10/11/2011

Accelerate - Vehicle or Mortgage

Posted by with 11 comments | in
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?

11 comments:

  1. Jessie11 October 2011 at 07:19

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

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  2. Anonymous11 October 2011 at 07:20

    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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  3. Michelle11 October 2011 at 07:45

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

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  4. Rachel11 October 2011 at 08:39

    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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  5. Jessie11 October 2011 at 09:22

    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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  6. Anon 211 October 2011 at 13:27

    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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  7. Jenn11 October 2011 at 15:40

    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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  8. Anonymous11 October 2011 at 19:55

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

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  9. Rafiki11 October 2011 at 21:05

    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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  10. Rachel12 October 2011 at 19:43

    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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  11. Rachel12 October 2011 at 19:45

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

    ReplyDelete

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