Should I pay extra monthly mortgage?

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candyfloss
Posts: 26
Joined: Fri Oct 08, 2021 11:20 am

Should I pay extra monthly mortgage?

Post by candyfloss »

[Topic is now in Personal Finance (Not Investing) - mod mkc]

Hi everyone, we bought a 500K house last year with 5% downpayment and 6.5% interest rate because I just hated to spend so much money on renting. My questions is what is best practice in terms of making extra payment if we don't know whether we want to stay in this house and potentially pay it off or own it for 5-7 years and sell it (and buy a better house)? We like the house, but its a bit small and we are not sure if we will have enough money for a bigger home in maybe like 10 years... I really want to make monthly extra payment and reduce the remaining principal but then if I do it I would lose savings for potential, probably unrealistic, future house. I would love to hear any suggestions or thoughts you have. Thank you very much in advance!

Ps. Sorry for not adding all the details! Here’s more details about our financial situations.

Income: $12,000 monthly income (after-tax)
Mortgage: $3,600/month including PMI and all other stuff
Car loan: $1,000/month but will be paid off within a year
Student loan: $400/month
Emergency savings: $40,000
Investment portfolio: $10,000
401K: $120,000

We are putting $300-400 per month for investment, mainly buying VTI. I’d also appreciate any investment advice!!!
Last edited by candyfloss on Mon Jul 08, 2024 8:09 pm, edited 1 time in total.
runswithscissors
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Re: Should I pay extra monthly mortgage?

Post by runswithscissors »

Will you be selling your current home and renting before buying a new home? If not you may not want to pay down the mortgage as you'll want to have more cash available for down payment on the next larger/better home.

As to the financial prudence of paying down a 6.5% mortgage sooner than later, I would probably pay it down. If the rate was below 5% I'd probably elect to not pay it down. But everyone will have a different opinion on this.
CoAndy
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Re: Should I pay extra monthly mortgage?

Post by CoAndy »

What is your household income and how much are you investing every year? What do your investments look like as well as your liquidity in general?
Golf maniac
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Re: Should I pay extra monthly mortgage?

Post by Golf maniac »

From the limited information you provided there are several reasons to pay down the mortgage. First, you only have 5% equity and you could be underwater with just a minor move in prices. If you are paying PMI the true interest rate you are paying is even higher. Second, any money you save for your next house should be kept in a fairly safe investment like a money market or CD. You will not be able to get 6.5% on those investments. Build your equity as fast as possible, get rid of PMI as soon as possible (if you have it), and always live well below your means.

Note: we have no information on your overall financial situation so the above advice may not be correct if you have no emergency savings or retirement savings, or other debts such as credit cards, car loans, or personal debt.
Jack FFR1846
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Re: Should I pay extra monthly mortgage?

Post by Jack FFR1846 »

There are 2 three letter words that are worse than any four letter words. HMO and PMI. I've avoided both all my life. You've been struck by at least one of these and you can start inflicting small cuts in the devil by putting extra money towards your mortgage principal. When you've exceeded 20%, in most states, you can get rid of that PMI. You'll probably have to pay for an appraisal but once done, you'll have even more extra money to pay towards the principal and like Dave Ramsey says, one of the characteristics of most millionaires is that they live in a paid off house.
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Admiral
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Re: Should I pay extra monthly mortgage?

Post by Admiral »

Absent other information:

You put 5% down on a half million dollar house at 6.5% interest. That tells me you bought more house than you could afford. If you have spare cash to pre-pay, why did you put down only 5% rather than save up and get a lower mortgage?

How long and how much money will it take to get to 20% equity to eliminate PMI?

Unless your pre-tax accounts are maxed, you should not pre-pay as a general rule. There are some exceptions.
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candyfloss
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Re: Should I pay extra monthly mortgage?

Post by candyfloss »

CoAndy wrote: Mon Jul 08, 2024 4:21 pm What is your household income and how much are you investing every year? What do your investments look like as well as your liquidity in general?
Ps. Sorry for not adding all the details! Here’s more details about our financial situations.

Income: $12,000 monthly income (after-tax)
Mortgage: $3,600/month including PMI and all other stuff
Car loan: $1,000/month but will be paid off within a year
Student loan: $400/month
Emergency savings: $40,000
Investment portfolio: $10,000
401K: $120,000

We are putting $300-400 per month for investment, mainly buying VTI. I’d also appreciate any investment advice!!!
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candyfloss
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Joined: Fri Oct 08, 2021 11:20 am

Re: Should I pay extra monthly mortgage?

Post by candyfloss »

Golf maniac wrote: Mon Jul 08, 2024 5:36 pm From the limited information you provided there are several reasons to pay down the mortgage. First, you only have 5% equity and you could be underwater with just a minor move in prices. If you are paying PMI the true interest rate you are paying is even higher. Second, any money you save for your next house should be kept in a fairly safe investment like a money market or CD. You will not be able to get 6.5% on those investments. Build your equity as fast as possible, get rid of PMI as soon as possible (if you have it), and always live well below your means.

Note: we have no information on your overall financial situation so the above advice may not be correct if you have no emergency savings or retirement savings, or other debts such as credit cards, car loans, or personal debt.
Ps. Sorry for not adding all the details! Here’s more details about our financial situations.

