Should I be applying the money I am saving towards homes principal or am I doing it right by saving it?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
itsallaboutme
Posts: 37
Joined: Mon May 22, 2017 2:47 pm

Should I be applying the money I am saving towards homes principal or am I doing it right by saving it?

Post by itsallaboutme » Sun Jul 07, 2019 5:12 pm

Here is how I do it. I save money every month and that goes towards the next years mortgage. So around May I am done with the current year and saving for the next year. I leave it in a savings account earning a little over 2% with ally bank. Should I put that money towards the principal instead? I never pay monthly because I've already saved up enough to pay in advance. Plus I also use tax money to put towards the year.
Right now we are in July I am done for the whole year already. The money is in the bank and it's being taken out automatically every month for the mortgage and taxes. So money I am saving now is for next year. I have about 3 months saved for next year not including tax money. I don't know if putting it towards principal would help in anyway. Is there a tool to figure this out or can someone guide me thanks.

stoptothink
Posts: 5899
Joined: Fri Dec 31, 2010 9:53 am

Re: Should I be applying the money I am saving towards homes principal or am I doing it right by saving it?

Post by stoptothink » Sun Jul 07, 2019 5:17 pm

I'm all but certain your mortgage has a higher rate than what you are earning in your Ally account, plus you are paying taxes on the interest. So, yeah, there is definitely value in putting some of it towards principal. I usually split the difference, putting about half the excess cash each month towards the mortgage principal and the rest in high-yield savings.

chessknt
Posts: 174
Joined: Wed Jul 13, 2016 3:15 am

Re: Should I be applying the money I am saving towards homes principal or am I doing it right by saving it?

Post by chessknt » Sun Jul 07, 2019 5:18 pm

Complicated question that you didn't supply enough information to answer.

Generally speaking you are going to come out ahead applying extra money toward your mortgage principal since most don't deduct home loan interest from federal taxes any more and the rate will almost certainly exceed any savings account.

The other side of the coin is loss of liquidity and loss of leverage advantage that your mortgage gives you to invest in the market.

AKsuited
Posts: 29
Joined: Tue Jun 11, 2019 6:50 pm

Re: Should I be applying the money I am saving towards homes principal or am I doing it right by saving it?

Post by AKsuited » Sun Jul 07, 2019 7:06 pm

If all your ducks are in order; emergency fund funded, retirement funded, college 529 funded and etc then by all means use the extra cash to pay off your primary home principle. The new tax laws make carry a mortgage moot as the mortgage deduction is pretty much useless compared to just using the standard.

Topic Author
itsallaboutme
Posts: 37
Joined: Mon May 22, 2017 2:47 pm

Re: Should I be applying the money I am saving towards homes principal or am I doing it right by saving it?

Post by itsallaboutme » Mon Jul 08, 2019 5:35 am

stoptothink wrote:
Sun Jul 07, 2019 5:17 pm
I'm all but certain your mortgage has a higher rate than what you are earning in your Ally account, plus you are paying taxes on the interest. So, yeah, there is definitely value in putting some of it towards principal. I usually split the difference, putting about half the excess cash each month towards the mortgage principal and the rest in high-yield savings.
itsallaboutme wrote:
Sun Jul 07, 2019 5:12 pm
Here is how I do it. I save money every month and that goes towards the next years mortgage. So around May I am done with the current year and saving for the next year. I leave it in a savings account earning a little over 2% with ally bank. Should I put that money towards the principal instead? I never pay monthly because I've already saved up enough to pay in advance. Plus I also use tax money to put towards the year.
Right now we are in July I am done for the whole year already. The money is in the bank and it's being taken out automatically every month for the mortgage and taxes. So money I am saving now is for next year. I have about 3 months saved for next year not including tax money. I don't know if putting it towards principal would help in anyway. Is there a tool to figure this out or can someone guide me thanks.
stoptothink wrote:
Sun Jul 07, 2019 5:17 pm
I'm all but certain your mortgage has a higher rate than what you are earning in your Ally account, plus you are paying taxes on the interest. So, yeah, there is definitely value in putting some of it towards principal. I usually split the difference, putting about half the excess cash each month towards the mortgage principal and the rest in high-yield savings.
So every month it should go into the mortgage since waiting until the end of the year would be useless since I'd already earn interest on savings and have to pay taxes on it. I might split it next year. This year I will use the rest of the savings on the principal. So next year the tax money will go towards the principal. And I will make monthly payments for the first time

User avatar
Watty
Posts: 16856
Joined: Wed Oct 10, 2007 3:55 pm

Re: Should I be applying the money I am saving towards homes principal or am I doing it right by saving it?

