Where should this $$$ go? (loans, credit, debt, mortgage)

[tahiti]

I want to put an extra $400/mo *somewhere*. At first, I thought about applying it to our mortgage. But then I thought maybe it should go towards my kids' 529's. Then I thought the old "fund your retirement since your kids can get loans to put them through college" line of thinking, and reverted back to the mortgage.

Facts:

1) we already fund the 529's monthly (10 yrs before my kids go to college).
2) we have no "bad" debt, including car payments, i would have applied this $$$ towards that first
3) we already fund retirement to the max, so I can't do that.
4) our mortgage (10 yr ARM, 5.125%, we're in our 3rd yr) is already very managable, and I know there are compelling reasons NOT to pay off your mortgage, but psychologically i'd love to be able to see that balance drop so when it comes time to refinance to a fixed in 7 yrs, we would've chopped 35% off the original note.

So, my choices are 1) mortgage, 2) 529's or 3) stocks, fund or some other investment....

thoughts? TIA

[AussieMale]

Hi tahiti

I dont know the banking system ins n outs over there yet , i will learn soon enough as im moving over.
Have you read the fine print of the mortgage to see if you are able to reduce it once a year with a lump sum payment. Some mortgages allow this & people are not aware of it , you may want to look into it or even ask them if you can make a lump sum payment once a year, it you dont ask you wont know. , good luck whichever way you go with you money.

[christina0001]

I'm constantly reading that if you have extra money, you should put it towards retirement...if you are fully funding a 401k/403b, then you could open an IRA and fund that to the max. Maybe you are doing both already.

Do you have money set aside in a savings account already? Depending on who you're reading, the experts (or at least, the ones that get their books published) recommend having anywhere from 3 - 6 months' income set aside in an accessible account (ex. money market), to dip into in case of an emergency (you or spouse get laid off or fired, that sort of thing).

Me personally (and I am no expert!) I would pay extra on the mortgage. I long for the day when I own my own home, free and clear.

[tahiti]

Originally Posted by christina0001

I'm constantly reading that if you have extra money, you should put it towards retirement...if you are fully funding a 401k/403b, then you could open an IRA and fund that to the max. Maybe you are doing both already.

Do you have money set aside in a savings account already? Depending on who you're reading, the experts (or at least, the ones that get their books published) recommend having anywhere from 3 - 6 months' income set aside in an accessible account (ex. money market), to dip into in case of an emergency (you or spouse get laid off or fired, that sort of thing).

Me personally (and I am no expert!) I would pay extra on the mortgage. I long for the day when I own my own home, free and clear.

thanks. we are doing both 403b and IRA. we also have more than 6 months cash readily available in the event of some unforseen crisis. i SO hear you on the mortgage, i know it might not be the best financial move, but the psychological pull is so great it would be worth it, just to make me feel we're accomplishing something tangible!

[Sgoldie]

Can I ask a stupid question?

I don't understand the idea of getting a new fixed mortgage in seven years, when your ARM is up. Won't your house be paid off at the termination of your current mortgage, the ARM one?

[christina0001]

sgoldie - I'm guessing at the end of the 10 year ARM, the entire balance is due? hence the need to refinance into a fixed rate mortgage at that point.

tahiti - I look at it this way. If you pay the extra money towards your mortgage, you are guaranteed a return equal to what you would have paid in interest. Financial experts will say you will probably earn more from investing the money, but when you subtract the taxes you pay on your earnings, plus consider the fact that there is no guarantee your investment will earn more interest than you will pay on the mortgage, I personally think it's a great investment to pay down your mortgage. But again, that's just me. I dislike risk and I dislike owing money.

[tahiti]

Originally Posted by Sgoldie

Can I ask a stupid question?

I don't understand the idea of getting a new fixed mortgage in seven years, when your ARM is up. Won't your house be paid off at the termination of your current mortgage, the ARM one?

not a stupid question! the monthly payment on my 10 yr ARM (which is actually a "10/1/30") is based upon a 30 yr term. after 10 years, the "adjustable" part of the "ARM" kicks in - it can go up or down (adjusted once yearly - the "1" in "10/1/30") depending on conditions. It can go up a max of 2% each year, with a lifetime cap of no more than 6%. i'm guessing (looking into my crystal ball and all ) that we'll mostly like refi to a fixed mortgage after 7 years, since I don't like the flux in the interest rate, and like to know exactly what we're going to pay. When we got this mortgage, this rate was far better than a 30yr and at that point we had no clue if we'd be in the house that long (still don't, but as of 3/26/07 we're pretty sure we will be)....

