Equity vs. Cash
February 25, 2010 6:33 AM Subscribe
What is the point of putting extra cash into an existing mortgage in order to increase 'equity' rather than keeping cash on hand if I have no need or desire to borrow on that equity? Trying to understand my adviser's recommendation.
I have a mortgage of about 400k. Owned my place for going on 18 months now. I also have a large amount of cash on hand, because I don't feel my job is secure enough that I can continue to pay my mortgage should I get laid off without a large emergency fund. My financial adviser wants me to put 50k of that emergency fund into the mortgage in order to increase equity. I don't understand the point of this because I have no plans or desire to need to borrow on the value of my place. What is the advantage of building equity and why would he adamantly recommend putting cash into the mortgage like this given our current economic situation? What am I losing by keeping this money liquid? If you explain this to me as if I were a 5th grader, that would be very helpful.
I have a mortgage of about 400k. Owned my place for going on 18 months now. I also have a large amount of cash on hand, because I don't feel my job is secure enough that I can continue to pay my mortgage should I get laid off without a large emergency fund. My financial adviser wants me to put 50k of that emergency fund into the mortgage in order to increase equity. I don't understand the point of this because I have no plans or desire to need to borrow on the value of my place. What is the advantage of building equity and why would he adamantly recommend putting cash into the mortgage like this given our current economic situation? What am I losing by keeping this money liquid? If you explain this to me as if I were a 5th grader, that would be very helpful.
If you pay down your mortgage, you will pay less in interest going forward. That's the main reason to do it, afaik. It might or might not be a good idea to do so in your specific case... but that's the point.
posted by Perplexity at 6:37 AM on February 25, 2010
posted by Perplexity at 6:37 AM on February 25, 2010
Perhaps the thinking is that your principal will go down, which equates to less interest paid back in the long run? But I agree that having a 50K safety net is not much different than having a potential 50K borrowing safety net in the house, but IAMAEconomist.
I remember being SHOCKED when I saw, at our house closing, that we would actually be paying three times the amount of the mortgage after 30 years of paying interest. We make extra payments to our principal whenever we can. I believe the math is that if you make one extra full monthly payment a year, you reduce your mortage to 22 years instead of 30, or something crazy like that.
posted by archimago at 6:38 AM on February 25, 2010
I remember being SHOCKED when I saw, at our house closing, that we would actually be paying three times the amount of the mortgage after 30 years of paying interest. We make extra payments to our principal whenever we can. I believe the math is that if you make one extra full monthly payment a year, you reduce your mortage to 22 years instead of 30, or something crazy like that.
posted by archimago at 6:38 AM on February 25, 2010
If you're paying 5% interest on $400k, you're going to be paying interest for a lot longer than if you're paying 5% interest on $350k. Putting money into the principal will decrease the total cost of your mortgage over its lifetime.
posted by jckll at 6:39 AM on February 25, 2010
posted by jckll at 6:39 AM on February 25, 2010
What am I losing by keeping this money liquid? If you explain this to me as if I were a 5th grader, that would be very helpful.
If the amount of money you're making in interest in your bank account is less than the amount of money you're paying in interest on your mortgage, you're losing out. Example:
$50,000 @ 2% Annual Interest: This makes you $1000 annually in your bank account.
$50,000 @ 5% Annual Interest on a Loan: You pay $2500 annually to the bank in interest.
You save $1500 by paying down the debt by simply not paying more interest.
posted by Hiker at 6:42 AM on February 25, 2010
If the amount of money you're making in interest in your bank account is less than the amount of money you're paying in interest on your mortgage, you're losing out. Example:
$50,000 @ 2% Annual Interest: This makes you $1000 annually in your bank account.
$50,000 @ 5% Annual Interest on a Loan: You pay $2500 annually to the bank in interest.
You save $1500 by paying down the debt by simply not paying more interest.
posted by Hiker at 6:42 AM on February 25, 2010
I'm not a financial advisor, but interest rates seem very low, historically speaking. Thus I, too, would wonder what the gain is to paying down principal, over staying liquid, when the amount of interest being paid over the life of the loan may already be somewhat low, relative to older mortgages.
If you were to put your $50k into the house now and then you lose your job, that is $50k you cannot put towards house payments until you transition to a new job, which puts you at risk of foreclosing and losing your $50k, your initial down payment, and any equity you have already accrued in 18 months.