Post by Watty » Mon Jul 08, 2019 7:31 am

itsallaboutme wrote:
Sun Jul 07, 2019 5:12 pm
Plus I also use tax money to put towards the year.
If this means that you normally get a large income tax refund each year then you should change your payroll withholding so that the amount withheld is closer to what you will actually owe. When you get a big tax refund that means that you have given the government an interest free loan for the year.
itsallaboutme wrote:
Sun Jul 07, 2019 5:12 pm
Right now we are in July I am done for the whole year already. The money is in the bank and it's being taken out automatically every month for the mortgage and taxes. So money I am saving now is for next year. I have about 3 months saved for next year not including tax money. I don't know if putting it towards principal would help in anyway. Is there a tool to figure this out or can someone guide me thanks.
You did not mention if you had a seperate emergency fund that you could depend on in case something happened like you lost your job or were disabled.

https://www.bogleheads.org/wiki/Emergency_fund

If I understand what you are doing it sounds like if something happened and you could not work for six months then you would still have money to pay your mortage. That is good to have. One problem with prepaying the mortage is that normally that just shortens the length of the loan but you still have to make your next month's mortage payment. That could be a problem if you lost your job the day after you made a large prepayment.

If you don't have it already I would suggest setting up a seperate emergency where you could save up six months expenses.

Once you have a seperate emergency fund then prepaying the mortage would make more sense because you would be OK if something happened like you lost your job.

It would also be good to put some money aside each month into a car fund to save up for any large car repairs and to be able to pay cash when you need to replace your car.

Since you are able to comfortably save more than your mortage payment you might want to consider refinancing the loan with a shorter loan if you have a 30 year mortage. That MIGHT be able to get you a lower interest rate. What is your current; loan amount, interest rate, payment(without taxes and insurance) and how many years are left on your loan?

Jags4186
Posts: 3589
Joined: Wed Jun 18, 2014 7:12 pm

Re: Should I be applying the money I am saving towards homes principal or am I doing it right by saving it?

Post by Jags4186 » Mon Jul 08, 2019 8:40 am

I believe paying extra on your mortgage is a bad idea. Your mortgage is a fixed monthly commitment. Until it is paid off, paying extra on the loan only serves to reduce the interest you pay. It does not reduce your monthly commitment—only the length of time you have that commitment. The major risk of a home/mortgage is being unable to satisfy your loan payments and being foreclosed on. The bank does not care if you’ve been making extra payments for years if all of a sudden you miss regularly scheduled payments.

For these reasons, I think it is best to save your money in a liquid account—even if it’s just a savings account earning less interest than the mortgage interest rate. Once you have enough money saved to completely pay off your mortgage you can then decide whether or not to pay off the loan. Paying off the loan then has the immediate effect of saving you your monthly mortgage payment and decreasing your monthly commitments.

Topic Author
itsallaboutme
Posts: 37
Joined: Mon May 22, 2017 2:47 pm

Re: Should I be applying the money I am saving towards homes principal or am I doing it right by saving it?

Post by itsallaboutme » Mon Jul 08, 2019 12:04 pm

Jags4186 wrote:
Mon Jul 08, 2019 8:40 am
I believe paying extra on your mortgage is a bad idea. Your mortgage is a fixed monthly commitment. Until it is paid off, paying extra on the loan only serves to reduce the interest you pay. It does not reduce your monthly commitment—only the length of time you have that commitment. The major risk of a home/mortgage is being unable to satisfy your loan payments and being foreclosed on. The bank does not care if you’ve been making extra payments for years if all of a sudden you miss regularly scheduled payments.