[tahiti]

Originally Posted by christina0001

sgoldie - I'm guessing at the end of the 10 year ARM, the entire balance is due? hence the need to refinance into a fixed rate mortgage at that point.

tahiti - I look at it this way. If you pay the extra money towards your mortgage, you are guaranteed a return equal to what you would have paid in interest. Financial experts will say you will probably earn more from investing the money, but when you subtract the taxes you pay on your earnings, plus consider the fact that there is no guarantee your investment will earn more interest than you will pay on the mortgage, I personally think it's a great investment to pay down your mortgage. But again, that's just me. I dislike risk and I dislike owing money.

christina - re: your last sentence - that's me to a T! thanks for the input, maybe there's something out there we're both not thinking of that will make me/you change my mind. appreciate your thoughts!

[Sgoldie]

When your kids get ready to go to college the college will take all or most of the money that's in the kids names, not so with your savings, so if there's extra you want to keep it in your name, not theirs.

What I'm going to suggest based on your above statements, and not having anything to do with the $400, is that you go for a fixed rate mortgage right now. Don't wait for the 10 years to be up unless it makes a difference in current affordability. Chances are rates won't be going down much from what they are now but there is a chance they could go up in the future when you go to refinance.

Most mortgages are amortized which means that they're almost entirely interest payments in the first several years with little going towards the principal. That means that at the end of 10 years for a 30 year mortgage you will not have 30% paid off on the house. It will be much less.

If you want to continue to make addl principal payments for the ten years you could handle it that way. But make sure the bank credits them towards principal, and not towards interest. Ask for a statement.

Mortgage interest is not a dollar for dollar tax deduction. It's better to have the house paid off sooner. Run the numbers and see how much you'd still owe at the end of 10 years which will give you an idea how long you'd need to refinance for, and would show you the total # years between both loans. There may be a chance you're better off refinancing now.

[tahiti]

Originally Posted by Sgoldie

When your kids get ready to go to college the college will take all or most of the money that's in the kids names, not so with your savings, so if there's extra you want to keep it in your name, not theirs.

What I'm going to suggest based on your above statements, and not having anything to do with the $400, is that you go for a fixed rate mortgage right now. Don't wait for the 10 years to be up unless it makes a difference in current affordability. Chances are rates won't be going down much from what they are now but there is a chance they could go up in the future when you go to refinance.

Most mortgages are amortized which means that they're almost entirely interest payments in the first several years with little going towards the principal. That means that at the end of 10 years for a 30 year mortgage you will not have 30% paid off on the house. It will be much less.

If you want to continue to make addl principal payments for the ten years you could handle it that way. But make sure the bank credits them towards principal, and not towards interest. Ask for a statement.

Mortgage interest is not a dollar for dollar tax deduction. It's better to have the house paid off sooner. Run the numbers and see how much you'd still owe at the end of 10 years which will give you an idea how long you'd need to refinance for, and would show you the total # years between both loans. There may be a chance you're better off refinancing now.

thanks for the post. good thought around the savings re: their name -vs- ours, however, in our names it's going to be taxed, as opposed to a 529, which grows tax free, correct?

i really have no desire to convert to a fixed rate right now. between the cost to do it (over $3000) and the higher payment (6% -vs- 5.125), and the fact that i would not even begin to recoup costs until 7 years from now. the most my rate would be the first after the adjustable kicks in is 7.125%. even then i'm not recouping my costs after that for at *least* 3 more years. all on the premise we'll still even be here! as of now, i can say "YES", we will, but life throws you curveballs, KWIM?

my 30% chop in the mortgage is based upon me paying $400 extra per month for 7 years. my balance after time period will be 30% lower than what the original amount was. if rates are attractive at that point, i can refi to that rate for a 30 yr with a MUCH lower payment (but still pay what I'm used to and maybe pay my house off not too long from there!?!? ACK - I can't even imagine). if not, i'll ride the 2% increase. i do appreciate your thoughts!