Stop Extra Payment Toward Mortgage?

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goodoboy
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Stop Extra Payment Toward Mortgage?

Post by goodoboy » Sat Jul 26, 2014 11:24 pm

Hello,

I posted this on another site, but wanted some more comments please.

I have 30 year mortgage at 3.25%. I make an extra $400 a month payment per month, to pay off mortgage in 14 years.

Lately, I had to go into savings to pay for extra things that just came out the blue (house repair, car repair, kids, etc) and has eaten a bit chunk of my savings.

My savings is my emergency fund and it has reduced to about 4 month of emergency fund.

My question is: Should I temporarily stop making the extra $400 a month payment for about a year until I rebuild my savings to about $20k? I do save monthly and my goal is to rebuild and reach $20K by July 2015.

After a year and reach my goal, I can restart applying the $400 back to mortgage principal.

I know most say leave 3-6 months emergency fund in the savings account, but I think I want more cash in my bank. I honestly want $30K in my savings to feel secure. . I can reach this, but will take some time.

So the question is: Should I temporarily stop extra mortgage payment to build my savings up quicker? Or should I just keep on saving what I can and keep on making extra towards mortgage? I would just feel better with more in the account.

Thanks

LeeMKE
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Re: Stop Extra Payment Toward Mortgage?

Post by LeeMKE » Sat Jul 26, 2014 11:32 pm

If you have kids and other responsibilities, I'd stop the pre-payments for awhile and get the emergency fund replenished. However, get back to prepaying the mortgage as soon as possible. You have already figured out that you are adding equity faster than any investment you have. Prepaying in the early years of a 30 year mortgage give you outstanding ROI, so I would return to prepaying once you have your fund back at $20,000, and then continue prepayments and put a HELOC in place for another $20k to serve as a backup to your emergency fund.
The mightiest Oak is just a nut who stayed the course.

DSInvestor
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Re: Stop Extra Payment Toward Mortgage?

Post by DSInvestor » Sat Jul 26, 2014 11:33 pm

How much are you adding to emergency fund per month now while you're making extra mortgage payments?

Are you contributing to Roth 401k or Traditional 401k? If contributing to Roth 401k, consider a switch to Traditional 401k to get the tax deduction and increase take home pay.
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goodoboy
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Re: Stop Extra Payment Toward Mortgage?

Post by goodoboy » Sat Jul 26, 2014 11:44 pm

DSInvestor wrote:How much are you adding to emergency fund per month now while you're making extra mortgage payments?

Are you contributing to Roth 401k or Traditional 401k? If contributing to Roth 401k, consider a switch to Traditional 401k to get the tax deduction and increase take home pay.

Thanks

I been adding about $600-$800 per month to savings account. But one recent repair to A/C took 3 months of savings away. But moving forward, I plan to save $800 a month for the next year.

I am maxing my Traditional 401k to $17.5K per year.

Thanks

goodoboy
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Re: Stop Extra Payment Toward Mortgage?

Post by goodoboy » Sat Jul 26, 2014 11:45 pm

LeeMKE wrote:If you have kids and other responsibilities, I'd stop the pre-payments for awhile and get the emergency fund replenished. However, get back to prepaying the mortgage as soon as possible. You have already figured out that you are adding equity faster than any investment you have. Prepaying in the early years of a 30 year mortgage give you outstanding ROI, so I would return to prepaying once you have your fund back at $20,000, and then continue prepayments and put a HELOC in place for another $20k to serve as a backup to your emergency fund.

Thank you.

What does HELOC mean?

sscritic
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Re: Stop Extra Payment Toward Mortgage?

Post by sscritic » Sat Jul 26, 2014 11:52 pm

goodoboy wrote: What does HELOC mean?
Home Equity Line of Credit. You need equity to get one, meaning your house has to be worth more than you owe. If you pay down the mortgage and the value of the house doesn't fall, you should have equity.

http://en.wikipedia.org/wiki/Home_equity_line_of_credit

LeeMKE
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Re: Stop Extra Payment Toward Mortgage?

