Extra Mortgage Principal Payments Aren’t Always Best Investment To Make

Making extra principal payments on a mortgage can be a good investment but not always.

It may not make sense if you’ve had your mortgage for many years. Because interest makes up a progressively smaller portion of the monthly payment as the years go by, you may save much less if you wait to make extra principal payments until late in the mortgage term.

On a 30-year, $100,000 loan at 7 percent, the first month’s payment consists of $82 in principal, $583 in interest. A $5,000 extra principal payment at this point would save you nearly $30,000 over the life of the loan and allow you to pay off the debt about four years early.

Make the same extra payment 20 years into the mortgage and it will save you only $4,712 in interest and shorten the mortgage term by only 1.17 years. Reason: In the 20th year, the monthly payment is the same as in first year, but principal comprises $327, interest only $338.

Payments are calculated with an amortization schedule, which is designed so that payments are the same through the life of the loan, and so that the interest portion represents the interest rate applied each month against the principal that is still owed.

An early principal payment is like an investment that compounds at the interest rate charged on the mortgage. The more time is left on the loan, the more you can earn by making the extra payment.

It’s also important to figure how paying down the loan will affect your taxes. As the principal shrinks, less of your payment is for interest, and that reduces the interest-payment deduction on your federal income tax.

Your year-end statement from the lender reports last year’s interest payments. Multiply that figure by your tax rate - 15, 28, 31, 36 or 39.6 percent - to determine how much the interest deduction is worth.

To figure your interest payments after paying extra principal, use an amortization schedule from a personal finance program, such as Quicken or Money98, or use online calculators such as those at www.hsh.com.

More household wealth in stocks

American households have more wealth invested in the stock market than at any time in the past 50 years, according to data compiled by the Federal Reserve.

Stock investments make up 28 percent of the total wealth of U.S. households - which includes possessions ranging from houses and cars to bank accounts and other assets, The New York Times reported this week, citing the Fed’s numbers.

The figure means that while many Americans are feeling wealthier as their stock portfolios have steadily increased in value during the current bull market, a long-term decline could seriously undercut the financial well-being of many households.

The stock investment figure has more that doubled since 1990.

The increase comes as stocks have gained 30 percent annually during the last three years, compared with historical stock gains of 8 percent per year.

According to the Times, household wealth as of late September 1997 broke down this way: stocks, 28 percent; real estate, 27 percent; small business investments, 14 percent; cash, 12 percent; bonds, 11 percent; and durable goods, 8 percent.

In 1990, stock holdings accounted for 12 percent of household wealth while 33 percent was tied up in real estate and 17 percent in cash. The other figures were approximately the same.

The Times also reported that Americans are spending more of the extra money from stock portfolios and saving less: The rate of saving fell to 3.8 percent of disposable income last year, the lowest level in 58 years.

What is saved is less likely to be placed into relatively conservative investments like real estate and more likely to be put in the stock market.

Value Line screens five stocks

The folks at the Value Line Investment Survey (1-800-833-0046), the best source for information on stocks, have used their computers to find five stocks that meet some tough criteria: above- average potential for returns over the next three to five years, below-average risk and a fast-growing dividend of at least 2.1 percent.

In other words, these are low-risk stocks for growth and income - a soothing combination in a turbulent market.

The five are:

AMP Inc. (symbol: AMP), electronics.

R.R. Donnelley & Sons Co. (DNY), publishing.

Hercules Inc. (HPC), chemicals.

Snap-on Tools Corp. (SNA), tools.

TRW Inc. (TRW), automotive and space.

, DataTimes