Comments on: Extra Mortgage Principal Payments + Moving Soon = Good Short-Term Investment?

By: –› DirecTV at Two Houses, Real Estate, and Investing

–› DirecTV at Two Houses, Real Estate, and Investing — Thu, 08 Oct 2009 13:30:30 +0000

[...] Extra Mortgage Principal Payments + Moving Soon = Good Short-Term Investment? [...]

By: Murthy

Murthy — Thu, 01 Oct 2009 17:24:13 +0000

Thanks Jonathan. Now, I see.

By: TFB

TFB — Thu, 01 Oct 2009 15:30:18 +0000

“I suppose that one big risk in doing this is that you don’t end up selling the house, so your cash is now stuck in the home’s equity and will be more difficult to access.” — While the cash is stuck in the home’s equity, it’s earning 8.875%. It’s stuck in a good way.

By: David@DINKSFinance

David@DINKSFinance — Thu, 01 Oct 2009 02:01:51 +0000

This seems like a clever method to get ahead a bit and would certainly work, but as many here have already pointed out it depends on your own situation. It’s important to look at the big picture of your finances as a whole before making a decision like this.

By: Willy J

Willy J — Thu, 01 Oct 2009 00:22:57 +0000

I actually ended up doing this… and using a 0% interest card to make up the difference so I could pay it down quicker… IE the mortgage esentially got shifted onto a CC.

Two results:
1) I had a condo as well with a second that I paid down (seems similar here)…….. the fact that I had the 2nd paid off made it easier to sell (no short sell by missing a $1K or two after commission)
2) I did indeed save money! 8.875% times a large balance can be close to $2-3K on a modest 2nd.

I would do it all over again…

By: Jonathan

Jonathan — Wed, 30 Sep 2009 21:26:38 +0000

Any change in the value of your house would not affect the return you’d getting from paying down your mortgage loan.

If your mortgage interest is not tax-deductible somehow, that would actually make it even MORE attractive to pay it down and reduce the interest paid.

By: David

David — Wed, 30 Sep 2009 19:46:24 +0000

Let’s assume you will close your house in 18 months and you have $10k cash that don’t need until you close.

Then making $10k payment toward second mortgage has the same effect as investing in a 18month CD at 8.875%. The tax effects wash out each other if you itemize.

By: Alex

Alex — Wed, 30 Sep 2009 19:29:45 +0000

I got a big pay increase and have been able to save as much as $10k/month over the past year. I paid down my $100K
home equity line of credit over the past year. Now, I’m wondering if I should have paid off my mortgage first instead of the home equity loan. The home equity line of credit was charging 2% less interest than the home mortgage interest rate.

My spouse’s job is relocating within the next year and the move will be paid for by her employer. Our 1st mortgage loan rate is 6.625%. With a house sale looming so soon, it hasn’t made sense to refinance our $120K loan. The Alternative Minimum Tax is hitting me such I don’t get about $8-9K of my interest deduction anymore. So I’ve been trying to pay my principal down beneath $100K, then I’m considering paying off the mortgage loan with my home equity line of credit which has been charging about 4.5% interest lately. I should be able to pay off the $100K over the next year regardless of whether I pay off the home loan or the home equity line of credit. Thus, it doesn’t make sense for me to start putting my excess cash flow into savings when the interest rates are so much lower than what I’m paying in interest on borrowed money.

By: Jim

Jim — Wed, 30 Sep 2009 18:39:19 +0000

If they have a sufficient emergency fund and don’t have any other debts with higher % interest then I’d say go for it. 8% is a relatively high rate for a mortgage loan so paying that off is a good priority. But I wouldn’t put money towards paying down a mortgage if I don’t have a good emergency fund. If they have other debts like credit cards at a higher interest rate then I’d pay those off first of course.

By: Michael Jamison

Michael Jamison — Wed, 30 Sep 2009 18:32:24 +0000

Ummm I think your convoluted math is taking you down a strange path. If you owe $100 at 8% it is costing you 8% per year. If you pay back $100 you owe nothing and it costs you nothing. I think ANY paydown of an 8.875% loan is the equivalent of earning you the annual rate of 8.875%.

By: Randy

Randy — Wed, 30 Sep 2009 16:49:01 +0000

It’s got to depend on your personal financial details.

From my perspective, liquid cash would be worth quite a bit more at closing time than a smaller mortgage balance. Depending on the size of those pre-payments, the difference in interest paid can’t be much more than $1000 or $2000.

Now if you’ve already got a big pool of cash to draw from, to either facilitate closing (make negotiated repairs, pay agent fees, transfer tax, etc), supplement a down payment on your next property or pay first/last/deposit if you’re moving back to a rental, then I could see going ahead with pre-payments.

In this housing market, I’m not confident that prices have bottomed out. That condo might be less 18 months from now.

By: KP

KP — Wed, 30 Sep 2009 14:46:47 +0000

I think there are more cost associated with house other than interest. You need to consider how much money market you would loose on your principal (since that money could have been in bank account instead of in your house principal). You also need to consider inflation rate vs appreciation rate. (especially when house value is going down).

By: Murthy

Murthy — Wed, 30 Sep 2009 14:35:48 +0000

If this is a second home, wouldn’t the gains (principal in extra payments) be taxable? and hence the returns reduced?

By: Evan

Evan — Wed, 30 Sep 2009 13:55:22 +0000

The only thing I would add/discuss with the emailer is that it may be more prudent to use the extra cash to reduce reoccurring bills as your debt to income ratio may be more of a factor in getting a ‘better’ mortgage.

By: Jacob E

Jacob E — Wed, 30 Sep 2009 13:55:06 +0000

I’ve considered this idea too, but decided not to based on the potential that the house may not sell quickly and my savings is locked in a place I can’t get to if need be. Also there’s no telling what you’ll get for your house.