For these reasons, I think it is best to save your money in a liquid account—even if it’s just a savings account earning less interest than the mortgage interest rate. Once you have enough money saved to completely pay off your mortgage you can then decide whether or not to pay off the loan. Paying off the loan then has the immediate effect of saving you your monthly mortgage payment and decreasing your monthly commitments.
Watty wrote:
Mon Jul 08, 2019 7:31 am
itsallaboutme wrote:
Sun Jul 07, 2019 5:12 pm
Plus I also use tax money to put towards the year.
If this means that you normally get a large income tax refund each year then you should change your payroll withholding so that the amount withheld is closer to what you will actually owe. When you get a big tax refund that means that you have given the government an interest free loan for the year.
itsallaboutme wrote:
Sun Jul 07, 2019 5:12 pm
Right now we are in July I am done for the whole year already. The money is in the bank and it's being taken out automatically every month for the mortgage and taxes. So money I am saving now is for next year. I have about 3 months saved for next year not including tax money. I don't know if putting it towards principal would help in anyway. Is there a tool to figure this out or can someone guide me thanks.
You did not mention if you had a seperate emergency fund that you could depend on in case something happened like you lost your job or were disabled.

https://www.bogleheads.org/wiki/Emergency_fund

If I understand what you are doing it sounds like if something happened and you could not work for six months then you would still have money to pay your mortage. That is good to have. One problem with prepaying the mortage is that normally that just shortens the length of the loan but you still have to make your next month's mortage payment. That could be a problem if you lost your job the day after you made a large prepayment.

If you don't have it already I would suggest setting up a seperate emergency where you could save up six months expenses.

Once you have a seperate emergency fund then prepaying the mortage would make more sense because you would be OK if something happened like you lost your job.

It would also be good to put some money aside each month into a car fund to save up for any large car repairs and to be able to pay cash when you need to replace your car.

When you guys say paying extra on mortgage you mean paying towards the principal? In the case of tax refund what is the bet way to see what is right amount of dependents to put on w4? That is the way to find out if you are giving them(government) a lot of free interest correct?

Since you are able to comfortably save more than your mortage payment you might want to consider refinancing the loan with a shorter loan if you have a 30 year mortage. That MIGHT be able to get you a lower interest rate. What is your current; loan amount, interest rate, payment(without taxes and insurance) and how many years are left on your loan?
[/quote]

I don't think I can get a lower interest rate right now I am less than 3 years in. 3 years in November of this year loan amount 292,999 interest rate 3.50% payment without taxes and insurance I think it's 1584 27 years left

Topic Author
itsallaboutme
Posts: 37
Joined: Mon May 22, 2017 2:47 pm

Re: Should I be applying the money I am saving towards homes principal or am I doing it right by saving it?

Post by itsallaboutme » Mon Jul 08, 2019 12:07 pm

another thing I heard was people taking out HELOC loans to payoff mortgage early. I have to look it up but I think it was something like they take the loan amount and pay principal and pay off loan and keep doing it over and over until paid off.
Last edited by itsallaboutme on Mon Jul 08, 2019 3:44 pm, edited 1 time in total.

Bacchus01
Posts: 3017
Joined: Mon Dec 24, 2012 9:35 pm

Re: Should I be applying the money I am saving towards homes principal or am I doing it right by saving it?

Post by Bacchus01 » Mon Jul 08, 2019 12:16 pm

If the only option is to save that money to pay principal, then I would definitely just pay off the principal early instead of having it sit in a bank earning little interest (which is taxable too).

A better alternative would be to invest that money into something that has a longer term horizon consistent with your total mortgage length. Then, if you like, use the dividends to pay extra principal if you like.

Paying extra principal is a polarizing opinion around here. It usually is more about personal preference than actual financial return. If you want to do it, fine, but the way you are doing it is probably sub-optimal.

runner540
Posts: 1000
Joined: Sun Feb 26, 2017 5:43 pm

Re: Should I be applying the money I am saving towards homes principal or am I doing it right by saving it?

