I have a 120k loan at 4.67%
and paying it off at about 600 bucks per month.
If I have 25k sitting in my bank doing nothing, if I use
that to help pay off my loan, will it lower my interest rate
and help or does it not make a difference?
Would I be better off just investing that 25k to make some
money each year?
Your interest rate is your interest rate. You lower your balance by paying it. You lower your interest rate by renegotiating the loan.
However, making a large lump sum payment directly to the principle should drastically reduce the amount of interest you ultimately pay.
If you can earn better than 4.67% by investing it then do that.
If you can’t, then use it to pay down the mortgage.
This. With the added complications that (a) depending on your tax situation, the mortgage interest you pay may be tax deductible, effectively “lowering” your interest rate (especially at the beginning of the mortgage), and (b) it’s a really good idea to have emergency cash available, I wouldn’t use my last $25k to lower my mortgage and have no emergency funds.
Keep in mind that that $25K is not just doing nothing. It’s waiting for an emergency, like a new car if your current one is totaled. But I know your feeling. I have about $63K left on my mortgage principal and about $52K in savings. It’s really only a matter of time before I use it to pay off the last of the principal. I’ll just wait until the principal is lower and the savings are higher. But I do budget 6 “extra payments” per year. These is where I pay double the payment amount with the entirety of the “2nd payment” going to the principal. If I keep this up, I’ll have the total paid off in 3 years instead of 5 (and paying a 15-year loan in 8 years).
There is utility to having access to $25k. You might have an emergency. You might need to buy a car. You might lose your job. It’s going to be harder to get that $25k back out into cash from a home equity loan.
So it’s not just the interest rate vs rate of return on investment.
ETA: Ninja’ed multiple times.
Yep, that’s the right answer. If you can beat your mortgage interest rate while investing your 25k, then do that- in essence, you’ll make your investment rate - your mortgage rate on 25k. Which is not much, but it’s not zero either.
If you invest it at a lower rate, you’re actually paying to invest that money, which is bad. If you pay your mortgage off by 25k and could have invested it at a higher rate, you’re leaving money on the table.
Plus, you’re more liquid hanging onto that 25k like @Hypno-Toad and several others point out. That’s not a trivial concern.
I actually was in something of the same situation with some small amount of inheritance money and my student loans. Since my student loans were at 1.5%, investing the money was a no-brainer, as nearly everything outside of a CD would make more income over time on that inherited money.
So if I make a lump sum payment of 25k then me paying back 95k vs 120k will still have me paying the same rates each month but ultimately over a shorter time-span thereby saving more money in the long run? Am I thinking this correctly?
If you’re paying off $120k at 4.67% in $600 monthly installments, it’ll take you 389 months to pay it off, paying a total of $112,729.74 in interest.
If you drop a $25k lump sum into it right now, you pay it off in 248 months, paying a total of $52,923.32 in interest.
wow ! that’s a huge reduction 
It definitely sounds right to drop that 25k towards my loan repayment!
As for everyone warning me about having emergency money / liquid money etc.,
I definitely understand. For me, I save up money quite quickly. I’ll have 25k saved
up again in 1 year. I was just wondering what to do with my 25k just sitting in my bank
doing nothing. So does this seem like a good plan then to drop 25k towards paying off
the principal? I also think I can increase my monthly repayment from 600 to 1200 a month?
So basically, if I can increase my monthly repayment and pay off my loan faster, is better than to
take your time and pay it off over 30 years? Are the loan guys tricking us into making us repay it over a long time at lower monthly payments because they know they will make more money off of us??? They don’t want us to pay it off as fast as possible?
BUT
Right now you can open an account at Fidelity and get 4.99% in their money market. It’s free. And you retain near instant access to the money.
So as long as rates are up there, that’s what I would do. If the MM rates come down then you could reconsider.
Be sure to plan this out. But yeah, paying down the principal early has eliminated 22 payments from my remaining debt for a savings of almost $27K. And with my continued extra payments, a few more will be eliminated, which also shortens your debt as well as saves money. I really can’t wait until the insurance agency isn’t holding me by the mortgage.
Mortgages are calculated monthly. So paying more each month will reduce the total interest you pay. Making a lump-sum reduction will also, but more and faster.
But keep in mind (as I mentioned in another post) we’re in a time of relatively high interest rates, and you can do much better than 3.67% without risk. Much better with just a little risk.
As Munch’s calculations showed, as it sits right now paying $600/mo. it’s going to take you over 32 years to pay back that loan. That’s what’s killing you in interest. If you can bump your payments to $1200 you’ll save over $80K in interest.
Ok thanks guys, I am getting the clearer picture now. I better bump up my monthly payments since I am able to and to pay it off as fast as possible (within reason) is overall better to save money from paying so much interest!
3 month treasury bills are yielding 5.25% – you could put the money there for three months while you think about it and earn more than you’re paying in interest.
Or, the Fidelity account mentioned above, which might be easier than rolling three month bills.
Your mortgage rate is actually very low compared to current rates, so I’m not sure it’s a good idea to pay it down more quickly.
Yes. Absolutely yes. But they aren’t “tricking” you - the numbers are all there for you to see.
As for what to do, the answer is always dependent on your own personal goals, risk tolerance, and money management skills. Do you want to keep up on the daily fluctuations of a money market account’s interest rates? Are you comfortable with the short-term fluctuations of the market? Does the prospect of a surprise emergency expense scare you? These are all things to consider.
Thank you. I think important think to note is that I’m well supported by my parents who are retired. So they do help me a lot and I don’t have to worry too much about expenses, which is why I can save up a lot of money fast even though I don’t make a lot. I think if I was living alone full-time and only had myself, it would be more worrisome but since my parents are taking care of me quite a bit, I feel safer.
Here’s a basic loan calculator where you can play around with all the variables to see how they all affect your total interest paid over the life of the loan. Gives some eye opening insight into those long term loans they push with the enticing low payments.
There’s no tricks. You can get a shorter mortgage term if you want; my mortgage has a 15-year term, and even shorter is possible. Shorter terms incur less risk of default to the lender, so the borrower typically can get a lower interest rate. The downside of a shorter term is that you’re paying the principal back more quickly, so your monthly payment is likely to be considerably larger than it would be for a mortgage with a 30-year term. 30 years is pretty typical because a lot of people can’t afford a 15-year term for their mortgage, at least not until they’ve gotten well into middle age and can refinance the now-smaller balance into a 15-year loan with a payment they can handle (presumably by this time in their lives their paychecks have also grown).
As others in this thread have noted, there’s a balance to be struck between paying down a debt and putting your spare cash into investments that generate wealth. A simplistic analysis says that if you find an investment with a rate of return greater than the interest on your debt, then it’s unquestionably in your financial interests to just pay the bare minimum due on your debt and put the rest of your spare cash into the investment. The flip side is the position of debt-phobic people who insist that any and all debt is bad - even if some is necessary - and that you should endeavor to pay off your mortgage as quickly as possible, foregoing all daily pleasures and saving for the future until your debt is obliterated. Everyone gets to choose their own path, but my wife and I are somewhere in the middle: we have a 15-year term, and we pay somewhat more each month than is required, but we’re still investing plenty and wouldn’t dream of selling wealth-generating assets to pay off our mortgage.