The advice you received sounds sketchy, but without knowing all the details, it's hard to say. Maybe you should ask the opinion of a second financial advisor.
posted by Blazecock Pileon at 6:43 AM on February 25, 2010 [2 favorites]
If you were to put your $50k into the house now and then you lose your job, that is $50k you cannot put towards house payments until you transition to a new job, which puts you at risk of foreclosing and losing your $50k, your initial down payment, and any equity you have already accrued in 18 months.
The advice you received sounds sketchy, but without knowing all the details, it's hard to say. Maybe you should ask the opinion of a second financial advisor.
posted by Blazecock Pileon at 6:43 AM on February 25, 2010 [2 favorites]
You can do some simple calculations to see what good it does you over time. I use Karl's Mortgage Calculator to do this. It allows you to figure out the overall effect of doing a prepayment.
posted by procrastination at 6:45 AM on February 25, 2010 [2 favorites]
posted by procrastination at 6:45 AM on February 25, 2010 [2 favorites]
When I was overpaying my mortgage, it was set up in such a way that I could borrow back any overpayments at any time with no notice. I was also entitled to "payment holidays", where I could just stop paying the mortgage until the previously made overpayments had been used up. So, money overpaid on a mortgage can sometimes be liquid.
posted by emilyw at 6:45 AM on February 25, 2010 [2 favorites]
posted by emilyw at 6:45 AM on February 25, 2010 [2 favorites]
Are you paying mortgage insurance, by the way? Maybe your advisor is really suggesting you bring your equity up to 20%, which allows you to forgo the PMI. The insurance premiums are not tax-deductible, while the mortgage interest is. So there might be a greater tax benefit or overall savings to bringing your equity up to 20% of the home's valuation.
posted by Blazecock Pileon at 6:47 AM on February 25, 2010 [2 favorites]
posted by Blazecock Pileon at 6:47 AM on February 25, 2010 [2 favorites]
How much is your whole emergency fund? Is it just the $50K?
I am all for paying down a mortgage early, but I would make a safety net the number one priority. Figure out how many month's expenses you would like to keep on hand - say six months maybe - and use money over that prudent reserve to pay down the mortgage.
What am I losing by keeping this money liquid?
We are talking about an Opportunity Cost. Usually, you would think about it like this: you are earning zero from your liquid assets and you could invest it and earn some number greater than zero. In your case, your adviser is saying you are earning negative 5% (or whatever your mortgage rate is) by having the money and not paying down the mortgage.
Here's the thing: this is just a preference. You have a preference for liquidity right now and there is nothing wrong with that. Your adviser is correct to point out to you how much this preference is costing you so you can make a more informed decision. Tell your adviser you need a six month = 50K cushion right now and given that, what is the best thing to do.
posted by shothotbot at 6:48 AM on February 25, 2010
I am all for paying down a mortgage early, but I would make a safety net the number one priority. Figure out how many month's expenses you would like to keep on hand - say six months maybe - and use money over that prudent reserve to pay down the mortgage.
What am I losing by keeping this money liquid?
We are talking about an Opportunity Cost. Usually, you would think about it like this: you are earning zero from your liquid assets and you could invest it and earn some number greater than zero. In your case, your adviser is saying you are earning negative 5% (or whatever your mortgage rate is) by having the money and not paying down the mortgage.
Here's the thing: this is just a preference. You have a preference for liquidity right now and there is nothing wrong with that. Your adviser is correct to point out to you how much this preference is costing you so you can make a more informed decision. Tell your adviser you need a six month = 50K cushion right now and given that, what is the best thing to do.
posted by shothotbot at 6:48 AM on February 25, 2010
The above advice is generally correct - paying off your mortgage earlier saves you money in interest. However, there are a few reasons you might NOT want to pay off your mortgage early:
1.) You can earn an even higher return elsewhere. If your mortgage is 5% and you think you can earn 8% in the stock market (good luck with that...) then the stock market is probably a better use of your capital.
2.) You have debts with even higher interest rates than your mortgage. Do you have $50k of credit card debt at 20% interest? Pay that first.
3.) You might need the cash. You give up flexibility when you pay off your debts early, meaning you will not have that cash available if you need it in a pinch. Don't bet on being able to reclaim that cash in the form of a home equity loan if your situation suddenly changes for the worse. The capital markets are terrible right now, and home equity loans for people having hard times are pretty hard to find right now.