Post by runner540 » Mon Jul 08, 2019 12:54 pm

itsallaboutme wrote:
Mon Jul 08, 2019 12:07 pm
On either thing I heard was people taking out HELOC loans to payoff mortgage early. I have to look it up but I think it was something like they take the loan amount and pay principal and pay off loan and keep doing it over and over until paid off.
How does it help to replace mortgage debt with heloc debt?

mhalley
Posts: 7262
Joined: Tue Nov 20, 2007 6:02 am

Re: Should I be applying the money I am saving towards homes principal or am I doing it right by saving it?

Post by mhalley » Mon Jul 08, 2019 1:22 pm

You might be thinking of the method described here
https://www.doughroller.net/mortgages/c ... h-a-heloc/
Is it a good idea? Here is what doughroller says
. In general, the best financial strategies are the ones that are most simple. Simplicity is the basic concept behind dollar-cost averaging and investing in index funds. Simple means that you don’t have to think about it, or struggle to make it happen—and that’s exactly what it takes to make it work.

The HELOC strategy is anything but simple. You’re essentially setting up a scheme based on debt. This scheme is used not only to pay off your mortgage, but also to manage your entire financial situation. It means that you’re constantly juggling between a credit card and a HELOC, while putting all of your extra money into your first mortgage....
There are less complicated ways to pay off your mortgage early, and they will generally give you more control over the process..
If your mortgage is less than 4 % you should probably not pay it off and start investing your extra savings.

Jags4186
Posts: 3589
Joined: Wed Jun 18, 2014 7:12 pm

Re: Should I be applying the money I am saving towards homes principal or am I doing it right by saving it?

Post by Jags4186 » Mon Jul 08, 2019 1:32 pm

itsallaboutme wrote:
Mon Jul 08, 2019 12:04 pm
When you guys say paying extra on mortgage you mean paying towards the principal? In the case of tax refund what is the bet way to see what is right amount of dependents to put on w4? That is the way to find out if you are giving them(government) a lot of free interest correct?

I don't think I can get a lower interest rate right now I am less than 3 years in. 3 years in November of this year loan amount 292,999 interest rate 3.50% payment without taxes and insurance I think it's 1584 27 years left
I mean don’t pay more than your minimum payment due. And I don’t suggest you save up hundreds of thousands of dollars into a bank account, I do believe you should invest money above and beyond your emergency fund. Over a long period of time it is very likely you will beat a 3.5% return after tax. Even today you can by intermediate term (5 year) investment grade corporate bonds paying 5%+ interest right at Vanguard, which if you are paying 30% in taxes puts your right at your after tax mortgage interest rate of 3.5%.

With regards to your tax refund you should increase or decrease your allowances based on the type of refund you are getting. You can use the IRS’s worksheet to determine the appropriate amount of allowances you should be claiming

https://apps.irs.gov/app/withholdingcalculator/

The only time I suggest you pay extra on your mortgage is if your mortgage rate is high — say >=4.75% — or if you’re just going to buy toys instead of saving the money.

Topic Author
itsallaboutme
Posts: 37
Joined: Mon May 22, 2017 2:47 pm

Re: Should I be applying the money I am saving towards homes principal or am I doing it right by saving it?

Post by itsallaboutme » Mon Jul 08, 2019 4:36 pm

Jags4186 wrote:
Mon Jul 08, 2019 1:32 pm
itsallaboutme wrote:
Mon Jul 08, 2019 12:04 pm
When you guys say paying extra on mortgage you mean paying towards the principal? In the case of tax refund what is the bet way to see what is right amount of dependents to put on w4? That is the way to find out if you are giving them(government) a lot of free interest correct?

I don't think I can get a lower interest rate right now I am less than 3 years in. 3 years in November of this year loan amount 292,999 interest rate 3.50% payment without taxes and insurance I think it's 1584 27 years left
I mean don’t pay more than your minimum payment due. And I don’t suggest you save up hundreds of thousands of dollars into a bank account, I do believe you should invest money above and beyond your emergency fund. Over a long period of time it is very likely you will beat a 3.5% return after tax. Even today you can by intermediate term (5 year) investment grade corporate bonds paying 5%+ interest right at Vanguard, which if you are paying 30% in taxes puts your right at your after tax mortgage interest rate of 3.5%.

