Financial Planning for Generation X & Y Women
 
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Expert Q&A Archive

01/28/2009
Would it be better to pay extra on the principal of my house note or put the extra money in savings?
I purchased my home approximately 2 years ago when the housing market was still doing well in my area. Since then, there has been a drop in new home prices in my neighborhood. I financed 100% of my home. With the recent drop, I now owe slightly more on my home than it is worth. I would like to purchase a new home in the next few years. I am able to save around $200 each month and would like to know if I am better off paying more than my required monthly mortgage payment to reduce that amount that I owe for my current home, or if I should take the extra money and place it in a savings account for a down payment on my next home. Thank you.
Susan Saleem:
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You need to compare the interest rate you are paying on your home to the rate you can receive on a savings account. In this environment you are probably going to do better by paying down the principal of your mortgage. Make sure and designate on the check that the extra money is to be applied to the principal. It is even a good idea to use a separate check specifically for the principal payoff, since mortgage companies have been know to apply the funds to your escrow or other non-earning account.
Harriet Smartt:
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I would recommend hanging on to your cash for the time being, well invested. Meanwhile wait for the turnaround to see how the value of your current home recovers.
Suzanne Kincaid:
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My advice is to apply this extra $200 a month to the principal on your current mortgage. This will significantly save you a lot of money in interest which is the same as a savings account-- and at a higher interest rate. In a few years when you want to sell, refinance or rent the home, you will be in a better position to do so.

Putting the money in a savings account, money market or CD will not yield you near as much extra money to work with. And in a few years the market could bring the value of your home up to what you owe or even less, with more options for a down payment on a new house.

Good Luck!
Susan Garcia:
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I would recommend you place the extra money in a savings account for the new home. Unless you are close to paying off your home, the early payments are essentially interest payments and not payments on the principal of the loan.
Rebecca Schreiber CFP:
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Absolutely put the cash aside for the next transaction. Saving the cash vs. prepaying the mortgage keeps you in control of the extra capital. Having the extra funds liquid in a high-yielding savings account will protect you in the event of an emergency when you would not be able to pull equity from your home due to its drop in value. Good luck and keep saving!
Michael A. Masiello:
expert info »
First I think you may need to slow down just a bit. Your current home may rebound slowly, so don't go planning on next house just yet. The extra can be accumulated in an emergency account, same as savings. Just don't touch it. I would suggest not buying a new house until you have [a] significant down payment [in the]10-20% range and have the extra income to keep your payments within a healthy range of income. My concern is financing 100% of [the] house tells me too much house was purchased the first time. [Im] concerned about [your] repeating [the] mistake. [Id recommend] time and patience versus quick buy. $200/mo in savings will accumulate [to] $2,400/yr. I'd guess you'll need 3-5 yrs to accumulate enough for emergencies and then [an] alternate home. Sorry. Don't mean to be harsh, but with limited info, best advice I can give. Mike.
Delores Lenzy - Jones, CPA, CIA:
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My advice would be to pay off more of the principal vs. putting in a savings account. Savings account interest is extremely low right now. The financial markets are pretty volatile right now, so my advice would be to invest in your home.
Gail V. Marquet:
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I would definitely wait for the housing market to turn around before anticipating selling the present home. Assuming you have a 30-year fixed rate mortgage, either option would be acceptable and not make much of a difference; however, if you have a 15-year fixed rate, I would suggest adding the extra $200 to the principal to increase your equity in the house.
Bettye J. Banks:
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Market conditions change, and a few years from now the value could exceed the outstanding balance you owe. This has to be a judgment call for you. I usually recommend that homeowners pay on the principal balance in addition to your regular monthly payment if you can. You would be surprised how quickly you can reduce your balance by following an orderly, systematic process of extra principal payments. I also strongly suggest that you attend a homebuyer class at your local HUD-approved housing counseling service, even if you already own your home. The information can help you make your decision. It will also help you as you prepare to buy another house.

You should always include regular saving in your household financial process.

Include a small short-term savings account for minor emergency spending, such as minor car repairs, small medical expenses, etc. Try to accumulate a fund of between $500 and $1000. Then consider how much you can save to apply toward a down payment on your new house. Sometimes the savings can come from a reduction in spending or shopping more frugally. Give yourself a timeline for reaching your goal. And figure out how much you must set aside each month to reach it.

Remember that housing values change over time and generally appreciate in value. The sale of your existing house could generate enough of a profit to apply toward the new purchase.
Elizabeth Rusnak:
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I would recommend (if at all possible) for you to stay in the home you purchased 2-years ago and continue to make the regular monthly payments (and keep building your savings account). The market will eventually correct, but I doubt it will happen anytime soon. Living conservatively (that means, not buying that other newer, nicer home), and building your savings is one of the keys to financial success.
Sharon P. Hardy, CFE:
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Given the current rates of return (i.e. from 1 to no more than 2 percent) on money that's deposited into a regular passbook saving account, which currently are being paid by most financial institutions here in the U.S, the answer to participant's question is a "no-brainer". The $200.00 that she indicates that she has available to use as she pleases, each month should be used by applying it to the principal balance on her existing mortgage. By doing this, she will certainly shorten the life of the existing mortgage, while at the same time reduce the total amount of interest that she would have paid over the original life of the loan if she hadn't paid down the principal balance.
Frank Wells:
expert info »
The answer depends on 2 things:
1. The interest rate of your mortgage
2. The rate of return on money you would save.

Paying down debt gives you a known return on your money, because you are saving at the mortgage interest rate. A return on savings depends on the type of investment you choose for your savings and the rate of tax you would pay on any earnings.

Ultimately, it would be best to do both, save and reduce debt. You always need some savings. Www.Crown.org has a lot of info on how to do this. Thanks, Frank