Plan to move ~5 years, pay extra or save?

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Nukeboilermaker
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Plan to move ~5 years, pay extra or save?

Post by Nukeboilermaker » Sun Feb 05, 2012 10:08 pm

Something I have been contemplating is my game plan for when we would like to move up in housing. We are actively planning kids in the near future and are planning on moving up right before are kids reach school age. What I am trying to decide is do I pay extra to the mortgage or save. If I save, what is a good vehicle for this purpose?

Our personal data:

Married both of us are 25
Mortgage- 136k 15yr fixed 3.25% Just Refinanced and February was my first payment (home currently worth ~140k)
No Debt
Emergency Fund- 14k (7 months and growing)
Income- 120-140k gross
Retirement: Maxing his 401k and his (R) and her (T) IRAs

We are looking to move to a home in the 250-325k range.

I'm curious to hear people's strategies on this type of situation.

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CaliJim
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Re: Plan to move ~5 years, pay extra or save?

Post by CaliJim » Mon Feb 06, 2012 12:01 am

If I were you I would pay down the mortgage by an additional $300/mo to get to your goal, and another $200/mo into the emergency/house fund. $14k is a very small efund imho.

AND... I might target a house on the cheaper side of the range you mentioned.

Nukeboilermaker
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Re: Plan to move ~5 years, pay extra or save?

Post by Nukeboilermaker » Mon Feb 06, 2012 5:25 am

CaliJim,

Thanks for the input, I am currently paying an extra $210/month (just happens to be an easy $1500/month round number) and paying myself Bi-weekly at that same rate ($750/check towards mortgage). I am also currently putting at least $500/month into E fund. Our expenses budget is ~$2200/month for 100% of our living costs. So I am all ready doing your current recommendations :D. What I am trying to decide is do I continue to pile my overtime and extra funds towards mortgage, savings, or both? It sounds like you agree I should continue to put extra towards the mortgage and E fund.

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Aptenodytes
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Re: Plan to move ~5 years, pay extra or save?

Post by Aptenodytes » Mon Feb 06, 2012 6:18 am

You are saving for a down payment on a new house, and the question is whether to park the savings in your current home's equity or another vehicle (e.g. short-term bond fund or CD). You will need the down payment in five years or so.

I don't see how it makes sense to put the savings in your current home's equity (through extra mortgage payments). Although you would be able to use the increased home equity when you sell, you will be tying up savings in a very high-risk investment. If real estate prices drop 5% in the next five years, you end up losing. For money you need that quickly, better to keep in a safer vehicle, where such a loss isn't possible.

You are already on a pretty rapid pace toward paying down your mortgage, through the 15-year term, and are getting a healthy reduction in interest rate because of that. I would proceed as if you already have a very good plan for paying off the mortgage, and concentrate on safeguarding the new savings. If it were me, I would put the new savings in CDs maturing in 2016.

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damjam
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Re: Plan to move ~5 years, pay extra or save?

Post by damjam » Mon Feb 06, 2012 6:34 am

The OP will "loose" if the price of the house goes down whether the OP prepays or does not. Or are you suggesting the OP plan to walk away from the property and mortgage if the value goes down?

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Aptenodytes
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Re: Plan to move ~5 years, pay extra or save?

Post by Aptenodytes » Mon Feb 06, 2012 7:07 am

damjam wrote:The OP will "loose" if the price of the house goes down whether the OP prepays or does not. Or are you suggesting the OP plan to walk away from the property and mortgage if the value goes down?

I'm saying that putting extra savings in the mortgage limits options down the road unnecessarily. It is almost always better to have more options. One of those options would be walking away from an underwater loan, but that's not the only one. E.g. suppose a dream house comes on the market all of a sudden five years from now and the OP wants to buy it, but has to act fast. Having all the extra savings tied up in the current house limits ability to apply a down payment. I don't know whether this is a realistic possibility or not in this case, but another option that would be constrained would be a choice to remodel on the current lot.