Income: $12,000 monthly income (after-tax)
Mortgage: $3,600/month including PMI and all other stuff
Car loan: $1,000/month but will be paid off within a year
Student loan: $400/month
Emergency savings: $40,000
Investment portfolio: $10,000
401K: $120,000

We are putting $300-400 per month for investment, mainly buying VTI. I’d also appreciate any investment advice!!!
finite_difference
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Re: Should I pay extra monthly mortgage?

Post by finite_difference »

If you are maxing out your 401k and Roth IRA then yes I would use the remainder to pay down the mortgage until you can avoid PMI.

And then also keep an eye on interest rates and do no cost refinance if they come down.
The most precious gift we can offer anyone is our attention. - Thich Nhat Hanh
schwank
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Re: Should I pay extra monthly mortgage?

Post by schwank »

candyfloss wrote: Mon Jul 08, 2024 8:11 pm Income: $12,000 monthly income (after-tax)
Mortgage: $3,600/month including PMI and all other stuff
Car loan: $1,000/month but will be paid off within a year
Student loan: $400/month
Emergency savings: $40,000
Investment portfolio: $10,000
401K: $120,000
With those numbers if my income was stable, I would do 401k to match and fund a Roth, then I would pay off the car from Emergency. Take that 1000 cash flow and refund emergency and make extra mortgage pmts until you get rid of PMI. Then I would go back to 401k.

I'd personally be more aggressive even, but that's me and not enough details to recommend for others.
tashnewbie
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Re: Should I pay extra monthly mortgage?

Post by tashnewbie »

I personally would stop any taxable investments and then would max 401k and Roth IRA (you have enough income to do it). I would do all that before paying extra towards the mortgage.

How old are you?

Will you have a pension?

You will need to see if you are eligible to make direct Roth IRA contributions. Your Modified AGI may exceed the limit to do so. If so, then unless you are familiar with the backdoor Roth process and can handle the tax paperwork, you should forego any IRA contributions.
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candyfloss
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Re: Should I pay extra monthly mortgage?

Post by candyfloss »

schwank wrote: Tue Jul 09, 2024 12:45 am
candyfloss wrote: Mon Jul 08, 2024 8:11 pm Income: $12,000 monthly income (after-tax)
Mortgage: $3,600/month including PMI and all other stuff
Car loan: $1,000/month but will be paid off within a year
Student loan: $400/month
Emergency savings: $40,000
Investment portfolio: $10,000
401K: $120,000
With those numbers if my income was stable, I would do 401k to match and fund a Roth, then I would pay off the car from Emergency. Take that 1000 cash flow and refund emergency and make extra mortgage pmts until you get rid of PMI. Then I would go back to 401k.

I'd personally be more aggressive even, but that's me and not enough details to recommend for others.

Thank you for your suggestion. We are doing 9% 401K contribution now, which I thought is enough. And for Roth do you mean backdoor Roth IRA or Roth 401k?

Also, my two car loans have 0% and 1.99% APR, should I still pay them off early for that 1000 cash flow because my mortgage interest rate is way higher?
muffins14
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Location: New York

Re: Should I pay extra monthly mortgage?

Post by muffins14 »

candyfloss wrote: Mon Jul 08, 2024 3:38 pm [Topic is now in Personal Finance (Not Investing) - mod mkc]

Hi everyone, we bought a 500K house last year with 5% downpayment and 6.5% interest rate because I just hated to spend so much money on renting. My questions is what is best practice in terms of making extra payment if we don't know whether we want to stay in this house and potentially pay it off or own it for 5-7 years and sell it (and buy a better house)? We like the house, but its a bit small and we are not sure if we will have enough money for a bigger home in maybe like 10 years... I really want to make monthly extra payment and reduce the remaining principal but then if I do it I would lose savings for potential, probably unrealistic, future house. I would love to hear any suggestions or thoughts you have. Thank you very much in advance!

Ps. Sorry for not adding all the details! Here’s more details about our financial situations.

Income: $12,000 monthly income (after-tax)
Mortgage: $3,600/month including PMI and all other stuff
Car loan: $1,000/month but will be paid off within a year
Student loan: $400/month
Emergency savings: $40,000
Investment portfolio: $10,000
401K: $120,000

We are putting $300-400 per month for investment, mainly buying VTI. I’d also appreciate any investment advice!!!
You hate the idea of rent, but were totally OK with a 5% down mortgage and 30k of annual interest? You’re paying $2500 to a bank for nothing. And you’re paying PMI, which is like a fee for the privilege of paying 30k interest to the bank.

You likely would have been better off renting honestly.


Where does the rest of your 12k go every month? You mention mortgage and loans around $5000 and you’re saving $400 only. Are you spending $6500 each month on discretionary items? Or is it like private school, childcare etc?
Last edited by muffins14 on Tue Jul 09, 2024 7:30 am, edited 1 time in total.
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candyfloss
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Re: Should I pay extra monthly mortgage?

Post by candyfloss »

tashnewbie wrote: Tue Jul 09, 2024 7:16 am I personally would stop any taxable investments and then would max 401k and Roth IRA (you have enough income to do it). I would do all that before paying extra towards the mortgage.

How old are you?

Will you have a pension?

You will need to see if you are eligible to make direct Roth IRA contributions. Your Modified AGI may exceed the limit to do so. If so, then unless you are familiar with the backdoor Roth process and can handle the tax paperwork, you should forego any IRA contributions.
I am familiar with backdoor Roth and tax paperwork, but just because it's a bit of hassle to do it I did not do it for last 2 years. Maybe I should start contributing again.

