So I just got a small monetary gift that could really take a chunk out of my mortgage balance and cut years off loan (and its accrued interest)
This is my first mortgage and I'm a little clueless. I have been told to apply any additional payments directly to principal and not interest, correct?
Correct, directly to principal.
That’s correct, unless there are tax situations that I guarantee do not apply here.
Sweet. If my math is right, this should knock my 30 year mortgage down to about 5 years.
No tax situations that I can think of. I do have escrow but I don't think that is what you're referring to.
I don’t know if that is the best financial approach or not.
Depending on the interest rate and investment opportunities there may be better financial strategies than paying down the mortgage.
I haven’t been fortunate enough to need to look into it, so I can offer any more information.
Depending on the amount of the gift, it may be best to talk with a professional advisor to get the most benefit from the gift.
On edit, some reading material:
https://www.mrmoneymustache.com/2012/02/24/pay-down-the-mortgage-or-invest-more-a-winwin-question/
While I agree and I could look into it, the balance on the mortgage is just north of $30k and I'm looking at putting $10k toward it. APR is 4.125%. I don't anticipate many investments providing that kind of return on $10k.
I also think that getting out from under the bank's thumb is a pretty worthy investment if you catch my drift.
If you're about to embark on schooling, maybe just keep that stack in the bank so you don't have to work too many hours during semesters? I mean, 30-year fixed with decent credit is what, 4%? What's it worth to you to have the security of a big wad of "berkeley you boss" in the bank?
AngryCorvair said:If you're about to embark on schooling, maybe just keep that stack in the bank so you don't have to work too many hours during semesters? I mean, 30-year fixed with decent credit is what, 4%? What's it worth to you to have the security of a big wad of "berkeley you boss" in the bank?
Not a bad assessment.
Damn, lots more posts since I started thumbing that last reply.
How many years are left on that 30-year note if the balance is only $30k? And how does knocking it down to $20k make it a 5-year note?
id keep the $10k in the rainy day fund unless the giver specifically said "put this lump sum into principal or give it back".
AngryCorvair said:Damn, lots more posts since I started thumbing that last reply.
How many years are left on that 30-year note if the balance is only $30k? And how does knocking it down to $20k make it a 5-year note?
29 years left. I bought last June.
I didn't share the full math. The gifted money is part of an trust from a deceased relative. It works out to be about $10k/yr, so I was assuming that if I put in half or 2/3rds of it every year along with regular monthly payments, I'll have it paid off in 5 years.
My mortgage broker and I were laughing when I got the original loan and going over the amortization sheet.
With escrow I'm at about $350/mo.
I told her she'd be lucky to get 5 years out of me. I primarily did it that way out of fear being my first mortgage. I knew I'd have more than $350/mo to put toward a house, but I work for a non-profit theater that is usually one tax bill away from closing the doors. I wanted to bank savings knowing that I would have enough income to pay it down faster, but have the option of being able to still pay in case I lost the job. I structured it so that I can pay fast, but I'm not panicked and putting in Starbucks applications if the job goes belly up.
I'm more or less paying on it like it is a 15 year loan with additional lumps thrown in
Curtis, I am just a bit ahead of you and like wise have some extra cash on hand. I thought about putting the cash into the mortgage but decided to pass, good thing as I needed some of the cash for a major unexpected home repair.
My advice is to put the cash in the bank (not connected to your checking account) and just let it sit. If you need a large amount of cash it will be there, ready to go in the drop.of a hat.
Paul, another fist time home owner.
Curtis, if you want the best of both worlds, consider going with biweekly payments (each of half the total monthly due amount), or my method of doubling the principal part of each payment... or both, franky, considering the size of your mortgage. Either one will significantly reduce the amount of total interest you pay, while also keeping a good portion of your 'flexibility fund' on hand.
Investment order applies here.
1. Make sure your emergency fund is filled enough to cover sudden surprise expenses or take care of your living costs for a few months in the event of a job loss
2. Then, Pay down any debt with higher interest rates than the mortgage
3. Then, Invest vs pay down the mortgage comes down to playing the odds or acting emotionally. 'The Math' is pretty clear that investing cash In a fund that mirrors the general market has a very good chance of earning more than the interest that is paid on your mortgage. That being said, there's always some risk which many people are uncomfortable with. If you want to act emotionally to feel more secure, pay down the mortgage. If you want to trust 'The Math', and play the odds a little you can almost definitely be better off investing that cash. It's your call.
Me personally, even knowing 'The Math', I choose to pay down my mortgage. But I understand that choice is an emotional one because it makes me feel better. I sleep more easily at night than I would trusting some invisible investment in a tumultuous market. That makes me weak. I don't really care.
One thing I would suggest doing is some math- the delta of putting it all down today vs. making extra payments per month so that you have a reserve.
Like what AC pointed out for education- even doubling the monthly to $700/mo, that will take a few years to eat into the whole fund, so you have the reserve if you need it for that time.
And in addition to the out the door fund, I'd also consider how much work your $30k home will need- cash in hand is better than taking our a home improvement loan.