I could see giving those options up if there's some benefit in return, but I don't see what that is in this case, other than a modest reduction in interest payments.

How the future unfolds can be hard to anticipate, so preserving flexibility counts for something.

All that said, I can see the case for going the other way and don't feel very strongly about it.

Nukeboilermaker
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Re: Plan to move ~5 years, pay extra or save?

Post by Nukeboilermaker » Mon Feb 06, 2012 10:26 am

Aptenodytes,

With your reasoning do you suggest I only pay my minimum mortgage payment and save all extra funds? Or are you suggesting I stay my current course and save the rest? As a reminder I am currently paying ~200/ month extra and will put an extra half payment in the two months that have three pay periods.

Thanks for your input and I hope more members will contribute their thought proccess too!

guitarguy
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Re: Plan to move ~5 years, pay extra or save?

Post by guitarguy » Mon Feb 06, 2012 1:21 pm

If I were you I'd just save rather than pay extra. If paying a little more to make it a round number makes you happy, do it, but I'd just save the bulk of your extra funds.

If you park your cash in CDs or wherever an and earn something on it, the difference in what you'd save by pre-paying that low interest loan won't add up to all that much, and would be a small price to pay for the liquidity and potential flexiblity down the road.

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CaliJim
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Re: Plan to move ~5 years, pay extra or save?

Post by CaliJim » Mon Feb 06, 2012 2:28 pm

Be aware that your best rate of return for a 5 year fixed instrument is probably the option of paying down the mortgage as much as you can.

However, we are not talking about a lot of interest savings - less than $1.5k. So you have to be the judge of the utility of having liquidity.

Locking the money up in the house does enforce discipline - keeps you from spending it on fluff.

Nukeboilermaker
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Re: Plan to move ~5 years, pay extra or save?

Post by Nukeboilermaker » Mon Feb 06, 2012 9:08 pm

CaliJim wrote:Be aware that your best rate of return for a 5 year fixed instrument is probably the option of paying down the mortgage as much as you can.

However, we are not talking about a lot of interest savings - less than $1.5k. So you have to be the judge of the utility of having liquidity.

Locking the money up in the house does enforce discipline - keeps you from spending it on fluff.


See that is one aspect, is that it guarantees discipline and returns by paying extra. However, it prevents flexibility of use of funds. It's a tough choice! I think I might try and split down the middle and continue with a slight extra payment monthly and the biweekly payment scheduling and then determine to save a % of extra funds directly for the intended purpose of the cost of a housing upgrade.

On a side note, profits made from the sale of a home are not taxed where as interest earned is correct?

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CaliJim
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Re: Plan to move ~5 years, pay extra or save?

Post by CaliJim » Tue Feb 07, 2012 12:54 am

For your situation you are correct. You can model this down to the gnat's a** if you want - figuring out the tax implications of each plan, etc - but I don't think you need to. Splitting it seems like a good plan. Close is good enough in this type of calculation. The main thing at your age is to keep the expenses under control. Keep up the good work of living below your means. You're off to a good start. And best wishes for actively planning those future kids of yours.... they tell me that type of planning can be quite strenuous. :beer
Last edited by CaliJim on Tue Feb 07, 2012 11:03 pm, edited 1 time in total.

Valuethinker
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Re: Plan to move ~5 years, pay extra or save?

Post by Valuethinker » Tue Feb 07, 2012 1:31 pm

Nukeboilermaker wrote:Something I have been contemplating is my game plan for when we would like to move up in housing. We are actively planning kids in the near future and are planning on moving up right before are kids reach school age. What I am trying to decide is do I pay extra to the mortgage or save. If I save, what is a good vehicle for this purpose?

Our personal data:

Married both of us are 25
Mortgage- 136k 15yr fixed 3.25% Just Refinanced and February was my first payment (home currently worth ~140k)
No Debt
Emergency Fund- 14k (7 months and growing)
Income- 120-140k gross
Retirement: Maxing his 401k and his (R) and her (T) IRAs

We are looking to move to a home in the 250-325k range.