My husband and I are in mid 30s. I do have pension with my current company but I am still doing 9% 401K just in case I don't get enough pension or I don't retire at my current company. For maxing 401K, do you mean just matching with company rate or making yearly contribution limit?
muffins14
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Location: New York

Re: Should I pay extra monthly mortgage?

Post by muffins14 »

candyfloss wrote: Tue Jul 09, 2024 7:28 am
tashnewbie wrote: Tue Jul 09, 2024 7:16 am I personally would stop any taxable investments and then would max 401k and Roth IRA (you have enough income to do it). I would do all that before paying extra towards the mortgage.

How old are you?

Will you have a pension?

You will need to see if you are eligible to make direct Roth IRA contributions. Your Modified AGI may exceed the limit to do so. If so, then unless you are familiar with the backdoor Roth process and can handle the tax paperwork, you should forego any IRA contributions.
I am familiar with backdoor Roth and tax paperwork, but just because it's a bit of hassle to do it I did not do it for last 2 years. Maybe I should start contributing again.

My husband and I are in mid 30s. I do have pension with my current company but I am still doing 9% 401K just in case I don't get enough pension or I don't retire at my current company. For maxing 401K, do you mean just matching with company rate or making yearly contribution limit?
Making up to the limit, then also doing backdoor Roth when possible. You get tax savings on the deductible portion of the 401k
Crom laughs at your Four Winds
NYCaviator
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Re: Should I pay extra monthly mortgage?

Post by NYCaviator »

muffins14 wrote: Tue Jul 09, 2024 7:23 am Where does the rest of your 12k go every month? You mention mortgage and loans around $5000 and you’re saving $400 only. Are you spending $6500 each month on discretionary items? Or is it like private school, childcare etc?
This is an important factor.

OP, how much do you spend on other stuff? Groceries, entertainment, gas, insurance, etc.? You have $6,500 left over each month.

It seems like you bought more house than you can afford. Unless your income is going to go up significantly, I'd stop thinking about a buying another house. Putting less than 20% down is sometimes OK if it's your first house and you're trying to get on the property ladder, but buying a $500k house with 5% down at 6%+ interest is really risky.

1. max our your tax deferred retirement accounts first.

2. put extra money towards your mortgage until you can get rid of PMI. You're just throwing money away on that.

3. Reassess once PMI is gone and your retirement savings is on track.
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candyfloss
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Re: Should I pay extra monthly mortgage?

Post by candyfloss »

muffins14 wrote: Tue Jul 09, 2024 7:23 am
candyfloss wrote: Mon Jul 08, 2024 3:38 pm [Topic is now in Personal Finance (Not Investing) - mod mkc]

Hi everyone, we bought a 500K house last year with 5% downpayment and 6.5% interest rate because I just hated to spend so much money on renting. My questions is what is best practice in terms of making extra payment if we don't know whether we want to stay in this house and potentially pay it off or own it for 5-7 years and sell it (and buy a better house)? We like the house, but its a bit small and we are not sure if we will have enough money for a bigger home in maybe like 10 years... I really want to make monthly extra payment and reduce the remaining principal but then if I do it I would lose savings for potential, probably unrealistic, future house. I would love to hear any suggestions or thoughts you have. Thank you very much in advance!

Ps. Sorry for not adding all the details! Here’s more details about our financial situations.

Income: $12,000 monthly income (after-tax)
Mortgage: $3,600/month including PMI and all other stuff
Car loan: $1,000/month but will be paid off within a year
Student loan: $400/month
Emergency savings: $40,000
Investment portfolio: $10,000
401K: $120,000

We are putting $300-400 per month for investment, mainly buying VTI. I’d also appreciate any investment advice!!!
You hate the idea of rent, but were totally OK with a 5% down mortgage and 30k of annual interest? You’re paying $2500 to a bank for nothing. And you’re paying PMI, which is like a fee for the privilege of paying 30k interest to the bank.

You likely would have been better off renting honestly.


Where does the rest of your 12k go every month? You mention mortgage and loans around $5000 and you’re saving $400 only. Are you spending $6500 each month on discretionary items? Or is it like private school, childcare etc?

Yes, I agree with you for the most part. Buying a house was not a financially driven decision, its more for ownership and peace of mind thing.

For the rest of the income, we are paying for child care which is $1,500 a month and $500-800 for utility, gas, etc, grocery shopping and dining out is more than $1,000, and then I am saving $1,000 in savings account. The rest are basically spent on house maintanence, traveling, shopping etc.
sjt
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Location: NC

Re: Should I pay extra monthly mortgage?

Post by sjt »

Seems that your mortgage is on the higher end of what I'd recommend. The childcare expense is really painful, I had several years of that.

Instead of making extra payments toward the mortgage, I'd recommend funding a brokerage (taxable) account instead. You will likely earn more than 6.5% annually, and it can be tapped if needed for unexpected expenses.
"The one who covets is the poorer man, | For he would have that which he never can; | But he who doesn't have and doesn't crave | Is rich, though you may hold him but a knave." - Wife of Bath tale
muffins14
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Location: New York

Re: Should I pay extra monthly mortgage?