Only you and your financial adviser can decide how to handle those factors, especially #3. If you have a nice cushion of savings, then paying off your mortgage early might be wise. If you feel uncertain about your job, then you may be smarter to hold on to your savings.
posted by fremen at 6:51 AM on February 25, 2010 [1 favorite]
1.) You can earn an even higher return elsewhere. If your mortgage is 5% and you think you can earn 8% in the stock market (good luck with that...) then the stock market is probably a better use of your capital.
2.) You have debts with even higher interest rates than your mortgage. Do you have $50k of credit card debt at 20% interest? Pay that first.
3.) You might need the cash. You give up flexibility when you pay off your debts early, meaning you will not have that cash available if you need it in a pinch. Don't bet on being able to reclaim that cash in the form of a home equity loan if your situation suddenly changes for the worse. The capital markets are terrible right now, and home equity loans for people having hard times are pretty hard to find right now.
Only you and your financial adviser can decide how to handle those factors, especially #3. If you have a nice cushion of savings, then paying off your mortgage early might be wise. If you feel uncertain about your job, then you may be smarter to hold on to your savings.
posted by fremen at 6:51 AM on February 25, 2010 [1 favorite]
When I was overpaying my mortgage, it was set up in such a way that I could borrow back any overpayments at any time with no notice.
Yep, I do this too and it seems like the best of both worlds. I keep a small amount of savings elsewhere - enough to keep me going for a few weeks until I decide whether to borrow back the mortgage overpayments. Note that not every mortgage has a 'borrow back' or 'payment holiday' feature.
posted by le morte de bea arthur at 6:57 AM on February 25, 2010
Yep, I do this too and it seems like the best of both worlds. I keep a small amount of savings elsewhere - enough to keep me going for a few weeks until I decide whether to borrow back the mortgage overpayments. Note that not every mortgage has a 'borrow back' or 'payment holiday' feature.
posted by le morte de bea arthur at 6:57 AM on February 25, 2010
I used to pay extra towards mortgage and think home equity line as way to have access to cash in an emergency. Then bank lowered the credit line to almost nothing and all the sudden had job losses, etc. We managed, but going forward I'll always keep the cash and debt. I also won't keep my cash at the same institution that I owe my money to. If necessary I will walk away with my money and let the bank keep their house.
Net worth is the same when you have $0 and owe $0 vs. have $200k and owe $200k, but I much rather be in the latter situation. Goes contrary to what I've believed in the past, but is based on my personal experience.
posted by zeikka at 6:57 AM on February 25, 2010 [1 favorite]
Net worth is the same when you have $0 and owe $0 vs. have $200k and owe $200k, but I much rather be in the latter situation. Goes contrary to what I've believed in the past, but is based on my personal experience.
posted by zeikka at 6:57 AM on February 25, 2010 [1 favorite]
One more thing: ask your financial adviser to calculate the "present value" of your interest savings if you pay the $50k. That number tells you how much money you're saving in interest in today's terms. Then ask him to calculate the present value of the interest savings for a few different scenarios, such as:
1.) Paying $50k in 6 months
2.) Paying $50k over the course of 1 year
3.) Paying $25k now, keeping $25k in a savings account
4.) etc, etc
You'll find that the present value of paying back the loan now is the highest (you save the most interest), however the big advantage of this method is that you can compare the cost of the other options on equal grounds. In other words, if the difference between option #1 and option #2 is $XX - is that worth it to you?
posted by fremen at 7:00 AM on February 25, 2010 [2 favorites]
1.) Paying $50k in 6 months
2.) Paying $50k over the course of 1 year
3.) Paying $25k now, keeping $25k in a savings account
4.) etc, etc
You'll find that the present value of paying back the loan now is the highest (you save the most interest), however the big advantage of this method is that you can compare the cost of the other options on equal grounds. In other words, if the difference between option #1 and option #2 is $XX - is that worth it to you?
posted by fremen at 7:00 AM on February 25, 2010 [2 favorites]
Best answer: First of all, if your financial advisor can't explain his/her thinking to you in a way that you can understand, then you need a new financial advisor. That's the whole point of hiring the person. The fact that you're coming to AskMe says they're not doing their job.
