double house payments or save the money for a land payment?

[sfloggie]

DisplacedPA,

Before I answer:

1. Caution who you tell when you find land or even look!

You are in NC and I am near the NC line close to the Dismal Swamp.

Before we brought our VA land,we were going to buy timberland in NC just South of the NC/VA line. Commercial timber companies sell good land (and bad). One 100 acre site had a mix of 20-30 year timber, water and a 50 foot wide rock road. It was priced under $200,000. Before I could arrive to view it, it was sold to a local guy. Every time I found a good parcel, he would buy first. I later discovered the forester I was working with was telling this guy every time I called to let him (forester) know I found a place. I was talking to the forester only because I wanted a Land Management Plan due to the amount of timber, plus he knew the area.

2. Walk the entire land, check the courthouse , view from Google and Bing, count your neighbors.
- I have 113 acres with two neighbors on the East and two on the West. There is a river to my South and a hard top to my North. This is enough! I looked at one property that was 33 acres with 23 neighbors!! Wow..too many to be nice to.
- Our current land showed an old survey listing 126 acres. There was really only 113 acres because the old house and three acres had been sold plus there had been another sell of ten acres. None had been recorded property, but we got that straight. We also did a survey, but it was not completed until a year and a half after I brought. I paid extra for them to look at the current survey and other documents before I brought. Plus I talked to the guy who did the survey of record.
- Look for land that has some timber, water (water table, pond, creek, river), accept wetlands (not swamp) as it is beautiful, but ensure you have enough land that is high enough to perc. We have 113 acres of which we have six sites that will perc. They are all to the North with wetlands near the river which is 90 feet across since it is the head waters.

- Raw land and barn/tractor etc.
-Farm Credit does not even blink at the request to buy raw land; whereas the regular bank did. The Farm Credit loan officers are farmers or have farm knowledge.
-Farm Credit would finance farm equipment and buying more land if needed. I stay ion touch with our local Farm Credit to ask his advice and to let him know if I see a neighbor wants to sale and I would like to buy through them.

- Ensure you find a good farm and farmer to grow crops on your land if you are not. This allows you the Land Use Tax Reduction. Please farmers can teach you land management. I do not charge anything for the lease as he gives me more in land management (ditches, etc), help with neighbors etc than I could ever do. For taxes I estimate the value of their services to me and I put that down when I do taxes (with explanation). It increase my income, but not more than the value received.

Now to answers:
Five years or seven.
- I am 63 years old, four heart attacks, retired Army SF and working in D.C. and Blessed to be doing OK in finances. So I wanted the shorter time. It sounds as if you are doing well and are younger, so you could do the seven years. Do not put stress you can stand on your wife as she will support you, bu is it fair. If you are younger, you have time. I looked for three years this last time. However; if you have the ability and no stress (to wife)..go for the five.
- While I am working, I need the tax write offs. A dollar is not worth a dollar. But if I pay a dollar to lay some road, build a barn or plant trees that dollar is worth more than a dollar. (not really, but I get excited!) The tax deduction is about 25 cents per dollar spent on the farm (for deductible items)as I do not live on it. Also the dollars I spend for things on the farm help the farm increase in value thus why I say worth more than a dollar.
Percentage down.

Down Payment.
- They look at your loan to value ratio as any lender does. We put 30% down using our home equity line of credit and some cash savings because we could and wanted to keep an emergency fund, so not more. They wanted 20% down and did not mind that we were using home line of credit. They gave us a rate higher than a home mortgage rate, but I did not care due to deduction plus we drop by a quarter percent allowing them automatic deduction. Also we get quite a bit back at the end of the year because the Farm Credit shares profits.

Careful with questions as I am long winded!!!

Jim

 

[beppington]

Well ... here is my situation.

My mortgage is at 3.02 APR. Pretax rate.

I can buy AA rated and insured Missouri municipal bonds at a yield of 2.45%. At a 35% Federal and 6% Missouri tax rate that is equal to a 4.15% rate. Next year, the Federal tax rate will go to 39.6% and the Health Care tax of 3.8% on passive income will kick-in. That raises the combined tax rate to 49.4% on non-Muni interest. So, in 2013 the pretax equal rate rises from 4.15% to 4.84%.

Do I pay-off a motgage at 3.02% or put the money into a Muni at 4.84%? Hummmmm ....

I'm not as fluent with the specific numbers as say MossRoad or smstonypoint, so I'll let them opine.