Post by LeeMKE » Sun Jul 27, 2014 12:01 am

Sorry, a HELOC pre-approves you for a line of credit against your home. It pairs nicely with your prepayments as you'll have enough equity to support the HELOC application, if not today, soon.
The mightiest Oak is just a nut who stayed the course.

Nukeboilermaker
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Re: Stop Extra Payment Toward Mortgage?

Post by Nukeboilermaker » Sun Jul 27, 2014 12:09 am


placeholder
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Re: Stop Extra Payment Toward Mortgage?

Post by placeholder » Sun Jul 27, 2014 12:13 am

If it were me I wouldn't pay any extra toward principal.

goodoboy
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Re: Stop Extra Payment Toward Mortgage?

Post by goodoboy » Sun Jul 27, 2014 12:17 am

LeeMKE wrote:Sorry, a HELOC pre-approves you for a line of credit against your home. It pairs nicely with your prepayments as you'll have enough equity to support the HELOC application, if not today, soon.

Thank you,

My home is currently worth more than what I owe. Its worth about $30K more than what I owe.

Do I have to pay back the HELOC back with interest?

Thanks

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grabiner
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Re: Stop Extra Payment Toward Mortgage?

Post by grabiner » Sun Jul 27, 2014 12:46 am

goodoboy wrote:My home is currently worth more than what I owe. Its worth about $30K more than what I owe.

Do I have to pay back the HELOC back with interest?
A HELOC is a line of credit, like a credit card, which allows you to borrow money as needed.
Thus you must pay back anything you borrow with interest (although the interest is usually tax-deductible; up to $1M to improve your home, and $100K for any purpose). If you don't borrow anything, there will be no interest due, although there may be set-up fees (for example, the bank many need to appraise your home).

You usually won't be able to get a HELOC for the full equity in your home, as the bank needs to have an assurance that it will be paid back even if your home value declines or was incorrectly estimated.
Wiki David Grabiner

stan1
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Re: Stop Extra Payment Toward Mortgage?

Post by stan1 » Sun Jul 27, 2014 4:17 am

Personally I would not want to borrow money to pay for household repairs or car repairs like you describe so I would not even consider the HELOC option. I would stop making extra payments on the mortgage until your emergency fund is back where you want it to be. I think you have a good plan.

Theotree
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Re: Stop Extra Payment Toward Mortgage?

Post by Theotree » Sun Jul 27, 2014 7:37 am

Do you have 529 accounts for the kids? I would open these and start contributing before paying down the mortgage. You don't want to NEED a HELOC to pay for college.

l2ridehd
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Re: Stop Extra Payment Toward Mortgage?

Post by l2ridehd » Sun Jul 27, 2014 8:45 am

I would not apply or use a HELOC option. If something happens and you really need it, apply then. There is usually a cost to set them up, so wait until required. I would not stop making extra payments on the mortgage. Maybe drop the amount and split that $400 into $200 to mortgage and $200 to emergency fund. Once you stop, it's hard to get back to it. Something always comes up to cause you to wait until next month.

So build the emergency fund back to a level your comfortable with, keep adding something every month to the mortgage, and once the emergency fund is there, start 529's for the kids if you believe you will help them with college. This way everything is continuing to move forward toward the goals you have set. As extra funds become available through raises or reaching an objective, just move the amounts up for the other items.

crowd79
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Re: Stop Extra Payment Toward Mortgage?

Post by crowd79 » Sun Jul 27, 2014 8:58 am

3.25% is a low interest rate for a loan. I don't understand why people pay off low-rate loans faster than they have to. I'd take the extra payments and sock it into investments. There's a good chance your investments make better than 3.25% over the long haul.

goodoboy
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Re: Stop Extra Payment Toward Mortgage?

Post by goodoboy » Sun Jul 27, 2014 10:32 am

stan1 wrote:Personally I would not want to borrow money to pay for household repairs or car repairs like you describe so I would not even consider the HELOC option. I would stop making extra payments on the mortgage until your emergency fund is back where you want it to be. I think you have a good plan.
You are correct. I just paid off my student loan and not really interested in loans at the moment.

