Newbie here--budget advice (help me save/invest more wisely)

[jIM_Ohio]

The part about the interest only mortgage was added in a later post.

Interest rate on mortage is 6.5%. It is an interest only loan but at a fixed rate (no balloon, arm, etc). I know how most feel about this--at the time we bought our home, I was a SAHM and we purchased it knowing our income would increase but it gave us a little more buying power at the time). Therefore, it is important to us to pay on the principal each month. We did put a nice downpayment on it so we DO have equity in our home between that the $200 over. By the way, we have always done the $200 over (even when I was SAHM).

I bet OP could refinance. lower payment, and get a 15 year or 30 year fixed mortgage. I would look into this.

I would keep paying $200 towards principal. I would consider taking raises and adding it to this amount. Part of this would be a calculation as to what it would take to make a 15 year payoff on the interest only loan (calculate ammortization table for 15 yr fixed mortgage). More than likely $200/month does not cover the 15 year payoff, so I would increase payment until you reached that point. For example add car payment to this in 3 years and see what $500/month does to ammortization schedule. Add a 1% raise to this each year and see what that does. I would not keep the interest only loan for a long period of time, but while you have it, you have a risk, and the way to hedge that risk is to pay it down quickly.

Does this interest only payment balloon? I use 15 years above because that should protect you from a possible balloon payment in year 20, 25 or 30. If you have a 15 year balloon payment, you might need a different strategy if you cannot refinance.

[sweetZ4me]

This feedback has been wonderful. No, the mortgage does not balloon, and the interest rate is fixed for life of the loan.

Do you all recommend that we refinance to a traditional mortgage even if we could up the principal each month on this interest only loan?I checked out an ammortization table and plugged us in at 15 years, fixed, same 6.5% and it says $1480.00 monthly for the 15 years to pay off the balance. So, if I did that and just kept the interest only but put the $480 toward principal each month, would it work out about the same? I hope what I am asking makes sense. We are 2.5 years into this mortgage, if that info matters.

[jIM_Ohio]

This feedback has been wonderful. No, the mortgage does not balloon, and the interest rate is fixed for life of the loan.

Do you all recommend that we refinance to a traditional mortgage even if we could up the principal each month on this interest only loan?I checked out an ammortization table and plugged us in at 15 years, fixed, same 6.5% and it says $1480.00 monthly for the 15 years to pay off the balance. So, if I did that and just kept the interest only but put the $480 toward principal each month, would it work out about the same? I hope what I am asking makes sense. We are 2.5 years into this mortgage, if that info matters.

Do a 15 year fixed based on todays principal balance and that will give you estimated payment to pay off in 15 years. How $480/month would work would depend on many factors which I do not know and would need an ammortization schedule to plug into. The $200 payment over last 2.5 years would also have changed things- this may or may not have been high enough to pay down principal on a 15 yr fixed schedule. In addition it depends if you paid $200+principal owed or kept the payment fixed (if interest owed is $1300 and you pay $200 extra, do you send $1500 each month, or when interest goes down, do you decrease payment)?

Download an ammortization table (blank) from microsoft and plug in your numbers. It will allow you to change monthly paydown amount each month or make regular extra payments.

http://office.microsoft.com/en-us/templates/results.aspx?qu=ammortization+schedule&av=TPL000

Once you get the spreadsheet set up for 6.5% and can pay it off in 15 years, then look at refinancing. Sum the column with principal payments made (should equal cost of mortgage- this is a check to make sure you set up spreadsheet correct). Sum the column with interest payments made.

If new rate is 5.5% look at that ammortization schedule. Sum the principal payments made. Sum the column with interest paid. Compare to 6.5% schedule currently.

My guess is you would need to save .5% on interest rate to see a big enough difference to refinance (based on closing costs).

I think 15 yr fixed mortgages are running at around 6% right now, depending on credit.

[maat55]

I think you should consider establishing a financial plan that funds all your spending. I follow a plan Dave Ramsey teaches that has a prioritized order.

1. Save 1000 for EF.
2. Payoff all consumer debt. (In your case, the car)
3. Build EF to 3 to 6 months.
4. Invest 15% of income into Roth's etc.
5. invest in 529's for college.
6. Pay extra on mortgage.

In your plan you should have a fund for cars and other consumer debt so that you do not borrow to buy them. Hope this helps.