Author Topic: mortgage principal question  (Read 3329 times)

Manguy888

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mortgage principal question
« on: April 17, 2014, 01:44:36 PM »
Hey All,

I have a friend in town who is an artist (i.e. his income is not steady). His house is used as a de facto public art space, and through an indiegogo campaign he was able to raise 40,000 to save the house from foreclosure.

So..he has 40k, and the house has an outstanding principal of 120,000. My question is this: how much should he put on the principal and how much should he save. I'm worried he will apply the entire amount to principle, which will not help his monthly cashflow situation. But if he puts nothing against principal he'll just have a chunk of money doing nothing and mostly paying interest each month.

Interested in anyone who has a good idea with what he should do. Keep in mind this is not a financially savvy person. His only goal is to keep his house current and eventually pay it off so that he can stay forever and continue using it as an artists' space. No complex investment plans would be implemented even if they made sound sense.

Thanks mustach-ians!
Manguy888

dragoncar

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Re: mortgage principal question
« Reply #1 on: April 17, 2014, 01:57:34 PM »
If it were me, I'd keep the cash as an emergency fund (unless the rate is really terrible).  But that assumes he has the diligence to keep his hands off of it.

In general, I'm in favor of saving up enough money to pay off the house in one go -- monthly payments to principal can't be easily extracted.

seattlecyclone

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Re: mortgage principal question
« Reply #2 on: April 17, 2014, 02:01:44 PM »
Yeah, he should probably keep most of the money as cash or invested in index funds so that he can use the funds to meet his monthly payments in the future during times when his income is lower due to not being able to sell as much art for a while.

GregO

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Re: mortgage principal question
« Reply #3 on: April 17, 2014, 02:22:20 PM »
You shouldn't invest the money if you will need it within 5 years.  He will likely need some of the money before then, so I think investing is a bad idea.  But it is still a tough question.  How disciplined is he?  You also don't want him to have that much money sitting around in a bank account, because then he might spend it on other things.  Or he might stop putting any of the money he makes toward the mortgage and just use that money every month, which is still not a good thing.

I would think the best thing would be to set up an emergency account (maybe with the bank that has the mortgage) and deposit somewhere around 6-12 months of mortgage payments into it.  Then use the rest of the money to pay down the principal.  That's what the money was raised for, and then it's not laying around to be used for other purposes.  And he still has some money set aside to use to make the monthly payments if he's in trouble that month.  But with only 6-12 months, it won't seem like a never-ending amount of money that he can pay the mortgage with.  Maybe that'd be a good middle-ground solution?

dragoncar

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Re: mortgage principal question
« Reply #4 on: April 17, 2014, 03:01:57 PM »
You shouldn't invest the money if you will need it within 5 years.  He will likely need some of the money before then, so I think investing is a bad idea.  But it is still a tough question.  How disciplined is he?  You also don't want him to have that much money sitting around in a bank account, because then he might spend it on other things.  Or he might stop putting any of the money he makes toward the mortgage and just use that money every month, which is still not a good thing.

I would think the best thing would be to set up an emergency account (maybe with the bank that has the mortgage) and deposit somewhere around 6-12 months of mortgage payments into it.  Then use the rest of the money to pay down the principal.  That's what the money was raised for, and then it's not laying around to be used for other purposes.  And he still has some money set aside to use to make the monthly payments if he's in trouble that month.  But with only 6-12 months, it won't seem like a never-ending amount of money that he can pay the mortgage with.  Maybe that'd be a good middle-ground solution?

But paying down his mortgage is "investing it" as well -- investing it for a fixed return that he can't reverse if he needs to money to, say, eat.  If he pays down the mortgage and ends up in foreclosure anyways, he will be wishing he didn't pay down the mortgage.

JT

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Re: mortgage principal question
« Reply #5 on: April 19, 2014, 03:18:54 AM »
Hi

I would put $20k into the principle, bringing it down to $100K, and then keep $20k for the payments (not sure what the repayments are so this figure could be adjusted).  Do you have offset accounts?  Also, it depends on what your interest rates are.  If the bank interest rate is lower than investments then investments would be the way to go - maybe split that $20k in half and use $10k for repayments and $10k in a short term investment.  Don't hang me though!  I'm in NZ and not familiar with the States.  I did like the suggestion of keeping enough aside for 12 months of repayments.  Can your friend rent a room in the house?

Zaga

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Re: mortgage principal question
« Reply #6 on: April 19, 2014, 05:59:39 AM »
Could he pay down the mortgage with most of the money (saving aside an emergency fund, which he clearly needs with his variable income), then refinance to reduce monthly outgo?

sulaco

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Re: mortgage principal question
« Reply #7 on: April 19, 2014, 07:16:52 AM »
I'm worried he will apply the entire amount to principle, which will not help his monthly cashflow situation. But if he puts nothing against principal he'll just have a chunk of money doing nothing and mostly paying interest each month.

Why wouldn't it help monthly cash flow? It should reduce his mortgage payment by about 33%, which I would guess would be close to $160 per month (assuming a 3% mortgage). Is that better or worse than he would do investing it (worse, but also guaranteed).

NewStachian

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Re: mortgage principal question
« Reply #8 on: April 19, 2014, 07:29:10 AM »
Paying principal doesn't reduce your payments unles you refinance.

I think your buddy's #1 concern is income/cash flow. I would only pay off the mortgage when it gets within striking distance to pay off in full. As mentioned above, more home equity doesn't mean squat if you can't make the payments.

He needs to take a hard look at the stability of his income stream and do a calculation on emergency fund. His requirement may be higher than others.

Emg03063

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Re: mortgage principal question
« Reply #9 on: April 19, 2014, 02:01:16 PM »
Would he qualify for a HELOC if he put the money towards principal, and is he disciplined enough not to use it for frivolous things?  What's the rate/term/payment/years remaining on the mortgage, what's his average monthly income, should we expect it to stay the same in the future for planning purposes, and if not what's a good estimate?  (Or, to put it a different way, what's the maximum average monthly payment we could expect him to be able to handle from income?). Is he current on his mortgage, and if not, how far behind is he?
« Last Edit: April 19, 2014, 02:07:35 PM by Emg03063 »