Without extra payments to mortgage, my P&I is only $650 a month. Not sure why I am even making extra payments anyway.

Currently I have 4 months of living expense and just would feel a bit more comfortable with about 1-2 years of living expense or just having cash in my savings account in general. When I had about $20K in my savings I felt a bit better. NOW, I can get to $20K in a year if I am being extremely frugal, but in reality...something will break, kid will need something, something will come up and offset the budget.
On the other hand, I got into the habit of paying extra to mortgage, but my interest is low right now so big deal here.

It want be that hard returning to making extra mortgage payments.

Professor Emeritus
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Re: Stop Extra Payment Toward Mortgage?

Post by Professor Emeritus » Sun Jul 27, 2014 10:36 am

LeeMKE wrote: You have already figured out that you are adding equity faster than any investment you have.
He is paying off a debt. His ROI is simply the interest avoided. "Adding equity" is a meaningless real estate term. You have an asset and you owe a debt.

nothing more or less.

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Aptenodytes
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Re: Stop Extra Payment Toward Mortgage?

Post by Aptenodytes » Sun Jul 27, 2014 10:39 am

Paying off a home in 15 years is often a better move than 30, but I would only do it if I could afford the 15-year mortgage at the outset. You normally get a significant interest rate reduction. Doing it your way you pay the higher interest rate of the 30-year but endure the belt-tightening of the 15-year. In exchange you get flexibility, but I wouldn't consider it a good tradeoff. I started at 30-year and then when interest rates plummeted I refinanced at 15 and will just stay there until all paid off.

It is hard to know what to do without knowing the rest of your financial circumstances. But the prima facie assumption for me would be that the extra money would be better spent topping off emergency funds so you don't need to worry about short-term debt, and increasing retirement savings.

So my best-guess answer to your question is Yes.

sscritic
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Re: Stop Extra Payment Toward Mortgage?

Post by sscritic » Sun Jul 27, 2014 10:41 am

goodoboy wrote:
stan1 wrote:Personally I would not want to borrow money to pay for household repairs or car repairs like you describe so I would not even consider the HELOC option. I would stop making extra payments on the mortgage until your emergency fund is back where you want it to be. I think you have a good plan.
You are correct. I just paid off my student loan and not really interested in loans at the moment.
No one suggested you take out a loan, not the way I read English. Try this again:
I would return to prepaying once you have your fund back at $20,000, and then continue prepayments and put a HELOC in place for another $20k to serve as a backup to your emergency fund.
I read:
1) build up emergency fund
2) go back to pre-paying
3) establish a line of credit

For those who don't understand what a line of credit is, it's like a pre-approved mortgage. You can have a pre-approved mortgage and never buy a house and never borrow any money. A line of credit is not a loan until you draw on your line of credit. Draw is another word for borrow. If you don't borrow, you don't have a loan and you don't pay interest. You may pay a fee for keeping the line of credit open, but that is not interest.

Twins Fan
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Re: Stop Extra Payment Toward Mortgage?

Post by Twins Fan » Sun Jul 27, 2014 10:53 am

OP, you seem to have answered your own question. If dipping into the savings dropped it to a lower level that you like, left you feeling uncomfortable about that, and building the savings back up would make you more comfortable... Well... :wink:

I say stop the extra payment, build the savings back up, and when that's done decide whether to go back to extra mortgage payments or not.

goodoboy
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Re: Stop Extra Payment Toward Mortgage?

Post by goodoboy » Sun Jul 27, 2014 11:06 am

Professor Emeritus wrote:
LeeMKE wrote: You have already figured out that you are adding equity faster than any investment you have.
He is paying off a debt. His ROI is simply the interest avoided. "Adding equity" is a meaningless real estate term. You have an asset and you owe a debt.

nothing more or less.
Yes, please, lets not even mention anything related to getting an equity loan. Its good to know, but that's not something I will do. I just paid off a 6% student loan for $40K and this cleaned my savings account just to pay off this debt, I don't want no more debt, unless dire emergency.

