Will76... financial question

A couple hundred a month is plenty of money to "invest." Investing isn't just stocks and bonds, and many financial advisors even say that people should not consider messing with stocks and bonds until they have other vehicles completely maxed out... such as 401(k) and IRA. Both 401(k) and IRA offer really great tax benefits (which of course could be pulled sometime down the line.) Although in this situation, I think the thread starter is self-employed so he may not have access to the same exact vehicles as a company employee, but I do know that there are IRA like vehicles for the self-employed.

If you break down the math... sticking that $100 a month into a IRA should earn you more money than paying down your low interest loan. On top of that, the fund will continue growing exponentially over time... you aren't going to see that by paying off your house. And then the tax benefits as well...

With this argument you're going to have one group of people that cheer for paying off the house and another group of people that cheer for investing the excess money. Every math breakdown I have seen and done pushes towards investing, but it really depends on what level of risk the person is willing to take and what their long-term goals are.

Investments stomp houses long term.

And houses are a great guarantee?

We are right after a housing bubble burst and going through a bad economy. I think the risk that his house will be worth less than it is today in 7 years is also remote. I will concede however that if someone is risk adverse then they probably shouldn't try to invest all of their extra money. The reason is if they get scared they would end up selling at the worst possible time. Maybe the best thing for him is to do some early loan pay down and some long-term investments.

I don't think it will be worth less either but he hasn't answered my question yet on how much he put down. If he put down 20% he has more of a cushion if values do go down more. Also, I don't know how good of deal he got either, he could have paid more than he should have so he could be starting off at a bad point.

Allocating some money towards a long term retirement plan is a great idea even if he can spend a small amount per month. That is for another discussion. I'll close here with repeating my main thoughts, "investing the extra money" is bad for most people. Most people will lose that extra money one way or another. If they can afford it, it is simply safer for them to put it into reducing the amount of interest they are paying on their mortgage only if their mortgage is their highest interest rate expense. They need to start with credit cards, car loans etc.. anything that they are paying high interest rates on. Once you get all the high rates shit knocked out then you can put some more towards long term retirement. And if you don't know much about stocks, investments etc... and especially if you are risk adverse or using money that you can't afford to lose, putting it into reducing your mortgage payments would be better for most people.

Also, hell I don't even know if he is paying PMI, if so he needs to get his mortgage paid down enough so he stops wasting money each month on that. I was always a preacher of using the banks money to make more money and investing the difference, but i know it doesnt work for most people, especially when you talking about someone's primary residence vs commercial or investment type situations.

bossku icq me if you have any questions.

Ok Will... if the question is "do I take my extra money and put it towards my house or do I take my extra money and let it sit in my bank account?", then I will agree with you. Yes, put it towards the house so long as you have a little cash on hand in case of emergency (you don't want to pay for emergencies with credit cards if you don't need to.)

Overall though, I don't think that's full advice. But like you said, that does answer the question.

The part I have a problem with is that he is using money that he can't afford to lose. If he can't afford to lose it then that means he doesn't have much money elsewhere. So why trade a liquid form of money for something that he won't see until the he sells his house or gets 25 years into his loan? He might as well keep the money as cash and have it if he ever needs it to pay his loan or for any other surprises he has.

That should be his first priority with his extra money, build a 1.5 - 2 year emergency fund that can be used to pay all his monthly bills. Then if he invests the rest of it in something that is better than his effective 3.8% loan he'll still have liquid cash.

Can you get a HELOC if the value of the house drops or if he has a drop in income?

If he puts it into his house and has an emergency he call pull it back out through a HELOC, if he is worried about doing a HELOC then just pay the min each month and put more money in your emergency fund.

Don't think of this as paying it off sooner, you need to look at it as if I pay "X" number of years it will cost me "x" in interest payments. You have to pay principle no matter how long or slow you pay it back, you still going to pay 100% of principle. However, you can control how much damage they bank will do to you by charging you interest. You can control how much you will pay in interest by adjusting the length of time you borrowing the money and paying it off.

"loosing interest" that you can claim for taxes isn't a bad thing, because it means you paying less in interest. You don't want to pay more money in interest payments just to get write offs. An accountant is wired to think on how to help you reduce your tax burden, not help you save,invest, make money.

