Author Topic: Pay extra on mortgage or build savings ? or both?  (Read 6147 times)

crazy30

  • 5 O'Clock Shadow
  • *
  • Posts: 40
Pay extra on mortgage or build savings ? or both?
« on: September 18, 2015, 02:04:46 PM »
Posted this on the general section so sorry if I had to repost.

Help me out please!

Facts: we have a 310k 30 yr mortgage at 4.275%, 18k heloc at 4% , no credit card debts or other debts, 10 months emergency fund, maxed roth, i am maxing 18k 401 and husband at 8k (we plan to max out next yr) , maxed out hsa... We used to be in 25% tax bracket but with all the deductions we might hit 15% this year. Currently we pay bi weekly 780 plus extra 1k on mortgage , then 110.31 plus extra 1000 on heloc... We want to save up for a rental property but I am now confused on where to start (pay off mortgage? Retirement? Investment?) . The catch is we are in early 30s but we just started funding our retirement from scratch since we focused on the home downpayment. Obviously, since we pay extra 2k on 2 mortgage, our savings are not going up unlike when we were saving up for a home. Should I stop paying extra on the 2 mortgages and just keep stashing money in a tax account?

PS. I am desperate. In my peers I cannot find anyone who is on the same page as I am (meaning nobody wants to talk about 401k, hsa or investing)

Thank you everyone!


MrSal

  • Pencil Stache
  • ****
  • Posts: 873
Re: Pay extra on mortgage or build savings ? or both?
« Reply #1 on: September 18, 2015, 03:00:33 PM »
i would stop doing the extra mortgage payments but thats me.

In essence your 4% interest rate are in fact after taxes about 3.12% or so since all those are deductible.

By investing, not only you get 15-25% back (if in deductible IRAs and 401k) but also investing which on average would get you a return higher than the 3.xx% that your mortgage is in effect.

As long as you use the extra funds released from not paying the extra in mortgage towards investing and not consumption I would go for it.

tiger002

  • 5 O'Clock Shadow
  • *
  • Posts: 36
Re: Pay extra on mortgage or build savings ? or both?
« Reply #2 on: September 18, 2015, 03:12:15 PM »
Mathematically, you'll probably do better taking the extra money you're putting toward the mortgage and putting it into the stock market. However, this is a riskier way to build wealth. If you're not going to touch it for 10-20 years or something, you'd be fine. Putting it toward a rental property could yield similar results, though the fact that it will need to sit in a savings account doing very little while you get enough saved to buy the rental property may be a factor.

nereo

  • Senior Mustachian
  • ********
  • Posts: 10814
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: Pay extra on mortgage or build savings ? or both?
« Reply #3 on: September 18, 2015, 03:29:53 PM »
Hello Crazy30 and welcome to the forums.

I'd also strongly recommend that you put the extra money towards building savings (and by savings I mean investments) instead of overpaying your mortgage.  I also disagree with tiger002's suggestion that paying down the mortgage is 'less risky' - which I find to be a false premise. 

You are in good shape here.  You have a 10 mo emergency fund, maxed out IRAs, HSAs, and 401(k)s.  From here what will help you the most is post-tax investments.  Also, since you mentioned that you are at/near the 25% tax bracket, I'd recommend taking a good look at the advantages of a traditional IRA account - you might find that it will be much better for your situation, especially given the availability of ROTH conversion ladders down the road.

A final thing to consider after you've maxed out your tax-deferred contributions to your 401(k)s is a setting up a mega-backdoor ROTH - you are eligible to contribute up to $53k each to your 401(k)s. 

crazy30

  • 5 O'Clock Shadow
  • *
  • Posts: 40
Re: Pay extra on mortgage or build savings ? or both?
« Reply #4 on: September 18, 2015, 03:30:08 PM »
aaargh! i wish I have known this in advance! does this apply with my heloc too?

Faraday

  • Handlebar Stache
  • *****
  • Posts: 1192
  • Age: 57
  • Location: NC
  • Solar Powered Slice
Re: Pay extra on mortgage or build savings ? or both?
« Reply #5 on: September 18, 2015, 03:34:43 PM »
Posted this on the general section so sorry if I had to repost.

Help me out please!