With regards to your tax refund you should increase or decrease your allowances based on the type of refund you are getting. You can use the IRS’s worksheet to determine the appropriate amount of allowances you should be claiming

https://apps.irs.gov/app/withholdingcalculator/

The only time I suggest you pay extra on your mortgage is if your mortgage rate is high — say >=4.75% — or if you’re just going to buy toys instead of saving the money.
Lots of info there. I don't know much about corporate bonds. Is that through IRA ?

Jags4186
Posts: 3589
Joined: Wed Jun 18, 2014 7:12 pm

Re: Should I be applying the money I am saving towards homes principal or am I doing it right by saving it?

Post by Jags4186 » Mon Jul 08, 2019 6:32 pm

You can purchase bonds either in a taxable account or tax advantaged account.

You can check on rates for various terms here:

https://personal.vanguard.com/us/FixedIncomeHome


Topic Author
itsallaboutme
Posts: 37
Joined: Mon May 22, 2017 2:47 pm

Re: Should I be applying the money I am saving towards homes principal or am I doing it right by saving it?

Post by itsallaboutme » Tue Jul 09, 2019 3:39 pm

I just did a quick check I should be able to remove my pmi around February. I will go look at the real numbers but it's definitely next year. Is it normal to remove after only 3 years?

Lee_WSP
Posts: 623
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Should I be applying the money I am saving towards homes principal or am I doing it right by saving it?

Post by Lee_WSP » Tue Jul 09, 2019 5:39 pm

Jags4186 wrote:
Mon Jul 08, 2019 8:40 am
I believe paying extra on your mortgage is a bad idea. Your mortgage is a fixed monthly commitment. Until it is paid off, paying extra on the loan only serves to reduce the interest you pay. It does not reduce your monthly commitment—only the length of time you have that commitment. The major risk of a home/mortgage is being unable to satisfy your loan payments and being foreclosed on. The bank does not care if you’ve been making extra payments for years if all of a sudden you miss regularly scheduled payments.
I agree with this statement.

User avatar
grabiner
Advisory Board
Posts: 24816
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Should I be applying the money I am saving towards homes principal or am I doing it right by saving it?

Post by grabiner » Tue Jul 09, 2019 9:55 pm

Jags4186 wrote:
Mon Jul 08, 2019 1:32 pm
itsallaboutme wrote:
Mon Jul 08, 2019 12:04 pm
When you guys say paying extra on mortgage you mean paying towards the principal? In the case of tax refund what is the bet way to see what is right amount of dependents to put on w4? That is the way to find out if you are giving them(government) a lot of free interest correct?

I don't think I can get a lower interest rate right now I am less than 3 years in. 3 years in November of this year loan amount 292,999 interest rate 3.50% payment without taxes and insurance I think it's 1584 27 years left
I mean don’t pay more than your minimum payment due. And I don’t suggest you save up hundreds of thousands of dollars into a bank account, I do believe you should invest money above and beyond your emergency fund. Over a long period of time it is very likely you will beat a 3.5% return after tax. Even today you can by intermediate term (5 year) investment grade corporate bonds paying 5%+ interest right at Vanguard, which if you are paying 30% in taxes puts your right at your after tax mortgage interest rate of 3.5%.
Vanguard Intermediate-Term Corporate Bond ETF is yielding 3.16%, not 5%. And even that isn't quite a fair comparison, as paying down your mortgage is a risk-free return, while this fund is half rated BBB.

Conversely, the duration is unfair in the other direction. unless you expect to sell the house in 5 years; paying down a mortgage with 27 years left is an investment with a 27-year duration. Therefore, I would recommend maxing out your IRA and 401(k), where you can get your returns tax-free, in preference to paying down the mortgage.
Wiki David Grabiner

Jags4186
Posts: 3589
Joined: Wed Jun 18, 2014 7:12 pm

Re: Should I be applying the money I am saving towards homes principal or am I doing it right by saving it?

