Stop paying extra toward mortgage?

[tink]

My hubby & I are currently paying extra toward our mortgage every month and debating if that is the right move.

I am 30, he's 36. We have one child. Cars are paid off, no consumer debt. Our income is around $130K annually, we have around 150K in retirement. We save around 15K annually in retirement currently. Our current goal is to have the mortgage paid off around the time my husband is 50(if not sooner) and do a substantial home addition in the next 8 years or so.

Current balance is $225,913.61, interest rate is 3.625%. P&I is $1071.73, with $566 toward insurance & taxes. The total mortgage payment is $1637.99. We are paying $2400, $762.01 more than the minimum. We are also saving $500 per month for a home addition we want to do in the next 8 years or so (current balance in that account is around 15K).

The cost of the addition is very unknown- which I suppose is part of the problem of knowing how much we need to save for it. I think it will be in excess of $100K. The current goal is to save the $500 toward the addition every month plus bonuses, tax refunds, etc. to pay cash for it.

With our mortgage interest rate so low, should we be investing that $$ instead of putting it directly toward the mortgage, with the intent of using it to pay down the mortgage in the future. Is there a better way to work toward accomplishing these two goals? Interest rates are so low right now (and we do have equity in our home) that I wonder about doing the addition now with a home equity loan- using the $$ that we were putting toward the mortgage/savings for the addition to pay that off quickly?

Thanks for your feedback!

[bjl584]

It may make sense to refinance the mortgage. You'll pay it off sooner and pay less in interest (possibly.)

I'm guessing you have a 30 year note?

Maybe look into a 15 year.

[autoxer]

My situation is very similar to yours (34 years old, one child, no consumer debt). I have a 15 year mortgage and I am maximizing the 401k.

I choose to stop the additional principal payments and divert the money to a brokerage account with an s&p index fund. But, I wouldn't put the money there if I had a short term goal for it. It sounds like this money is separate from your 'home addition account', so you may be okay with a more volatile fund.

[JoeP]

I'd do a few "what if" scenarios. You'll want to know:
1. Balance of addition fund
2. Date the mortgage will be paid off
3. How much you have in retirement accounts
4. When you will have enough in the home improvement fund to do the addition

A couple of the scenarios will be:
1. Continue doing what you're doing
2. Stop the extra principal payments and put that money into the addition fund
3. Do #2, and then when the goal is reached, pay more toward principal (or not)

In the meantime, I'd get a few estimates to have a goal. Even if you're looking at 5 years out (depending upon the scenario you pick), it is nice to have a goal. Add 5% per year to adjust for inflation and other factors.

Also, your extra payments reduce your principal (and therefore end date) more when done early in the mortgage term, so if you're past a certain point, the benefit is reduced.

Your interest rate is actually pretty good, so I am not sure a re-fi and the associated costs of doing so will give you enough benefit.

[Petunia 100]

Well, I think you are underfunding retirement a bit. I'd bump that up to at least 15% of gross before prepaying the mortgage.

Next, I would not prepay the mortgage while planning an expensive addition. Instead, funnel that money into savings towards your addition. Meanwhile, get some bids so you have an idea what it is going to cost you.

Once the addition is done and paid for, you can go back to prepaying the mortgage.

[HappySaver]

I second the idea to stop putting anything extra to your mortgage until after you've saved for and finished your addition. We were actually in a similar situation a few years and we first saved for/completed our remodel and after that funneled extra cash to the mortgage. Did not regret it - enjoyed every second in the remodeled house.

[cardtrick]

1. Don't refi to a 15 year. The rate now is about close to 3.5%. And a refi costs money upfront.

2. The question really becomes "Can I make more than 3.625% on my investments on average over the life of the loan". History screams "absolutely". Depends also on your tolerance for risk. I will also soon be in a situation where if I wanted, I can pay off my mortgage in under 10 years. But, I absolutely don't ever plan on paying more than my monthly payment. In fact, if someone offered to lend me more money at the rate of my mortgage, I'd borrow all I could get my hands on. I'm confident that I will make more than 3.625% over the long-term. (My 30 year mortgage is also at 3.625%).

