Should I try to pay off home loan ?

[aim-high]

I recently bought a house. The loan currently is around 550K. Our interest rate is 4.00%.
We got a 30 year loan. Both myself and my wife are working. We both maximize 401K. I put money in ESPP. I have some stocks that is vesting in few months (if i sell all of the vesting stocks, it would be around 30-35K depending on stock price at that time). I generally invest around 2K in stocks. If I make profit in selling stocks/options,I move the profit to savings. We have about 30K in reserves.

This is our first home and its hard for us not to think about the home loan we have. Once I get some extra cash as part of the vested stocks, should I pay additional principal towards the loan or should I save that amount or should I invest it somewhere else ? I cant make a decision here.

Please advise. Sometimes i think because the interest rate is only 4% , may be I am better off re-investing the stock money in stocks (not my company ofcourse) so I can get better return on investment.

[Retired To Win]

reply deleted

[Goldy]

How much do you have in your emergency fund? Is that the 30k of reserves? If that's the case I would work to beef that up before I would start throwing extra money at the mortgage. With a mortgage that large I would want a 12 month EF.

I'm a big fan of paying extra on a mortgage in general but I would first get a solid EF and then make sure I was saving enough for retirement before chipping at the mortgage. Have you thought about just paying biweekly?

[aim-high]

yes 30K in reserves.
12 months of EF means 12 * my mortgage payment per month ?
What is the benefit of paying bi-weekly ? Does it reduce the overall interest payments ?

[MonkeyMama]

I would pay down the mortgage. Though I agree you want some liquidity in case of emergency.

I think the thing is that by itself it might not be a huge priority. But, if you are already maxing out 401k and investing an appropriate amount, then I would absolutely pay down the house. Diversification.

It's hard to give relevant advice without knowing more of your entire situation. But general rule of thumb is to pay down house once retirement savings is on track.

[Goldy]

yes 30K in reserves.
12 months of EF means 12 * my mortgage payment per month ?
What is the benefit of paying bi-weekly ? Does it reduce the overall interest payments ?

Typically Emergency Funds are supposed to be 6 months of expenses including mortgage, gas, car payments, food, etc etc. This is to protect you in case you lose your job and have a hard time finding a new one. What are you monthly expenses? Given the mortgage I would assume they would be close to 6k.

Do you have any other debt like car loans or student loans? Are you paying PMI on this mortgage?

If you don't have any other debt and you are certain you are saving enough for retirement then I would start chipping away at the mortgage. I would recommend talking to your bank and seeing if they offer a bi-weekly payment plan for free, don't pay for this. Given your loan paying biweekly would save you over 59k in interest and would allow you to pay off the mortgage about 5 years earlier. They basically divide your mortgage in half and require you to pay it every other week and since there are 52 weeks you pay 26 times which comes out to one extra monthly payment a year. This is a easy way to start chipping away at the mortgage. If you still have extra cash you can increase your monthly payment and get it paid off much sooner.

We are in a similar situation, retirement is on track, EF is good, all other needs are met, so we are aggressively paying down our mortgage to diversify. We are on track to pay our 30 yr mortgage off in under 10 years which is going to save us a bundle in interest.

[MonkeyMama]

We are in a similar situation, retirement is on track, EF is good, all other needs are met, so we are aggressively paying down our mortgage to diversify.

Yes. To be clear, aim-high, I was assuming no other debts, etc. Goldy said it very well.

[aim-high]

No other loans . Not paying PMI on mortgage.
Monthly expenses with mortgage is around 6.5K (mortage i pay 3.8K with property tax)

yes I think this bi-weekly is a very good option. I thought about it one month back and never proceeded to get that going. May be I should do that. thanks a lot for the advise.

Typically Emergency Funds are supposed to be 6 months of expenses including mortgage, gas, car payments, food, etc etc. This is to protect you in case you lose your job and have a hard time finding a new one. What are you monthly expenses? Given the mortgage I would assume they would be close to 6k.

Do you have any other debt like car loans or student loans? Are you paying PMI on this mortgage?

If you don't have any other debt and you are certain you are saving enough for retirement then I would start chipping away at the mortgage. I would recommend talking to your bank and seeing if they offer a bi-weekly payment plan for free, don't pay for this. Given your loan paying biweekly would save you over 59k in interest and would allow you to pay off the mortgage about 5 years earlier. They basically divide your mortgage in half and require you to pay it every other week and since there are 52 weeks you pay 26 times which comes out to one extra monthly payment a year. This is a easy way to start chipping away at the mortgage. If you still have extra cash you can increase your monthly payment and get it paid off much sooner.

We are in a similar situation, retirement is on track, EF is good, all other needs are met, so we are aggressively paying down our mortgage to diversify. We are on track to pay our 30 yr mortgage off in under 10 years which is going to save us a bundle in interest.

[aim-high]

One other thing.
I have a 3 year old son. I have not yet started to put money in 529. Should I start doing that ? I am thinking of putting like 100-200 per month and let that grow based on stock/bond purchase that happens in 529.

