Money Matters
RosieC18
member
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Our tech team has launched updates to The Nest today. As a result of these updates, members of the Nest Community will need to change their password in order to continue participating in the community. In addition, The Nest community member's avatars will be replaced with generic default avatars. If you wish to revert to your original avatar, you will need to re-upload it via The Nest.
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Thank you.
Note: This only affects The Nest's community members and will not affect members on The Bump or The Knot.
Mortgage Pre-Payment?
A number of you have mentioned pre-paying your mortgages and I have some questions about how that works. I'd love to hear about your experiences and goals.
First, I've read that penalties vary widely depending on the mortgage terms. Was easy pre-payment something you looked for when shopping for a mortgage? Did you negotiate on it? Do you pay extra each month, or save up for big payments less often?
Second, what does this do to the remainder of your payments? Does it shorten the life of the loan or lower your payments? Do you have a choice? I know with my student loans when we overpay we basically get credited to future payments so the monthly payment stays the same, but if I stopped paying I wouldn't incur a penalty until the bills "caught up" to what I've paid. Also, for student loans pre-payment goes to principal - can you do the same thing for a mortgage or will it be taken from interest first?
We're looking at buying in the next year or so and plan on a payment that we can cover with one income. Since we currently have two, we will probably pre-pay significantly for a couple years at least. It would be nice to have the option to go to a lower payment when if I leave the workforce, even if we can still technically afford the payments. Maybe the better thing would be to refinance when the time comes and put down more cash? But I'm pretty sure interest rates are only going up so that doesn't appeal.
Okay, so that's a lot more than 2 questions but this is an area I know very little about and would like to know more as we figure out how much house we feel comfortable buying. Your advice and wisdom are greatly appreciated!
First, I've read that penalties vary widely depending on the mortgage terms. Was easy pre-payment something you looked for when shopping for a mortgage? Did you negotiate on it? Do you pay extra each month, or save up for big payments less often?
Second, what does this do to the remainder of your payments? Does it shorten the life of the loan or lower your payments? Do you have a choice? I know with my student loans when we overpay we basically get credited to future payments so the monthly payment stays the same, but if I stopped paying I wouldn't incur a penalty until the bills "caught up" to what I've paid. Also, for student loans pre-payment goes to principal - can you do the same thing for a mortgage or will it be taken from interest first?
We're looking at buying in the next year or so and plan on a payment that we can cover with one income. Since we currently have two, we will probably pre-pay significantly for a couple years at least. It would be nice to have the option to go to a lower payment when if I leave the workforce, even if we can still technically afford the payments. Maybe the better thing would be to refinance when the time comes and put down more cash? But I'm pretty sure interest rates are only going up so that doesn't appeal.
Okay, so that's a lot more than 2 questions but this is an area I know very little about and would like to know more as we figure out how much house we feel comfortable buying. Your advice and wisdom are greatly appreciated!
Re: Mortgage Pre-Payment?
Depending on your interest rate, pre-paying mortgages isn't always a good deal. Our interest rate is around 4%, and I typically earn significantly more than that in the market.
Some people pre-pay simply because they hate debt. Others pre-pay because they bought more house than they really should have, and they're trying to get ahead on payments in anticipation of more expensive months in the future. Mathematically, though, prepayment is usually not the best use of extra money if you would otherwise have invested that money in the market.
Also look at 15-year mortgages if the notion of a long mortgage isn't appealing to you. That's the sweet spot for a lot of people in terms of length of time you're paying it off vs. the interest rate.
I pretty much agree with everything @hoffse said. We have a 15-year mortgage at under 4% and have about 10 years left to pay. I'm comfortable making those 10 year's worth of payments because it means that we have more cash on hand to use in other ways--mainly saving for retirement or putting it back into the home via home improvements.
As long as you don't over buy, I think a mortgage is one of the better debts to carry.
On our mortgage, if we did pay extra, it would be applied to principal but it would not mean that we could skip payments until we caught up, it just means it would be paid off sooner.
We pay extra on our mortgage every month. We made sure we asked the mortgage company first if there was a pre-payment penalty which there wasn't. There is no extra fee for it. We just basically round up the dollar amount to whatever we felt was comfortable and stick with it. We knew we couldn't afford a 20 yr or less mortgage due to the higher payments so we took the 30 yr and decided that if we wanted to pay down extra every month to shorten the life of the loan we could do that on our own terms.
I do agree with Hoffse though but this is how we choose to handle our mortgage.
Basically you need to have a mortgage with no prepayment penalty.
Be sure if you do prepay - that you specify that the amount over and above the required monthly payment be applied to PRINCIPAL -
Doing this on a regular basis can cut years off your mortgage.
Some people prefer shortening the loan period (15 yrs vs 30 year) but you can accomplish the same thing with a 30 year loan by paying at the 15 year rate.
Although you can do well in the stock market - you can also lose money. The value of your home may change (up or down) but the debt will definitely be less if you prepay and you will see the debt free status arrive sooner with that plan.
Although we have been enjoying very low interest rates for an extended period of time - those days will not last forever and rates will rise again. (Historical average is 8% for a mortgage rate --- and the late 1970s and into the 1980's had rates up to 18%.)
