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Is it wise to try to pay off a home loan quickly in order to save on interest ?

I am planning on buying a home for 63,000 dollars I have about 35,000 dollars saved up in my bank account is it wise to try to pay off the house as quickly as possible in order to save on interest? I live at home with my parents so I am buying the house as an investment. I plan to put about 25 or 30 thousand down on the house and leasing out the house and I am going to try to pay it off in about 2 years….Is it wise to do this or should I just give a small down payment on the home and just save my money….Banks don’t pay that much on interest 4 or maybe 5 % at most, but I would be gaining about 200-250 above my monthly payment on the loan if I gave a large down payment because my payments on the home loan would only be about 400 dollars and I would be renting out the home for about 650 dollars….Is it wise to put a large down payment and try to pay off the home quickly…Or should I just give a 20% down say about 12,000 dollars and then try to pay it off later when I’ve saved up?

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50 Comments

  1. Level Eight says:

    Yes. Pay it off as soon as you can.

  2. aaron says:

    As long as there isnt a prepayment penalty on your mortgage.

  3. Tonda S says:

    It is very wise to payoff fast..but you lose in equity. I would talk to a mortgage officer at the bank. Maybe 5yrs is a good amount to gain equity.

  4. math_prof says:

    It depends on a lot of factors. Based on what you have said, I would probably put down the larger down payment. By paying down the principle more quickly you build your equity faster.

  5. Dave C says:

    I would find a good financial planner and a good mortgage broker. I put 20% down and finance the rest of the home, invest the rest of your cash. Read the following book or do some more research, heck Warren Buffet, Bill Gates, and most any mortgage broker keep their homes financed at 70-80% Combine Loan to Value (CLTV) and interest only loans at that.

    Ordinary People, Extraordinary Wealth: The 8 Secrets of How 5,000 Ordinary Americans Became Successful Investors–and How You Can Too by Ric Edelman

  6. mmorganloans says:

    One way to help pay off a home and able to gain equity and build your credit score is to send and extra one to two hundred dollars a month towards your mortgage payment. By doing this it will take 6-8 years off your payment. But double check with the lender to make sure that there are no pre-pay penalties by paying your house off early. It could cost you anywhere from $3000-$5000 plus.

    Are you looking into investing into more property? If you plan on buying more homes in the future and either sell or rent them out, keep payment on this home for at least 2 years. Make all your payments on time so that when you do go get another loan the lender’s like to see that the mortgage was never late and it won’t be too difficult for you to get a loan.

    Some lender’s will only give you up to 5 loans for properties for investments and some do not care. You can contact the HUD; Housing Urban Development, in your state for more info on home owning and investments.

    Also, be careful if you are going to charge more money for rent on your mortgage; ex: your payment would be $400 and you want to charge $650 for rent. I know that where I live, if you charge rent more than the mortgage payments you have to claim the additional money to the IRS as income. I believe that it applies in the US, but I could be wrong. Contact the Attorney Generals Office in your area to get more info.

  7. gri204 says:

    It good to pay the larger amount, however make sure you have cover all your expenses before releasing such a large down payment. You will have instant equity in your property so you won’t be losing anything. I view the profit from the rent as your net profit minus your expenses. You will receive an immediate return on your investment, especially if you already have a tenant for the house. Great job!!

  8. mortgage help says:

    Put your 20% down, and use your money to buy more real estate. Before you know it, you will have multiple properties under your belt and be wealthy years down the road.
    help@choicefinance.net

  9. cookiesmom says:

    i would say that your biggest mistake here is leasing…..i dont care how much money in advance you collect for a deposit…..your home (and yes it is yours) will not be taken care of the way you want it to be kept….stains on carpet, holes in walls/ceilings, general bug problems, unkempt landscape….i just dont think i would trust $65K to a total stranger!….i’d put the $12k down and then in 6 months pay a curtailment continue and pay another until youve exhausted the original funds

  10. ladida says:

    It is fine to go ahead and try to pay as much as yopuo can if you have the money. But also try to make sure you have enough emergency money. When you are renting out the home, you have no idea how well the leasor is going to take care of the home, so there can be some damages. Interest is always money, y pay out money that you do not need to. Just make sure also that there is no penalty for early payment, etc. Any loan after a year or 2 will help build your credit score. Good luck!

  11. trigam41 says:

    There’s not much difference between putting the $35k down and using it to pay off a large portion of principal in a month or so (except for the interest accrued between funding and payoff).

