First Mortgage Payment - WWBHD? [What Would a BogleHead Do]

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mortfree
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First Mortgage Payment - WWBHD? [What Would a BogleHead Do]

Post by mortfree »

$200,000 mortgage
30-year
3.875%
$940/month(P&I)

My first payment will be coming due soon.

the lender overestimated closing costs originally and I will be getting an extra $4K (~$19k total back) than I had planned.

Playing with the amortization schedule, If I pay $3940 for the first payment that knocks out 10 payments ($3940 is approximately 4 monthly payments).

I’ve maxed my Roth and 401k in 2017 and am ready to max Roth for 2018.

What would a Boglehead do - Is it smart to pay extra on that first payment?
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timboktoo
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Re: First Mortgage Payment - WWBHD?

Post by timboktoo »

Assuming that you:

1. Have an emergency fund that's large enough to make you comfortable
2. Believe that you are on track for retirement already
3. Are maxing out retirement accounts
4. Have paid down any non tax deductible debt
5. Have taken care of your family's needs
6. Have saved properly for anything you'll need in the next few years

Then your plan sounds fine.

Having a plan *before* money comes in is a good (though incredibly boring) way to ensure that you use it wisely. If you were to receive $100,000 today, how would you go about handling it? With a plan in place ahead of time, one that you and your spouse (if applicable) agree on, you can execute that plan the same whether you get a credit card reward refund, a bonus or a windfall.

Keep in mind that things related to enjoying life should also be part of your plan. It's tempting to stretch for every possible extra dollar, for some of us anyway... But I've lived in a cold house, taking cold showers and eating rice long enough to tell you that it's kind of nice to spend some of it, too. :)

Peace

- Tim
EHEngineer
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Re: First Mortgage Payment - WWBHD? [What Would a BogleHead Do]

Post by EHEngineer »

I don't understand the concept of a buyer "getting back" money from a closing. But, in general, if you have a $4k uneexpected windfall paying down the mortgage is a good thing. I suspect you have an emergency fund, and your ahead with your roth savings. go for it. But you may want to talk to you lender and make sure it pays down the principle, and doesn't get held in purgatory to satisfy future payments.
Or, you can ... decline to let me, a stranger on the Internet, egg you on to an exercise in time-wasting, and you could say "I'm probably OK and I don't care about it that much." -Nisiprius
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CyclingDuo
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Re: First Mortgage Payment - WWBHD? [What Would a BogleHead Do]

Post by CyclingDuo »

mortfree wrote: Sat Nov 25, 2017 8:12 pm $200,000 mortgage
30-year
3.875%
$940/month(P&I)

My first payment will be coming due soon.

the lender overestimated closing costs originally and I will be getting an extra $4K (~$19k total back) than I had planned.

Playing with the amortization schedule, If I pay $3940 for the first payment that knocks out 10 payments ($3940 is approximately 4 monthly payments).

I’ve maxed my Roth and 401k in 2017 and am ready to max Roth for 2018.

What would a Boglehead do - Is it smart to pay extra on that first payment?
You bought a home to live in, not as an investment. At that low mortgage interest rate, put that $4K to work in an investment that will return better than your actual mortgage rate (interest rate - your tax deduction). Once you have amassed a tremendous amount of wealth to cover all of your retirement needs, and needs along the way - then you can consider paying extra to the mortgage.
"Save like a pessimist, invest like an optimist." - Morgan Housel | "Pick a bushel, save a peck!" - Grandpa
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mortfree
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Re: First Mortgage Payment - WWBHD? [What Would a BogleHead Do]

Post by mortfree »

EHEngineer wrote: Sat Nov 25, 2017 8:37 pm I don't understand the concept of a buyer "getting back" money from a closing.
I am walking away with more cash from the sale of my home than I need to complete the purchase of the new (to me) house.

I chose to borrow more to get some equity back. But my numbers were based on the original amounts provided for closing costs estimates.

Had the numbers been more exact I would have borrowed 195,000
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EHEngineer
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Re: First Mortgage Payment - WWBHD? [What Would a BogleHead Do]

Post by EHEngineer »

mortfree wrote: Sat Nov 25, 2017 8:55 pm
EHEngineer wrote: Sat Nov 25, 2017 8:37 pm I don't understand the concept of a buyer "getting back" money from a closing.
I am walking away with more cash from the sale of my home than I need to complete the purchase of the new (to me) house.

I chose to borrow more to get some equity back. But my numbers were based on the original amounts provided for closing costs estimates.
Got it. Makes sense now.
Or, you can ... decline to let me, a stranger on the Internet, egg you on to an exercise in time-wasting, and you could say "I'm probably OK and I don't care about it that much." -Nisiprius
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mortfree
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Re: First Mortgage Payment - WWBHD? [What Would a BogleHead Do]

Post by mortfree »

CyclingDuo wrote: Sat Nov 25, 2017 8:50 pm

You bought a home to live in, not as an investment. At that low mortgage interest rate, put that $4K to work in an investment that will return better than your actual mortgage rate (interest rate - your tax deduction). Once you have amassed a tremendous amount of wealth to cover all of your retirement needs, and needs along the way - then you can consider paying extra to the mortgage.
Thanks. I keep seeing 130k in interest and want to try to lower that to below 100k over the life of the loan.

I am trying to embrace that mindset where I don’t pay extra on the mortgage and just keep investing.