There are a number of threads on this topic. They tend to run pretty "hot", with people having strong opinions one way or another. I'm not going to "go there", instead, let's talk about your particulars:

Quote
Facts: we have a 310k 30 yr mortgage at 4.275%, 18k heloc at 4% , no credit card debts or other debts, 10 months emergency fund, maxed roth, i am maxing 18k 401 and husband at 8k (we plan to max out next yr) , maxed out hsa... We used to be in 25% tax bracket but with all the deductions we might hit 15% this year. Currently we pay bi weekly 780 plus extra 1k on mortgage ,

EXCELLENT EXCELLENT EXCELLENT! You are getting a lot right according to:
http://www.bogleheads.org/forum/viewtopic.php?f=1&t=6211
Read this link and see what you think. It's a good fundamentals primer, which you already seem to understand.

Good job on the 780 bi-weekly. Question: when you add the extra $1k, do you specifically indicate it should go against the principal? I know that if I don't specify, my mortgage company will treat it like an extra PAYMENT, not principal abatement.

The $18k heloc sucks and blows. You need to wipe this out as soon as you can. Why? Because I believe you should refinance, but go into a much shorter term loan -15 years or so - if you are going to be in this property for the forseeable future, and definitely refi if you plan to be here the rest of your lives. I'm saying "refi" because, even though your mortgage is relatively "cheap", you can make it even cheaper with refinancing. I have saved many thousands of dollars this way (I estimate well over $120k...)

Quote
Then 110.31 plus extra 1000 on heloc... We want to save up for a rental property but I am now confused on where to start (pay off mortgage? Retirement? Investment?) . The catch is we are in early 30s but we just started funding our retirement from scratch since we focused on the home downpayment. Obviously, since we pay extra 2k on 2 mortgage, our savings are not going up unlike when we were saving up for a home. Should I stop paying extra on the 2 mortgages and just keep stashing money in a tax account?

If anything, I'd accelerate the payoff of the heloc. That will be a goodly amount of cash flow back in your pocket when it's done.

Quote
PS. I am desperate. In my peers I cannot find anyone who is on the same page as I am (meaning nobody wants to talk about 401k, hsa or investing)


You have come to the right place!

Faraday

  • Handlebar Stache
  • *****
  • Posts: 1192
  • Age: 57
  • Location: NC
  • Solar Powered Slice
Re: Pay extra on mortgage or build savings ? or both?
« Reply #6 on: September 18, 2015, 03:40:54 PM »
I'd also strongly recommend that you put the extra money towards building savings (and by savings I mean investments) instead of overpaying your mortgage.  I also disagree with tiger002's suggestion that paying down the mortgage is 'less risky' - which I find to be a false premise. 

That's the hot button. I'm not putting an opinion out there, I'm just saying opinions are widely divergent and talk on the topic is strong and direct. The folks who believe on either side are very passionate about their opinions. What I'm doing myself is about 50/50 saving (pre-tax) and pre-paying principal so I can do a big refi in January. I'll save a minimum of $3k over the remaining 10 years of mortgage.

Refi is kinda outside this opinion and is simply a strategy to cut the interest rate of the mortgage. Even if it is considered "cheap money", there's no reason not to make it even cheaper.

crazy30

  • 5 O'Clock Shadow
  • *
  • Posts: 40
Re: Pay extra on mortgage or build savings ? or both?
« Reply #7 on: September 18, 2015, 03:52:16 PM »
hey guys! thanks for the input. This type of conversation is something I dream about whenever I have drinks with friends haha. I like different people having different strategies because it gives me a whole range of choices on what to do.

I am paying extra 1k to principal only. Also this is already refinanced just this July. my original loan was 393,500 last Jan 2015 at 4.5% and with PMI. Refinancing took out the PMI and escrow account for taxes/insurance and I was able to get heloc of 31100 (thus now 18k). Property value is 425-450k.

Maybe I should aggressively wipe out the HELOC, do bi weekly 780 on 1st mortgage then SAVE the rest for a DP?

ShoulderThingThatGoesUp

  • Magnum Stache
  • ******
  • Posts: 3057
  • Location: Emmaus, PA
Re: Pay extra on mortgage or build savings ? or both?
« Reply #8 on: September 18, 2015, 06:28:20 PM »
That's an expensive house. Can you downsize?

Faraday

  • Handlebar Stache
  • *****
  • Posts: 1192
  • Age: 57
  • Location: NC
  • Solar Powered Slice
Re: Pay extra on mortgage or build savings ? or both?
« Reply #9 on: September 18, 2015, 07:17:48 PM »
hey guys! thanks for the input. This type of conversation is something I dream about whenever I have drinks with friends haha. I like different people having different strategies because it gives me a whole range of choices on what to do.