As for the specific advice, I disagree with it. If you feel that you are at risk of losing your job, you should keep your emergency financial cushion as large as possible. This will allow you to continue making mortgage payments in the event you lose your job. The $50K extra that you put in now does not relieve you of the responsibility of making future payments every month; it just means you'll pay off the loan earlier and pay less interest over the life of the mortgage. But as Blazecock Pileon says, if you default on your mortgage you lose your $50K along with all the rest of the equity in your house.
Now, you haven't told us the whole story. You say you have a lot of cash on hand, but you don't say how much. If you have $300K in the bank, then maybe it'd be okay to put another $50K into the house. But if you have $75K in the bank, I'd leave it all there. (In this economy, I don't think 6 months of expenses is enough for an emergency account. There are lots of people who are unemployed for a year or more.)
One compromise you could make would be to pay an extra $200/month on your mortgage. Over time this will substantially reduce your payments and the overall cost of the loan. But if your financial situation changes, you can stop making those extra payments any time you want. That's what mrs. alms and I are currently doing.
posted by alms at 7:04 AM on February 25, 2010 [1 favorite]
As for the specific advice, I disagree with it. If you feel that you are at risk of losing your job, you should keep your emergency financial cushion as large as possible. This will allow you to continue making mortgage payments in the event you lose your job. The $50K extra that you put in now does not relieve you of the responsibility of making future payments every month; it just means you'll pay off the loan earlier and pay less interest over the life of the mortgage. But as Blazecock Pileon says, if you default on your mortgage you lose your $50K along with all the rest of the equity in your house.
Now, you haven't told us the whole story. You say you have a lot of cash on hand, but you don't say how much. If you have $300K in the bank, then maybe it'd be okay to put another $50K into the house. But if you have $75K in the bank, I'd leave it all there. (In this economy, I don't think 6 months of expenses is enough for an emergency account. There are lots of people who are unemployed for a year or more.)
One compromise you could make would be to pay an extra $200/month on your mortgage. Over time this will substantially reduce your payments and the overall cost of the loan. But if your financial situation changes, you can stop making those extra payments any time you want. That's what mrs. alms and I are currently doing.
posted by alms at 7:04 AM on February 25, 2010 [1 favorite]
Response by poster: That being said, if you don't feel your job is secure you likely shouldn't own a house
My job was secure when I bought it. Thanks.
posted by spicynuts at 7:35 AM on February 25, 2010
My job was secure when I bought it. Thanks.
posted by spicynuts at 7:35 AM on February 25, 2010
Response by poster: Ok it seems the thinking here is in line with my reasoning, which is thus:
I am not worried about my long term financial security, so saving on the overall interest I have paid after 30 years is not my priority concern. I don't intend to own for the entire 30. More importantly, I had been planning on an emergency fund of at least a year's worth of mortgage, food and utilities, plus a slush fund for continued maintenance/upgrades/furniture should I not need the emergency fund. I have 100k. So my calculations are 50k emergency fund for 1 year's critical expenses, 25k for unexpected catastrophes (health, etc) plus 25k cushion to be spent at discretion should things continue to be stable.
I am not worried about my adviser is not 'doing his job' as we just had this conversation yesterday at the end of a convo about other issues and he mentioned it as something he'd like to see me do. I said I'd think about it, but I'd rather ask all y'all for free than have another half hour convo with him at x dollars per hour.
posted by spicynuts at 7:44 AM on February 25, 2010
I am not worried about my long term financial security, so saving on the overall interest I have paid after 30 years is not my priority concern. I don't intend to own for the entire 30. More importantly, I had been planning on an emergency fund of at least a year's worth of mortgage, food and utilities, plus a slush fund for continued maintenance/upgrades/furniture should I not need the emergency fund. I have 100k. So my calculations are 50k emergency fund for 1 year's critical expenses, 25k for unexpected catastrophes (health, etc) plus 25k cushion to be spent at discretion should things continue to be stable.
I am not worried about my adviser is not 'doing his job' as we just had this conversation yesterday at the end of a convo about other issues and he mentioned it as something he'd like to see me do. I said I'd think about it, but I'd rather ask all y'all for free than have another half hour convo with him at x dollars per hour.
posted by spicynuts at 7:44 AM on February 25, 2010
I am not worried about my long term financial security, so saving on the overall interest I have paid after 30 years is not my priority concern. I don't intend to own for the entire 30.
