QUESTION: My wife and I are both 23 years young. A year and a half ago we purchased a town house with a 30-year mortgage. We are thinking of moving in approximately three years. Would you consider it wise to accelerate payments in this case? In the event of a sale would my wife and I accrue profits reflecting these additional "principal only" payments?
ANSWER: I don't have the sort of crystal ball that can tell me whether you are going to have any profit in the sale of this town house or not. After all, we're looking about three years into the future when, presumably, "Rambo IX" will be ready for release. But we can work out a "what if?" scenario that might help.
Let's say that you have a 30-year, $50,000 mortgage on your town house at 10% that calls for monthly payments of $438.79 (principal and interest only). Down the street, your neighbors, the Hatfields, have exactly the same mortgage. The difference is that, with the first payment, you started adding $100 extra to your monthly payment to principal. Not so with the Hatfields.
After five years (you've been there a year and a half and are planning to spend another three, so that's close enough) you sell--as do the Hatfields. How much "profit" either of you end up with is determined by subtracting from the sales price your selling expenses and how much you still owe your lender, right? Let's say that both your town house and the Hatfields' have appreciated to $60,000 and sell for that. Ignoring the selling costs, the Hatfields will walk away with $11,714 because they still owe their lender $48,286 of the original $50,000 loan.
And you? You'll walk away with $19,457 because you only owe your lender $40,543. That's makes you $7,743 better off than the Hatfields in just five years--during which time you will also have paid your lender $1,744 less in interest than the Hatfields have.
It's a hard way to build up a nest egg--paying out a cool $438.79 a month on your mortgage and seeing a fat $23 of it building up your equity in the home. That's the average reduction of principal in the first year of a 30-year, 10% mortgage on a $50,000 home. By painlessly accelerating principal payments you can save thousands in mortgage interest, build up equity quickly and lop years off your payoff time. Our leaflet, "Free and Clear: Getting the Mortgage Monkey Off Your Back," explains how. Send a long, stamped, self-addressed envelope and $2 to cover costs to Don Campbell, P.O. Box 80260, Phoenix, Ariz. 85060