    Unless you can invest the money at a higher interest rate than the mortgage, I would put the $35k down.

  12. Chris T says:

    I have a few different options. 1st the 35 grand you have, at what interest rate is it growing at? if you are make 10 to 12% you might not want to touch it. It is much different collecting 10 to 12% than paying 5 to 6%. Also if you are living at home w/ parents you should have your money in other money market accounts where it can grow more aggressively. 2ND if you correct the 1st part the comparison will not even compare. If you make 200 a month off the property only putting 20% down you will still be in a win win situation. It may not look like it now but the interest you pay will be tax deducible. And most of all if you are wanting to put down more money make sure to buy down your points to have a cheaper interest rate. Good Luck.

  13. Kainoa says:

    I would check the housing market, if you are seeing a rapid rise in prices in your area, try to pay off and sell as early as possible.

  14. Erudite says:

    It’s wise to pay off any debt as quickly as you can. Interest on any debt is higher than what you would earn on an investment. And even though the house would be considered an investment, or asset, the mortgage is still a debt.

  15. pebble says:

    My father actually just went through this. He inherited $250000 and owed 60000 on his house. He considered paying it off so as not to have that payment but after talking to a broker, decided to keep making his payments because the amount of interest he was being charged on the house is less than the amount of money he could gain on the same sum of money. His broker has put money into many different things some of which pay up to 10%. I don’t remember exactly what his mortgage rate is but I do remember there was a lot of profit to be made by holding that sum of money and gaining interest on it over paying it off at once to save on interest. Talk to a broker, they will be able to help you decide what is best for you.

  16. Polymath says:

    Do you have credit cards, a car loan, or other interest debt that could be higher than a home loan? Pay that off first, more bang for your buck.

    If you are buying a house as investment property, that interest is deductible against income, which is also good. This doesn’t mean that you shouldn’t pay off the loan, but it might help you with your priorities for the money you have saved.

    My strategy would be to put 20% down, and having the rental income cover the payments. Then I keep a nest egg aside to cover repairs or legal expenses (what if you get sued?)

    Banks don’t pay much interest, but you might want to consider putting some savings into a stock or bond index in order to diversify, and create better gains. Keep some in a money market or savings account in case you need it.

    If you are risky and unafraid of going bankrupt, you could also buy a second $60,000 house with the extra money and lease it. That way, you are buying two houses instead of just one. This is extrememly risky, and I wouldn’t recommend this if you don’t have the regular income to pay both mortgages without renters. But you can always roll the dice…

  17. Candy Mamii says:

    yes

  18. Intellect says:

    Of course, it’s extremely wise, your home is the most important investment you’ll ever make and people have to work for so many years to pay off a house, the bank ends up making a killer on the interest, at the end of the day if you were to keep the loan for lets say 30 years (for regular conventional loans) you’d be paying twice the amount of the amount that was financed to you, the most fortunate people are the ones who own a home free and clear, like my mom, so by all means pay off your home asap, you won’t make the bank rich and will have saved a lot of money. It’s one of the wisest things to do if you have the means go for it!!

    Tonda is incorrect you would never lose equity by paying off your home sooner, it has nothing to do with the market, the only way you would lose is if your mortgage loan comes with a hard prepayment penalty, which means you pay 6 months worth of payments for paying off the loan earlier than the term established, like 2 or 3 years, it doesn’t seem that you’ll be getting this type of loan anyhow, just wanted to clarify that, and what you are doing is very wise, try paying for things in full, I bought my car cash and I love not having those payments, the people in the finance dept. were mad and persistent, they said keep your money, for investments, blah blah, blah, I said no thanks, I already have that aside. They were mad, they make nothing of course.

  19. lil_viet_soja says:

    if you have the moeny. and make sure you have enough money for food and some othe stuff.

  20. sarajane14207 says:

    ALWAYS!

  21. vanamont7 says:

    As opposed to a loan shark, yeah!

  22. Ken M says:

    Really depends on how much risk you are willing to take. A 30 year loan will cost you at least 2.5 times the price that you paid. On the face of it, that looks bad, but you must consider your financial situation. Money you collect as rent is taxable, but the house is depreciable over it’s useful life. This is a complex issue to address in general terms, but I do this: Save 6 months of your salary for a rainy day , and invest the rest. If you pay it off, consider owner financing and sell it. Renting is risky.