This is somewhat irrelevant. If you decide to sell your house before your 30-year mortgage is finished, your principal is still a huge factor in how much money you'll get from the sale. The calculation as to interest versus principal applies the same whether you plan on selling in 10 years or 50.
posted by jckll at 7:55 AM on February 25, 2010
This is somewhat irrelevant. If you decide to sell your house before your 30-year mortgage is finished, your principal is still a huge factor in how much money you'll get from the sale. The calculation as to interest versus principal applies the same whether you plan on selling in 10 years or 50.
posted by jckll at 7:55 AM on February 25, 2010
Ask yourself this- are you willing to pay 50k*your mortgage rate - 50k*Money Market rate for the extra piece of mind and you get from the higher than needed backup fund.
So if your mortgage is 5 and you are getting 1 on the MMA its costing you 2k a year. To me that's a no brainer. People get too caught up in FV of money calculations. If you have a really low interest rate in the long run your real cost of funds is almost zero anyway.
posted by JPD at 8:09 AM on February 25, 2010
So if your mortgage is 5 and you are getting 1 on the MMA its costing you 2k a year. To me that's a no brainer. People get too caught up in FV of money calculations. If you have a really low interest rate in the long run your real cost of funds is almost zero anyway.
posted by JPD at 8:09 AM on February 25, 2010
Response by poster: higher than needed backup fund.
This is really the crux of it. I'm thinking that I'm willing to pay in the long term right now for the peace of mind over the next two to three years that if I lose my job I will be able to maintain the mortgage. I mean, let's say I feel more secure in two years - then I drop the 50k onto the principal two years from now. I still get a degree of long terms savings on interest. Right? I'm not saying I would never pay down additional principal...I'm weighing the benefits on a timeline of like 2 to 5 years. So, let's say it is costing me 2k a year for 2 years...that's only 4 grand, whereas if I lose my job tomorrow....
I'm thinking out loud as you guys respond here. Hope you don't mind.
posted by spicynuts at 8:30 AM on February 25, 2010
This is really the crux of it. I'm thinking that I'm willing to pay in the long term right now for the peace of mind over the next two to three years that if I lose my job I will be able to maintain the mortgage. I mean, let's say I feel more secure in two years - then I drop the 50k onto the principal two years from now. I still get a degree of long terms savings on interest. Right? I'm not saying I would never pay down additional principal...I'm weighing the benefits on a timeline of like 2 to 5 years. So, let's say it is costing me 2k a year for 2 years...that's only 4 grand, whereas if I lose my job tomorrow....
I'm thinking out loud as you guys respond here. Hope you don't mind.
posted by spicynuts at 8:30 AM on February 25, 2010
Best answer: I mean, let's say I feel more secure in two years - then I drop the 50k onto the principal two years from now. I still get a degree of long terms savings on interest. Right?
Firstly, that assumes that your mortgage allows that (some have limits on how much you can pay off without incurring a penalty).
By paying that $50,000 now, you're effectively saving yourself approx. $5,500 (on a 5% mortgage). If the peace of mind of having that $50,000 available over the next two years is worth spending $5,500, then that's fine.
Think of that $50,000 as a loan over two years at whatever your mortgage rate is. Does that make you any more inclined to pay it off now?
A safety net is good, but with interest rates low you might be better to consider putting capital into your mortgage and just getting a loan if the need arises.
posted by le morte de bea arthur at 8:50 AM on February 25, 2010
Firstly, that assumes that your mortgage allows that (some have limits on how much you can pay off without incurring a penalty).
By paying that $50,000 now, you're effectively saving yourself approx. $5,500 (on a 5% mortgage). If the peace of mind of having that $50,000 available over the next two years is worth spending $5,500, then that's fine.
Think of that $50,000 as a loan over two years at whatever your mortgage rate is. Does that make you any more inclined to pay it off now?
