Paying off 20% of home mortgage, maxing out 401K and HSA same time

[DBV1985]

Hi all,

I am new to the MMM community and feel like I have finally found a community that shares views on spending and saving! I'm a first time home buyer and have a 2016 goal of paying off the 20% of my loan so that I can remove the stupid mortgage insurance and save a lot on interest. I know I know.. please don't fault me for buying a home without already putting down 20%. This home was the best deal I could find after years of researching the real estate in my town. I could not let it pass! I just knew that if I waited a year to save 20% to buy that the prices would keep rising and they did in just the last 3 months.

Here is where I am at currently:
My original loan was 4% interest, 290K and in 3 months I was able to bring it down to 270K. It is frustrating to be paying each month $900 towards interest plus mortgage insurance $130. So far I am renting out 2 rooms in my home in order to pay more towards principal. Additionally, for the first time this year I am maxing out my 401K and HSA contributions every pay period.  The human resource lady looked shocked when I asked to max it out. I needed to tell her what the max was because she didn't know lol. As much as I would love to put all the money towards the mortgage I feel more comfortable allocating it towards different investments. It is also beneficial because of tax advantages since my income is in the higher tax bracket. I really would love to be debt free again and get this mortgage completely paid off sooner than later. The interest on it is at 4%. Depending on how investments are in the future I may wait to pay it off but no longer than 15 years. This mortgage insurance fee needs to go ASAP! :D

If anyone has any other suggestions on ways to pay it off faster let me know!

J

[steviesterno]

I'm going to be one of the ones who doesn't fault you for not putting 20% down. we didn't when we bought in the fall of 2014. but if we had waited to save it up, we would have needed to spend almost 20% MORE on the cost of the house, as that's how fast the market was/is going up around here. so our 140/month PMI cost ($1960) has gotten us $40,000 in equity, plus allowed us to rehab the house to make it our own immediately rather than years from now, plus added probably $12,000 to the home value. If I could consistently turn 2k into 40k I would have retired years ago!

also having a house helped us stay grounded, has made starting a family easier (our first son was born 4 weeks ago), and the tax advantage was $5k in our favor this year, mostly from the home. Sure we pay more in taxes, but we moved to the best school district in the area. This house may just be the best investment we've made

[GrowingTheGreen]

In general, PMI sucks.  It literally is pissing money down the drain.

But you made a really good move by renting out two rooms.  You turned a crappy situation into a truly fantastic one by becoming a mini-landlord. 

How long would it take for you to get rid of the PMI if you slightly reduced your 401k/HSA contributions?  I think you should make the mortgage a priority until you can dump the PMI.  After that, there's nothing wrong with making the minimum payment on a 4% mortgage--most people believe that you'll earn a better return by investing the money instead of paying off the loan.

[Dicey]

I agree with the posts above. ..

I'd rather see you funding a Roth (if you qualify), filling an EF bucket of modest size and buying taxable equities before killing the mortgage, even with PMI. Don't forget that if your RE market is rising in value, even doing absolutely nothing means that your LTV is improving. You DO think that or you wouldn't have bought the property without 20% down, right? There are better steps you can take to improve your long term financial picture. Compound interest is a huge friend, PMI is a relatively small foe.

Personally, I am positive it makes more sense to be asset heavy than completely debt-free, especially if you want to RE.

[DBV1985]

Thanks! It makes the most sense to maximize my tax deductions since I am in the higher tax bracket. I will have to investigate if I can contribute to a ROTH but don't think it will be much. I am happy about my decision to buy and I love love my first home. That's the most important thing!

J

[MilesTeg]

If you have the capability to do large payments to your mortgage, I would suggest asking your mortgage holder if they will re-amortize your loan if you provide a large payment. The credit union I have my mortgage though will re-amortize for $100 if I make a 10% payment. It's something I have done a couple times to pay down the mortgage quickly AND reduce my monthly debt load. My current required payment is about 60% of the original. I was in a similar situation to you, I found a great deal on a home but could not immediately put 20% down, so I was glad when my loan officer mentioned this 'perk' as it allowed me to get the home for less than 20% but get it up there within 18 months (and reduce the payment) without an expensive re-finance.

You can end up paying more interest over the life of the loan IF you actually reduce your payment, but if you continue to pay at least the original payment and better yet pay 10% whenever you can, you won't. You just have to run the numbers to find figure it out.

It's effectively an extremely cheap re-finance ($100 vs. thousands). If you get a new mortgage or refinance in the future, and want to do this, it's a good differentiation point.

[DBV1985]

Miles,

I have never heard of recasting until now. I was planning on paying extra every few weeks towards principal. Then my PMI automatically gets removed as soon as I have 20% paid. Does recasting mean that you pay less interest every month because your total loan is a lot less? Does the PMI get automatically removed after you reach 20%?

J

[MilesTeg]

Miles,

I have never heard of recasting until now. I was planning on paying extra every few weeks towards principal. Then my PMI automatically gets removed as soon as I have 20% paid. Does recasting mean that you pay less interest every month because your total loan is a lot less? Does the PMI get automatically removed after you reach 20%?

J

It depends on exactly where you are in your repayment, etc. The best way to figure it out is to find a mortgage calculator and run some scenarios with your actual numbers. If you only many the minimum after the re-amortization and are only a couple years into repayment period it'll probably be cheaper overall. If you are many years in, it may end up more expensive. I don't have the math but my gut tells me if you keep paying the original amount you'll always end up paying less.

I did it, but keep up the original payment. It's just nice to know that if the shan hits the fit, my actual monthly obligation is much lower.

All that said, the best way to reduce overall cost of a mortgage is to pay as much as you can every month or paycheck, rather than waiting for a big payment like that. Compounding interest is a bitch, hah