  23. two_eighty_eight says:

    Yes, put as much reasonable down as you can but make sure you still have enough to overpay the minimum payments. It’s also another good idea to make a minimum payment every paycheque if it’s reasonable to you. Bottom line, never pay the minimum.

  24. Xavier T says:

    Pay it off my friend you won’t reget it.

  25. CowboyBill says:

    It is ALWAYS better to pay off and own a home/house vs being leveraged in finance. So-called high dollar money gurus will crunch numbers and throw stats at you all day trying to make you believe you should always remain in debt, i.e; “you need to finance a home for the tax write-off”. God, how many times are we going to hear that one? If you are so interested in a tax write-off then calculate what the interest would be on a mortgage and donate that amount to the Red Cross or your church — you get the EXACT benefit tax-wise yet no financial advisor ever tells you this. One more thing — there is this this thing called ‘risk management’, and you HAVE to use this in your financial calculations when dealing with large numbers (like the purchase of houses). Less risk = more profit, always and forever.
    Check out this guy if you haven’t already: http://www.daveramsey.com. He is the genuine article when it comes to money and how to keep it.

  26. mss04 says:

    The advice I usually give is do the 20% down and consider “How long will you be saving in order to save the additionsl 20k. about 80 to 100 months. I would keep the rest in your investments. Buy another house.

  27. cheshire says:

    You should figure out this scenario with a your tax guy. Factoring the added income over and above state taxes (if you have) and mortgage.
    You may end up paying in Federal and state taxes or other. Get all your overhead costs and misc cost predictions and sit down with your tax guy…their usually very good with such and will give you wise advice. 😉

  28. Shashi says:

    House Value : $ 60000
    Dwn Pmt: $ 10000
    Loan Amt: $ 50000

    Rate Of Interest: 7.00% on reducing balance
    In case the repayment is taken over 15 years the monthly repayments shall be $ 449.41 and total interest paid $ 30,894.54

    In case the repayment is taken over 10 years the monthly repayments shall be $ 580.54 and total interest paid $ 19,665.09

    In case the repayment is taken over 5 years the monthly repayments shall be $ 990.06 and total interest paid $ 9,403.60

    In case the repayment is taken over 2 years (as you have envisaged in your question) the monthly repayments shall be $ 2,238.63 and total interest paid $ 3,727.09

    The amounts of monthly repayments and total interest would be different in case you opt for a larger down payment.

    Hope it helps in deciding

  29. DeadDwarf says:

    I have been paying extra money ($2000) towards my principle every month. It will be paid off in less than a year. I will be 26 with no debt and a house paid for. AND I saved about $90,000+ in interest!

  30. Rosie says:

    I think you should take all of this advice and then make an appointment with a financial planner who specialized in real estate investments and pay whatever the fee is.

    Also, I have always paid at least one extra mortgage payment a year, with a written note that expressly stated that amount was to be applied to the Capital only, thereby reducing the amount that remains to have interest applied on. Year after year, it quickly adds up

  31. Troy says:

    It is always best to put down the biggest down payment that you can and pay off any loan as soon as you can if there are no penalties.

  32. KMS7777 says:

    Simple answer… If you need a tax write off, keep the home loan.

  33. rjp4505 says:

    it depends on your lifestyle.

  34. vicki_waldner says:

    I would say paying it off as quickly as possible would be better and would really really build up your credit faster.

  35. gerrijack@sbcglobal.net says:

    would buy the house and live in it and than after two or three years you Can collect the equity that has accumulated, than you can do some repairing and sell the house for $100.000.

  36. friend says:

    It depends. Make sure your bank doesn’t penalize you for paying your loan of early. If not, go for it. In the end you’ll save a lot of money.

  37. Quociana L says:

    yes pay it off early. you will save on the interest and still make a profit off of the lease, unless you have some terrible tenants. its better to use the money to work for you now instead of giving it to the banks.

  38. newdnns says:

    I will just say pay about a year and keep doing that for the equity factor. I would try and put down about 20000

  39. amberzworld101 says:

    No, it is better to invest the money and let it work for you.

  40. benny says:

    Yes, if you have the money to pay off your loan fast, why not do it. With your equity, you can do business and make more money.

  41. kitty says:

    Of course it is wise to pay it fast to save on interests…

  42. piggrumpy@verizon.net says:

    Yes, pay it off as quickly as you can. You’ll save big money on interest. BUT also keep in mind that banks are in the busniess of making money. So as such make sure to READ ALL of the fine print. Some banks ADD penalties for paying off early. Doing so as they lose money they would make on interest. One thing you will notice is that 99 % of the monthly mortage is interest. VERY VERY VERY LITTLE goes towards the mortage itself.

