Originally Posted by poorcarver
As a slight twist on either saving the pre-pay yourself until the end or pre-paying every month, we saved up each year. Then said well we made it this far, no crisis present, so we then pre-paid the year's savings. And so forth. Not as dramatic as the monthly item but more advantageous than the wait till the end.
That doesn't really help you. As soon as you make that annual pre-payment your "made it this far" safety account is back down to zero. If a crisis hits the next month, you are in the same position as if you didn't have that side account.
Financially, it is indeed better to pay the principal down as quickly as possible. But things have to be examined from a risk vs. reward viewpoint.
The reward is paying less interest in total.
The risk is that if you miss a couple of payments you lose the house and you lose all the money you put into it.
The net time the mortgage is shortened by isn't as large as it seems, either.
Looking at a mortgage & savings calculator,
$200K loan at 4.5%, 30 yr, pay extra $100/mo cuts 5 years off the loan. Paid off in 25 years.
If instead that $100/mo goes into savings/CD account earning a blended rate of 1.5%, it will grow large enough to pay off the remaining mortgage balance in 26.5 years.
25 years vs. 26.5 years. And after the first year, the savings account has enough money to make 1 or more payments in case you get laid off and can't make the payment.
Small reward vs. large reduction in risk.