Eliminate Mortgage Debt

Do not try to pay off your mortgage unless you have paid off other higher interest loans, especially credit cards.

Should a person save for a major purchase like a car, or pay down their mortgage and finance the car 5 years from now. I picked some average home and auto values, and this is what I found out:

Mortgage Balance: 146,000
Interest Rate: 5.75%
Years Left on Loan: 28

Interest to be paid over next 28 years with no additional payments: $148,066.75
Interest to be paid over next 28 years with additional payments of $500 a month for only the next 60 months: $79,849.72
Interest Savings: $68,217.03

If $500/month is saved for 60 months at 3.5% interest you would have saved: $33,043.00
If $33,043.00 is financed for a new car for 60 months at 6% it would cost: $38,138.00
Interest Costs: $5,095.00

So, by paying on the mortgage instead of saving for a car:
you can save $68,217.03 on mortgage interest.
You will lose $5,095.00 on auto loan interest.
For a net savings of $63,122.03 !!

I would never have thought there would be such a big savings. Naturally you won't have as much interest expense to claim on your income taxes. I'm not able to estimate what this might cost, but I doubt seriously it comes close to $63,122.03 ! :)

Maybe there is some flaw in my logic, but this is how it appears to me. Before making a decision yourself, check with your financial advisor. We may have to consider a change in the way we think about purchases when we have a mortgage. Is anything I buy today with cash really being financed for 30 years since I could have paid on my mortgage with that cash instead?

You can download this cool amortization spreadsheet from here or you can download it where I got it at Office.Microsoft.Com . It will allow you to play what if scenarios with extra payments on your mortgage.

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