Post by Jags4186 » Wed Jul 10, 2019 7:47 am

grabiner wrote:
Tue Jul 09, 2019 9:55 pm
Jags4186 wrote:
Mon Jul 08, 2019 1:32 pm
itsallaboutme wrote:
Mon Jul 08, 2019 12:04 pm
When you guys say paying extra on mortgage you mean paying towards the principal? In the case of tax refund what is the bet way to see what is right amount of dependents to put on w4? That is the way to find out if you are giving them(government) a lot of free interest correct?

I don't think I can get a lower interest rate right now I am less than 3 years in. 3 years in November of this year loan amount 292,999 interest rate 3.50% payment without taxes and insurance I think it's 1584 27 years left
I mean don’t pay more than your minimum payment due. And I don’t suggest you save up hundreds of thousands of dollars into a bank account, I do believe you should invest money above and beyond your emergency fund. Over a long period of time it is very likely you will beat a 3.5% return after tax. Even today you can by intermediate term (5 year) investment grade corporate bonds paying 5%+ interest right at Vanguard, which if you are paying 30% in taxes puts your right at your after tax mortgage interest rate of 3.5%.
Vanguard Intermediate-Term Corporate Bond ETF is yielding 3.16%, not 5%. And even that isn't quite a fair comparison, as paying down your mortgage is a risk-free return, while this fund is half rated BBB.

Conversely, the duration is unfair in the other direction. unless you expect to sell the house in 5 years; paying down a mortgage with 27 years left is an investment with a 27-year duration. Therefore, I would recommend maxing out your IRA and 401(k), where you can get your returns tax-free, in preference to paying down the mortgage.
I didn’t say corporate bond ETF I said corporate bonds. Vanguard is selling individual corporate bonds for 3 year duration at ~4.5% and 5 year duration at ~5%. Again it’s not risk free but it is an option.

It’s also not fair to say a 30 year mortgage is a 30 year commitment because we know most 30 year mortgages are paid off in 7-10 years either through refinancing, selling the home, or simply paying it off.

Yes, I agree with you that investing for the long term is preferable to prepaying a mortgage and point that out in a later post.

Every decision you make has opportunity cost and risk associated with it. It’s up to you to decide what you can live with.

ralph124cf
Posts: 2281
Joined: Tue Apr 01, 2014 11:41 am

Re: Should I be applying the money I am saving towards homes principal or am I doing it right by saving it?

Post by ralph124cf » Wed Jul 10, 2019 9:05 am

If it would allow you to get rid of PMI earlier, that would be a good argument for paying extra on the principal.

Ralph

coachd50
Posts: 204
Joined: Sun Oct 22, 2017 10:12 am

Re: Should I be applying the money I am saving towards homes principal or am I doing it right by saving it?

Post by coachd50 » Wed Jul 10, 2019 4:37 pm

itsallaboutme wrote:
Sun Jul 07, 2019 5:12 pm
Here is how I do it. I save money every month and that goes towards the next years mortgage. So around May I am done with the current year and saving for the next year. I leave it in a savings account earning a little over 2% with ally bank. Should I put that money towards the principal instead? I never pay monthly because I've already saved up enough to pay in advance. Plus I also use tax money to put towards the year.
Right now we are in July I am done for the whole year already. The money is in the bank and it's being taken out automatically every month for the mortgage and taxes. So money I am saving now is for next year. I have about 3 months saved for next year not including tax money. I don't know if putting it towards principal would help in anyway. Is there a tool to figure this out or can someone guide me thanks.
You really haven't given much information here. Such decisions can not be made in a vacuum. I would suggest you take some time researching financial literacy though.

Now, purely based on arithmetic here, paying down the principal of a 3.5% mortgage would yield more than holding that cash in a 2% savings account. But there are so many other things to consider.

1) Is there a better investment option? Most people on this board would agree that if you are looking to do this for the next 15-18 years, then chances are investing in a S&P 500 or Total Market Index fund would yield a better return than paying down the mortgage

2) Liquidity needs.

3) Your goals

4) The PMI that was mentioned.
etc. Just a few of the things that would impact this decision.

Post Reply