Pay down Mortgage or Keep Money in an Account

Updated on April 19, 2013
J.G. asks from Chicago, IL
19 answers

Well, after this latest storm, I have decided that there is no way in hell I'm doing a build on our current property. Our backyard is a lake, and our street is a pond. Our yard and three other neighbors yards are retention ponds, and of course water is leaking in the basement. And of course we put down mulch last weekend, so now it is floating in my yard --like I need to do that chore again!

I've been saving for an addition. We use to make extra payments on our mortgage, but we stopped when our house value fell so much, thinking it was better to have cash on hand. Now that i'm set on moving, probably in two years, I'm thinking we should throw some money at the mortgage to bring down the principle.

Which is better, paying down the mortgage or just saving cash in preparing for a move?

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So What Happened?

We don't have to be honest about the water in our basement, there isn't a basement in any home in my area that isn't hit... We, fortunately, have an overhead sewer. Most houses got sewage this time around, we didn't. The storm sewers are slowly being replaced where we live, but meanwhile, water in basements is the norm. We get a very small amount...... My issue is building on a piece of land that has a retention pond in its backyard when we get massive storms.

We have gorgeous porcine tile in our basement, and a lovely bathroom. Clean-up is easy.

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answers from Oklahoma City on

I'd save the money, it will make money while in savings. BUT a financial advisor could show you the math. It might save you more in the long run to pay off the mortgage and save that interest.

I do think that having money on hand invested to make a little money, not a risky investment is what I mean, and increase that money gives me a bit more power. If I had a need I could go take some out and not have to jump through any agencies hoops.

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answers from St. Louis on

Paying down the mortgage will put you in a better financial position when you sell in a few years. Regardless of how you invest it it will not make as much as you are paying in interest even with the tax effect of mortgage interest.

Sure if you don't pay it down it would appear you have more to put down on a new home but what you put down on a new home is not only a function of cash in hand but equity or lack there of in the home you are selling.
Okay I get math is hard but this is actually a simple equation. What you sell your home for is a set variable in relation to your decision. You will get only what someone is willing to pay, right? We will call that SP(sale price). You have P (principle) C (cash on hand).

So DP (down payment, well potential down payment), DP = (SP-P)+C If the interest rate on the mortgage is higher than the interest rate on investment clearly you are at a greater equity advantage by paying down your mortgage because the principle reduction lowers interest paid so both lower the principle balance when you sell.

Whether you are upside down, rightside up or vertical on your mortgage is not a variable in this equation. That mortgage must be extinguished before a bank will issue a new mortgage.

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answers from Pittsburgh on

If you plan to buy a new house, you'll need to have 20% to put down in order to avoid paying for mortgage insurance. So I'd save until you have 20% of what you think a new house will cost. Once you have that $$ in the bank, then pay down the mortgage.

This is based on a lot of assumptions - like you aren't upside down on your mortgage, etc. You should talk to a financial planner to see the numbers and be sure.

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answers from Atlanta on

i'm going to go against the trend and say to keep that money liquid. If you're planning on moving in two years, throwing it at the principal isn't going to do much with the interest. Keeping it liquid will ensure that you have it for a down payment and just in case your world collapses on you and your jobs are lost, someone falls very ill, etc. you have that money readily available.

If you were planning on staying there longer, I'd then opt to throw it at the mortgage principal.

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answers from Chicago on

I think it depends on whether or not you are upside down on the mortgage. If you are upside down, I'd pay off as much as possible. If you aren't, I'd save for the down payment on the new home.

So sorry to hear that you flooded. Our area is terrible too and I was terrified driving my son to his Naperville school today.

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answers from Denver on

Unless you can find a short-term investment that will allow you to earn more than your mortgage interest rate, you are better off paying down your mortgage. Keep whatever cash in your account you feel safe for liquidity purpose.

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answers from Chicago on

I spent years working on paying down the mortgage, recently tried to refinance and found that in spite of eighteen years, our house is (sorry about the term) 'underwater'. It is worth almost thirty thousand dollars LESS than what we paid for it eighteen years ago. My advice, make your money your own again. You can pay down the next place.

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answers from Washington DC on

If you owe more than the sale value, pay towards the principle. If you are on the plus side, save towards the down payment. Also, if you have any credit cards, look at paying those down or off also.

