opportunity, then you should do that.
You have the intuition for the time value of money, paying a little now to keep from paying a lot later is good. Investing only works when you can buy a future payoff at a current discount. That payoff would have to justify the risk and not paying towards your mortgage. As you've noticed, not many low-risk opportunities are out there with a big enough payoff. So you're better off paying your debt to avoid interest. Basically preserve the money you have rather than try to grow it.
If you are unwilling to invest in
, then it absolutely makes sense to pay off your mortgage as quickly as is viable for your other savings needs. If your rate is appreciably higher than the interest on any savings vehicle available to you, the effective value of the money is better as you explain in your math; basically whatever money you put into your mortgage is a garunteed return of whatever your mortgage rate is. IF that's like some 7% bullshit then you're balling and no savings account will ever give you that much. Although I think the math changes if you assume you will refinance at some point.I don't have a 7% interest rate, thank god. But its like %5.75 and the default for my savings and IRA is 0.25%. Best is the 401k which is like %4. I probably should move my IRA over from my bank to whoever does my 401k because it looks like a joke.
How is your 401k so low? The one my work automatically puts it into is like 15% this year?
Maybe I'm reading the stats wrong. There's no equivalent fixed APY because its tied to
. it says %10 somewhere bit I read that as total overall not year total.
