Financing in Denver>Question Details

Kristi Maris, Home Buyer in Colorado

Question about making an extra payment every year - Advice requested.

Asked by Kristi Maris, Colorado Thu Dec 27, 2012

We are closing on a home and got an amazing interet rate of 3.5. We are putting down 3.5% as the down payment on a $240K loan. We are going to have to pay mortgage insurance since we are putting down less than 20%. What is your opinion/advice for this situation. Should we make an extra payment every year (actually we would prefer to pay an extra $150 payment above what our monthly mortgage payment is) or are we better off putting that money in savings? Normally I would absolutely say that we need to make the extra payment every year to cut down the length of our loan but with interest rate being so low what is your advice. We are young 25 years old and we would love to have our home paid off by the time we are 45 - 50 but we dont want to make a poor financial decision. We want to make our money work for us. Is there any advice that you all would give us as first time home buyers? We are hoping to start a family soon and we want to make this our forever home. We dont want to flip

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Robert Paquette, CBR’s answer
Its a religious war. But since your talking PMI, its a clearer choice. If you can afford the extra payments comfortably, I would optionally pay down the principal to get closer to the 25% needed to rid yourself of the PMI. After all its your equity your gaining as well. As for the concept of paying off a mortgage only, the juries out. If you have a good rate over 30 years, keep your money and further invest it, perhaps in other income producing property or other lucrative investments.
0 votes Thank Flag Link Fri Dec 28, 2012
Kristi; here's the scoop: I remember that you want to pay down your loan in order to have the mortgage insurance removed. Also, remember, on an FHA loan, after a minimum of 5 years, the MI can be removed onced the loan balance reaches 78% of the original purchase price. At a sale price of 240,000, your initial loan balance is 231,600. And, 78% of the sales price is 187,200. So, the magic number is getting the principal below 187,200. If you pay the regular payment each month, it takes 9 years to reach this; however, if you pay an additional $150 per month, you will reach the "magic" 78% number in 78 months (6.5 years). Paying extra is discretionary, so you pay extra if it fits your budget; in the event of a temporary setback, you can always revert to the minimum required payment. Smart thinking!!
0 votes Thank Flag Link Fri Dec 28, 2012
Kristi,
Congratulations on buying your first home and for asking a great question. I can’t give you a blanket answer however. It will really come down to the rest of your financial situation. Your mortgage payment should be affordable, but not too comfortable. The first home is the one you should have to stretch a little to reach. Between your mortgage interest write off (which we hope is continued) and future raises, your payment will be more affordable over time.
If you are in other debt, car, credit cards, student loans, you may want to focus on paying them off first. The rates are generally higher and the value that those goods are on depreciates. If you don’t already have a safety net in the way of a savings account, I would go there next. Having several months of income in savings can help you keep your house if one of you loses a job or becomes ill and misses work for a while.
If you are otherwise debt free and have a great savings (emergency) account, then paying down your mortgage would be good. I think most people will find paying a little extra every month will have the greatest net affect. Every dollar over the minimum payment on a simple interest loan goes against the principle. As your principle decreases, the total interest you will be paying will decrease as well.
I hope this was helpful, congratulations again and best wishes for a great new year.
0 votes Thank Flag Link Thu Dec 27, 2012
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