I am paying extra 1k to principal only. Also this is already refinanced just this July. my original loan was 393,500 last Jan 2015 at 4.5% and with PMI. Refinancing took out the PMI and escrow account for taxes/insurance and I was able to get heloc of 31100 (thus now 18k). Property value is 425-450k.

Maybe I should aggressively wipe out the HELOC, do bi weekly 780 on 1st mortgage then SAVE the rest for a DP?

Good job on putting toward principal.

I vote for definitely wiping out the heloc - it prevents you from any further refinancing and it's simply debt you don't need. That will free up cash flow you can either put toward the principal or invest -  you can think about your options and choose at that point.

Didn't you already say you are contributing max possible to your 401k, but spouse has yet to do so? If you paid off the HELOC, you could ramp up that other 401k and "shelter" that income, seeing some nice tax benefits, without changing anything else.

ShoulderThing was asking about the price of the house - seems high, on the other hand, that would barely cover a modest cottage in some areas of California. What's your opinion on the house? Is it you and your family's dream house, and is that pretty much a "done deal" and not something you could change (by selling and moving, in other words....)

nereo

  • Senior Mustachian
  • ********
  • Posts: 10814
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: Pay extra on mortgage or build savings ? or both?
« Reply #10 on: September 18, 2015, 08:33:16 PM »
Hey Crazy30

I'll agree with mefla that this paying down a mortgage vs savings is a hot-button issue, and there are very passionate people on both.
To clarify what I said earlier, the reason why I strongly advise for you to put more towards savings in your specific situation is that by overpaying your mortgage (at the expense of increasing your savings) you are skewing your asset allocation heavily towards your home.  In effect, unless you tap into your tax-deferred accounts (IRAs, 401(k)s) the bulk of your savings right now is in your home, which is heavily non-liquid. 

Personally I'd pay the minimum on your mortgage while building up your post-tax investments (especially since you are already doing an accelerated bi-weekly plan), but you could certainly do a 50/50 split or find something you are comfortable with.

Also - agree with Melfa that you should look into refinancing. 30 year fixed sit around 3.9%, 15 year fixed at 3.1%  5-year ARMs are ~2.9%.  Your current rate of 4.25% seems higher than it could be.

Faraday

  • Handlebar Stache
  • *****
  • Posts: 1192
  • Age: 57
  • Location: NC
  • Solar Powered Slice
Re: Pay extra on mortgage or build savings ? or both?
« Reply #11 on: September 19, 2015, 04:05:46 PM »
Also - agree with Melfa that you should look into refinancing. 30 year fixed sit around 3.9%, 15 year fixed at 3.1%  5-year ARMs are ~2.9%.  Your current rate of 4.25% seems higher than it could be.

+1, my 15 year is 2.875 and I'm going for a 2.5 10-year next.

But that's why I was asking you about "how you view the house": is the house important, non-negotiable, or viewable as a short-term place to sleep? Also, how old are you? That's got a LOT to do with whether you should pay down mortgage or not.

For wife and I, our home is important beyond simply a place to sleep, because I designed it to exceed Energy Star standards. Our all-electric home has an average monthly electric bill that's very low,  no carpet (no allergy-causing floor coverings) and no more than three steps to anywhere. Oh, and full brick all around, so no painting. We would have to find a very similar brick ranch to beat what we've got, and people have to die for you to find a good brick ranch floorplan around here.

So, the home has more value than simply an investment to us: it's designed to be leveraged for very low cost living. Therefore, I pay ahead on the mortgage, but not at the expense of savings and investment. I don't see it as an either/or, black-and-white proposition. I see it as a means for leveraging a structure specifically designed for extremely low-cost living. After me and the DW are gone, it'll go to the kids. They will likely sell it and split the money, but that's OK by me - by that time, the value of it will be very good and they'll make a nice chunk of change for THEIR stashes.

So: think about what the house means to you and act based on that. But definitely get rid of the HELOC then refi as soon as you can - preferably this coming January (I'm thinking rates will be low that month, especially if it's a bad winter, which I also expect....)

dess1313

  • Bristles
  • ***
  • Posts: 441
  • Location: Manitoba Canada
Re: Pay extra on mortgage or build savings ? or both?
« Reply #12 on: September 19, 2015, 09:25:00 PM »
The HELOC needs to go away NOW.  put any extra payments towards that for a few months instead of your mortgage.  If you try to do anything else requiring credit checks that works completely against you.  should be over within a year.