My only question is: should I stop paying extra $400 on a 3.25% interest to build up my cash reserves?

I think I will stop the extra payments for awhile to build my cash reserves. Its good to have a community of people to discuss these types of concerns. I am just trying to stay on the straight line. lol

goodoboy
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Re: Stop Extra Payment Toward Mortgage?

Post by goodoboy » Sun Jul 27, 2014 11:11 am

Aptenodytes wrote:Paying off a home in 15 years is often a better move than 30, but I would only do it if I could afford the 15-year mortgage at the outset. You normally get a significant interest rate reduction. Doing it your way you pay the higher interest rate of the 30-year but endure the belt-tightening of the 15-year. In exchange you get flexibility, but I wouldn't consider it a good tradeoff. I started at 30-year and then when interest rates plummeted I refinanced at 15 and will just stay there until all paid off.

It is hard to know what to do without knowing the rest of your financial circumstances. But the prima facie assumption for me would be that the extra money would be better spent topping off emergency funds so you don't need to worry about short-term debt, and increasing retirement savings.

So my best-guess answer to your question is Yes.

Thank you,

I am only maxing my 401k to 17.5k and wife is contributing the standard 5% to get company match. These are our only retirement funds. I had plan to start a ROTH IRA this year, but I will wait til my emergency fund is built up to my liking. Of course a ROTH IRA can be used a emergency fund as well, but I worry on that later.

goodoboy
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Re: Stop Extra Payment Toward Mortgage?

Post by goodoboy » Sun Jul 27, 2014 11:38 am

Thanks for all that replied.


I decided to stop (for about 1.5 years until my savings reach +$25K) or 1 year of emergency fund) paying extra towards mortgage for the following reasons:

1. current rate is 3.25% and 26 years remaining, I want miss out much interest savings for about a year. My P&I is only $650 per month without paying extra. I was paying more living in apartment.
2. Having more cash in my savings helps me feel better and better options.
3. I would hate for some repair or cost to come up and wipe my current little savings out.

I'll be a bit more frugal until my goal is met and then start adding back to mortgage.
Thank you

goodoboy
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Re: Stop Extra Payment Toward Mortgage?

Post by goodoboy » Sun Jul 27, 2014 12:38 pm

Also, just incase anyone is wondering.... if i stop making extra payment, I will pay $65k in interest for the life of the loan (26 years). If I continue paying extra payments, I will pay $31K for the loan. Taxes, I take the standard deduct rather I pay extra or not. Another thought was to open ROTH IRA and use this as emergency fund as well and just build continue to build once I start back extra payments to mortgage. With this low interest rate, I have lots of options.

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Re: Stop Extra Payment Toward Mortgage?

Post by jackholloway » Sun Jul 27, 2014 12:50 pm

crowd79 wrote:3.25% is a low interest rate for a loan. I don't understand why people pay off low-rate loans faster than they have to. I'd take the extra payments and sock it into investments. There's a good chance your investments make better than 3.25% over the long haul.
Because you are not guaranteed better than 3.25% on investments and you are guaranteed 3.25% on the debt. Debt is risk, no two ways about it. Debt free is worth a lot, as it gives you options that debt closes off. More importantly, the market really can stay irrational longer than you can stay solvent.

I still owe on my mortgage, because I do see value in liquidity too. If I continue to pay at present rates, I will have my mortgage paid off in my late fifties, and I am thinking of moving it forward to early fifties instead. I am in an industry where you may well discover after the fact that you just got downsized from your last high paying job, so holding no debt looks very attractive. (Hint - virtually everyone is in an industry like that; they just may not be aware of it.)

Anyone fully funding their 17,500 for retirement, saving appropriately for kids college, and with additional savings to bring them to a reasonable savings rate (for me, perhaps 20% all in) should consider where they want to bear risk. There is a very good argument for reducing even low rate debt if you otherwise sufficiently financially secure.

