I swear this isn't another pay off your mortgage early thread

[Tezz24]

Let's say you plan to upgrade your house in 5 years. This isn't very Mustachian, I know. But based on job future, kids, etc let's say it makes sense and you want to.

Assuming current interest rates (4%~5%) Is it smarter to put spare cash in a CD/money Market type account or pay down your current mortgage balance over the next 5 years?

This is, of course, after maxing out all tax advantaged accounts.

[shinn497]

Why would current interest rates matter. Do you have a variable rate mortgage? Anyway, you won't be getting 4 - 5% from a money market anytime soon so pay the mortgage off. The other question I have is why does your job mean it makes sense to upgrade your house? I am not against doing this, but shouldn't the rate of return on your house upgrade factor in this decision. E.G. if you put 20k into an upgrade, but your appreciation is 40k than it would maybe make sense, else it doesn't . However, everything i know about housing upgrades say they don't make sense as investments or sensible ways of spending money over stocks.

[Tuskalusa]

I’d say put in a separate account for use when you upgrade. Putting it directly on mortgage Fred UCD’s your flexibility. You may have different plans in 5 years. Who knows?  Keeping your cash liquid allows you more decision making power.

[Tezz24]

Sorry, I think I used the wrong term.

By upgrade, I meant selling the current house and moving to another.

@shinn497 The job reference was mostly in terms of the potential growth outlook for having more cash to either invest / pay principle etc.

[letthelightin]

I’d say put in a separate account for use when you upgrade. Putting it directly on mortgage Fred UCD’s your flexibility. You may have different plans in 5 years. Who knows?  Keeping your cash liquid allows you more decision making power.

I agree with this. In my opinion, having the savings liquid and useable is far better than having it locked up in an asset whose value you have no control over.

It was recently discovered that thousands of homes near where I live have faulty foundations, and the only repair is to lift the house to replace the entire foundation. The cost to do this is often more than the value of the house. Home values have drastically decreased for any home built in the "affected" timeframe, because there is no guaranteed way for buyers to know if a home is not affected. 

Before this happened, I thought paying down a mortgage was an okay option. After seeing home values in a widespread region plummet (through no fault of their owners), I'm fully convinced it's better to put that extra money elsewhere. 

[shinn497]

I actually think there is a behavioural benefit to having your savings be high return and illiquid, so i save for purchases with a mix of stocks/bonds. It is only slightly illiquid vs cash, as it takes several days to get deposited but it is a good enough barrier so that i don't buy a pizza with it.

As for the risk of house appreciate. I personally just don't view a house to be an investment. It is a liability, especially with debt. Therefore the incentive is to spend as little on it as possible. The land I could consider an investment, but houses themselves have maintenence and issues that can eat away at their appreciation.

Anyway. The way I see it. Putting extra money into your house isn't really a wise use of it. You won't  get the same return you would if you were to pay off your mortgage or invest it. And it is a similiar MO with regards to saving. Don't worry so much about the rate of return of your savings vehicle but if it influences your behaviour enough to get you to save. That is fine.

Although I do agree with the original sentiment. Putting money in your house isn't very mustacian but oh well. I will actually not judge for that.

[FIRE@50]

I'm in a similar place. We plan to buy a new home in a couple of years. I view paying down my mortgage as saving for the down payment on the new house but at a much better rate than cash/CD's etc. I plan to max out the 401k, put some money in cash to cover other expenses associated with buying and selling a home, and then put the rest of my available funds into the existing mortgage.

[bacchi]

It was recently discovered that thousands of homes near where I live have faulty foundations, and the only repair is to lift the house to replace the entire foundation. The cost to do this is often more than the value of the house. Home values have drastically decreased for any home built in the "affected" timeframe, because there is no guaranteed way for buyers to know if a home is not affected. 

A builder did this in a nearby subdivision. He would lay the steel, get the permit approved, and then move most of the steel to the next lot. The foundations didn't have enough reinforcement to handle the soil movement.

[sadperson]

I'm in the exact same situation as the OP and looking for advice as well.

My financially savvy friends all advise against putting the cash into the current mortgage but I'm still torn.

Paying down the mortgage is basically a 4% return give or take given recent mortgage rates.

Sitting on cash is maybe 2 or 2.5% in a high yield savings account.

I think these are pretty much the options unless you are willing to take some risk by putting it in the market.

The key question to me seems to be how easy or not easy is it to access home equity through a heloc or home equity loan and how costly is it to do so? 