I will say that for me to choose "next egg" over "paid-off house", the #'s would have to be very strongly in favor of "nest egg", & the small differences in your numbers don't look like it is.

Of course the "free lunch" choice here would be to diversify ("diversification is the only free lunch") by doing some of both ... as long as you're OK with owing your lender longer & the ongoing existence of possible foreclosure (however unlikely).

 

[MossRoad]

Ya!
You have to pay yourself first and foremost. A young kid should be putting away 15% of every dollar earned into some sort of retirement fund.

Disclaimer: I am not giving advice, just talking about what worked for us...

For example, if you employer offers 401k and matches you a % on the first 6%, the experts recommend you put in 6% of your income into the 401k, then put 9% into a ROTH IRA. (of course, if you can afford it, put the max allowed in the ROTH each year). 401k is pre tax, but you have to pay tax when you take it out. ROTH is after tax, so you get taxed on it before you put it in, but it is tax free when you take it out.

I'd be sure to pay myself first, then pay the mortgage, then pay extra on the mortgage principle as much as I could. Pay the house off before you buy land.

I'd look into a blanket mortgage to cover both the hosue and the land. Let's say your house is worth 100K. You find land for 100K. The bank wants 25% down. You have to come up with 25K. By putting the house and the land on one blanket mortgage, you now have one item worth 200K that you already have 100K in equity, or 50% already paid for. You won't need any money down, just mortgage costs. (we've done this twice). The only stipulation is when you finally sell your house, you only have the land left on the mortgage. You now have one item worth 100K and no equity. You have to sign some papers that say if you sell the house, the bank gets paid 25K at the closing of the house so that the equity never drops below the 25%. Get it? At closing on the sale of your house, you have to give the bank 25K. But you could give them 50K and keep 50K for yourself and buy a nice trailer, or make that a downpayment on a construction loan, etc... works good. :thumbsup:

 

[deezler]

I am in a similar situation. Only 28 years old and stuck with a condo that I can't sell (long story, not quite underwater, but close). My wife and I wanted a nice piece of land in the area to eventually build our dream home on, but figured that wouldn't happen for at least a couple years.

Well wouldn't you know it, the dream parcel of land that I have had my eye on for years now comes back on the market at just 15% of the original asking price, and the buyer (it was now bank owned) accepts our even lower offer! I have a pretty good job but was still surprised to find out that I qualified for the additional financing, as is, from my local farm credit bureau.

So did we want to own 2 properties and have two mortgages? Heck no! But this land was everything we ever wanted (rolling, wooded, 19 ac, a nice stream, very close to town), so we had to jump on it.

While I would much rather spend the money to dig out of my condo loan, or be able to sell it and move on cleanly, we couldn't pass up the opportunity. So if you find that just right piece of land, and it feels good, don't hesitate.

On the other hand, if you can be patient, it would certainly be wiser to limit your liability and financial risk.

 

[LD1]

Ya!
You have to pay yourself first and foremost. A young kid should be putting away 15% of every dollar earned into some sort of retirement fund.

Agreed:thumbsup: If one can afford it, put away all you can and still live comfortably.

Because I am afraid us "youngins" aint gonna have any SS to fall back on.

I am currently stashing 8% in 401k with a 50 cent match up to 5% from the company. And then another 10% into a ESPP (employee stock purchase program) where they match @ 20%. And the wife is putting back 5% with a full 100% match from the company.

I dont want to have to rely on SS when I retire, even though I would have paid in for years and it is owed to me, I dont think I'll ever see that money.

I saw TOO many co-workers bail out when the market crashed in 08. NOT me. I dumped all I could in knowing I had a ways to go before retirement, that it would eventually bounce back. The addage is "buy low...sell high" and by bailing out, they sold low and bought back in high:confused2: Bad move IMO.

 

[MarkV]

I agree that there are valid arguments for both paying off and saving for land. We already have the land and are old enough that retirement is coming soon. Having your house paid for is a big plus if you are retiring so we pay off aggressively.

I think you also have to look at your local mortgage market. You can't assume you can get a loan even with great credit. In my area you will have a hard time finding a lender for raw land. I hear people say "Farm Credit" for raw land but not around here. I am sure it varies by region.

MarkV

 

[MarkV]

I agree that there are valid arguments for both paying off and saving for land. We already have the land and are old enough that retirement is coming soon. Having your house paid for is a big plus if you are retiring so we pay off aggressively.