What sort of equity do you have in your home?  If you tried to buy a rental property would you have so little equity it would work against you?

Fantastic job on the savings AND the emergency fund.  People don't like to think about bad things happening

After the HELOC is done, that's about 1110 towards anything else you choose.
What sort of risk level are you?  would you invest in the markets?  Would you rather do rentals? 
Will you be getting back a hefty tax rebate due to all your savings?

Do you know how much of your mortgage is going towards principle vs interest?  That payment seems pretty low.   I'm getting estimates of 310k at 4.275% costing $1100 in interest per MONTH but your payment you say is $780x2=1560 plus your extra payment.  That means without your extra payments you're only paying down your mortgage at the rate of about $460 per month other than the couple bonus weeks doing it biweekly. 

I know they say you can get some rebates on interest paid, is it worth it at that high of a interest charge?  Have you figured out what you ACTUALLY will get back?  I'm not sure, but would it be affected by your dropping tax brackets?

Even if you choose to buy rental, invest, save etc, i would still keep some extra (even small if your really want to invest elsewhere) payments going towards your mortgage.  Doesn't have to be all, but until you hit that 50/50 sweet spot where the interest is less than 50% of the payments its like trudging up mount everest.  after that point it goes much faster even if you don't help it with extra payments.  Play around with some good mortgage calculators and look and see what happens to your total interest paid when you increase payments even by a little.  (ducks flying tomatoes from the investing crowd)  Heck with the HELOC paid off you have $1110 monthly to play with to do what ever you want right there

csprof

  • Stubble
  • **
  • Posts: 229
Re: Pay extra on mortgage or build savings ? or both?
« Reply #13 on: September 19, 2015, 10:42:52 PM »
hey guys! thanks for the input. This type of conversation is something I dream about whenever I have drinks with friends haha. I like different people having different strategies because it gives me a whole range of choices on what to do.

I am paying extra 1k to principal only. Also this is already refinanced just this July. my original loan was 393,500 last Jan 2015 at 4.5% and with PMI. Refinancing took out the PMI and escrow account for taxes/insurance and I was able to get heloc of 31100 (thus now 18k). Property value is 425-450k.

Maybe I should aggressively wipe out the HELOC, do bi weekly 780 on 1st mortgage then SAVE the rest for a DP?

Good job on putting toward principal.

I vote for definitely wiping out the heloc - it prevents you from any further refinancing and it's simply debt you don't need. That will free up cash flow you can either put toward the principal or invest -  you can think about your options and choose at that point.

Didn't you already say you are contributing max possible to your 401k, but spouse has yet to do so? If you paid off the HELOC, you could ramp up that other 401k and "shelter" that income, seeing some nice tax benefits, without changing anything else.

+This.  If I were in your shoes, I'd immediately retarget those extra payments on both the HELOC *and* the mortgage into maxing out the 401k this year.  Then aim the remainder after scheduling that at the HELOC.

Rationale:  The tax deduction on the 401k that you're not yet maxing out amounts to a roughly 15% free yield.  You can throw an extra $10k at it.  Wahoo!

After that, the HELOC is probably your highest effective interest rate when you discount the mortgage because of the interest tax deduction.  4% risk free -- I'd take it over throwing in the market, but I'm conservative and boring. :)

I'd still max the 401k first, or get as close to it as you can this tax year, because you can kill 10k of the HELOC within a year, and only have lost 4% of the 10k that you put in the 401k, whereas you gained 15% in tax savings.  But that does require discipline:  Come up with a plan that will have you maxing both 401ks *and* destroying the HELOC within a year.  Totally within your grasp, just allocate it right.

nereo

  • Senior Mustachian
  • ********
  • Posts: 10814
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: Pay extra on mortgage or build savings ? or both?
« Reply #14 on: September 20, 2015, 09:16:03 AM »
Hello again

I don't understand the rational for paying extra towards the HELOC at this time - your mortgage actually has a higher rate than your HELOC, and with a 10mo emergency fund and a plethora of cash at the end of each month there seems to be no reason to pay down your HELOC faster than necessary right now - certainly not at a rate of $1,000/mo extra.  Assuming that your HELOC is tied to your home value (most are) paying off your mortgage will have as much of an affect on your credit score as paying down your HELOC.  Ultimately though, having other investments to cover 20%+ for a rental property will be the most important for your goals.