Typically Emergency Funds are supposed to be 6 months of expenses including mortgage, gas, car payments, food, etc etc. This is to protect you in case you lose your job and have a hard time finding a new one. What are you monthly expenses? Given the mortgage I would assume they would be close to 6k.

Do you have any other debt like car loans or student loans? Are you paying PMI on this mortgage?

If you don't have any other debt and you are certain you are saving enough for retirement then I would start chipping away at the mortgage. I would recommend talking to your bank and seeing if they offer a bi-weekly payment plan for free, don't pay for this. Given your loan paying biweekly would save you over 59k in interest and would allow you to pay off the mortgage about 5 years earlier. They basically divide your mortgage in half and require you to pay it every other week and since there are 52 weeks you pay 26 times which comes out to one extra monthly payment a year. This is a easy way to start chipping away at the mortgage. If you still have extra cash you can increase your monthly payment and get it paid off much sooner.

We are in a similar situation, retirement is on track, EF is good, all other needs are met, so we are aggressively paying down our mortgage to diversify. We are on track to pay our 30 yr mortgage off in under 10 years which is going to save us a bundle in interest.

[aim-high]

Hi,
I looked at the bi-weekly program offer that I got . I called them and they said I need to pay 3.50 extra every 2 weeks so it comes to around $7 per month extra for enrolling in this program.
when I gave my specific loan amount, I see a savings of $76,770.63 overall. This will cut down my loan years by 6 (24 years).

Looks like i have to absolutely be in this program for 6 months. If i cancel before 6 months, there is around 1000 penalty.

What do you suggest ? Yes $7 per month which comes to 2016 in 24 years but overall isnt there an advantage.

Typically Emergency Funds are supposed to be 6 months of expenses including mortgage, gas, car payments, food, etc etc. This is to protect you in case you lose your job and have a hard time finding a new one. What are you monthly expenses? Given the mortgage I would assume they would be close to 6k.

Do you have any other debt like car loans or student loans? Are you paying PMI on this mortgage?

If you don't have any other debt and you are certain you are saving enough for retirement then I would start chipping away at the mortgage. I would recommend talking to your bank and seeing if they offer a bi-weekly payment plan for free, don't pay for this. Given your loan paying biweekly would save you over 59k in interest and would allow you to pay off the mortgage about 5 years earlier. They basically divide your mortgage in half and require you to pay it every other week and since there are 52 weeks you pay 26 times which comes out to one extra monthly payment a year. This is a easy way to start chipping away at the mortgage. If you still have extra cash you can increase your monthly payment and get it paid off much sooner.

We are in a similar situation, retirement is on track, EF is good, all other needs are met, so we are aggressively paying down our mortgage to diversify. We are on track to pay our 30 yr mortgage off in under 10 years which is going to save us a bundle in interest.

[doingitallwrong]

Yes $7 per month which comes to 2016 in 24 years but overall isnt there an advantage.

No. In that case just make one extra payment to principal once a year. You'll end up paying $1200 more in interest than with the biweekly payments, which is still lower than the $2016 in fees. (Or you could add 1/12 of your payment amount to each monthly payment.)

Bankrate.com has some good calculators to run the numbers, one showing the savings of biweekly vs monthly with no extra payments, and the one showing monthly with the extra payments.

[aim-high]

ok I ran some numbers.

a) If I dont make any additional payment towards principal , i will end up with total interest of 440,129.18 (Loan amount is 612K with 4.00% interest rate for 30 years).

b) Now, with bi-weekly, Total interest I would save is around $76K (according to this company).
In addition, i pay a fee of 3.50 per payment which is equal to $91 (26 payments per year) (I did my calculation wrong last time). With bi-weekly, I will finish the loan in 25 years
So total cost to me = 2275 in fees.
So I still save 76K - 2.2K = 73.8K in savings.

Lets forget that I am making any additional payment towards principal in either a or b.
Am I getting my math correct here ?

[Petunia 100]

ok I ran some numbers.

a) If I dont make any additional payment towards principal , i will end up with total interest of 440,129.18 (Loan amount is 612K with 4.00% interest rate for 30 years).

b) Now, with bi-weekly, Total interest I would save is around $76K (according to this company).
In addition, i pay a fee of 3.50 per payment which is equal to $91 (26 payments per year) (I did my calculation wrong last time). With bi-weekly, I will finish the loan in 25 years
So total cost to me = 2275 in fees.
So I still save 76K - 2.2K = 73.8K in savings.

Lets forget that I am making any additional payment towards principal in either a or b.
Am I getting my math correct here ?

You're doing the math correctly, but you're overlooking an important fact: the savings is NOT due to the bi-weekly program, the savings is due to the fact you are paying one extra payment per year. You can easily do this yourself and save the fees. Or better yet, throw an extra $7 per month AND an extra payment per year at your mortgage, and save even more.

[aim-high]

Got it. Thanks. I think I will go with 1 extra payment so not only i am achieving the same thing but also i dont have to work with another 3rd party company and just deal with my bank alone.

[aim-high]

One last question. The main reason for this thread was to see if paying off home loan is the right thing with some extra cash coming from options. Is it better to starting to put money in 529 for college education for my kid or use that towards home payment ?