3. Regardless of what extra you pay on the mortgage, you still "own" it. And by "own", I mean you get 100% of the upside. Why not up your retirement savings? Hypothetical situation. Something really bad happens and your house value drops to $50K. Now, say you paid off $150,000 of the principal. You basically got most of the downside too. If you had instead maxed out your 401K, you can always short sell the house and not be liable for the difference. Retirement accounts can't be taken by the bank. So, in a way you're protected from the downside. Not an ethical thing to do, but perfectly legal.

4. Cash in king. It might cost you more in the future to take the home equity out. Rates might go up so much that you won't be able to afford a HELOC. So, don't bank on having that equity. Also, home prices can fall.

[feh]

Well, I think you are underfunding retirement a bit.

I agree. I don't have an answer to the primary question, but the first thing I'd do is increase retirement savings to 15-20% of income.

[greenskeeper]

keep throwing money at the mortgage

the bailouts and QE infinity (?) was a game changer.

I can't live under a 401k so I am on target to pay the 30yr note off in 12 years (about 7 left to go)

I'm 33, wife is 34.

[autoxer]

keep throwing money at the mortgage

the bailouts and QE infinity (?) was a game changer.

I can't live under a 401k so I am on target to pay the 30yr note off in 12 years (about 7 left to go)

I'm 33, wife is 34.

Are you saying that you expect the bailouts and QE will make the markets perform poorly over the long term?

How do you plan to fund your retirement?

[greenskeeper]

Are you saying that you expect the bailouts and QE will make the markets perform poorly over the long term?

How do you plan to fund your retirement?

The markets are all an illusion just like the dollar.

But since you asked:

401k with company match (conservative funds)

holding physical silver with some gold as well

if/when the sh1t hits the fan, you can survive on a lot less without having a mortgage.

[autoxer]

The markets are all an illusion just like the dollar.

But since you asked:

401k with company match (conservative funds)

holding physical silver with some gold as well

if/when the sh1t hits the fan, you can survive on a lot less without having a mortgage.

I know we are getting a little off topic, but I think it is interesting how everyone's investment philosophy and tolerance for risk, separate us into completely opposite schools of thought about paying down principal on a mortgage.

[tink]

Thank you all for your advice.

I was wrong on our retirement savings per year. My dh has 14K going into his 401K every year, I have 5K into my Roth IRA, he has 1200K into his ROTH, and 3K going into my Simple IRA. A total of $23,200 per year toward retirement. Is that a better amount or should I still look at taking some of the addition/mortgage money and putting it toward retirement?

We have only had our home for 2 years, so with us paying a lesser amount toward principle (since we're new to the mortgage), does that change the advice to not pre-pay the mortgage?

Where should I look to save this money for the addition? Currently, it's in a mutual fund, but I'm not sure if that is the best place for money that I would like in the next 5-8 years?? Thank you!

[feh]

Thank you all for your advice.

I was wrong on our retirement savings per year. My dh has 14K going into his 401K every year, I have 5K into my Roth IRA, he has 1200K into his ROTH, and 3K going into my Simple IRA. A total of $23,200 per year toward retirement. Is that a better amount or should I still look at taking some of the addition/mortgage money and putting it toward retirement?

Yes, that's pretty good (17% using your numbers).

W

Where should I look to save this money for the addition? Currently, it's in a mutual fund, but I'm not sure if that is the best place for money that I would like in the next 5-8 years?? Thank you!

Which mutual fund? It shouldn't be invested in equities, given your time frame.

[HappySaver]

[QUOTE=tink;362553]
We have only had our home for 2 years, so with us paying a lesser amount toward principle (since we're new to the mortgage), does that change the advice to not pre-pay the mortgage?
/QUOTE]

No.