Post by muffins14 »

candyfloss wrote: Tue Jul 09, 2024 7:43 am
muffins14 wrote: Tue Jul 09, 2024 7:23 am
candyfloss wrote: Mon Jul 08, 2024 3:38 pm [Topic is now in Personal Finance (Not Investing) - mod mkc]

Hi everyone, we bought a 500K house last year with 5% downpayment and 6.5% interest rate because I just hated to spend so much money on renting. My questions is what is best practice in terms of making extra payment if we don't know whether we want to stay in this house and potentially pay it off or own it for 5-7 years and sell it (and buy a better house)? We like the house, but its a bit small and we are not sure if we will have enough money for a bigger home in maybe like 10 years... I really want to make monthly extra payment and reduce the remaining principal but then if I do it I would lose savings for potential, probably unrealistic, future house. I would love to hear any suggestions or thoughts you have. Thank you very much in advance!

Ps. Sorry for not adding all the details! Here’s more details about our financial situations.

Income: $12,000 monthly income (after-tax)
Mortgage: $3,600/month including PMI and all other stuff
Car loan: $1,000/month but will be paid off within a year
Student loan: $400/month
Emergency savings: $40,000
Investment portfolio: $10,000
401K: $120,000

We are putting $300-400 per month for investment, mainly buying VTI. I’d also appreciate any investment advice!!!
You hate the idea of rent, but were totally OK with a 5% down mortgage and 30k of annual interest? You’re paying $2500 to a bank for nothing. And you’re paying PMI, which is like a fee for the privilege of paying 30k interest to the bank.

You likely would have been better off renting honestly.


Where does the rest of your 12k go every month? You mention mortgage and loans around $5000 and you’re saving $400 only. Are you spending $6500 each month on discretionary items? Or is it like private school, childcare etc?

Yes, I agree with you for the most part. Buying a house was not a financially driven decision, its more for ownership and peace of mind thing.

For the rest of the income, we are paying for child care which is $1,500 a month and $500-800 for utility, gas, etc, grocery shopping and dining out is more than $1,000, and then I am saving $1,000 in savings account. The rest are basically spent on house maintanence, traveling, shopping etc.
So it is $3000 per month for travel, shopping, maintenance.

Can you break that down?

Are you spending $1000 on maintenance and $2000 on travel and shopping every month?

If you are spending $1000 on monthly maintain plus $2500 interest plus PMI, I have a very hard time understanding how this is better than renting. “Peace of mind” has value, but I would be very anxious paying like 3500-4000 for non-principal portion of my home and then $1000 for principal. It seems financially very odd that that makes you feel better than renting
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Chadnudj
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Re: Should I pay extra monthly mortgage?

Post by Chadnudj »

candyfloss wrote: Tue Jul 09, 2024 7:43 am
muffins14 wrote: Tue Jul 09, 2024 7:23 am
candyfloss wrote: Mon Jul 08, 2024 3:38 pm [Topic is now in Personal Finance (Not Investing) - mod mkc]

Hi everyone, we bought a 500K house last year with 5% downpayment and 6.5% interest rate because I just hated to spend so much money on renting. My questions is what is best practice in terms of making extra payment if we don't know whether we want to stay in this house and potentially pay it off or own it for 5-7 years and sell it (and buy a better house)? We like the house, but its a bit small and we are not sure if we will have enough money for a bigger home in maybe like 10 years... I really want to make monthly extra payment and reduce the remaining principal but then if I do it I would lose savings for potential, probably unrealistic, future house. I would love to hear any suggestions or thoughts you have. Thank you very much in advance!

Ps. Sorry for not adding all the details! Here’s more details about our financial situations.

Income: $12,000 monthly income (after-tax)
Mortgage: $3,600/month including PMI and all other stuff
Car loan: $1,000/month but will be paid off within a year
Student loan: $400/month
Emergency savings: $40,000
Investment portfolio: $10,000
401K: $120,000

We are putting $300-400 per month for investment, mainly buying VTI. I’d also appreciate any investment advice!!!
You hate the idea of rent, but were totally OK with a 5% down mortgage and 30k of annual interest? You’re paying $2500 to a bank for nothing. And you’re paying PMI, which is like a fee for the privilege of paying 30k interest to the bank.

You likely would have been better off renting honestly.


Where does the rest of your 12k go every month? You mention mortgage and loans around $5000 and you’re saving $400 only. Are you spending $6500 each month on discretionary items? Or is it like private school, childcare etc?

Yes, I agree with you for the most part. Buying a house was not a financially driven decision, its more for ownership and peace of mind thing.

For the rest of the income, we are paying for child care which is $1,500 a month and $500-800 for utility, gas, etc, grocery shopping and dining out is more than $1,000, and then I am saving $1,000 in savings account. The rest are basically spent on house maintanence, traveling, shopping etc.
I'd agree with others here:

1. Pay off the car with emergency savings.
2. Stop putting money into taxable. First priorities should be (1) getting full match on traditional 401k at your jobs, (2) two backdoor Roths for you/spouse, (3) HSA (if applicable/eligible), and then (4) maxing out traditional 401ks at jobs....only THEN should you start doing taxable investing.
3. Replenish emergency fund with the former car payment, making sure emergency fund is in a high yield savings/high interest paying money market account. Once emergency fund is at the right level for you, divert the monthly interest towards taxable investing.
4. Then, and only then, begin taxable investing.
5. Throughout this process, try to find ways to make more money/spend less.
6. Do NOT pay more on the mortgage right now. Your priority for now needs to be maintaining liquidity in the event of emergency/job loss, and not putting a bunch of extra money into an illiquid asset (your house). Liquidity is so often overlooked in terms of importance, and it really should not be. And, while no one has a crystal ball on these things, there is a significant chance interest rates fall which would allow you to refinance to a lower rate mortgage (and if that does not come to pass, and interest rates rise, you'll likely see higher interest in your high yield savings/money market).

