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can someone answer this question buy giving all the facts needed to feed the data into some sort of a formula?

Looking for a way to figure out the formula for investing into an interest account vs making additional payments on a mortgage?

for example the loan is 250k @ 6.5% and a cd is @ 5.0%

assuming the payments are coming from a savings account that are not going to be used for anything other then investing at which point is it prudent to invest in house vs something else?

Also the tax bracket is 28% so consider the deductions

2 Thoughts on aditional principal vs investing into an interest account formula?
  1. Reply
    vegas_iwish
    February 7, 2014 at 8:46 am

    no need for any formula. You pay tax on the 5% at the same rate your deduction at 6.5% so still losing 1.5% + more if d0 not have enough other Sched A deductions to cover the standard deduction. That would mean mean part of the interest just filling out standard deduction can’t count the whole amount as true savings. Make additional pmts – period. Don’t sit there thinking about black & white options.

  2. Reply
    Jeff M
    February 7, 2014 at 9:03 am

    Your effective interest rate on the mortgage is 6.5% less the 28% tax consideration. That works out to about 4.7%.

    Your effective interest rate on the CD is 5% less 28% for taxes, so figure 3.6%.

    Do, all other things being equal, you are better paying down the principal on the house rather than putting into CD’s.

    But if the question is “prudence”, then there is more to it than just comparative interest rate analysis. Money paid into the house is harder to get. Make sure you have a fund of “quick cash” for emergencies. You can also use a home equity line for this purpose, but then you are paying interest on your own money.

    My view is that there is great freedom in being debt free. Even if the hard numbers say otherwise, I am generally in favor of paying down debt first.

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