Interest Rate Comparison

By Bailey from norbert on Jul 16, 2010 | Reply

I think what you’ve missed in the math here is the assumption about how you calculate mortgage interest, I could be wrong, but don’t mortgages normally take their interest first and isn’t this interest pre-calculated? Check out this link to see what I mean. On a 25-year mortgage more than half of your payment every month is going to pay off interest for the first 15 years! Your number of 12k interest fees is way too high, b/c that not how it’s calculated.

If you’re in say year 2 of a 25-year mortgage and you pay down your 10k bonus here’s what you’ve done.
1. You’ve added 10k to the ownership of the house, i.e.: what you could use for a HELOC (which carries its own interest)
2. You’ve knocked off the last 10k you were going to pay on the home. (sometime in 2030)
If you have a 200k mortgage that last 10k is nearly irrelevant. You’ve shaved like 6-12 months off the mortgage using today’s dollars and you may have shaved minor dollars on the monthly payment (depending on your term). But you were going to pay that amount using 2030 dollars which are worth much less anyways.
The extra value of the HELOC is pointless b/c the banks charge you for the HELOC so you might as well have the money in an account and not pay them interest (unless you’re implementing the SM). Your house is both an investment and an expense. Try not to throw too much money at an expense.

As to where to put the money, there are several questions worth asking:
1. Do you have an “expense fund” for your home and your car. I know that you just finished paying down the car, but what are you with that extra money? The car and the home have recurring expenses on the scale of months and years, but if you put 10k on the Mortgage and then have to use Credit to repair a leaky roof next summer, then you haven’t made any headway.
2. Are you maxing out your RRSP contributions? Do you even need to? RRSP money is income supplementation, but it’s rotten deal when you can’t buy your Jag at 55 b/c everything’s in RRSP and the house.
3. Is there something else that could use all or part of that bonus? Do you have short-term investment opportunities available? Can you convert that 5k into something useful?
If you don’t have a home/car expense fund, I would put aside at least part of that bonus in the ING/PC Financial/etc. bank account so that you have cash on hand to pay for upkeep of your stuff.

If you still have money left over, think about a 50/50 RRSP/Investment split. You’re already investing into your RRSP regularly and you’ve already done the math about how much money you need (right?). Throwing more money at the RRSP saves you taxes, but it also generates income you don’t need, b/c you’ve already met your RRSP goals. I say half b/c it will make you feel better to have some extra there (I know I would feel better