IF you have credit card debt or car loans - I would focus on paying those off first - then pay down the mortgage.
Yeah I mean, there are times when pre-paying makes sense emotionally or even mathematically... for instance, say you are approaching retirement and having your house paid off is part of your retirement plan. If that's the case, then by all means prepay. That's especially true if carrying a mortgage in your retirement would make retirement difficult.
I think it's fine to make financial decisions that might not be the most efficient decision from a pure math standpoint, as long as you understand why you are doing it. I keep a lot more cash savings than I need (that's not earning any significant interest), because I'm just not somebody who rolls with the punches well. I need a good safety net to feel ok about our finances, and that has been especially true with home ownership. Example: our water heater died in January and had to be replaced. The same month we had a leaky toilet and had to call a plumber. Just last week I got audited by the IRS. I'm pretty confident I will win that one, but if I don't, we can comfortably afford to pay the adjustment, so I'm really not worried about it. Mathematically, I know that I keep more liquid than I strictly need, but it helps me sleep at night.
Check with your mortgager about a prepayment penalty but, like @Xstatic3333 said, nowadays that's pretty unusual with a typical home loan through a bank.
Also, assuming you don't refinance at some point, paying toward principal will only decrease the amount of time you have for the loan. It will not decrease your payments into the future.
Generally speaking, if you make two extra mortgage payments per year, you will cut approx. 10 years off of a 30-year loan. And they don't have to be in two big chunks. Just figure out what two extra mortgage payments are, divide that by 12, and add that amount to principal every month.
It's also slightly better, interest-wise, to make smaller payments earlier rather than saving for a big payment. Of course, that is assuming you aren't making more money with that "extra" money somewhere else...like @hoffse suggested.
Normally I would want to wait to buy, save like crazy in the meantime and have a big down payment before buying around that 3 year mark, but we live in a really hot market and the longer we wait the more expensive houses get, on top of rising interest rates. So maybe we just build a really solid nest egg between now and that income drop off and leave the house out of it? I keep feeling like there should be a way to buy now, put a lot in while we have the money, and then benefit from a lower payment when we need one, but I think the timing may just not be in our favor right now, which is okay. We'll live.
Haha - I'm so ready to hand it to them. Get this - they audited me over claiming the education tax credit for my final semester of law school. I made less than $25K that year, but they still want documentation that I was a full-time student and the fees were paid in January of that year. I do have this documentation, but seriously? That's the kind of stuff they're trying to go after? You would think they would worry about things that are actually shady. Claiming the education tax credit as a full-time student =/= shady.
I'm pretty sure I've got this one nailed down. And if they fight me on it, I'm pretty sure the fight will end up costing them more than what they say I owe. Your government at work!
Add day care expenses -- or loss of your income if you plan to stay at home etc.
I agree with all the PPs. But, I wanted to add another reason to pay down a mortgage faster is so you can have the security of actually owning your home, versus having the bank technically "own" it while there's a mortgage lien against it. There's a lot of security knowing that you own, free and clear, the roof over your and your kids' heads.
Some other options include paying bi-weekly or even weekly (having the effect of making an extra monthly payment each year); choosing the shortest amortization period possible; and keeping payments the same even if, at time of renewal, interest rates are lower.
I've never really wanted a huge house. Right now we have three bedrooms, a basement with great in-law apartment potential, and a good sized yard. We'll make improvements, but I think it's all we'll ever need.
I'm not currently pre-paying because, hey it's a cheap loan I already have, and I'd rather save my money to buy investment properties.
But my long term plan is to get a few rental properties under my belt first and then, about 3 years from now, start paying the mortgage off for my primary home because I plan to live here a very long time.
This is my forever home and I love my house! While anything is possible, I don't have any future plans to move to a different home.
Yes but have you included the money you lose in closing costs both directions (especially selling when you are paying a 6% realtor's commission)? That's where the 5-year recommendation usually comes into play. Your house has to increase in value enough to off-set those costs, otherwise you are losing money when you move.
I know DC is a hot area, but make sure you know exactly what those calculators are including. I looked at them too, and they were way off for us.
It's anecdotal, but those calculators haven't even come close to how much we've spent on the house since moving in. I don't regret buying because it has given us a better location and significantly more space. We also have just over a half acre of land. The actual mortgage part of our payment is $100 more per month than rent was, and it has tripled the amount of usable space we have. But the mortgage is just part of it - we've spent a LOT more on things like furniture, home improvements, ripping out the nasty carpet and installing hardwood, etc. Plus you have to include taxes and insurance, which aren't insignificant. That's where those rent v. buy calculators usually fail hardcore.
Honestly - if we had not been able to gain this much space, we would have continued to rent.
So, it includes closing costs for both buying and selling, the rate of return if you kept your money elsewhere, rent increases, rental v. homeowners insurance, taxes etc. However, it doesn't include furniture, landscaping or renovations some of which we would probably do. I also took them at the default for annual maintenance, which may be off. It also assumes that you're renting a comparable space, which we wouldn't necessarily do, at least immediately.