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Advice - Savings vs. 2nd Mortgage
Hi,
I am mostly a lurker but I do post occasionally. I was wondering if you could give me your opinion on this situation.
We bought a "starter" house a few years ago. We bought right before the housing market crashed. We have a 1st mortgage and 2nd mortgage (at double the going interest rate right now). We plan on moving in 2-4 years. We also have a savings account (that will allow us to put 10% down as of today on a new house and have money left over for emergency fund).
We can't decide if it is better to 1) pay off the 2nd mortgage over the next 3 years (and still be able to put a small amount into savings) or 2) put all of the money into our savings account and not pay extra/off the 2nd mortage. With all the scenarios we calculated neither option will really save us any money since we do plan on moving, it's just a matter of where we want the money to go and where the money will be when we move.
Would you put our monthly savings into the mortgage or into the savings account?
Re: Advice - Savings vs. 2nd Mortgage
Please know that I am no financial adviser, but I do pay attention to these things and am always looking at the most cost effective way to save money and build up savings.
There is a school of thought that indicates paying off you mortgage is like putting money in the bank. Follow this: you have a 30 year mortgage at 6% that you are wondering if you should pay more on or put into the bank. Problem is, banks are paying under 1% for savings rates. Some folks say paying down the mortgage is like getting a 6% return.
I don't subscribe to the school of thought above. If it were me, I would prefer to have the liquid cash in a savings account (or, if you can tolerate risk, you can put your money into the stock market). That said, you can borrow against your home (not recommended) in the case of an emergency, but if that emergency is a job loss or a long term illness, it's going to be tough to secure that Home Equity Loan or Line of Credit. And, since you said you bought at the height of the market...are you underwater on your mortgage?
If it were me, I'd look at refinancing the 2 mortgages into 1 and secure the very strong rates that are out there now. I just looked yesterday and my credit union has a 30 yr mortgage at 4.125%, a 20 year mortgage at 3.375% and 15 year mortgage at lower rates.
As for the starter home element...I bought mine 8 and a half years ago, thought we'd move in 3 or 4 years, but we are still there. That is because we have improved it, renovated it, and invested time and money in it to make it better.
I'd look into refinancing as well.
Personally I'd put it in savings. If someone loses a job you can't pay the bills with your equity (unless you want an equity loan and want to pay interest on that) You can pay them with your savings.