Which would work out for you better after 10 years?

You have a $500,000 mortgage.

Traditional mortgage payment way: (lets use months instead of biweekly to make it easier)

Pay $2000/month for 10 years with a 5% fixed term interest rate.

Proposed way:

Pay $1500/month for 10 years with a 5% fixed term interest rate. But you keep the extra $500/month in a special account and at the end of the year you use the entire $6000 as a lump sum payment which comes off the principal.

Which way is best?

Is there an optimal amount to hold back each year to use as a principal lump sum payment or is it always best to max out on your monthly mortgage payment instead?

Originally posted by uzless Which would work out for you better after 10 years?

You have a $500,000 mortgage.

Traditional mortgage payment way: (lets use months instead of biweekly to make it easier)

Pay $2000/month for 10 years with a 5% fixed term interest rate.

Proposed way:

Pay $1500/month for 10 years with a 5% fixed term interest rate. But you keep the extra $5 ...[text shortened]... cipal lump sum payment or is it always best to max out on your monthly mortgage payment instead?

It's always best to max out on your monthly mortgage payment unless you have an account that gives you a higher return than your interest rate or if inflation is higher than your fixed interest rate.

The reason is that you do not pay the compound interest on the amounts that you were not repaying.

Originally posted by Palynka It's always best to max out on your monthly mortgage payment unless you have an account that gives you a higher return than your interest rate or if inflation is higher than your fixed interest rate.

The reason is that you do not pay the compound interest on the amounts that you were not repaying.

Originally posted by Palynka No, it wouldn't. Logic suffices.

I would actually tend to agree. Any money that you aren't paying as soon a possible, while interest is building monthly, is going to hurt your bottom line.

The inverse of this problem: paying a year's worth of principle ahead of time and forgoing payments for a year, WOULD help.

Originally posted by forkedknight I would actually tend to agree. Any money that you aren't paying as soon a possible, while interest is building monthly, is going to hurt your bottom line.

The inverse of this problem: paying a year's worth of principle ahead of time and forgoing payments for a year, WOULD help.

How much money do you save by paying the full $2000/month?

How much would you need to earn on your $500/month in order to make it worth your while to not max out your payment?

It makes sense if you can get higher interest in your savings account than your mortgage. But your mortgage company is unlikely to allow you to set up the underpayments, because the total sum owed will increase every month.

Local tax rates may interfere. Here the interest income is taxable, but the interest payment on a home mortgage is not. So the overpayment which reduces the principal (and therefore all future interest charges) is always the best deal here.