You can use to see your current house value.

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answers from Chicago on

My suggestion would be saving the cash. If you were planning to stay in your home, it would make sense to pay down the mortgage, but not if you are planning to move. If you put the money towards your mortgage, you may or may not get all of the money back when you sell the home (depends on the market and what you can sell your house for at the time). If you stash the cash in a low risk investment, you have all of your cash to use towards a down payment on a new home in addition to any equity you have in your current home.

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answers from Salinas on

All I can say is have cash on hand if you want to buy a new place.

In California some buyer see how low they can go before a short sale. In other words there are some home with equal comps and one will sell for $510K another for $560K. I have talked to friends selling and they say they just want out and at least they didn't short sale, but they did lose equity. Basically the buyer will see that they can squeeze an extra $50K on a regular sale and they will do it and they are just lucky to be done with the house. It is like give $50K to the buyer if you throw it into the house now. You will not get it back. The sale price it the true value.

If you plan to keep both houses there are lending rules stating that you need to have at least 30% equity in your current house or else you need to jump through hoops. You may think you have 30%, but the bank will determine what you have in equity (read what Shelia S. wrote).

Also, interest rates are so low. Could you get locked into a lower rate? This sounds better than throwing cash into the house, if you plan to keep it while you buy another house.

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answers from Chicago on

Save up your 25% down payment for your next house. Buckle down and save as much as possible so if/ when it's time to sell and it takes a while you know you can still go buy a home you want witnout contingencies and either rent your current one out until it sells or are able to have itt be empty and do repairs to property for water.

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answers from Chicago on

Do you think you could see your place for what you owe or more? if so, keep it cash. If you owe more than what you can see it for, you will need to clear this mortgage before a new one..

Cash will be helpful, but if you need to use that money to pay down the mortgage to clear it you might as well do that.

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answers from Chicago on

I assume that you're paying more in interest on your mortgage than you are earning in the checking/savings account you have the $$ in.

Always pay down anything that costs you more than you can make.

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answers from Grand Forks on

If you are sure you won't need the cash for anything else, then put it on your mortgage, but if you think you might want to buy a vehicle or make home improvements, keep the cash so you won't need to take out a high interest loan. (Our mortgage rates are really low.)

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answers from Chicago on

If you have any extra money, save it. The old school of thought was to pay down your mortgage, but that was when interest rates were high. With the rates being so low now, its to your advantage not to. Also, the rates will increase slowly, and if you need to borrow money in the future, it'll be much higher. Another issue is property values. Why sink more money into something that may not increase very much in value.
And the most important reason not to pay down that mortgage: banks and mortgage companies are so tight with restrictions on borrowing, that if you needed money you won't qualify. They won't care that you've added extra to your principal each month to try and bring down the loan amount, which by the way takes a lot of time to do. What if something happens, job loss, illness, etc, where there can be a loss of income.
Save every penny you can, as you never know when you'll need it.

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answers from Columbia on

Pay down the mortgage. Be sure that the extra payments go towards principal.

The amount we pay in interest on a mortgage is crazy. It's worth paying down. Keep some emergency money in the savings.

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answers from Chicago on

it USED to be paying down the mortgage,now they are saying cash on hand. Sucks. BUT realistically look at your mortgage rate (say 4%) and then look at the investment rate if you can invest and go with whichever is a higher amount. ONLY if it's a secure rate on the investment.

It's so hard when our house values fall so much when we put extra every month into the house thinking we were doing the right thing.

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answers from Miami on

When the water goes down, invest in getting good advice on how to prevent your basement from getting wet again. When you put your house on the market, you must be honest that your basement took on water. You will need to show that you did something about this to keep it from happening again, or you may not be able to get someone to buy the house...

If you think about the low amount of interest you make on your extra money, and how much you're paying in interest on your mortgage, you may do better to up your monthly payments. Putting some extra money towards the principle each month, or quarterly, will lower what you pay in the long run significantly.

If you put a lump sum down, and then something happens and you need the money, you could really hurt yourself there. That's why monthly or quarterly is probably better.

Talk to a real estate agent about the value of your house and if it makes sense to spend money on an addition.

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