Maybe. All the disagreement seems to be whether the theoretical longest term (paying off the mortgage eventually) is considered, or the more reasonable one that the mortgage will be fully repaid as part of a new home purchase within some much shorter term.
If the long term is considered, there’s no question that paying down the principal will have the greatest financial effect. However, in any case that does not involve paying more than 10-12 years on the mortgage, reducing the truck loan is more valuable.
I don’t think the minor difference in interest rates makes much difference, given that one is for maybe $25k over six years and the other is for probably ten times as much over 30 years. Very apple-and-orange situation. But the choice of “best” all depends on the OP’s long-term intentions.
No further argument, although I think some people did argue for paying the mortgage instead. The interest rate is a compelling point on which to base the choice, but you have to look at the actual dollars involved, too - if it’s $50 in 12% interest vs $500 in 4%, the former gets a lot less urgent. IMVHO, of course.
I’d say 75% of the refund on the car loan, and 25% on the mortgage. I agree with everyone else who says put it all on the car loan, but putting an extra payment on your mortgage early on reaps huge benefits later on.
As an aside, are you making monthly mortgage payments? Just switching from monthly payments to bi-weekly payments will take years off your mortgage.
The “magic” of a biweekly payment is highly overrated anyway. It only takes years off of your mortgage when it increases the amount you pay. If you go from 12 payments of $1000 to 26 payments of $500, the math is simple: instead of paying $12,000, you’ve paid $13,000.
But if the 26 payments are set up to be 461.50, then you’ve still paid only $12,000 in the year. The only difference then is that you’ve saved 2 weeks of interest on the first payment each month.
For people who are paid on the same biweekly schedule, I can see it being convenient to have the timing of the mortgage payment be the same as the paycheck. They just need to keep it in perspective - they’re paying it off faster only because they’re paying it off faster, not because they’ve figured out some clever loophole that’s not available to monthly payers.
I think you’re off down a wrong slippery slope with your logic here.
The amount of interest paid on a large 30-year loan is so enormous and disproportional to the principal that even a modest acceleration of repayment will save very large amounts in the long run. It’s a car loan or small personal loan turned up to 11… or 13. Paying ahead on a smaller loan doesn’t gain very much, but paying even a few percent extra (that goes to principal reduction, not fixed loan terms) has sizable compounded value.
As with all prior comments, it really, really depends on whether you intend to pay off the mortgage or regard it as a distributed lease for some shorter period of time. There isn’t much advantage in paying ahead if you are reasonably certain you will roll it over to another 30-year loan in 5-10 years. But if your goal is payoff, every bit really does make a huge difference in the end.
ETA: There’s also a difference between payments on a regular loan schedule (formal bi-weekly payments) - you are correct-er there. A slightly more frequent payment schedule based on the overall loan terms doesn’t gain much traction. What you want to do is make EXTRA payments that specifically REDUCE THE PRINCIPAL. That moves things along by leaps and bounds. If the loan is structured so that extra payments are accepted only within the framework of the regular loan terms - e.g., you make an extra double payment and it moves your payment schedule forward two months - there’s no gain at all.
Unless you have a prepayment penalty then you can add extra principal to your payment every month and get the same effect (that is, same effect as dracoi’s case #1 - you actually pay extra principal). The only catch is you have to make sure the extra payment goes to principal and not next months payment. But should not be too complicated, with my bank I can go online and there is an “Additional principal” box on the payment screen.
I agree with Amateur Barbarian here - our bi-weekly payment is set up so we make 26 payments per year. For example, if we pay $600 every two weeks, we would pay $15,600 per year. If we paid $1200 per month, we’d pay $14,400 per year. I can’t remember the exact terms, but it’s going to take something like seven years off the length of our 25 year mortgage. There are two months each year where we have three payments instead of two, but you get used to the payments coming out every two weeks.
If we had set it up so we just made 24 payments per year, I don’t think that would make nearly as much difference.
As sugar and spice says, you could make the same basic effect by making some extra principal payments on your own a couple of times per year. Mortgages are very interest-loaded at the start of the mortgages, so making any extra principal payments you can early on magnifies the benefits over the long term.
The expectation over the years is that the house will be an appreciating asset. While the truck will continue to depreciate. The truck also has a higher interest rate. So I would pay the truck off first.
Another thing to consider to pay the truck off first. If you were to apply for a new loan for some other purpose and you listed your assets, listing the truck at some point will have a value that is less than the balance due on the loan.
There’s no question that a vehicle will depreciate (although some do so very slightly). But I wouldn’t bet on RE being an appreciating asset - level, perhaps, within 10%, but heavy betting on guaranteed appreciation is what sent us off the cliff six years ago.
Again, not always. Those who buy vehicles that depreciate rapidly (especially if driven a lot of miles or used hard) on too high a loan (over 80%) and extend the loan too long might see some inversion, but it’s far more normal to see the loan value stay somewhere below vehicle value, and far below in extended years.
I’m not saying you’re wrong in either instance, but you’re extending somewhat limited cases to be common.
Making up some numbers here (and not sure I’m 100% correct) but… Let’s say your mortgage has a principal of 200,000. your payment is 1,000 a month and 900 of that is interest. That’s 30 dollars a day (assuming a perfect 30-day month), or 100 dollars of principal per month.
Cut that in half and at the end of 2 weeks, you’ve accrued 420 in interest and you make a 500 dollar payment. Now your loan balance is 199, 920 and the accrued interest on that winds up to be 29.99 a day. In another 2 weeks you pay 500 dollars, of which 419.86 goes to interest, and 80.14 goes to principal. You’ve reduced principal by 160.14. Let’s say that’s enough to reduce your daily interest accrual to 29.97 a day.
If you were paying every 15 days, your 500 dollar payment would pay 450 in interest and 50 in principal. The second 15-day payment now pays 449.85 in interest and 50.15 in principal. So you’ve paid down 100.15 instead of 100.00. Let’s say that’s enough to reduce your daily interest accrual to 29.98 a day.
f you were paying monthly, you’d pay that thousand at the end of the month, and your principal would be reduced just by the 100.00. We’ll say that’s enough to reduce your daily interest to 29.98 a day (same as the every-15-days approach).
Things will snowball after this. The every-14-days approach will snowball fastest because you’re significantly increasing the amount of principal you’re throwing at the loan every year. The every-15-days approach will speed up a little - probably won’t make a huge difference since you’re not really prepaying by much. But it might shave a few months off the loan.
You could play around with that in Excel doing stuff with interest calculations and see what your principal and interest payments would do going that route (paying 13,000 a year), or 500 twice a month (paying 12,000 a year), or 100 once a month (paying 12,000 a year). The last two are probably going to come put pretty close in the long run.
All that said: we usually will through our tax refunds against consumer debt or whatever, but sometimes “found” money goes to the mortgage. Like we got a small escrow refund this year (about 100 dollars) and I put that toward the mortgage, and we always prepay at least 10 dollars a month. It won’t save a huge amount, but it’s kind of a psychological thing.
Just for giggles I went to the mortgage calculator at bankrate.com, plugged in my mortgage’s current principal and remaining term (27 years, we refinanced just 3 years ago) and plugged in a one-time payment of 120 dollars right now (which was about what that refund was).
It shortened the term of the mortgage not at all, but did cut the final payment by 400 dollars. You could use the same tool to see the effect of a one-time payment on the car loan (how much it would shorten that).