DSInvestor
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Re: Stop Extra Payment Toward Mortgage?

Post by DSInvestor » Sun Jul 27, 2014 1:03 pm

goodoboy wrote:I am only maxing my 401k to 17.5k and wife is contributing the standard 5% to get company match. These are our only retirement funds. I had plan to start a ROTH IRA this year, but I will wait til my emergency fund is built up to my liking. Of course a ROTH IRA can be used a emergency fund as well, but I worry on that later.
If you cannot afford to max out retirement plans and save for emergency fund, you should save for emergency fund in your Roth IRA accounts. If your goal is to have 30K emergency fund, it doesn't all have to be in the savings account. You can have 19K in savings and 11K in Roth IRA (assuming you and your wife max out for $5500 each). If you don't contribute to Roth IRA, you lose that contribution space forever. If you contribute to Roth IRA and a large emergency cash need consumes all of the savings and Roth IRA, it's like you never contributed to Roth in the first place. However if you contribute to Roth IRA and the cash need does not arise that requires withdrawal from Roth IRA, you will have taken advantage of the Roth IRA contribution space which is limited and very valuable.

Invest in something conservative like Vanguard Short Term Investment Grade or Short Term Bond Index for the emergency fund money held in the Roth IRA. Once you are able to build up emergency cash outside of the retirement accounts, you can shift the Roth IRA to other investments more in line with your asset allocation for retirement assets.
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goodoboy
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Re: Stop Extra Payment Toward Mortgage?

Post by goodoboy » Sun Jul 27, 2014 1:21 pm

jackholloway wrote:
crowd79 wrote:3.25% is a low interest rate for a loan. I don't understand why people pay off low-rate loans faster than they have to. I'd take the extra payments and sock it into investments. There's a good chance your investments make better than 3.25% over the long haul.
Because you are not guaranteed better than 3.25% on investments and you are guaranteed 3.25% on the debt. Debt is risk, no two ways about it. Debt free is worth a lot, as it gives you options that debt closes off. More importantly, the market really can stay irrational longer than you can stay solvent.

I still owe on my mortgage, because I do see value in liquidity too. If I continue to pay at present rates, I will have my mortgage paid off in my late fifties, and I am thinking of moving it forward to early fifties instead. I am in an industry where you may well discover after the fact that you just got downsized from your last high paying job, so holding no debt looks very attractive. (Hint - virtually everyone is in an industry like that; they just may not be aware of it.)

Anyone fully funding their 17,500 for retirement, saving appropriately for kids college, and with additional savings to bring them to a reasonable savings rate (for me, perhaps 20% all in) should consider where they want to bear risk. There is a very good argument for reducing even low rate debt if you otherwise sufficiently financially secure.
Good point jackholloway,

Often I hear people say stop paying extra towards mortgage and invest it elsewhere somewhere else. For me, I personally rather have about $40K in my savings (regular savings account) just because I like having that cash there for any other emergency or opportunity that arise.

goodoboy
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Re: Stop Extra Payment Toward Mortgage?

Post by goodoboy » Sun Jul 27, 2014 1:26 pm

DSInvestor wrote:
goodoboy wrote:I am only maxing my 401k to 17.5k and wife is contributing the standard 5% to get company match. These are our only retirement funds. I had plan to start a ROTH IRA this year, but I will wait til my emergency fund is built up to my liking. Of course a ROTH IRA can be used a emergency fund as well, but I worry on that later.
If you cannot afford to max out retirement plans and save for emergency fund, you should save for emergency fund in your Roth IRA accounts. If your goal is to have 30K emergency fund, it doesn't all have to be in the savings account. You can have 19K in savings and 11K in Roth IRA (assuming you and your wife max out for $5500 each). If you don't contribute to Roth IRA, you lose that contribution space forever. If you contribute to Roth IRA and a large emergency cash need consumes all of the savings and Roth IRA, it's like you never contributed to Roth in the first place. However if you contribute to Roth IRA and the cash need does not arise that requires withdrawal from Roth IRA, you will have taken advantage of the Roth IRA contribution space which is limited and very valuable.