If heloc is easy and cheap, then it would make sense to take the 4% and use heloc to get the cash back at a later date if needed. 

Lets say you decide to forgo the new dream home due to a great investment opportunity.  Or you go ahead with the dream home but need cash up front to deal with construction, moving, etc. and want to deal with selling the current home afterwards.  You could use a home equity loan in either case.

I don't have experience with these products and I need to do more research about fee's and interest rates.  I also need to learn about how easy it is to get these types of loans in a tight credit market.

I hope more smart people will weigh in an educate us.

[CheezM]

I'm in the exact same situation as the OP and looking for advice as well.

My financially savvy friends all advise against putting the cash into the current mortgage but I'm still torn.

Paying down the mortgage is basically a 4% return give or take given recent mortgage rates.

Sitting on cash is maybe 2 or 2.5% in a high yield savings account.

I think these are pretty much the options unless you are willing to take some risk by putting it in the market.

The key question to me seems to be how easy or not easy is it to access home equity through a heloc or home equity loan and how costly is it to do so? 

If heloc is easy and cheap, then it would make sense to take the 4% and use heloc to get the cash back at a later date if needed. 

Lets say you decide to forgo the new dream home due to a great investment opportunity.  Or you go ahead with the dream home but need cash up front to deal with construction, moving, etc. and want to deal with selling the current home afterwards.  You could use a home equity loan in either case.

I don't have experience with these products and I need to do more research about fee's and interest rates.  I also need to learn about how easy it is to get these types of loans in a tight credit market.

I hope more smart people will weigh in an educate us.

Depends how much you are putting in to the house, whether the calculation is beneficial vs a lower interest money market.  In other words, when you pull the HELOC money out to buy a new house, how long are you borrowing before the old house sells?  That interest adds up.  Also, the fees associated with setting up a HELOC and even the headache of doing so.  That extra 1%+ may not be worth it at all and may not even cover the fees/expenses.

I am 100% in the "pay off your mortgage" camp.  But if someone is looking to buy a new house in a few short years, I'm not sure I would view the mortgage as a great savings vehicle in that case.

[ender]

Our plan is to save a fairly significant percentage of the mortgage balance and keep it in a high interest savings account  (balance is around $170k, probably save $25kish) . After that point, we will start paying down the mortgage directly until it's balance is equal to the savings account - then we'll pay it off in one chunk.

Why?

Because there's nearly no benefit from a cash flow perspective to paying down a mortgage until it hits zero. And having the "mortgage money" available via the savings account is far more of a risk mitigation tool.

Additionally, as/when we start paying down the mortgage I probably will shift to less and less bonds as in some ways we are picking up that part of our portfolio via paying down the mortgage.

I know it's not as optimal to pay down a relatively low rate mortgage. But I really, really do like the idea of being debt free.

[waltworks]

If you are *certain* you'll be selling the house in 5 years or less, and you have adequate liquidity, I don't see a problem with this. It's probably not optimal, but if you're not comfortable with stock market volatility, it's certainly better than sitting in cash, which is pretty much as "risky" as you can be, given that you're guaranteed to lose money.

What will your 30-years-in-the-future self think of the decision?

-W

[OurTown]

Our plan is to save a fairly significant percentage of the mortgage balance and keep it in a high interest savings account  (balance is around $170k, probably save $25kish) . After that point, we will start paying down the mortgage directly until it's balance is equal to the savings account - then we'll pay it off in one chunk.

Why?

Because there's nearly no benefit from a cash flow perspective to paying down a mortgage until it hits zero. And having the "mortgage money" available via the savings account is far more of a risk mitigation tool.

Additionally, as/when we start paying down the mortgage I probably will shift to less and less bonds as in some ways we are picking up that part of our portfolio via paying down the mortgage.

I know it's not as optimal to pay down a relatively low rate mortgage. But I really, really do like the idea of being debt free.

I like this a lot.  So when we hit our magic number in investments we should have app'x 5 years and $70k left on the mortgage, booking along at 3 3/8 percent.  That time period isn't really long enough in my mind to justify the arbitrage of investing in the market and letting it ride.  I could definitely see us building up a high interest savings or money market to about $35k, then paying down the mortgage to $35k, then blowing it away.  Our money market is currently yielding 2.2 percent, so if we could get something comparable the rates would be close to a wash, and we would have some decent liquidity during the process.