I think you also have to look at your local mortgage market. You can't assume you can get a loan even with great credit. In my area you will have a hard time finding a lender for raw land. I hear people say "Farm Credit" for raw land but not around here. I am sure it varies by region.

MarkV

 

[MossRoad]

One more thought. Some folks are suggesting that you shouldn't make extra payments on your mortgage principle because you are giving your money to the bank. That's not the way it works...

Its the interest payment that you are giving to the bank. The principle payment is returned to you in the form of equity in your home. When you sell the house, you don't give that equiity to the bank. It's yours! (just watch out for capital gains).

 

[smstonypoint]

When you sell the house, you don't give that equiity to the bank. It's yours! (just watch out for capital gains).

Unless the tax code has changed recently, the OP and his wife can exclude a total of $500k from Federal cap. gains taxes as long as they have been living in the house for at least 2 of the last 5 years.

Steve

 

[displacedPA]

I just played on the spreadsheet for a few minutes and something just isnt jiving here:confused2:

I/We need a little more info:thumbsup:


Based on this^^^ (unless you refinanced) The 164k to get an $839 payment would have to be a 30 year loan @ 4.59% and started 9-1-2000 to have a current balance of ~126k







But based on the above 30yr@4.59, and a payment with no additional principal of $839, I am showing you would only owe 102k in 5 years. NOT 115K.

So what are the terms of your loan??? Because Unless we are missing something, your normal payment of $839 for the next 5 years (50k total) is only going to knock off 11k off the balance:confused2:

So you can see my confusion. What is your current interest rate? Did you re-finance? if so...when, how much, and for how long? Being able to plug these #'s in myself would make it a lot easier to give advise


here

I missed this post before!!!
I bought the house and put 30k down as a down payment. The loan started in may of 2010.

rate is 5%

it seems as though I should maybe diversify and save some and pay a little more on the house. thoughts?

 

[LD1]

I missed this post before!!!
I bought the house and put 30k down as a down payment. The loan started in may of 2010.

rate is 5%

it seems as though I should maybe diversify and save some and pay a little more on the house. thoughts?

Still isnt adding up to me?? I cannot guve an honest answer as to what you should do (or what I would do if I were in your shoes) without being able to play with the #'s on a amortization table for a few minutes.

So with what you are saying....bought the house for 164k and put 30k down. Thats 134k. And 134k @ 5% over a 30 year loan is only a $719/month payment. And if started in may 2010, you would still owe 131k, not 26k like you said?

I really want to help you out, but without knowing the terms of the current loan, it makes it pretty hard.

But earlier in another post, you mentioned that in 5 years with NO extra payments, you would still owe 115k (only knocking 9k off in the 5 years for 50k paid), but if you started the loan 5/2010 @ 134k, and are currently @ 126k, that was 8k off in less than two years:confused2:

More details would help tremendiously, but just off the top of my head, 5% is pretty high by todays standards. Another option...have you considered a re-fi?? I just heard that third federal was advertizing 2.74% fixed rate on 10 year loan:thumbsup: That would make a payment of ~$1200 on 26k and be done in 10 years

 

[displacedPA]

I should say that I also have esscrow which I can canncel because I put more than 20% down on the house. That is what not adding up for you. My base payment is 704.00 with esscrow its 839.00/ I have the ballence at
126k because i have been paying extra as I can.

I still belive that I can keep paying it down more it will make it better for me in the end. I can take a home equity loan if I find a great peice of property. then sell my house and pay the remainder of the land with my house payment. Or I can wait to i pay it off then sell and use that money dirrectly for a land payment?

 

[MarkV]

Sounds to me that you are liquid enough and have good credit so I would look at refinancing. Today a 5% loan rate is high and the money saved on interest you can apply to your principal each month. You could also look at a 15 year loan I and would bet your payments would not be much bigger than they are now while saving a great deal of interest.

MarkV

 

[dmccarty]

Managing money is a balancing act based on decisions that have to be made with imperfect data...

- Build a nest egg.
- Start saving for retirement and the earlier the better.
- Take on as little debt as possible and pay off as soon as possible.

That sounds good but then life hits you in the face.

At this point, 12 years into our Big Land Owning life phase, we have managed to build a house, sell the old house, and make payments. :laughing::thumbsup:

The plan was to have the land loan paid off AND have a much larger nest egg but family health issues have made that impossible. However, we have gotten the land loan amount down quite a bit. It might be possible to pay off the land loan late in the year or maybe next year but it depends on what Life brings us next.