EDITED TO ADD: I suppose you also should try to pay off the student loan, depending on interest rate/possibility of forgiveness, likely before taxable investing at step 4 (and certainly before paying any extra on the house).
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CommitmentDevice
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Re: Should I pay extra monthly mortgage?

Post by CommitmentDevice »

Definitely stop the taxable investing. It will have a lower risk-adjusted return compared to tax-deferred or mortgage.

Car loan is low interest rate so let it ride.

Personally, at those interest rates, I’d liquidate taxable and focus on paying down the mortgage to 20% as quickly as possible. Controversial, but maybe do this extra quickly via a 401K loan.

Hopefully interest rates will go down and you’ll be able to refinance, but who knows.
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candyfloss
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Re: Should I pay extra monthly mortgage?

Post by candyfloss »

muffins14 wrote: Tue Jul 09, 2024 7:52 am
candyfloss wrote: Tue Jul 09, 2024 7:43 am
muffins14 wrote: Tue Jul 09, 2024 7:23 am
candyfloss wrote: Mon Jul 08, 2024 3:38 pm [Topic is now in Personal Finance (Not Investing) - mod mkc]

Hi everyone, we bought a 500K house last year with 5% downpayment and 6.5% interest rate because I just hated to spend so much money on renting. My questions is what is best practice in terms of making extra payment if we don't know whether we want to stay in this house and potentially pay it off or own it for 5-7 years and sell it (and buy a better house)? We like the house, but its a bit small and we are not sure if we will have enough money for a bigger home in maybe like 10 years... I really want to make monthly extra payment and reduce the remaining principal but then if I do it I would lose savings for potential, probably unrealistic, future house. I would love to hear any suggestions or thoughts you have. Thank you very much in advance!

Ps. Sorry for not adding all the details! Here’s more details about our financial situations.

Income: $12,000 monthly income (after-tax)
Mortgage: $3,600/month including PMI and all other stuff
Car loan: $1,000/month but will be paid off within a year
Student loan: $400/month
Emergency savings: $40,000
Investment portfolio: $10,000
401K: $120,000

We are putting $300-400 per month for investment, mainly buying VTI. I’d also appreciate any investment advice!!!
You hate the idea of rent, but were totally OK with a 5% down mortgage and 30k of annual interest? You’re paying $2500 to a bank for nothing. And you’re paying PMI, which is like a fee for the privilege of paying 30k interest to the bank.

You likely would have been better off renting honestly.


Where does the rest of your 12k go every month? You mention mortgage and loans around $5000 and you’re saving $400 only. Are you spending $6500 each month on discretionary items? Or is it like private school, childcare etc?

Yes, I agree with you for the most part. Buying a house was not a financially driven decision, its more for ownership and peace of mind thing.

For the rest of the income, we are paying for child care which is $1,500 a month and $500-800 for utility, gas, etc, grocery shopping and dining out is more than $1,000, and then I am saving $1,000 in savings account. The rest are basically spent on house maintanence, traveling, shopping etc.
So it is $3000 per month for travel, shopping, maintenance.

Can you break that down?

Are you spending $1000 on maintenance and $2000 on travel and shopping every month?

If you are spending $1000 on monthly maintain plus $2500 interest plus PMI, I have a very hard time understanding how this is better than renting. “Peace of mind” has value, but I would be very anxious paying like 3500-4000 for non-principal portion of my home and then $1000 for principal. It seems financially very odd that that makes you feel better than renting

For some months, yes we do spend a lot. For example, we spent $7,000 on flight for a very important family trip. And we've been paying $190/month for lawn service, so to get rid of that, we bought $1,500 worth of lawn equipment last month and plan to DIY everything going forward. But there are some months that we have leftover so I was able to save $2,500 to my emergency savings account, etc. But we do spend a lot on dining out and buying kid's toy. I buy a lot of used toys too but things just get too expensive now with all child stuff.
CoAndy
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Re: Should I pay extra monthly mortgage?

Post by CoAndy »

So, I would pay down the mortgage to the point that PMI is dropped, and would max out the 401(k), which I want to say is $23k this year. I would let the car loan ride. I would want more money in investments before putting more money towards the house. Good luck.
Mattman25
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Re: Should I pay extra monthly mortgage?

Post by Mattman25 »

No one has mentioned the student loans yet. What is the interest rate on those loans?
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candyfloss
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Re: Should I pay extra monthly mortgage?

Post by candyfloss »

Mattman25 wrote: Tue Jul 09, 2024 8:42 am No one has mentioned the student loans yet. What is the interest rate on those loans?
It's around 3.8% and has $20,000 left.
cmr79
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Re: Should I pay extra monthly mortgage?

Post by cmr79 »

CoAndy wrote: Tue Jul 09, 2024 8:30 am So, I would pay down the mortgage to the point that PMI is dropped, and would max out the 401(k), which I want to say is $23k this year. I would let the car loan ride. I would want more money in investments before putting more money towards the house. Good luck.
Agree with this. Get rid of the PMI and then focus on investing. No sense in paying off the car loans or student loan faster than you need to right now at the expense of carrying PMI longer, and even after it is gone, the rates on those loans are low enough in the current interest environment that it doesn't make much sense to prioritize them over investments and liquidity. If interest rates drop to where the after tax return on something like VMFXX is less than the after tax return on paying down a loan is similar, I would pay extra on the loans then.
Church Lady
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Re: Should I pay extra monthly mortgage?