Here's my suggestions, in order of importance
1) fully fund husband's 401(k) - tax advantages alone make this the most important thing to do now.
2a) Save money in taxable accounts for future rental property (at least 50% after #1, and as much as 100%)
2b) pay down the mortgage faster (no more than 50% of extra cash).

Also - you didn't specify whether your HELOC was still open and fixed/variable (i.e. if you could still access the HELOC at 4% or not), nor did you specify where your 10 months emergency fund is.  Assuming that your EF is in a savings account earning ~1%, you might consider putting some of your EF to work paying down that debt.  I'm not advocating you zero-out your EF, but you could be better served reducing your EF to 3-6 months while applying all of that money towards either investing or paying down your debt, especially if you still have access to your HELOC, have stable jobs and are otherwise in a stable situation.  As it is, your EF might be a sizable leak on your finances - particularly when you are paying +4% interest elsewhere. 


Faraday

  • Handlebar Stache
  • *****
  • Posts: 1192
  • Age: 57
  • Location: NC
  • Solar Powered Slice
Re: Pay extra on mortgage or build savings ? or both?
« Reply #15 on: September 20, 2015, 09:09:36 PM »
I don't understand the rational for paying extra towards the HELOC at this time - your mortgage actually has a higher rate than your HELOC,
...

It could be different in other states, but in NC, you can't refinance if you owe money on a HELOC, ie: getting that interest rate down on that jumbo loan. OW!

crazy30

  • 5 O'Clock Shadow
  • *
  • Posts: 40
Re: Pay extra on mortgage or build savings ? or both?
« Reply #16 on: September 20, 2015, 09:38:40 PM »
That's an expensive house. Can you downsize?
.  We live in the bay area, this is actually a good buy since the reappraised value is 450-500k . However, we do have plans to downsize in 10 years. A 4br house is so hard to maintain! Haha

crazy30

  • 5 O'Clock Shadow
  • *
  • Posts: 40
Re: Pay extra on mortgage or build savings ? or both?
« Reply #17 on: September 20, 2015, 10:04:30 PM »
Hello again


Here's my suggestions, in order of importance
1) fully fund husband's 401(k) - tax advantages alone make this the most important thing to do now.
2a) Save money in taxable accounts for future rental property (at least 50% after #1, and as much as 100%)
2b) pay down the mortgage faster (no more than 50% of extra cash).

i will follow this strategy starting now. Thank u so much

crazy30

  • 5 O'Clock Shadow
  • *
  • Posts: 40
Re: Pay extra on mortgage or build savings ? or both?
« Reply #18 on: September 20, 2015, 10:08:07 PM »
The HELOC needs to go away NOW.  put any extra payments towards that for a few months instead of your mortgage.  If you try to do anything else requiring credit checks that works completely against you.  should be over within a year.

What sort of equity do you have in your home?  If you tried to buy a rental property would you have so little equity it would work against you?

Fantastic job on the savings AND the emergency fund.  People don't like to think about bad things happening

After the HELOC is done, that's about 1110 towards anything else you choose.
What sort of risk level are you?  would you invest in the markets?  Would you rather do rentals? 
Will you be getting back a hefty tax rebate due to all your savings?

Do you know how much of your mortgage is going towards principle vs interest?  That payment seems pretty low.   I'm getting estimates of 310k at 4.275% costing $1100 in interest per MONTH but your payment you say is $780x2=1560 plus your extra payment.  That means without your extra payments you're only paying down your mortgage at the rate of about $460 per month other than the couple bonus weeks doing it biweekly. 

I know they say you can get some rebates on interest paid, is it worth it at that high of a interest charge?  Have you figured out what you ACTUALLY will get back?  I'm not sure, but would it be affected by your dropping tax brackets?