Being able to use the tax deduction is a benefit to owning a home (vs renting) but not a reason to paying tons of money in financing if you don't have to.

I would do this, go to http://calculators.interest.com/cont...ly-payment.asp and play with the numbers. Put in the loan amount and interest rate you paying. Try it at 30 years and make sure it confirms what you paying now so you know you got it right. Then put in 25 years, 20 years and look at the monthly payment. Also click "Show Amortization Table". This will show you how much you pay back in interest depending on how many years it takes you to pay off the mortgage.

200K - 30 year mortgage at 5.125% = monthly payment: $1089 total interest paid: $192,252

200K - 25 year mortgage at 5.125% = monthly payment: $1184 total interest paid: $155,313

200K - 20 year mortgage at 5.125% = monthly payment: $1334 total interest paid: $120,235

It comes down to this... how much are you comfortable a month paying. In the example above if you can swing $1334 a month vs $1089 you will save 72K over the next 20 years in interest payments.

99% of the time it is not wise to spend money just to get a tax DEDUCTION. Send me $1 I will give you .25 cents back ;) You would be better off not spending the $1. Now tax CREDITS are a different story.

The other thing to take into account since your interest rate is pretty low is.... do you feel confident that you can take that extra money and make more than about 8% return with it ? If you can then pay the min a month and invest the difference. If not, the safest and easiest thing to do is pay as much as you feel safe doing each month, save a ton on interest payments, and build equity in your house faster. If you need a loan in 5 years you will be able to get a HELOC if you been paying it off on a 20 year amort schedule, vs a 30 year. 5 years in on a 30 year repayment schedule you will have very little principle built up and likely wont be able to get a loan unless the value of your house shot up a lot.

Accountants are rarely the best people for financial advice, they look at things in the past mainly, and only look at one component, how to save you taxes and not a holistic approach taking everything into consideration.

I'm cool and I used the Google. Looks like you would save six years, not 13 or 15. There is even math.

http://www.mortgagecalculatorsplus.c...r-mortgage.php

Hopefully, this guy knows more about mortgages and math than being a real estate agent.

What does a 20% down payment have to do with a $200,000 loan? A $200,000 loan is a $200,000 loan. It doesn't matter what you paid on top of that as a down payment.

If your house was $200,000, you put down a 20% down payment of $40,000, you would then effectively have a $160,000 loan (assuming you did not add on another $40,000 to the loan just for the hell of it), not a $200,000 loan.

You Americans are so fortunate to be able able to write off your mortgage interest, we aren't so lucky in the great white north.

The only way we can deduct interest is if it's for an investment property, not our main residence.

Good on you will for putting so much time into your answers.

Can you get a HELOC if the value of the house drops or if he has a drop in income?

In the US you can sell a house once per lifetime (primary residence) and not pay income tax (capital gain) on the house. Up to a certain amount, perhaps $300,000.

But only one time.

Thus if your parents, for example, end up in the end with no money and only the house, you sell the house, which all quickly goes to the assisted living/nursing home and/or medical assistance, then they suddenly die broke before tax time, the administrator and estate wont have a huge tax obligation on the house. This happens all the time.

Adult webmasters giving advice on finance is about as funny as adult webmasters displaying their lack of knowledge about politics.

Or toilet paper, for that matter.

Will excepted, of course.

In the US you can sell a house once per lifetime (primary residence) and not pay income tax (capital gain) on the house. Up to a certain amount, perhaps $300,000.

But only one time.

Thus if your parents, for example, end up in the end with no money and only the house, you sell the house, which all quickly goes to the assisted living/nursing home and/or medical assistance, then they suddenly die broke before tax time, the administrator and estate wont have a huge tax obligation on the house. This happens all the time.

if you know what you are doing you never pay tax on real estate sales...
1031 exchange FTW

old shit.. but paying something off early is always smarter.

I bought my Jeep and they set it up so I'd owe approximately $10,500 in interest when I finished paying it off.

I paid $1000 to $2000 a month on it and when I paid it off I ended up paying only $700 in interest. That really pissed off the guy that collected my payment each month.