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Old 07-14-2010, 01:01 PM
 
Location: Chino, CA
1,458 posts, read 3,167,739 times
Reputation: 556

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Just wondering what the opinions are on this subject matter - whether it would be better financially to make additional payments on an underwater house or to keep the money and put it elsewhere.

Liz Pulliam on MSN - Money tends to lean towards NOT paying more into your mortgage - especially if you are underwater.

Don't rush to pay off that mortgage - MSN Money

Mainly on the grounds:
- Retirement funds 401ks, Ira's, Mutual Funds pay off more in the long run
- Liquidity
- Rat race with falling home prices

We've been paying a little extra on our mortgage every month... but our home value seems to drop even faster and we're increasingly underwater.

We currently have a 6 month emergency fund, and I'm debating on whether to pre-pay even more into our mortgage or contribute more into Emergency funds and retirement.

What if I lose my job and 6 months isn't enough and all those "extra" payments to the house end up going to the bank along with the house?

Would I regret paying more into the house instead of buffing up more in Emergency and retirment?

Thanks for any thoughts, experience, etc.

-chuck22b
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Old 07-14-2010, 02:53 PM
 
28,460 posts, read 81,217,132 times
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Basically every dollar beyond what are obligated to pay would literally have to be devalued at a rate greater than the interest on you mortgage.

I can think of a fee edge case scenarios where that might happen, but even in such a case I personally would still prefer liquidity and not illquidity and being upside down...

(the edge cases have to do with needing to be in a situation to refinance, either due to high rate on current loan or a balloon that is coming due, though honestly if you are facing that I can suggest beet ways to handle...)
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Old 07-14-2010, 03:15 PM
 
15,311 posts, read 24,581,456 times
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Every case is different. But in general, no -- it doesn't make sense to put more money down the rat hole.

Here's where you might consider it. In our case, we've lived in our house for 23 years, and our mortgage is way way lower than what rents could go for. And we aren't quite underwater yet. (home values have dropped over 75% around here). The faster I get the house paid off, the better off I will be, and I will have 600 more bucks a month to shove into savings.

But if we were in the most obvious boat, I wouldn't stick any more money into an asset that we might end up walking away from. I'd also not stick it into an emergency fund (which is usually liquid. I'd be using that money to build wealth. Save it until you get enough to invest in a mutual fund of your choice, and then save that amount monthly.
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Old 07-14-2010, 03:41 PM
 
13,808 posts, read 25,858,918 times
Reputation: 14200
Lots of good dividend paying stocks out there paying 6%+. Look at electric utility companies and communications companies like Verizon (7% now).

I am buying solid dividend stocks that pay out much higher than my mortgage rather than pre-pay on my mortgage.

I'm 28 though, you sound a little older. That might make a difference. I want to have $0 mortgage before I retire so that is important to me.
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Old 07-15-2010, 12:33 PM
 
Location: Chino, CA
1,458 posts, read 3,167,739 times
Reputation: 556
Thanks guys for the responses

Hmm... what do you think of this strategy...

Create a brokerage account dedicated towards the extra payment money. Buy high dividend stocks with 6%+ dividend yields until the yields go down to around parity to mortgage interest rate (ie, the price goes up/dividends reduced, and yield goes down).

At that point, sell the stocks, and apply to mortgage principal because at that point the yields + any stock appreciation wouldn't have as high of a return as the risk-free mortgage paydown return (have to remember dividend yields also have capital gains tax while mortgage paydowns don't).

The idea behind that, is that I'll have liquidity and better returns/yields when stocks provide better yields, but, when they don't, I'm able to take the gains and apply it to the mortgage. This way at some point I'll have the mobility from paying down my mortgage to the point where I may have some equity.

Once I have that magical "equity" point with my mortgage... I should also have some flexibility from most major personal losses. Worse case scenario I could sell the house without incurring any bad consequences from a forced foreclosure or short sale. Homes shouldn't depreciate indefinitely, at some point it'll level and appreciate with inflation.

Meanwhile, with the temporary brokerage account, I also keep liquidity in the case if I lose my job for an extended period during the recession.

So, basically a hybrid plan.... What do you guys think?

-chuck22b

Last edited by chuck22b; 07-15-2010 at 12:43 PM..
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Old 07-15-2010, 12:46 PM
 
Location: MMU->ABE->ATL->ASH
9,311 posts, read 19,908,416 times
Reputation: 10413
Don't forget to factor in the Income taxes on the dividend, and Capital Gains tax on the Gain on the stock.
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Old 07-15-2010, 01:51 PM
 
28,460 posts, read 81,217,132 times
Reputation: 18665
Default ... And transaction costs!

Quote:
Originally Posted by flyonpa View Post
Don't forget to factor in the Income taxes on the dividend, and Capital Gains tax on the Gain on the stock.
When you do the math on small regularly spaced "investments" the transactions costs consume a HUGE percentage of your capital. Anything you can do to account for that minimize will probably be THE deciding factor in where you income dollars work the hardest...
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Old 03-23-2015, 03:25 PM
 
Location: North America
5,960 posts, read 5,318,754 times
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If you are underwater, paying 6%+ every year in interest, plan on moving out of the home in three years or less and don't want to destroy your credit then I can't think any reason why you wouldn't prepay your mortgage so you can get the heck out of there.
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Old 03-23-2015, 09:41 PM
 
Location: MID ATLANTIC
8,445 posts, read 21,797,363 times
Reputation: 9977
This discussion is almost 5 years old. When it was started, one in every 4 homes was upside down and 1 in 10 was delinquent, headed towards short sale or foreclosure. We are now down to a national average in single digits the number of homes under water and short sales and foreclosure.

Circumstances are night and day from July 2010 to March 2015.
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