Post by Church Lady »

Emergency savings: $40,000
Investment portfolio: $10,000
401K: $120,000
On the one hand, it would be great to pay an additional 75,000 on the mortgage to get rid of PMI, and refinance when(if) rates drop. :happy

On the other hand, your savings are way too low. :(

Normally I'd say pay enough to get rid of PMI, but you really, really need more savings.

You have about three months' after tax salary in emergency funds. If one of you loses your job, will that tide you over until you can get another job? We don't know how easily you can replace your job.

Someone suggested a 401K loan. No, because if you lose your job, you have to pay off the loan immediately. You don't have the cash to do that.

For now. prioritize building your savings: Roth, tax deferred, taxable. When rates drop, look into refinancing or even downsizing your home. Do all you can at that time to avoid PMI.

Keep a weather eye on local home prices. If you're lucky, Mr. Housing Market will award you an additional 75K of home equity. When that occurs, you can apply to remove PMI. Don't procrastinate; Mr. Housing Market could just as easily remove 75K of home equity.

Good luck!
He that loveth silver shall not be satisfied with silver; nor he that loveth abundance with increase: this is also vanity.
Golf maniac
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Re: Should I pay extra monthly mortgage?

Post by Golf maniac »

A lot of contradictory advice here. Given the interest rates on car and student loans I would not try to pay those down. My focus would be on paying down the mortgage to get rid of the PMI. I wouldn’t add to the investment portfolio until you get the mortgage below 80%. We have no idea on your age so we can’t say whether you’re doing great or terrible. Remember everyone here has their own experiences and preferences. Take the information provided and make your own decision based on what you believe is the right path. Best of luck.
Admiral
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Re: Should I pay extra monthly mortgage?

Post by Admiral »

Golf maniac wrote: Tue Jul 09, 2024 3:37 pm A lot of contradictory advice here. Given the interest rates on car and student loans I would not try to pay those down. My focus would be on paying down the mortgage to get rid of the PMI. I wouldn’t add to the investment portfolio until you get the mortgage below 80%. We have no idea on your age so we can’t say whether you’re doing great or terrible. Remember everyone here has their own experiences and preferences. Take the information provided and make your own decision based on what you believe is the right path. Best of luck.
Rarely a good idea to pre-pay a mortgage without first maxing a pre-tax account. There are exceptions ofc but why save 6.5% when you can save (or "defer") 22+%?

PMI is terrible, I agree, but the OP either knew or should have known about the costs of PMI and factored that into their plans. There are v. good reasons to put down 20%, at that's one of them.
Golf maniac
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Re: Should I pay extra monthly mortgage?

Post by Golf maniac »

Admiral wrote: Tue Jul 09, 2024 3:48 pm
Golf maniac wrote: Tue Jul 09, 2024 3:37 pm A lot of contradictory advice here. Given the interest rates on car and student loans I would not try to pay those down. My focus would be on paying down the mortgage to get rid of the PMI. I wouldn’t add to the investment portfolio until you get the mortgage below 80%. We have no idea on your age so we can’t say whether you’re doing great or terrible. Remember everyone here has their own experiences and preferences. Take the information provided and make your own decision based on what you believe is the right path. Best of luck.
Rarely a good idea to pre-pay a mortgage without first maxing a pre-tax account. There are exceptions ofc but why save 6.5% when you can save (or "defer") 22+%?

PMI is terrible, I agree, but the OP either knew or should have known about the costs of PMI and factored that into their plans. There are v. good reasons to put down 20%, at that's one of them.
My focus was not on the pre tax investment. It was focused on the small amount ($300 to $400 per month) that he was putting into an investment account post tax. He is saving 9% in pre tax and already has $120k in there. Depending on his age he may be doing well. With the PMI his effective interest rate has to be really high. I believe pay down the mortgage as fast as possible.
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candyfloss
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Re: Should I pay extra monthly mortgage?

Post by candyfloss »

Golf maniac wrote: Wed Jul 10, 2024 1:09 pm
Admiral wrote: Tue Jul 09, 2024 3:48 pm
Golf maniac wrote: Tue Jul 09, 2024 3:37 pm A lot of contradictory advice here. Given the interest rates on car and student loans I would not try to pay those down. My focus would be on paying down the mortgage to get rid of the PMI. I wouldn’t add to the investment portfolio until you get the mortgage below 80%. We have no idea on your age so we can’t say whether you’re doing great or terrible. Remember everyone here has their own experiences and preferences. Take the information provided and make your own decision based on what you believe is the right path. Best of luck.
Rarely a good idea to pre-pay a mortgage without first maxing a pre-tax account. There are exceptions ofc but why save 6.5% when you can save (or "defer") 22+%?

PMI is terrible, I agree, but the OP either knew or should have known about the costs of PMI and factored that into their plans. There are v. good reasons to put down 20%, at that's one of them.
My focus was not on the pre tax investment. It was focused on the small amount ($300 to $400 per month) that he was putting into an investment account post tax. He is saving 9% in pre tax and already has $120k in there. Depending on his age he may be doing well. With the PMI his effective interest rate has to be really high. I believe pay down the mortgage as fast as possible.