Even if you choose to buy rental, invest, save etc, i would still keep some extra (even small if your really want to invest elsewhere) payments going towards your mortgage.  Doesn't have to be all, but until you hit that 50/50 sweet spot where the interest is less than 50% of the payments its like trudging up mount everest.  after that point it goes much faster even if you don't help it with extra payments.  Play around with some good mortgage calculators and look and see what happens to your total interest paid when you increase payments even by a little.  (ducks flying tomatoes from the investing crowd)  Heck with the HELOC paid off you have $1110 monthly to play with to do what ever you want right there
thank you  dess1313, this will be my assignment this week.

crazy30

  • 5 O'Clock Shadow
  • *
  • Posts: 40
Re: Pay extra on mortgage or build savings ? or both?
« Reply #19 on: September 20, 2015, 10:11:38 PM »
Also - you didn't specify whether your HELOC was still open and fixed/variable (i.e. if you could still access the HELOC at 4% or not), nor did you specify where your 10 months emergency fund is.  Assuming that your EF is in a savings account earning ~1%, you might consider putting some of your EF to work paying down that debt.  I'm not advocating you zero-out your EF, but you could be better served reducing your EF to 3-6 months while applying all of that money towards either investing or paying down your debt, especially if you still have access to your HELOC, have stable jobs and are otherwise in a stable situation.  As it is, your EF might be a sizable leak on your finances - particularly when you are paying +4% interest elsewhere.
sigh, EF are all over the place. I have 40% at a regular savings account at .10% (i kmow i know!), 20% at .5% and the ret is at my dream account with barclay (1.05%)

crazy30

  • 5 O'Clock Shadow
  • *
  • Posts: 40
Re: Pay extra on mortgage or build savings ? or both?
« Reply #20 on: September 20, 2015, 10:31:20 PM »
Ok now im confused on making the heloc payment. Maybe i should pay off heloc with the extra 1k, leave the mortgage with just bi weekly , stash the rest to ef and max out husband 401k  for 2016 ?? Or throw what was extra 1k mortgage making 2k heloc payment? Then save when heloc is almost paid?

csprof

  • Stubble
  • **
  • Posts: 229
Re: Pay extra on mortgage or build savings ? or both?
« Reply #21 on: September 20, 2015, 11:10:00 PM »
Ok now im confused on making the heloc payment. Maybe i should pay off heloc with the extra 1k, leave the mortgage with just bi weekly , stash the rest to ef and max out husband 401k  for 2016 ?? Or throw what was extra 1k mortgage making 2k heloc payment? Then save when heloc is almost paid?

I think I was wrong on this - I forgot that up to $100k of HELOC interest is also deductible from your federal taxes.  You should double check on this, and see if there are any "hidden costs" to having your HELOC such as others have mentioned, when trying to determine if the HELOC or the mortgage is more expensive.

But almost everyone agrees - get the tax deduction from the 401k first. :)

My personal answer on this is:  Pay off the HELOC, because it helps you free up emergency fund cash to invest at a higher rate of return.

(Others will probably disagree, with good reasons!)

Why I say that:  Getting rid of the HELOC reduces your monthly cash flow requirements.  It's small and you can do it quickly. If disaster hits, it's $110 less you have to worry about covering from your EF.  Which means you can be a little tighter with putting your EF funds to work for you.  If you keep it at 10 months (if that's where you want it), then by having eliminated your mandatory $110 HELOC payment, you can reduce the EF by $1100 and move that money somewhere more productive.

I've been very happy with Ally Bank for my EF, btw -- they're at about 0.99%, which isn't as good as your Barclay account, but is way better than the rest.  They're online-only, but the rates are great.  I mean, great for a savings account, which is pretty crappy overall. *grin*

ShoulderThingThatGoesUp

  • Magnum Stache
  • ******
  • Posts: 3057
  • Location: Emmaus, PA
Re: Pay extra on mortgage or build savings ? or both?
« Reply #22 on: September 21, 2015, 05:38:01 AM »
That's an expensive house. Can you downsize?
.  We live in the bay area, this is actually a good buy since the reappraised value is 450-500k . However, we do have plans to downsize in 10 years. A 4br house is so hard to maintain! Haha

Got it. Though if you can downsize earlier it would help, but you already know that.

Sometimes people come on here with half-million dollar houses in Des Moines, so it seemed worth checking.

nereo

  • Senior Mustachian
  • ********
  • Posts: 10814
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: Pay extra on mortgage or build savings ? or both?
« Reply #23 on: September 21, 2015, 08:35:31 AM »
Ok now im confused on making the heloc payment. Maybe i should pay off heloc with the extra 1k, leave the mortgage with just bi weekly , stash the rest to ef and max out husband 401k  for 2016 ?? Or throw what was extra 1k mortgage making 2k heloc payment? Then save when heloc is almost paid?

