10/11/2011

Accelerate - Vehicle or Mortgage

Over Thanksgiving I had the opportunity to talk to my family a lot about our upcoming Mortgage commitment - fixed or variable and accelerated or standard - there are so many options!  What we're stuck on right now is once everything is settled in the new house and we've paid off our credit card debt - should we put any un-allocated  money we have on the mortgage or on the Escape payment.

I was originally thinking that we should go with the higher interest rate and smallest debt - the Escape.  It would free up $388.62/month which we could then add to our RRSP's or Mortgage or life..or some combination.

My mom suggested that we consider putting any extra money towards the Mortgage because of the effect of compounding interest over thirty years.  Making additional principal payments have the biggest impact the sooner they are made into the mortgage (the same rationale is used when contributing to RRSPs).

Have you ever had to make this decision, which way did you go and how did you decide?

Jordan just heard me talking about this post with my mom and he voted for the higher interest rate...and while that was my initial feeling to - I'm going to give my mom's idea a chance and put the math into excel.

This first chart shows the savings after three years, but does not account for the long term savings of paying off mortgage principal early on - unforutnatly, I can't figure that out so maybe you can help?

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12 comments:

  1. We paid off our LOC at 6.5% BEFORE making additional payments to our mortgage (5.5%). Once our LOC was paid (8 months), we started paying $200/month extra onto our mortgage. If we keep it up, it will make a difference of 3 years on a 20 year mortgage.

    I think you'd probably save MORE by paying any extra money onto your mortgage, but I think the psychological benefit of getting the car loan paid off is a bigger win and will keep you motivated and focused. Most people need to see the benefit of their day-to-day sacrifice in order to stay motivated and encouraged. So my vote goes to paying off the Escape!

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  2. Thanks Makky's Mom! There's so many decisions to make!!

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  3. I would work on getting the emergency fund up to 8 moths worth of expenses, pay off the car ASAP. Save as much as you can (outside of the 8 months emergency fund) and until the car is paid off pay a yearly lump sum into the mortgage. After the car is paid off you can double the mortgage payment every pay or as often as you can afford it. We paid off our mortgage in 8 years instead of 30 by doing the above.
    Good luck

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  4. I agree with Anonymous. Also, the feeling of having no car payment would be great!

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  5. Maybe I'm confused by the stuff you said at the top of the post. Are you already doing accelerated bi-weekly payments on the mortgage?

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  6. Hi Rachel - sorry if I was confusing.

    We're not doing it yet - but we are planning on accelerated weekly payments once we take possession :)

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  7. Build EF if not done yet.
    Pay off car. (Remember that once you pay of your car, the amount required in the EF goes down :) )
    Put the amount that used to go towards EF and car towards mortgage.
    Yes, compounding is important, however if you put the money you used to put towards the car towards your mortagge after 3years (assumption on # of years), it is only a 3-yr difference and not a 30-yr difference.

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  8. I think you should be able to use the debt snowball calculator here to figure out the various math - http://www.vertex42.com/Calculators/debt-reduction-calculator.html

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  9. Kill the car loan then mortgage. Having an extra payment to worry about each month is emotional tiring :(.

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  10. I'd say knock out the car first because it would free up some money when the month comes plus on either one you will be saving so you shouldn't really stress which one you are saving on. I just think with the car loan freed up you will be much more at eased.

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  11. Thanks for the clarification. I agree mostly with the above. Get that EF up to a healthy level and pay off that depreciating asset (car) as fast as you can. Then put some of your money/month towards increasing your mortgage payment and some towards savings for your future vehicle. That way you won't have to take out as much of a loan next time around.

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  12. PS. I keep getting an error message when I come to your page. Something about networthiq's security certificate.

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