Thank you for your suggestion. I think it makes a lot of sense to me. I was really having a hard time wrapping my head around why I should pay the car or student loans using my savings first. Both me and my husband are in mid 30s and we have $120k in our 401k and a little less than $50k in Roth IRA. I do think they are less than ideal, but I also have pension plan so I am a little hesitant to put too much money in my 401k, although I am leaning towards maxing it out if I could.
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candyfloss
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Re: Should I pay extra monthly mortgage?

Post by candyfloss »

Church Lady wrote: Tue Jul 09, 2024 10:43 am
Emergency savings: $40,000
Investment portfolio: $10,000
401K: $120,000
On the one hand, it would be great to pay an additional 75,000 on the mortgage to get rid of PMI, and refinance when(if) rates drop. :happy

On the other hand, your savings are way too low. :(

Normally I'd say pay enough to get rid of PMI, but you really, really need more savings.

You have about three months' after tax salary in emergency funds. If one of you loses your job, will that tide you over until you can get another job? We don't know how easily you can replace your job.

Someone suggested a 401K loan. No, because if you lose your job, you have to pay off the loan immediately. You don't have the cash to do that.

For now. prioritize building your savings: Roth, tax deferred, taxable. When rates drop, look into refinancing or even downsizing your home. Do all you can at that time to avoid PMI.

Keep a weather eye on local home prices. If you're lucky, Mr. Housing Market will award you an additional 75K of home equity. When that occurs, you can apply to remove PMI. Don't procrastinate; Mr. Housing Market could just as easily remove 75K of home equity.

Good luck!

Thank you very much for your suggestion. How much savings do you think is enough? Like 6 months of salary would be enough? I don't think either one of us can easily find another job once we are laid, so I do believe having enough saving is good. I just don't know how much is enough.
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Re: Should I pay extra monthly mortgage?

Post by Admiral »

candyfloss wrote: Wed Jul 10, 2024 1:34 pm
Golf maniac wrote: Wed Jul 10, 2024 1:09 pm
Admiral wrote: Tue Jul 09, 2024 3:48 pm
Golf maniac wrote: Tue Jul 09, 2024 3:37 pm A lot of contradictory advice here. Given the interest rates on car and student loans I would not try to pay those down. My focus would be on paying down the mortgage to get rid of the PMI. I wouldn’t add to the investment portfolio until you get the mortgage below 80%. We have no idea on your age so we can’t say whether you’re doing great or terrible. Remember everyone here has their own experiences and preferences. Take the information provided and make your own decision based on what you believe is the right path. Best of luck.
Rarely a good idea to pre-pay a mortgage without first maxing a pre-tax account. There are exceptions ofc but why save 6.5% when you can save (or "defer") 22+%?

PMI is terrible, I agree, but the OP either knew or should have known about the costs of PMI and factored that into their plans. There are v. good reasons to put down 20%, at that's one of them.
My focus was not on the pre tax investment. It was focused on the small amount ($300 to $400 per month) that he was putting into an investment account post tax. He is saving 9% in pre tax and already has $120k in there. Depending on his age he may be doing well. With the PMI his effective interest rate has to be really high. I believe pay down the mortgage as fast as possible.

Thank you for your suggestion. I think it makes a lot of sense to me. I was really having a hard time wrapping my head around why I should pay the car or student loans using my savings first. Both me and my husband are in mid 30s and we have $120k in our 401k and a little less than $50k in Roth IRA. I do think they are less than ideal, but I also have pension plan so I am a little hesitant to put too much money in my 401k, although I am leaning towards maxing it out if I could.
Is the pension fully vested? Until or unless it is, all you really have is the money you put into it. Therefore it makes sense to fully fund a pre-tax account, assuming you're able to do so, and capture the tax savings, at least until you KNOW you will receive a pension. Certainly it makes more sense than taxable investing, and likely more sense than pre-paying your mortgage.

PMI is obviously a costly annoyance, but you'll likely save much more by deferring federal taxes than you will spend on PMI. Not to mention you'll benefit from compounding interest.

None of these decisions should be make in a vacuum so having more info on your situation (age etc) and investments is helpful. $120k in a pre-tax account in your mid-thirties is... ok. It could be much better.
MorgansRun
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Re: Should I pay extra monthly mortgage?

Post by MorgansRun »

Agree with getting rid of PMI. Get all the 401k match stuff too and maybe max it out if you can. But also, I don't think there is anything wrong with building up savings in a taxable investment account. Figure out what works best for you and will let you sleep well at night.
howard71
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Re: Should I pay extra monthly mortgage?

Post by howard71 »

I only owe about 190k on a 3% mortgage with a payment of $868/month and a house currently worth about $450k.

No intention of ever paying it off early except for one scenario. If homeowner's insurance hits the ridiculous levels some are seeing her in FL, I might write a check to pay the whole thing off and self-insure.
Church Lady
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Re: Should I pay extra monthly mortgage?

Post by Church Lady »

candyfloss wrote: Wed Jul 10, 2024 1:37 pm
Church Lady wrote: Tue Jul 09, 2024 10:43 am
Emergency savings: $40,000
Investment portfolio: $10,000
401K: $120,000
On the one hand, it would be great to pay an additional 75,000 on the mortgage to get rid of PMI, and refinance when(if) rates drop. :happy

On the other hand, your savings are way too low. :(

Normally I'd say pay enough to get rid of PMI, but you really, really need more savings.