I'm curious to hear people's strategies on this type of situation.


In truth, I'd move to the right house as soon as I could.

Now that's got 2 issues:

- can't afford it - OK you have to wait

- life changes, don't make babies etc. etc. - well if you bought a house in a good school district, it will always have a resale value

My logic is this. You don't want to move too often: big transactions costs (5-10% of sale price). Should US housing prices start going up again (no sign they will, but in some places they are) then the house you want may be unobtainable in 5 years time, say-- good neighbourhoods always move first.

It's not something you can 'time' optimally. You just know where you want to get to, and you should try to get there ASAP.

A house is really a lifestyle issue, it's not an investment per se. It's a place to buy, to live, to grow old with your family around. Like a crustacean shedding it's shell, you may have to discard it and move on in time, but that's not desirable (although it may be inevitable).

Sorry if this does not really answer your question.

Can I query your nick though? AFAIK the last places nuclear boilers (or at least the pressure vessels on a PWR) are made are 1). in Japan 2). in France. Sheffield Forgemasters, a UK company, has a government guaranteed loan to expand its capability to build same for the next generation of UK nukes, but not AFAIK capability yet. So (AFAIK) those are the only places you can get a nuclearboilermaker made these days? Yet I am assuming you are in USA?

Nukeboilermaker
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Re: Plan to move ~5 years, pay extra or save?

Post by Nukeboilermaker » Tue Feb 07, 2012 8:01 pm

Thanks for the input ValueThinker, I will definitely consider that option but I would still need another year or two before I could afford (to MY standards to move). As for my name, I'm a Purdue Boilermaker (studied radiological health physics) who is now an operator at a GE BWR 6 Mark III plant.

Valuethinker
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Re: Plan to move ~5 years, pay extra or save?

Post by Valuethinker » Wed Feb 08, 2012 4:30 am

Nukeboilermaker wrote:Thanks for the input ValueThinker, I will definitely consider that option but I would still need another year or two before I could afford (to MY standards to move). As for my name, I'm a Purdue Boilermaker (studied radiological health physics) who is now an operator at a GE BWR 6 Mark III plant.


When you do move, try to get the 'right' house for a long time, if you can. It's worth sacrificing for. Because once you have done that, barring career change or other big life change, you can then focus on the house and the other parts of your life (eg extend the house rather than move again, etc.). The danger is, of course, while you are saving for the right house, the prices move up. Generally in the USA right now I would view that risk as low (although all the fundamentals are signalling 'bottom' there's not a lot of sign of upward pressure) although there are probably localities where they will move up (ones with stronger local economies). Basically the crash, pressure from foreclosures etc. has choked off new supply and has delayed demand-- eventually those buyers will come back. You are already seeing this in the car market: the statistic at one point was that the average US car was being replaced every 19 years at the ratio of new sales to existing-- unsustainable. So, indeed, the car market has started to recover.

In terms of your investment policy I think you want to save like the blazes for the downpayment. Get any company match on your 401k, and the rest of the money into ST US Treasury Bonds (or perhaps tax exempt municipals, investment grade only) funds.

Thank you for being upfront about your career.

My father built nuclear reactors (CANDUs-- Canadian heavy water). The virtue is the industry is short of skilled people (his generation was never really replaced) and these things will be around a *long* time (it's a separate debate whether we build new ones-- some countries will, there will be lots of work helping the Chinese and Indians and South Koreans to do this, if no one else). Shrewdly, the British government located its nukes (mostly Advanced Gas Reactors-- there is one PWR in Suffolk, NE of London) in fairly remote coastal areas where unemployment is high and good paying jobs are scarce-- communities are complaining if they are not on the list for the next generation of reactors planned, one community is actually petitioning Parliament. (no comment intended about whether new nukes are wise/ desirable, ie simply an observation about what is happening).

http://www.antipope.org/charlie/blog-st ... -buil.html

is a tour of a nuclear reactor: thought you might find it interesting.

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