OK... let's see if we can sort this out together.  What is confusing to me is why you are currently throwing extra money towards the mortgage and the HELOC and keeping a 10-month emergency fund (at ≤1% rates), while one of your stated goals it to save up enough for a rental property.  Your approach doesn't necessarily fit your goals.

first: the HELOC.  with the lowest interest rate (4%) you could let this ride and pay the minimum, OR you could take csprof's advice and pay it off because it will increase your monthly cashflow.  Truthfully, either would be fine, but if you want to pay it off do it as quickly as possible - you have the assets ($2k/month in surplus cash plus quite abit in your ER fund) that you could zero out your HELOC in just a few months.  Ask yourself this:  Is there an advantage to having my HELOC gone right now?  Possible reasons include needing a HELOC paid off to refinance to a lower rate or take out a mortgage on a rental property, the desire to have increased cashflow each month (useful if you get laid off... but you do have that emergency fund to cover that already).

next, the mortgage.  At 4.275% it's higher than your HELOC, and so mathematically it makes more sense to pay this down faster than the HELOC (except for reasons outlined above).  Also, it's quite a bit higher than current rates, so you might be able to refinance right now to save tens of thousands$.  Definitely check out the refinance option.  Beyond that, a rate of 4.275% is in that "middle ground" where you can either choose to pay it off as fast as possible or you can decide to put all available surplus cash into long-term investments.  Remember that your debt is an inflation hedge and that your mortgage interest is tax deductible, so if we assume 2% inflation over the next decade (very low) and if you benefit from your mortgage interest then this debt is only costing you ~1.5-2% per year.  That's still very low, and why I would personally put everything extra towards investments.  But... there's no "wrong" answer.  One GOOD reason for paying down your mortgage ASAP is if you are underwater or close to being underwater.  Until your have a lot of equity in your home it can become a trap should you need to suddenly relocate.  A HELOC adds to this problem.

next - the 401(k).  You should max them both out.  Do this before you do anything else.
For extreme bonus points, check out the Mega-backdoor ROTH strategy, which could allow you to contribute as much as $53/k per person into retirement accounts with very little in taxes, ever.

next - saving in taxable accounts (e.g. a low-cost market index fund).  One of your stated goals is that you want to purchase rental properties in the near future. If you are going to do this, you should save at least 20% (perhaps more... perhaps a lot more) in order to not have PMI and to afford to cover renovations to maximize your profits and vacancies when things don't go according to plan.  This means putting a lot towards taxable accounts. Also, I find it really dangerous when people rapidly pay down their mortgage but have little/no other investments.  Basically, their NW is tied up in one single thing: the house.  This has the potential for going horribly wrong: houses can go down in value, you may have to sell during the wrong 'market', and it's harder to get value out of your home than it is from an index fund.  Bottom line; if you want to start buying rental properties you need to start saving a lot in taxable accounts.

all of this gets back to what your personal goals and risk tolerances are.  To help guide you, I'd create your own Investment Policy Statment (IPS) that will help guide you in making decisions that match your goals.  Plus, you can always post questions here and even a case-study if you like.

Faraday

  • Handlebar Stache
  • *****
  • Posts: 1192
  • Age: 57
  • Location: NC
  • Solar Powered Slice
Re: Pay extra on mortgage or build savings ? or both?
« Reply #24 on: September 21, 2015, 12:49:11 PM »
Ok now im confused on making the heloc payment. Maybe i should pay off heloc with the extra 1k, leave the mortgage with just bi weekly , stash the rest to ef and max out husband 401k  for 2016 ?? Or throw what was extra 1k mortgage making 2k heloc payment? Then save when heloc is almost paid?

OK... let's see if we can sort this out together.  What is confusing to me is why you are currently throwing extra money towards the mortgage and the HELOC and keeping a 10-month emergency fund (at ≤1% rates), while one of your stated goals it to save up enough for a rental property.  Your approach doesn't necessarily fit your goals.
....
all of this gets back to what your personal goals and risk tolerances are.  To help guide you, I'd create your own Investment Policy Statment (IPS) that will help guide you in making decisions that match your goals.  Plus, you can always post questions here and even a case-study if you like.

+1 to everything nereo said!

crazy30

  • 5 O'Clock Shadow
  • *
  • Posts: 40
Re: Pay extra on mortgage or build savings ? or both?
« Reply #25 on: September 21, 2015, 02:21:57 PM »
no doubt i am in the right place (forum)!!!

thanks everyone! I am off to build our rental prop money fund with all your good words.. cheers!