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Mortgage option question

post #1 of 15
2/28/11 at 11:58am
Thread Starter 
I’m just looking for some thoughts on this and wondering what everyone here thinks.

Our mortgage is up for renewal this year and, because of the economy, we can get a much lower interest rate (almost 2.5% lower) the question we’re being asked is whether we want to drop our monthly payments to reflect the new rate (knocking $200 a month off our mortgage) or keep our current payment and amortize the mortgage 5 years sooner.

I have no idea which to do. Paying the house off sooner is something that really appeals to me, but if we took the extra $200 a month, we could use it to pay off our student loans sooner.

Any thoughts or ideas are more than welcome.
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post #2 of 15
2/28/11 at 12:06pm
If it were me, I'd take the lower payment and pay off the student loans first. Then after they're paid if you want to put more toward the mortgage then go for it.
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post #3 of 15
2/28/11 at 12:53pm
Unlike in the US, it is to your benefit to pay off your mortgage sooner rather than later. In the US they get tax credits for monies owing on the mortgage and we don't. What is the interest on your student loans? If it is less than that on your mortgage, do the math - pay off the higher interest loan which is your mortgage.
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post #4 of 15
2/28/11 at 1:11pm
Would all depend on how much you owe on the mortgage and school loan(s), what the interest rates are for each, and who your student loan is from. It's understandable, though, if you don't want to post that info on a forum.

Btw, tax deductions in the U.S. are on the mortgage interest, not on the money owed.
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post #5 of 15
2/28/11 at 1:12pm
Thread Starter 
Quote:
Originally Posted by Yosemite View Post
Unlike in the US, it is to your benefit to pay off your mortgage sooner rather than later. In the US they get tax credits for monies owing on the mortgage and we don't. What is the interest on your student loans? If it is less than that on your mortgage, do the math - pay off the higher interest loan which is your mortgage.
Actually our mortgage interest is lower than our student loans (which is a sad statment about our student loans, I know) I've been chatting with DH and right now, we're leaning towards getting rid of the student loans first. That would free up much larger chunk of money each month and then we can speed up our mortgage.
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post #6 of 15
2/28/11 at 1:16pm
Quote:
Originally Posted by Ms. Freya View Post
Actually our mortgage interest is lower than our student loans (which is a sad statment about our student loans, I know) I've been chatting with DH and right now, we're leaning towards getting rid of the student loans first. That would free up much larger chunk of money each month and then we can speed up our mortgage.
That's the most sensible thing to do - pay off the higher interest debt first. It is important that you do indeed take the extra $200 and put it against the student loan. It is tempting to use some or all of that money to splurge after being so tight financially, in which case the extra money will not be a help.
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post #7 of 15
2/28/11 at 1:21pm
Personally, I would pay off the student loans last. Though it would be nice to have that extra money every month after they're paid off. Of all loans you can get the interest on a student loan is completely tax deductible so why rush to pay that off? I'd pay off other debts that are high interest first.
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post #8 of 15
2/28/11 at 1:25pm
Thread Starter 
Quote:
Originally Posted by Yosemite View Post
It is important that you do indeed take the extra $200 and put it against the student loan. It is tempting to use some or all of that money to splurge after being so tight financially, in which case the extra money will not be a help.
We've been talking about that because that's my one worry - If we let it become a slush fund for living expenses, we're no further ahead. DH has actually suggested that if we find ourselves doing that, we set the extra $200 to automatic withdraw to another account so that we don't even see it until we go to pay the student loans.
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post #9 of 15
2/28/11 at 1:31pm
Thread Starter 
Quote:
Originally Posted by kittiei View Post
Personally, I would pay off the student loans last. Though it would be nice to have that extra money every month after they're paid off. Of all loans you can get the interest on a student loan is completely tax deductible so why rush to pay that off? I'd pay off other debts that are high interest first.
While that's true of DH's Gvmt loans, due to changes in the loans process while we were in school, not all of ours are. We call them student loans but some of them are actually converted credit lines taken out for the purpose of schooling and are not tax deductable. (Long, convoluted story.)
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post #10 of 15
2/28/11 at 2:05pm
Lower the payment on the mortgage, pay off the student loan, then when that is paid off, apply the extra $200 a month towards the mortgage. Just make sure that when you refinance your mortgage, that you don't get penalties for paying ahead on that loan.

I was paying more than my mortgage payment for years, and it did allow me to pay off the entire balance in about 13 years.
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post #11 of 15
2/28/11 at 5:49pm
If you ever listen to finance guru Suzy Orman she like the highest interest debt paid off first then go to the next one etc.... You might consider if the student loans are paid off rather than put the money to the mortgage start saving that money if the mortgage is managable.
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post #12 of 15
2/28/11 at 6:26pm
Thread Starter 
Quote:
Originally Posted by GailC View Post
You might consider if the student loans are paid off rather than put the money to the mortgage start saving that money if the mortgage is managable.
Funny you should mention that. I was talking to DH about it over dinner and he wondered how I would feel about putting some of the spare into retirement savings once the student loans are gone. We might end up going that route - as it is we try to keep 2-4 months of payments stashed in case of emergencies.

Thanks guys. It helps to talk this stuff out. I think we're definitely going to lower the mortgage and work at cleaning up the other debts, then hopefully when the mortgage is up again in 5 years, we'll be free to start speeding it up.
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post #13 of 15
2/28/11 at 8:02pm
You might want to consider a TFSA (tax free savings account). You can put in up to $5,000 per year (I think that's the limit). The big difference between this and an RRSP is that when you collapse the RRSP you have to pay tax and that tax will depend on your total income, i.e., what tax bracket you are in.
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post #14 of 15
3/1/11 at 12:40am
We refinanced a few years ago, dropped our interest from 7.5% to 5.5% and went from a 30-year loan to a 15-year loan. But we kept paying the same amount, so we were well ahead of the amortization schedule.

Then last year, we refinanced again and went from 5.5% to 4% and cut it to a 10-year note. We're still paying the old amount, so we should have it paid off in about 6 years.

By the way, unless you pay a LOT in mortgage interest, the standard deduction will come out just fine.
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post #15 of 15
3/1/11 at 6:50am
On each of the houses we had, we used the variable interest rate which we could lock in at any time if the rates started to go up. By doing this we were able to pay our houses off in 13 years or less.
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