save or pay extra mortgage?

pinkeyy501 · #1 (**permalink**) 03-31-2006, 02:41 AM

We bought our first house last summer and currently have 2 mortgages for this house. I would like to put extra $500 into either savings or to pay principal for our mortgage. I think it's a better deal for us to paying extra principal towards our mortgage than to put $500 monthly into savings or CD account. If I am correct, which mortgage should I put the $500 on? So far, we've been only making the minimum payment on the both mortgages. Here's the breakdown on our mortgage:

Mortgage one - 30 yr fixed
Monthly minimum payment - $3,054.70
Principal Balance on 3/14/06 - $511,567.71
Interest rate - 5.875%

Mortgage two - 15 yr fixed
Monthly minimum payment - $850.12
Principal Balance on 2/1/06 - $93,772.42
Interest rate - 6.625%

Which is best??
Option A: Pay $500 to Mortgage one principal (big loan)
Option B: Pay $500 to Mortgage two principal (small loan)
Option C: Pay $250 to Mortgage one AND pay $250 to Mortgage two
Option D: Put extra $500 into savings or CD account

We would appreciate your input.

Thank you!

- pinkeyy501

Aldeya · #2 (**permalink**) 03-31-2006, 04:35 AM

It depends on what is important to you.

Me and my hubby decided that a piece of mind of owning our house is more important to us than trying to invest the "extra mortgage" money.

If you calculate the interest you will save for the life of the mortgage it will give you a tremendous return on your money.

We still have a few years to go but we calculated we already saved THOUSANDS of dollars in interest that we did not have to pay to the mortgage company.

Whatever happens we know we will have a roof over our heads. To us this piece of mind is very important.

coffeebreak · #3 (**permalink**) 03-31-2006, 01:19 PM

I would go with Option B because it has the highest interest rate. If you owe on credit cards, use it to pay off those for the same reason; high interest rates. Pay the debts/credit cards with the highest interest rate first.

I thought that $511,000.00 was incorrect for Mortgage #2. The new amount looks better.

CJsoccerchic · #4 (**permalink**) 03-31-2006, 05:22 PM

WOW - almost $4,000 per month on mortgagaes..... yikes.
Personally, I would put the $500 to the higher interest mortgage. Get that mortgage paid off before the 15years, then turn around and pay the extra $500 to mortgage #1. Do this only if you already have a good nest egg for a good couple of months because you gotta be able to cover expenses should one of you get disabled and cannot work, or whatnot. Once you got a good nest egg, then pay extra to the mortgages!

Hope that helps!

contrary1 · #5 (**permalink**) 03-31-2006, 06:37 PM

Gads, I feel blessed my mortgage isn't that high! I agree, I would start chipping away using your Option B, clearing out the highest interest rate account first.
Let us know which you choose & then keep posting so we can see your progress..........

mbhunter · #6 (**permalink**) 03-31-2006, 07:47 PM

Wow! You live in CA?

It's a good thing that you understand the value of paying your mortgage down faster.

One question: Do you have an emergency fund? As in a good 6 months' of expenses in something liquid (like a money market, cash, etc.)? If not, you might consider building that up to something reasonable before adding payments toward your principal. You'll want the emergency fund there because it's a lot more difficult to pull money out of your house if you actually need it!

If you already have an emergency fund, I'd try to knock down the higher-rate payment first because you'll "earn" 6 5/8% (minus any lost tax deduction) in saved interest for the extra amount you put toward principal on that loan. Then, after the first loan is paid off, you can throw that whole payment at the bigger loan.

Snoopy2645 · #7 (**permalink**) 03-31-2006, 09:31 PM

option b is what I would pick because it has a higher interest rate, I am a firm beliver in paying the mortage off first

pinkeyy501 · #8 (**permalink**) 03-31-2006, 11:07 PM

mbhunter,

You're right. We live in LA.

We have about 40K in savings and 20K in IRA. The only debt we have is the mortgage and my husband's student loan which is 4% fixed and have about 80k to pay still.

I think we will follow everyone's advise and tackle the higher rate mortgage first. Thank you everyone!

Tree0164 · #9 (**permalink**) 04-02-2006, 06:41 AM

How close are you to retirement? Having only 20k in an IRA, you will need alot more. I would atleast take some of the $500 to put in an IRA or increase your 401k contributions.

Ima saver · #10 (**permalink**) 04-02-2006, 09:10 AM

I would go with option B also. I can't imagine having a mortgage that high, I would not sleep at night! I once borrowed $50,000 to finish building the house I am in now. My payments were $500 a month and that made me nervous. I sold stuff and got it paid off in 2 1/2 years.

pinkeyy501 · #11 (**permalink**) 04-03-2006, 12:42 AM

My husband and I are in our early 30's, so we have a while for retirement. The mortgage is scary, but being in L.A., we are able to make more than most other areas where we could buy a house for much cheaper. We love where we live and we're willing to pay for it. The mortgage is less than 1/3 of our combined income and we have no other debts except for a student loan. I don't think we are stretching ourselves too thin right now...