A safety net is good, but with interest rates low you might be better to consider putting capital into your mortgage and just getting a loan if the need arises.
posted by le morte de bea arthur at 8:50 AM on February 25, 2010
..or what JPD said :)
posted by le morte de bea arthur at 8:51 AM on February 25, 2010
posted by le morte de bea arthur at 8:51 AM on February 25, 2010
It seems to me that you are not being honest with yourself or with other posters here. You were not confused by your adviser's recommendation; you were looking for reasons why his advice is wrong. This post and your subsequently selected "best answer" lead me to believe you're just looking for justification to do what you want to do, and since you didn't get that validation from your financial adviser you came here, looked past the answers that explained why it would be prudent to put down the money on the house, and selected the one that told you to keep your money. Your question wasn't "what should I do with my money, my adviser is telling me to do one thing but I'd rather do another" - it was specifically, "What is the point of putting extra cash into an existing mortgage in order to increase 'equity' rather than keeping cash on hand if I have no need or desire to borrow on that equity? Trying to understand my adviser's recommendation." Not that it matters one way or the other, but why waste the time of people offering an explanation in good faith when that is not the question you wished answered?
posted by (Arsenio) Hall and (Warren) Oates at 8:54 AM on February 25, 2010
posted by (Arsenio) Hall and (Warren) Oates at 8:54 AM on February 25, 2010
Best answer: I'm weighing the benefits on a timeline of like 2 to 5 years. So, let's say it is costing me 2k a year for 2 years...that's only 4 grand, whereas if I lose my job tomorrow....
Well, if you lost your job tomorrow, you'd still have 50k in the bank and you would save ~ 2k in interest payments, which extends the cash not tied up in your mortgage about 4%. I don't think anyone is suggesting you should make a risky move, I think most people in the financial community would argue that you're being too safe and you're missing out on making your net worth grow.
At the end of the day, you and you alone need to be comfortable with your financial situation, however it's going to be hard to find people who suggest 2 years worth of savings which are earning nothing is a good strategy. Best of luck!
posted by Hiker at 8:55 AM on February 25, 2010
Well, if you lost your job tomorrow, you'd still have 50k in the bank and you would save ~ 2k in interest payments, which extends the cash not tied up in your mortgage about 4%. I don't think anyone is suggesting you should make a risky move, I think most people in the financial community would argue that you're being too safe and you're missing out on making your net worth grow.
At the end of the day, you and you alone need to be comfortable with your financial situation, however it's going to be hard to find people who suggest 2 years worth of savings which are earning nothing is a good strategy. Best of luck!
posted by Hiker at 8:55 AM on February 25, 2010
Response by poster: You were not confused by your adviser's recommendation; you were looking for reasons why his advice is wrong. This post and your subsequently selected "best answer" lead me to believe you're just looking for justification to do what you want to do
This thread and this decision are far from over. If you'll note, I've marked an alternative from the other perpective as best answer now as well. Have some patience.
posted by spicynuts at 9:01 AM on February 25, 2010
This thread and this decision are far from over. If you'll note, I've marked an alternative from the other perpective as best answer now as well. Have some patience.
posted by spicynuts at 9:01 AM on February 25, 2010
A safety net is good, but with interest rates low you might be better to consider putting capital into your mortgage and just getting a loan if the need arises.
except that the interest rate you are paying on your mortgage is going to be much lower than what you would pay on an unsecured personal loan
posted by JPD at 9:17 AM on February 25, 2010
except that the interest rate you are paying on your mortgage is going to be much lower than what you would pay on an unsecured personal loan
posted by JPD at 9:17 AM on February 25, 2010
A safety net is good, but with interest rates low you might be better to consider putting capital into your mortgage and just getting a loan if the need arises.
What are you talking about? "If the need arises" he won't qualify for a loan. That's the whole point.
What are you talking about? "If the need arises" he won't qualify for a loan. That's the whole point.
Spicynuts: Hi Mr. Banker, I'd like a $50,000 loan.posted by alms at 9:42 AM on February 25, 2010
Mr. Banker: I'd be happy to help you. Why do you need the loan and what do you need it for?
Spicynuts: Well, I lost my job six months ago and I haven't been able to find other work. I had a pretty good cushion, but that's gone now. So I need $50,000 to cover my basic living expenses including mortgage payments until I find work.
Mr. Banker: Bwahahahaha ha. You're such a comedian. If you really need a bank loan some time, please come talk to me. In the mean time, maybe you should be talking your relatives about bailing you out.