You have about three months' after tax salary in emergency funds. If one of you loses your job, will that tide you over until you can get another job? We don't know how easily you can replace your job.

Someone suggested a 401K loan. No, because if you lose your job, you have to pay off the loan immediately. You don't have the cash to do that.

For now. prioritize building your savings: Roth, tax deferred, taxable. When rates drop, look into refinancing or even downsizing your home. Do all you can at that time to avoid PMI.

Keep a weather eye on local home prices. If you're lucky, Mr. Housing Market will award you an additional 75K of home equity. When that occurs, you can apply to remove PMI. Don't procrastinate; Mr. Housing Market could just as easily remove 75K of home equity.

Good luck!

Thank you very much for your suggestion. How much savings do you think is enough? Like 6 months of salary would be enough? I don't think either one of us can easily find another job once we are laid, so I do believe having enough saving is good. I just don't know how much is enough.
Think about how long it would take you to get a new job. IF you can replace your jobs in six months, save six months of income. If a year, save a year's worth.

Let's say it takes six months for either of you to replace your job. If you are good at tracking expenses, you can alternatively compute six months of expenses. Your tax bill would go down, but it wouldn't go away. Figure taxes into the total. Save that amount. This is probably less than six months' worth of two salaries.

My brokerage money market fund pays nearly 5%, and I can wire funds into my checking account literally in minutes. Short term CDs are paying in excess of 5%. Once you decide how large your emergency fund needs to be, you can post again for more ideas about how not to earn a rubbish interest rate on your emergency funds.

Good luck!
He that loveth silver shall not be satisfied with silver; nor he that loveth abundance with increase: this is also vanity.
angelescrest
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Re: Should I pay extra monthly mortgage?

Post by angelescrest »

candyfloss wrote: Mon Jul 08, 2024 3:38 pm [Topic is now in Personal Finance (Not Investing) - mod mkc]
Hi everyone, we bought a 500K house last year with 5% downpayment and 6.5% interest rate because I just hated to spend so much money on renting.
I just wanted to pick up on this initial comment. Many people buy a house for reasons that go well beyond purely financial reasons (which you outlined later).

Just how much was renting in your area? I am skeptical that renting was more expensive than owning a home with only putting 5% down (which increases your monthly payments both in terms of PMI and interest), especially in an area where you can buy a decent home for 500k. It sounds to me like you already think it’s too small for long term.

Perhaps you made a less than ideal financial choice here like many Americans, and like I have done before. If rent is a lot cheaper, perhaps the best course of action would be to sell the place (hopefully with any increase in value it might be a wash, though not likely after a year). That could free you up to putting a lot more toward your retirement savings which right now are underwhelming. 9% is not enough. All the efforts made to get rid of PMI is money that won’t go toward your retirement savings, which you need a lot more of. The more you save now while young, the more it will do for you compared to what you might save in 20 years. E.g., if I hadn’t sold some investments as a down payment for a home I bought many years ago (that I no longer own), I would have several hundred thousand dollars more today.

Then maybe you could buy the house you love, later on, while feeling confident of your long term retirement plans.

I could ‘afford’ to buy a home now, but I wouldn’t love the home and it would take away significantly from some of my savings goals. Renting, while very expensive, is a far, far better financial choice for me, for now.
Admiral
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Re: Should I pay extra monthly mortgage?

Post by Admiral »

angelescrest wrote: Sat Jul 13, 2024 10:41 am
candyfloss wrote: Mon Jul 08, 2024 3:38 pm [Topic is now in Personal Finance (Not Investing) - mod mkc]
Hi everyone, we bought a 500K house last year with 5% downpayment and 6.5% interest rate because I just hated to spend so much money on renting.
I just wanted to pick up on this initial comment. Many people buy a house for reasons that go well beyond purely financial reasons (which you outlined later).

Just how much was renting in your area? I am skeptical that renting was more expensive than owning a home with only putting 5% down (which increases your monthly payments both in terms of PMI and interest), especially in an area where you can buy a decent home for 500k. It sounds to me like you already think it’s too small for long term.

Perhaps you made a less than ideal financial choice here like many Americans, and like I have done before. If rent is a lot cheaper, perhaps the best course of action would be to sell the place (hopefully with any increase in value it might be a wash, though not likely after a year). That could free you up to putting a lot more toward your retirement savings which right now are underwhelming. 9% is not enough. All the efforts made to get rid of PMI is money that won’t go toward your retirement savings, which you need a lot more of. The more you save now while young, the more it will do for you compared to what you might save in 20 years. E.g., if I hadn’t sold some investments as a down payment for a home I bought many years ago (that I no longer own), I would have several hundred thousand dollars more today.

Then maybe you could buy the house you love, later on, while feeling confident of your long term retirement plans.

I could ‘afford’ to buy a home now, but I wouldn’t love the home and it would take away significantly from some of my savings goals. Renting, while very expensive, is a far, far better financial choice for me, for now.
The OP did not state renting was either cheaper or more expensive. The statement was they did not like spending “so much money” on rent. Since renting is a straight expense, it can be less appealing than a mortgage (even a larger one) which is also forced savings.

I agree that this was probably not a good financial decision based on what’s been posted. But, then, buying is not always a financial decision. As you note. Selling now would likely be even worse.
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