  43. FILO says:

    Yes! By all means, you should. It’s not possible to pay your house off in two years, incase you are getting a loan. May be 5 or more years. But if your parents are selling the house to you directly, and that they had the house paid off then it’s possible. But then again, anything is possible as long as you’re doing it leagally.

  44. Oswin says:

    YES

  45. roadrunneralf says:

    Interest is front loaded. When you make mortgage payments, they are set at monthly, or sometimes bi-weekly amounts. Every time you make a payment, you then owe the bank less money. So your interest is lower.

    When you make a small down payment, the first few payments you make after that go mostly toward interest. The more you put down, the better it is for you. Especially since you plan on renting the house out. In the beginning, the renters will basically be paying your mortgage. Once you have paid off the house, all the rent goes in your pocket.

    Pay it off as soon as you can.

    Unless you plan on investing that money elsewhere at a high rate, It’s not gonna do you any good sitting in a bank account.

  46. jgmafb says:

    the faster you pay it off the faster YOU MAKE money.of course the loan company won’t like it but,you will.
    its like this;paying off a house that cost 20,000 means you’re out 20,000.but,if the property is worth more then you’re worth more,you may of just spent 20,000 but your net worth could be 50,000.now if you go buy several and try to pay them off in long term then the bal.is actually debt.don’t try that concept until you have enough money to cover house debts from bad tenants,etc…

  47. Zloar says:

    If you can invest your cash in things that would yield a greater return that what you save in interest payments, do that and make minimum payments. Otherwise do what you can to save on your loan interest.

  48. ronscott1951 says:

    What ever you save on interest, you’ll pay in taxes. It’s best to put real property on the longest payment plan possible. 30 to 50 years is best. Less taxes on income, or increase of value. Leasing a property out when you don’t completly own it will cost you in other taxes, so you become the middle man for the government. Buy the property at a long term, and rent it at your terms, don’t lease. You will lose some immediate funds, but the gov’t won’t get most of your profits that way, over a 30 year term.

  49. Jesus is Lord says:

    Okay, if you put 35,000 down and you finance the other 28,000 for 15 years at 8%…

    You will have a $267.58 payment. If you pay it off in 15 years, you will pay $20,164.40 in interest.

    If you put $5,000 down and finance the other $58,000 for 15 years at 8% your payment would be $554.28 and you would pay $41,770.40 in interest.

    However, if you go with option 1, and instead of paying $267.58/month, you made a monthly payment of $1267.58, you would pay off the house in just under 2 years, and you would save $17,775 in interest, paying only about $2,389 dollars in interest!

    Now, it gets tricky comparing these figures to leaving money in the bank. I am going to assume that you afford about $1270/month (about what it would take to pay off the house in 2 years). If you make a small down payment, I’m going to assume you put the difference back into savings ($1270 – $555), which is $715…

    You leave $30,000 in the bank, and you put $715 in the bank while paying your mortgage. After 2 years you will have $51,543.45 in the bank. While this might sound good, remember, you started with $30,000 of that, and you still owe over $53,600! While you may have made $21,500, you essentially have a -$2,000 net worth on the deal. If you pay off the house, however, you have a $63,000 net worth.

    Buy the house quickly if you can.

    ***EDIT***

    If you are wondering about whether or not you’d come out ahead over 15 years…

    I would suggest you sell the house when you have it paid for. Let’s assume you get exactly what you paid for it. Do it all over again. Buy another house, putting $30,000 down, and put the other $33,000 in the bank. Pay off that house in 3 years, sell it, and now maybe you buy 2 houses, still leaving some in the bank… This is the best way (taking speed and saftey into consideration) to become a millionaire!

    ***EDIT***

    There are several people here that mentioned taking a deduction on your taxes. While this is nice, it really isn’t that big of a deal, unless you are a millionaire and you are looking for a tax shelter. Even then, you would want to do this with a very expensive house, not one that costs $63,000. You will STILL be able to take a deduction off of your taxes for the two years that you make payments. There was also someone that said your taxes on the house will be equal to the interest you save. This is simply not true, not even remotely. Since this is your first house, and a relatively inexpensive house, there is no reason that paying the house off in two years does not make good sense.

  50. kamsmom says:

    NO because you can deduct your interest on your taxes.

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