Anyway, the point is to understand the impact of a one time payment vs. different degrees of extra monthly payments would be, and the the value of having the fund for other home related things.
In reply to Curtis : I’m with you, if you leave it in the bank the tendency is to drain a little at a time for various reasons. If it paid off a big chunk of mortgage. You can always take cash out of a house in an emergency. However mortgage free is a wonderful freedom .
One more thing you may not feel you want to take on, but taking the $10K a year for two years is a mighty nice down payment on a second house to rent out. It's more work up front, but it ends up as a good long term income source.
If I read correctly and and you are talking about a reliable annual lump sum, then I would flog that mortgage until it's done.
But as a guy creeping up on retirement myself, I am advising you to consider putting a chunk of that money into a retirement vessel of some sort. That $10k invested when you are thirty will have the impact of closer to $50k invested in your fifties. Even at 45, you have time to make it work for you later. Some retirement options can be borrowed against in an emergency too, which lets you kill two birds with one stone.
There are basically 3 trains of thought here.
I'd personally be putting it in the Roth IRA. You'll get a better return than anything else, with mortgage payments at $320, you don't have to worry about making ends meet to have a place to live, and if it hits the fan, you can take out your contributions penalty free.
oldopelguy said:If I read correctly and and you are talking about a reliable annual lump sum, then I would flog that mortgage until it's done.
But as a guy creeping up on retirement myself, I am advising you to consider putting a chunk of that money into a retirement vessel of some sort. That $10k invested when you are thirty will have the impact of closer to $50k invested in your fifties. Even at 45, you have time to make it work for you later. Some retirement options can be borrowed against in an emergency too, which lets you kill two birds with one stone.
I realize that there is plenty of advice to save for retirement. On the surface it’s good advice. But it fails to deal with the reality of life.
I started saving for retirement as soon as I was fully employed following the service. Events happened and that fund was drained just prior to retirement.
I thought, my bad luck or poor timing etc. Then I started looking at others. Most of my contemporaries were in the same or worse fix.
40% of Americans do not have $400 in ready cash for an emergency. At one time with IRA’s and 401K’s over 60% of Americans had some share of the stock market. Today it’s a very small percentage.
Pay yourself first! Reduce or eliminate debt before you invest. It’s true money compounds leading to nice numbers. But debt compounds worse.
frenchyd said:oldopelguy said:If I read correctly and and you are talking about a reliable annual lump sum, then I would flog that mortgage until it's done.
But as a guy creeping up on retirement myself, I am advising you to consider putting a chunk of that money into a retirement vessel of some sort. That $10k invested when you are thirty will have the impact of closer to $50k invested in your fifties. Even at 45, you have time to make it work for you later. Some retirement options can be borrowed against in an emergency too, which lets you kill two birds with one stone.
I realize that there is plenty of advice to save for retirement. On the surface it’s good advice. But it fails to deal with the reality of life.
I started saving for retirement as soon as I was fully employed following the service. Events happened and that fund was drained just prior to retirement.
I thought, my bad luck or poor timing etc. Then I started looking at others. Most of my contemporaries were in the same or worse fix.
40% of Americans do not have $400 in ready cash for an emergency. At one time with IRA’s and 401K’s over 60% of Americans had some share of the stock market. Today it’s a very small percentage.
Pay yourself first! Reduce or eliminate debt before you invest. It’s true money compounds leading to nice numbers. But debt compounds worse.
If his only debt is a mortgage with a $320 monthly payment and 4.125% interest, that is factually incorrect. Additionally, saving for retirement literally is paying yourself first.
frenchyd said:40% of Americans do not have $400 in ready cash for an emergency. At one time with IRA’s and 401K’s over 60% of Americans had some share of the stock market. Today it’s a very small percentage.
Pay yourself first! Reduce or eliminate debt before you invest. It’s true money compounds leading to nice numbers. But debt compounds worse.
Just to be accurate, your statements are not exactly clear....
First, yes, the peak investment was 62% of Americans in 2008. Then the crash happened, which naturally reduced the number. Now it's 54%. given that is still over half the population, I would not call that a small percentage. Smaller, sure. But not small.
Then- the #1 reason people left was the crash- people lost a lot of value, got spooked, and left.
And for the last line, one HAS TO DO THE MATH. This isn't rocket science, it's just compound interest- every spreadsheet system has the models in it, it's so easy to run the model, and find out where the cost/benefit lie. Especially when weighted with the tax implications (which are pretty light with such a small mortgage- one is unlikely to need to ues the write off).
Put a model together with your current mortgage, put together some different scenarios to find out how much money you would save, etc. I used that as a major factor in looking into changing to a different mortgage schedule.
Dave Ramsey
emergency fund
pay down debt
invest
Datsun310Guy said:Dave Ramsey
emergency fund
pay down debt
invest
Dave Ramsey is great for people who are their own worst enemy. It is NOT the best financial advice for people who do not have a spending problem/live within their means.
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