CJsoccerchic · #12 (**permalink**) 04-03-2006, 04:05 AM

seems like you have a good nest egg - I would go with taking care and getting rid of the smaller loan with the higher interest rate - then when done with that small loan, whatever that X dollar amount is, plus (+) the extra $500, and put the WHOLE amount (Obtion B loan + $500) and put that towards the BIG loan and clear that huge loan WAY FASTER!!!!

Instead of having that huge mortgage for 30 years, you could cut that down HUGELY!!!!

Good luck and hope that helps

jmjj215 · #13 (**permalink**) 04-03-2006, 02:50 PM

I'm going w/ Tree's advice. Depending on your age, you may need to be at least increasing the priority of retirement contributions as well. Maybe a 50/50 split between the two?

Tree0164 · #14 (**permalink**) 04-03-2006, 04:34 PM

The earlier you save for retirement the less you actually need to save!

If you are not stretching it too much, I would adjust your retirement savings. Max out your 401k if you have it. You probably earn too much for a Roth. I would then take the rest and apply it to the smaller loan.

CJsoccerchic · #15 (**permalink**) 04-03-2006, 07:04 PM

How can someone earn too much for a roth IRA? I thought roth IRA were for everybody...?

sweeps · #16 (**permalink**) 04-03-2006, 07:13 PM

Individuals earning more than $110k and couples earning more than $160k are not eligible to contribute to a Roth.

pinkeyy501 · #17 (**permalink**) 04-04-2006, 12:16 AM

Quote:

Originally Posted by Sweepsplayer

Individuals earning more than $110k and couples earning more than $160k are not eligible to contribute to a Roth.

I was not aware of that... I better call my CPA...

My husband has a regular job, but I work from home under LLC. My husband is also a member of LLC. My IRA account is under my individual name, though. Am I not elgible for IRA?

pinkeyy501 · #18 (**permalink**) 04-04-2006, 12:32 AM

My uncle who has an accounting degree put together an amortization schedule in Excel sheet and it turns out that in the long run, I would be saving much more money to put $500 towards the big loan with lower interest rate.

The way he calculated is not the exact dollar amount as he used the current principal figure instead of the original loan amount which is close enough to see the difference.

If I put $500 extra towards principle to the big 30 yr loan, I would pay off 106 month early with approximately $196,000 interest savings.

If I put $250 extra towards principle to the big 30 yr loan, I would pay off 64 month early with approximately $120,000 interest savings.

If I put $250 extra towards principle to the small 15 yr loan (higher interest), I would pay off 61 month early with approximately $20,000 interest savings.

Combined Interest Savings for paying $250 extra towards principle on both loans = approximately $140,000 interest savings.

Therefore, Paying $500 extra on large loan is the greater savings by approximately $56,000.

Thanks to my uncle, I was able to see the clear difference by calculated number. Hope this post helps others here, too.

sweeps · #19 (**permalink**) 04-04-2006, 04:16 AM

Quote:

Originally Posted by pinkeyy501

My husband has a regular job, but I work from home under LLC. My husband is also a member of LLC. My IRA account is under my individual name, though. Am I not elgible for IRA?

If you're over the income limit, no, you're not eligible for a Roth IRA. However, since you own your own business, there are other retirement options such as a SEP IRA, SIMPLE IRA, Keogh, etc. Your CPA should be able to steer you in the right direction.

Quote:

Originally Posted by pinkeyy501

My uncle who has an accounting degree put together an amortization schedule in Excel sheet and it turns out that in the long run, I would be saving much more money to put $500 towards the big loan with lower interest rate.

This doesn't seem right to me. For option B, did you take into account that the $500 you were paying on the higher interest loan will be shifted to the lower interest loan after it's been paid off?

pinkeyy501 · #20 (**permalink**) 04-04-2006, 02:11 PM

Quote:

Originally Posted by Sweepsplayer

If you're over the income limit, no, you're not eligible for a Roth IRA. However, since you own your own business, there are other retirement options such as a SEP IRA, SIMPLE IRA, Keogh, etc. Your CPA should be able to steer you in the right direction.

This doesn't seem right to me. For option B, did you take into account that the $500 you were paying on the higher interest loan will be shifted to the lower interest loan after it's been paid off?

According to my calculation,

If I put $500 extra towards principle to the small 15 yr loan (higher interest), I would pay off 90 month early with approximately $32,000 interest savings.

If I put $500 extra towards principle to the big 30 yr loan after 90 month, I would pay off 66 month early with approximately $114,000 interest savings.

Combined Interest Savings for paying $500 extra towards principle on small loan the $500 extra on the big loan after 90 month = approximately $146,000 interest savings.

Therefore, Paying $500 extra on large loan is the greater savings by approximately $56,000.

The logic is that while you're working on the smaller loan, the interest on the big loan is racking up even more.

If I am wrong, I would love to see some numbers, even if it's hypothetical numbers.

Thank you!