Extra $ toward mortgage?

[mster425]

DH is 30 I am 29, we are debt free except for house, have 6 month emergency fund and a decent amount in other savings. We put 15% of our pre tax income toward retirement.

We bought our house in 2007 and it's depreciated just a little, a fair/ pessimistic guess would be 5%. We still own about 20% of it.

If we want to sell in the next 3 years (downgrading to cheaper house so we can afford children ), is it still in our best interest to try to pay down the principal of our home loan in the meantime?

I would not call us savvy investors really and we're only earning 3-5% on our savings currently, our mortgage rate is 5.125%

Any advice welcome!!

 

[Carl Fredricksen]

Most financial "experts" say paying your house off early is a lousy financial decision because the borrowed money is so "cheap". Most will say to take the cash and stick it in some fund that pays more than the house interest rate, and keeps it fairly liquid. But there is something to be said for knowing you have a huge amount of equity and/or a home that is paid off. That can go a long way toward helping you sleep well at night.

If it were me, I would check out ROTH IRA's as an investment, and max those out each year, in addition to your standard IRA contributions. They are great since they are tax free when you withdrawal at retirement, and no one knows right now how long the government will keep the ROTH option on the books. Some good starting points for research are HERE and HERE.

Other than that, I would see if you can find another decent investment vehicle, and just pay the house as the bills come IMO.

 

[Swimalie]

I wouldn't put anything extra toward your current mortgage but if you want to put extra money aside for the next house's down payment to avoid PMI or toward the closing costs and moving expenses, why don't you set up a savings account. We have one at ING where we have money automatically taken out of our checking account each month. We don't miss it since it's done automatically. Over the last 2 years it's added up quite nicely and will buy our new car for cash next year. ING has pretty good rates now, too. Not the best but their savings accounts don't charge any fees.

 

[wdwfan16]

Since you are planning on selling I would not pay extra.

 

[smkiya]

By paying extra on the house, you would be earning 5.125% on the money you are putting in. If you can find a liquid investment option that would pay you a similar or higher interest rate on a short term (3 years) investment, then certainly do that. You are decreasing your principal, and increasing the equity in your home that you will get a check for at closing to use on the downpayment of your next home.

 

[tinkarooni]

We pay a significant amount extra each month. However we do not intend to move for a very very long time. We do have a low interest rate however like you we have our emergency fund set and would prefer to be rid of this last debt. While there may be better financial choices to be made we are also saving and will sleep better when the mortgage is gone.

In your case if you are planning on moving so soon I probably wouldn't bother with the extra payments.

 

[robsmom]

Normally I am a fan of pay off the mortgage as fast as you can. It is a guaranteed return on investment and pyschologically adds a sense of security. Can you make more on investments - yes sometimes, but as the last few years have shown us, this is not guaranteed.

In your case, however, I would not pay in off. You wrote something interesting - that you want to sell the house to buy something cheaper to afford kids. What if you find you can not sell or what if you decide you really would prefer not to move. I would put that extra money aside for a "child" fund. This is money you could use to make your next mortgage more affordable, but is also money you could use to pay your current mortgage for a period of time if you find yourself wanting to have a child while still in the house.

 

[bettymae1121]

Well...if you have enough money left over after maxing out your retirement funds to pay extra towards you house, I'm not sure why you can't afford kids unless you downsize, but okay...

I agree with the others, if your moving in such a short amount of time, it's not worth it to pay down the mortgage. you won't save any in interest and the money is tied up in the house. If you have a problem selling it, there isn't away to get the money out to use it for something else.

I'm not a big fan of paying down mortgages early unless it's your "forever home". Most people move so frequently before the age of 50 or so that it generally doesn't make sense. Most are better off putting that money into savings or low-risk investments. That way the money is liquid in case of a life changing event, and if that event never happens, you can always pay off the house later if that's what you still want to do.

*Note that I used the word "most" in my above post. Obviously every situation is different, and if paying off the house makes a person happy, then that's what they should do...even if it's not the ideal financial move.

 

[Mom2Ben02]

Remember, too, that the mortgage interest is tax deductible. If you itemize, you are not truly paying 5%.

 

[Cheshire Figment]

First, I cannot understand the concept of downsizing a house to have kids. Normally when one has children you tend to need a larger house so the children will have their own rooms and space for playing.

For the last three years I have been applying extra money to my mortgage payment (average of about $120 per month) and have, according to my amortization table, already knocked more than a year of my total payments on a 15 year mortgage as well as reduced the total interest to be paid over the life of the loan by more than 10%.

And I do advise my tax clients to look at their Schedule A and compare the number there with the Standard Deduction amount. At a certain point your deductions, including mortgage interest, will probably be less than the Standard Deduction and the mortgage will have no tax benefit at all.

And

Remember, too, that the mortgage interest is tax deductible. If you itemize, you are not truly paying 5%.

But if you do not pay down the mortgage and invest the money, you will be paying tax on the income.

So my recommendation is to pay down the mortgage.

 

[mster425]

OP here-
Downgrade may have been the wrong word-our house is pretty small but it's in a needlessly expensive area- we could move 10-15 miles away, be in a similar school district, and have a much bigger house for $100,000 less, which would mean one of us could work part time or stay home to raise our family instead of the 60-80 hr weeks we have now.

In 07 we naively thought we'd be getting raises for the next 5-6 years and would be able to afford it on one income soon (meaning approx 30% or less of that income after taxes), but it hasn't happened, I heard some rumors the economy has been bad