To overpay mortgage or not???

[Campy1]

Hello,

I'm 42 yrs old, and I am trying to decide how to allocate income and savings for my current financial situation. The family has no kids, yearly income of $150K, $80K savings, no debt except $1070/mo mortgage w/$210K home loan, 401K maxed and $10K/yr going into the company employee stock purchase plan. The plan allows us to purchase company stock at a 15% discount that I just sell and place into savings. I would like to be free of the mortgage payment in 8 years and I'm wondering if I should throw a chunk ($30K) of savings at the mortgage during the next re-fi if rates go down in 2011? Also, I would like to buy a $35K car within the next couple of years but I want to have enough financial cushion in case of job loss or market swings. Any advice on better strategies would be great. How could I maximize my situation better?

Thanks

[disneysteve]

Welcome. Is the 80K in savings your total savings or just your liquid savings? Does it include what is in the 401k and stock purchase plan?

You earn 150K and max a 401k, so $16,500 to that, or 11%. Another 10K, or 6.7%, so a total of 17.7% to retirement which is just fine.

What are your monthly expenses? Make sure you maintain an emergency fund of 6 months worth of expenses (which might be what part of that 80K represents. I just wasn't sure).

I think 35K for a car is absolutely insane. I would strongly reconsider that part of your plan. It would be far better to buy a 15-20K car and put the other 15K toward the mortgage if your goal is paying that off early. In any case, do not buy any car if you can't either pay cash, or at the very worst, finance for no more than 3 years.

[creditcardfree]

If anything mortgage interest rates will be rising in 2011. If you refinance do it sooner, than later. However, you need to run the numbers to see if refinancing is even worth the money if you will be prepaying and have the house paid off in 8 years.

[Campy1]

Steve,

To answer your questions: We have an additional $400K in saved 401k and roll-over IRAs. The 80K is just liquid savings. We also have a rental house that has been paid off.

Our monthly expenses are approx. $3400

[disneysteve]

Originally Posted by Campy1

Steve,

To answer your questions: We have an additional $400K in saved 401k and roll-over IRAs. The 80K is just liquid savings. We also have a rental house that has been paid off.

Our monthly expenses are approx. $3400

That's great. So a 6-month EF is only $20,400. You've got nearly 60K in cash that could be put to better use, especially if it is sitting in low-yielding savings accounts.

I agree with creditcardfree that rates are trending up. I'd refi now if you are going to and yes, I'd put a chunk of that 60K toward the mortgage to reduce what you need to borrow. I think 30K toward that and 15-20K for the next car would be fine. The rest can just be added EF just in case.

[Petunia 100]

What rate are you paying now on your mortgage? Is the purpose of the re-fi to lower the rate or shorten the term?

[Bastille]

if you make extra payments every month or yearly of even a few dollars, it adds up to a substantial savings in interest over the course of a full mortgage.

[moneyclass]

as for me any extra money i get i apply it straight to my mortgage. i would apply as much as you can towards that. ask yourself this....how would i feel if my house was paid for?

[cschin4]

Why refi? If you are going to pay it off, leave it pay. Throw big chunks at it continually and get it paid off if that is your goal. That is exactly what I did and I paid off my home completely by throwing all bonuses, extra money, etc at principal. My home was completely paid for by 42 so you can do it as well. And, i don't regret it at all. One of my best decisions.

[greenskeeper]

I pay at the minimum double the principal payment per month. Looking to pay off a 30yr note in about 10-12 years.

I'm 31 years old (bought this house 3yrs ago), sounds like I shooting towards cschin4's goal.

[Campy1]

Originally Posted by Petunia 100

What rate are you paying now on your mortgage? Is the purpose of the re-fi to lower the rate or shorten the term?

Petunia 100,
The purpose of the potential re-fi is to lower the monthly payment in case of job loss. I'm always trying to determine if it is smarter to throw smaller principle payments at my mortgage or just save up the cash and throw a large chunk when I refinance which would guarantee me a smaller payment. Both my wife and I have good jobs BUT we work at the same company and if our company gets bought out and we get laid off then we're in trouble.

[KTP]

Originally Posted by Campy1

Hello,

purchase company stock at a 15% discount that I just sell and place into savings

I bet you don't sell your msft espp as fast as I do! I have a limit order in the same day the 15% discounted stock is deposited into the account.

[Frugal]

I agree in thinking that interest rates on mortgages will definitely rise this year and later into at least 2012. Some people can save money now by refinancing, but they need to talk to their financial professional, because it varies depending upon their individual situation.

We locked into 4.25% last fall, and certainly don't regret it. Wish everyone could have the good fortune to get a good rate, not a high one like 6%!

[DebbieL]

I can understand the need for quite a bit of liquid savings since you and your wife both work for the same company - so there is risk there. I would think that keeping about 35K (10 months or so of expenses - probably more like a year since you would cut back if unemployed) in the emergency savings is a good plan. I wouldn't spend 35K on a car, but then those are my values. If you want a 35K car, and it doesn't hurt your other goals (and you do seem to be on track there) I'd say go for it. Life is short. Some of us spend quite a bit on vacations over the years (I do), and other people like cars.

[Campy1]

We've decided against buying the new car so we now have about $80K liquid. Was thinking about doing a refi with about $35K which would lower the principle to $167K and the emergency savings to $45K.
Thanks for your suggestions!

[baris]

Put the money in your mortgage, get a low rate line of credit for emergency. your savings on your mortgage interest should help you get that 35K car easier.