Our land loan is a business loan. I pay more each month than required. Each month the bank sends me a bill but the bill now saws I do not need to make a payment until late summer or early fall. :thumbsup: Paying down the loan is saving me interest on the loan which is substantial. While I might not have the cash in the bank, we have built up equity, and for this loan, the bank tells me I do not need to make a payment for many months. In effect, I have prepaid the payments and it is as if I have the money in the nest egg.

We had to tap our equity loan last year for health reasons. There is very little left on the loan and we have enough money to pay off the loan but every month I look at the interest paid, which is minimal, and figure it would be better to keep the cash. The hospital automagically sets up a zero percent loan if you exceed your insurance maximums which we did last year. We have the cash to pay off the hospital loan but it is zero percent and they will not take less if we pay the loan off early so we let it ride to keep cash in the bank.

In one case I would rather pay a few dollars a month on a loan to keep cash in the bank. The interest cost is buying us flexibility. In the other case, the hospital is loaning me money for free so I will take it because it is more flexibility for nothing. It is a balancing act.

If you are paying for retirement and since you have a nest egg, I would be looking to save money to buy land. Now is the time to buy. Is it a risk? Yes it is. But life is risk. Manage the risk and the money. If you wait 10 years to buy, you will be 10 years older. What will the land cost in 10 years? Is it worth loosing those 10 years of having fun with the land? In 10 years, Life might prevent you from ever owning the land. Would it be better to own the land for a few years and then have to sell compared to never having the land and the dream?

Our first plan after buying our place was to build a smaller house on one parcel. Then we would pay off that house, save up money, and build the dream house on another section of land. However once we ran the numbers, it would take us a 10-15 years, at best, to pay off the small home and then start saving for the dream house. We would loose the time in the smaller house compared to a dream house. Since our dream house would not be that much more expensive, we sold off the lot for the smaller house, to provide more cash to build the dream house. It is more money than we wanted to spend but it is still less than what many pay for a mortgage. It is a balance.

Paying down the principal of a loan is supposed to be the same as earning the rate of the loan. So if the loan is 8%, paying it down/off early is the same as earning 8% on your money.

Later,
Dan

 

[LD1]

I should say that I also have esscrow which I can canncel because I put more than 20% down on the house. That is what not adding up for you. My base payment is 704.00 with esscrow its 839.00/ I have the ballence at
126k because i have been paying extra as I can.

I still belive that I can keep paying it down more it will make it better for me in the end. I can take a home equity loan if I find a great peice of property. then sell my house and pay the remainder of the land with my house payment. Or I can wait to i pay it off then sell and use that money dirrectly for a land payment?

Now we are getting somewhere.

Here is what I have figured (warning...this will be a long post with lots of options. To some of you, this may seem boring). But I Have figured a $131,200 loan beginning on 5-1-2010 @5% to get a BASE payment of $704:thumbsup: That put you owing 127.5k currently. But you said you overpaid some already, So I adjusted to get 126k currently. And based on that, IF no more overpayments are made, your payoff would be 9-1-2039

So knowing that, lets explore some options.

Option 1: Put $840 in a savings accout for the next 5 years. At the end of the 60 months, you will have $50,400 banked. BUT would still owe ~114k on the mortgage.

Option 2: Put the $840 on the house. At the end of 60 months you would have saved NONE, BUT..... would only owe 58k on the house. SO...you would have knocked an additional 56k off of the loan but have ZERO in the bank. THUS, only saving $6000 in the 5 years.

So based on that, IF you want to buy a peice of land in 5 years, I'd vote to SAVE the money. Because IF you can pay cash for the new land and NOT have to pay higher closing costs (plus cash sometimes helps get a better deal), that might just save your $6000 back:thumbsup: But a lot all depends on how long before you are ready to buy, and how much land. If you are talking about buying $200k worth of land, and still would have to finance, saving the $50k isnt going to gain you a whole lot. But if just buying ~$50k worth of land, if you can save enough to pay cash, IMO that is the better of the two options.

