Q. We’re in the fifth year of a 15 year mortgage and have come into some extra money. How can I figure out if paying $2,000 extra will shorten my payments and is the best thing to do? We are paying 6% interest on the mortgage and can only get about 4% interest on any short term CD.
A. You didn’t provide us with exact figures on your mortgage, but consider this example. If you had 10 years, six months left at 6% and a balance of $70,000, your payments would be $750 a month for principal and interest. You’d finish paying the loan off in May 2017 at a total cost of $24,519 in interest over the next decade.
If you made a one-time payment of $2,000, you would finish paying your mortgage in January 2017 and you’d pay $22,825 in interest, saving yourself four months and almost $1,700.
To calculate this yourself, using your real numbers, use our loan payment calculator. Just enter your balance, the years left on your mortgage, and your interest rate. Then below, where it says "extra payments" put in your $2000 as a one-time payment and then hit "Show amortization schedule." Look at the "payoff date" and then scroll to the bottom of the amortization schedule and check the "total interest payments." That's your real payoff.
There are a lot of banks offering 5.25% or more on 6-month and 12-month CDs. Go to our comparison charts to find the best rates.
If you were able to invest that $2,000 at 5% over the same 10-year period you’d make about $1,300 in interest. You’d have to earn about 6.5% to match the $1.700 you’d save by making an early payment on your loan.
Q. I live in Miami but expect to leave the area in two or three years. Should I buy or rent a home? I don’t know how much of my mortgage payment will be going to the principal and how much to the interest. If mostly will be going the interest, then I might as well rent and not worry about insurance and taxes.
A. Renting probably makes the most sense.
Very little of your mortgage payments in the first few years go toward principal. Just hypothetically, if you got a $250,000 mortgage at 6% your first payment would be divided thusly: $248 toward principal, $1,250 toward interest.
After two years, you would have paid $29,643 in interest and still owe almost $247,000 in principal. The ratio would shift in late 2024. At that time you would start paying off principal in big chunks. But after only two years, your paid equity would just over $3,000.
Also, the housing market in Miami is a little soft after a huge run-up in prices over the past five years. One study we’ve seen by Local Market Monitor says Miami is the second-most overvalued market in the nation. It would not be surprising if prices fell slightly over the next couple of years, giving back 10% or 15% of that extraordinary appreciation. You certainly can’t count on being able to buy today and sell at a profit in just two or three years.
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