Invest in something conservative like Vanguard Short Term Investment Grade or Short Term Bond Index for the emergency fund money held in the Roth IRA. Once you are able to build up emergency cash outside of the retirement accounts, you can shift the Roth IRA to other investments more in line with your asset allocation for retirement assets.

Thank you DSInvestor,

Good point.

I was thinking of first building the regular savings account to about $30K. Afterwards, I wanted to start maxing out both ROTH IRA accounts per year instead of putting extra money in regular savings account.

Are you saying use ROTH IRA as emergency fund now?

Thanks

DSInvestor
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Re: Stop Extra Payment Toward Mortgage?

Post by DSInvestor » Sun Jul 27, 2014 1:39 pm

goodoboy wrote:I was thinking of first building the regular savings account to about $30K. Afterwards, I wanted to start maxing out both ROTH IRA accounts per year instead of putting extra money in regular savings account.

Are you saying use ROTH IRA as emergency fund now?

Thanks
I'm suggesting that you should be flexible about where your 30K of emergency fund resides. If you get to 30K in savings but do not have 11K extra cash for Roth IRA contributions are you willing to skip the 2014 contribution? If you're flexible about where the EF money resides, you can achieve both goals of 30K EF and maxing out Roth IRA contribution, by simply contributing 11K to His/Her Roth IRA from the savings account. Maybe adjust your emergency fund so that savings account holds 3 months expenses and Roth IRA holds another 3 months of expenses. This way you can sustain most emergency cash needs without resorting to an IRA withdrawal. You have to decide what minimum amount you'd feel comfortable with in savings. If that minimum comfort level is 30K, then my suggestion may not work for you. However if you're comfortable holding say 15-20K in savings, why not hold the other 10-15K in Roth IRA and take advantage of the contribution space?

The deadline for 2014 Roth IRA contributions is April 15, 2015 so you have until then to decide. You can continue to save in your savings account for now.
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goodoboy
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Re: Stop Extra Payment Toward Mortgage?

Post by goodoboy » Sun Jul 27, 2014 1:46 pm

DSInvestor wrote:
goodoboy wrote:I was thinking of first building the regular savings account to about $30K. Afterwards, I wanted to start maxing out both ROTH IRA accounts per year instead of putting extra money in regular savings account.

Are you saying use ROTH IRA as emergency fund now?

Thanks
I'm suggesting that you should be flexible about where your 30K of emergency fund resides. If you get to 30K in savings but do not have 11K extra cash for Roth IRA contributions are you willing to skip the 2014 contribution? If you're flexible about where the EF money resides, you can achieve both goals of 30K EF and maxing out Roth IRA contribution, by simply contributing 11K to His/Her Roth IRA from the savings account. Maybe adjust your emergency fund so that savings account holds 3 months expenses and Roth IRA holds another 3 months of expenses. This way you can sustain most emergency cash needs without resorting to an IRA withdrawal. You have to decide what minimum amount you'd feel comfortable with in savings. If that minimum comfort level is 30K, then my suggestion may not work for you. However if you're comfortable holding say 15-20K in savings, why not hold the other 10-15K in Roth IRA and take advantage of the contribution space?

The deadline for 2014 Roth IRA contributions is April 15, 2015 so you have until then to decide. You can continue to save in your savings account for now.
Thank you DSInvestor. It makes sense to me now.

MathWizard
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Re: Stop Extra Payment Toward Mortgage?

Post by MathWizard » Sun Jul 27, 2014 7:01 pm

Yes, stop prepayments.

You have a low rate and you should
prioritize EF tax advantaged and
cash flow now.

You can get max flexibility by using
Roth contributions as part of EF
read about it on the BH wiki

Leemiller
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Re: Stop Extra Payment Toward Mortgage?

Post by Leemiller » Sun Jul 27, 2014 8:47 pm

I would max my Roth before paying off my mortgage. Run the numbers and it will be better than the interest savings on the mortgage.

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