If you're concerned about losing your job, I'd keep the 50k until you're feeling more secure. My back of the envelope calculation says that's about a year's worth of expenses including mortgage payments, if you own a $400k house.
posted by electroboy at 9:48 AM on February 25, 2010 [1 favorite]
posted by electroboy at 9:48 AM on February 25, 2010 [1 favorite]
I'm generally opposed to paying off a fixed-rate mortgage early, unless you have a high rate and can't refinance. The reason is that this is the cheapest capital you have access to. Besides home loans generally being cheaper than other kinds of loans, you get about a third off the top in the form of a tax break. If you were to need $50k in the future, it would be expensive to borrow: your choices include a second mortgage (which carries a much higher interest rate than your first), or a HELOC which is variable-rate and doesn't have as good tax benefits.
posted by jewzilla at 11:55 AM on February 25, 2010
posted by jewzilla at 11:55 AM on February 25, 2010
If you're concerned about building as much equity as possible into your house and want your payments over the long term to make a bigger dent in paying down the principal, then you should put that $50k into the house. If you have very little equity in your house and are getting killed every month on the PMI you're paying, then you can think of that $50k as a way to prevent sending money down the drain on PMI payments.
However, you can think of the $50k in your hands as a low-interest, tax-deductible-interest loan. That $50k could be better used invested, to pay off other, higher-interest loans, or just a security blanket.
You really sound like you're not in a very stable position right now. You probably want to hold on to as much money in liquid assets as possible until your job situation feels more secure, at which time you can make long term plans about paying off your house.
I'm in the midst of house hunting and thinking with a mind towards how much I'm going to put down as a downpayment. The issue always becomes that the money I'd save each month with a larger downpayment is not going to allow me to have access to that money any time soon (an extra $10,000 downpayment saves $60/month on a mortgage, which is an extra $720/yr, which isn't going to add up to $10,000 any time soon, money which could be used to replace my aging car in the meantime).
So ultimately, my point is that it's hard to justify putting that extra $50k into your home unless you're interested in rethinking your overall plan with respect to paying off your house or unless you're paying some big penalty to the bank for having very little equity.
posted by deanc at 12:06 PM on February 25, 2010
However, you can think of the $50k in your hands as a low-interest, tax-deductible-interest loan. That $50k could be better used invested, to pay off other, higher-interest loans, or just a security blanket.
You really sound like you're not in a very stable position right now. You probably want to hold on to as much money in liquid assets as possible until your job situation feels more secure, at which time you can make long term plans about paying off your house.
I'm in the midst of house hunting and thinking with a mind towards how much I'm going to put down as a downpayment. The issue always becomes that the money I'd save each month with a larger downpayment is not going to allow me to have access to that money any time soon (an extra $10,000 downpayment saves $60/month on a mortgage, which is an extra $720/yr, which isn't going to add up to $10,000 any time soon, money which could be used to replace my aging car in the meantime).
So ultimately, my point is that it's hard to justify putting that extra $50k into your home unless you're interested in rethinking your overall plan with respect to paying off your house or unless you're paying some big penalty to the bank for having very little equity.
posted by deanc at 12:06 PM on February 25, 2010
Re, PMI: The insurance premiums are not tax-deductible, while the mortgage interest is.
NOT true. PMI premiums are tax deductible, or else Turbo Tax is in big trouble with the IRS.
posted by croutonsupafreak at 12:29 PM on February 25, 2010
NOT true. PMI premiums are tax deductible, or else Turbo Tax is in big trouble with the IRS.
posted by croutonsupafreak at 12:29 PM on February 25, 2010
You might consider opening a home equity line of credit. You could then pay down the principal as your adviser recommends while still having access to a substantial safety net should the need arise. I haven't heard of credit lines being reduced as zeikka mentioned but of course you should investigate that possibility before pursuing such a course of action.
posted by harmfulray at 12:50 PM on February 25, 2010
posted by harmfulray at 12:50 PM on February 25, 2010
Response by poster: Great discussion, everyone, this is exactly the kind of back and forth I'm looking for.
posted by spicynuts at 1:13 PM on February 25, 2010
posted by spicynuts at 1:13 PM on February 25, 2010
This thread is closed to new comments.
The less interest payments you make over the life of the loan, the more cash you have to put toward other uses, such as savings or consumption.
That being said, if you don't feel your job is secure you likely shouldn't own a house.
posted by dfriedman at 6:35 AM on February 25, 2010