Previously (pre-BH) I spread money around (balanced approach) to 401k, Roth, taxable, car loan and the mortgage. Similar mortgage amount was paid off in 10 years but I am looking at 20 for this house, if I even stay there long enough. Target 14 years or so.
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SimonJester
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Re: First Mortgage Payment - WWBHD? [What Would a BogleHead Do]

Post by SimonJester »

If you are going to pay down the mortgage with your extra I would wait a until a few payments have been made on the loan to ensure the current lender is not going to sell the mortgage right away and you end up with a new servicer. You also need to make sure the extra payment is applied to principal and not as future payments.
"They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety." - Benjamin Franklin
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mortfree
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Re: First Mortgage Payment - WWBHD? [What Would a BogleHead Do]

Post by mortfree »

SimonJester wrote: Sat Nov 25, 2017 10:11 pm If you are going to pay down the mortgage with your extra I would wait a until a few payments have been made on the loan to ensure the current lender is not going to sell the mortgage right away and you end up with a new servicer. You also need to make sure the extra payment is applied to principal and not as future payments.
Mortgage is through my credit union. They won’t sell it. I’ve done this before with them and had that mortgage paid off in 10 years. So extra goes to principal.

Thanks for the warning though as I would not have thought about that if I went with someone else for the mortgage.
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chevca
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Re: First Mortgage Payment - WWBHD? [What Would a BogleHead Do]

Post by chevca »

mortfree wrote: Sat Nov 25, 2017 8:55 pm
EHEngineer wrote: Sat Nov 25, 2017 8:37 pm I don't understand the concept of a buyer "getting back" money from a closing.
I am walking away with more cash from the sale of my home than I need to complete the purchase of the new (to me) house.

I chose to borrow more to get some equity back. But my numbers were based on the original amounts provided for closing costs estimates.

Had the numbers been more exact I would have borrowed 195,000
If that's the case, I would make it as if the numbers were exact and put it towards the mortgage.

Do you plan to pay down the mortgage aggressively from here on?
Olemiss540
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Re: First Mortgage Payment - WWBHD? [What Would a BogleHead Do]

Post by Olemiss540 »

Are you maxing your 401k? It wasn't clear in your original post.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.
Topic Author
mortfree
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Re: First Mortgage Payment - WWBHD? [What Would a BogleHead Do]

Post by mortfree »

chevca wrote: Sun Nov 26, 2017 6:09 am
mortfree wrote: Sat Nov 25, 2017 8:55 pm
EHEngineer wrote: Sat Nov 25, 2017 8:37 pm I don't understand the concept of a buyer "getting back" money from a closing.
I am walking away with more cash from the sale of my home than I need to complete the purchase of the new (to me) house.

I chose to borrow more to get some equity back. But my numbers were based on the original amounts provided for closing costs estimates.

Had the numbers been more exact I would have borrowed 195,000
If that's the case, I would make it as if the numbers were exact and put it towards the mortgage.

Do you plan to pay down the mortgage aggressively from here on?
I may pay it like a 20-year which would be about $240 extra per month. Need to get a feel for the expenses associated with the new place.

I was just thinking that if I were to make any kind of extra payment the first payment would be a good one to do it on because of the trickle down effect with amortization.

@OleMiss
401k contributions will be in the 10-15k range (not including employer match of 4K) plus 5500 to roth
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noco-hawkeye
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Re: First Mortgage Payment - WWBHD? [What Would a BogleHead Do]

Post by noco-hawkeye »

If you are unsure of initial expenses in a new house (which is a perfectly normal concern), you might want to just keep the money in the best savings account you have and wait for 6 months?

Jumping on the amortization schedule is a good idea, but if you put that extra 4k to work in month #1 or month #6 or #12 - I don't think it's going to change the curve all that much on the schedule. It's going to help in both cases.

I can recall moving into a new house and seeing 2-4k in unexpected expenses - it's not unheard of. Doing nothing / staying put when you have money to spend is a tough skill to master - it's also good practice for this. :wink:
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grabiner
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Re: First Mortgage Payment - WWBHD? [What Would a BogleHead Do]

Post by grabiner »

Since you are maxing out your retirement accounts, it is reasonable to throw extra money at the mortgage. You will earn a risk-free 3.875% on the payment. The 3.875% return is taxable (assuming you itemize deductions; the mortgage interest alone gets you most of the way there), but that's still a decent long-term return.

It does depend somewhat on how long you keep the mortgage; see Paying down loans versus investing on the wiki. If you sell the home in ten years, then you get your prepayments back with interest at that time, so you effectively bought a ten-year bond for 3.875%, which is a good deal. If you live in the home and don't refinance for 30 year, then you effectively bought a 30-year bond, which isn't as good a deal.
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Watty
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Re: First Mortgage Payment - WWBHD? [What Would a BogleHead Do]

Post by Watty »

I would wait a couple of months before deciding what to do.

There is a chance that there will be some unexpected expense with the new home that you had not planned on.
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Re: First Mortgage Payment - WWBHD? [What Would a BogleHead Do]

Post by Hug401k »

Watty wrote: Mon Nov 27, 2017 8:54 am I would wait a couple of months before deciding what to do.

There is a chance that there will be some unexpected expense with the new home that you had not planned on.
In total agreement with Watty. Never bought a house without discovering some problem that needed fixing right away.
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