Now lets walk through another option. IF you continue to pay $840 extra (840+704=1544 TOTAL) and you dont buy land, payoff would be in 7-1-2020, about another 8-1/2 years. 98 more payments of $1544 to be exact

Look into re-financing. I have been hearing a bank advertize 2.74% fixed for 10 years. You currently owe 126K. IF you can get that rate, and can come up with a few thousand to close, your payment would NOW be $1201/month. BUT...to compare apples to apples, pay an extra $343/month to get back up to the $1544 in the above example. And the payoff would be in 91 months and NOT 98. So you would save 7 payments @ 1544 (~11k) at the cost of whatever closing on the re-fi would be:thumbsup:


You have a lot of options avaliable to you.:thumbsup: But IMO, the determining factor in what option you take is going to be WHEN you want to jump on land. IF you can wait 91 months, I would re-fi (if you can get those rates) and PAY off the hose ASAP. Then buy the land and pay that off when the house sells.

IF you want land any earlier than that, Based on the #'s, I'd say to bank the $840 for the new land purchase. BUT only if we are talking $40-50k in land. If you plan on spending 200k on land, Pay the house off ASAP. And it looks like the quickest means to that end is a re-fi.

 

[displacedPA]

Now we are getting somewhere.


You have a lot of options avaliable to you.:thumbsup: But IMO, the determining factor in what option you take is going to be WHEN you want to jump on land. IF you can wait 91 months, I would re-fi (if you can get those rates) and PAY off the hose ASAP. Then buy the land and pay that off when the house sells.

IF you want land any earlier than that, Based on the #'s, I'd say to bank the $840 for the new land purchase. BUT only if we are talking $40-50k in land. If you plan on spending 200k on land, Pay the house off ASAP. And it looks like the quickest means to that end is a re-fi.

I apperciate you working the numbers over again.. I have not looked into refi.

I would only like to buy land that has the value of my current house. In the area im looking at land the price per acre is 5k. some is at 4.5k so at that i could afford 32acres. of course there are always other deals that may come up and I would like to find one of those.. maybe 60 acres for the price of 32 at 5k. :drool:

I feel as though i could go with either option you spoke of.

heres a senerio; If we find a great peice of property everything we want. I have 38k in equity now. If I save up 40 or 50k more and combine that with a home equity loan I could have 88k for a down payment on land that is valued at 164k. at which time I would try and sell our current home. Once we could sell our house i would pay off the land. of course this would require us to live in a trailer or something for a time being. The only part that scares me about this is im really sticking my neck out... hmm in the back of my mind i feel i should keep paying down the house for five years but honestly I would love to find a peice of land withing two years...

 

[MossRoad]

I apperciate you working the numbers over again.. I have not looked into refi.

I would only like to buy land that has the value of my current house. In the area im looking at land the price per acre is 5k. some is at 4.5k so at that i could afford 32acres. of course there are always other deals that may come up and I would like to find one of those.. maybe 60 acres for the price of 32 at 5k. :drool:

I feel as though i could go with either option you spoke of.

heres a senerio; If we find a great peice of property everything we want. I have 38k in equity now. If I save up 40 or 50k more and combine that with a home equity loan I could have 88k for a down payment on land that is valued at 164k. at which time I would try and sell our current home. Once we could sell our house i would pay off the land. of course this would require us to live in a trailer or something for a time being. The only part that scares me about this is im really sticking my neck out... hmm in the back of my mind i feel i should keep paying down the house for five years but honestly I would love to find a peice of land withing two years...

Don't forget the value of an old farmhouse that sits on land already VS building new on vacant land.

 

[zzvyb6]

There is a technicality to this 'double up' scheme. The optimum way to pull this off is to pay the mortgage amount per month and include an additional sum that represents the amount of principle included in next month's payment. This works really good (but slowly at first) because the amount of principle being paid off in the early years is pretty small.

You will continually have to get amortization statements from thebank to let you know what the next month's principle amount is, but there are on-line calculators that will do this, too.

So no, not good to double the payment, but good to pay the monthly amount and include the principle amount applied to next month's payment.

 

[displacedPA]

Don't forget the value of an old farmhouse that sits on land already VS building new on vacant land.

I would like to find a peice that has a old house on it but im not counting on it. whe you said value did you mean $ value or value as in a place to stay in the interum?

 

[MarkV]

There is a technicality to this 'double up' scheme.

So no, not good to double the payment, but good to pay the monthly amount and include the principle amount applied to next month's payment.

Not sure I understand what you mean ZZ. On my mortgage if I make a double payment per month the first one is my normal principal and interest but the second one goes to principal only. Next month I am paying on that much less principal so the payoff date comes sooner. The sooner the payoff the less interest paid.

MarkV