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

[MWRR]

The OP didn't post his age and that would have a bearing on what I would do. When we first bought our land (the family farm) we were in debt up to our eyes and interest was 18%; we were in our early 20's and eager to work to get ahead. I may not ever have had the opportunity to buy the family farm again so I rolled the dice and went for it, sticking my neck out further than I would like to admit. It worked out great as land has went crazy here. I wouldn't take the chances today that I took when I was younger. I have far too much to lose now.

I agree that it could take a few years to find your ideal property. There is no benefit in putting the money in the bank; interest is close to nothing. The exception would be if there was a HIGHLY motivated seller wanting to sell quickly. It would be nice to have cash that could be accessed quickly. The value of your home has probably reached the bottom and will increase in value in the next few years. You could pay extra on your house and build equity which you could use for collateral should that ideal place come up for sale. If you have a good relationship with your bank you won't have any problem buying that piece of property if it should come up for sale. In the mean time you could save some 4-5% interest on your home.

 

[ultrarunner]

I can see it both ways and there is a lot of piece of mind knowing the roof over your families head is paid for.

A little over 7 years ago I bought a home and the seller carried back the loan 30 due in 7... so I was looking at a balloon or refi.

For 7 years... I was saving like crazy and also sold a rental before everything crashed...

As the date for the balloon came due... I thanked the sellers for extending me the credit... I put down 25%... and told them I would be paying them in full on the due date...

They are in their 80's and live in a retirement home and seemed a little disappointed... they said for 7 years my $2000 payment was hand delivered on the first and they liked it that way and many of their retirement community friends are having a hard time with the low bank rates...

The make a long story short... they offered to lower the rate to 4% and amortized the loan for another 8 years and I agreed...

I had fully planned to pay it off... but with the uncertain job situation these days... 25% of the company was let go last week... some with as much as 13 years on the job... I'm just as happy to keep my money and have the lower rate...

 

[rsewill]

Your situation indicates you could make bi-weekly (BW) payments which can save years of payments on a 30 year note. BW means a payment every two weeks or 26 payments per year. You need to make sure your lender will credit the payment immediately rather than 'holding' it until the end of the month and then applying it to your loan because then you save nothing. BW is different than bi-monthly which means a payment on the 15th and the end of the month (24 payments a year.) Bi-monthly saves you little and isn't worth the aggravation.

 

[smstonypoint]

Your situation indicates you could make bi-weekly (BW) payments which can save years of payments on a 30 year note. BW means a payment every two weeks or 26 payments per year. You need to make sure your lender will credit the payment immediately rather than 'holding' it until the end of the month and then applying it to your loan because then you save nothing. BW is different than bi-monthly which means a payment on the 15th and the end of the month (24 payments a year.) Bi-monthly saves you little and isn't worth the aggravation.

A numerical example of this point is provided here:Biweekly Mortgage Payments: Simple Interest Biweeklies vs Standard Biweeklies.

I interpreted the OP's situation differently. I thought he was set up on a monthly payment plan without prepayment penalty and was making additional principal only prepayments. That is a completely different situation.

Steve

 

[MossRoad]

Well as we all know the economy is not so great. I bought our home in 2010 it is a three acre lot with aprox. a 1300sq foot house. the house is in good shape and I have done lots of upgrades. kitchen, bathrooms added a Vermont castings wood stove. removal of popcorn ceilings ect. My wife and I would love to live house payment free someday. Our dream is to buy a piece of land aprox 28-35 acre live on the property in a old home on the property in fifth wheel or trailer until we can build our forever house.

I have been on a plan to pay the house down since day one. If I continue on the track I'm on currently We could pay off the house by 2019. I have had several ppl tell me don't make double payments its a waste of your money. I however see it as a means to an end. However I'm not even sure I could sell it for what I bought it for.
The price was not astronomical when I bought but currently valued thirty thousand less than I paid for it.
We also do not have any other payment or consumer debt. the only other payment I have is the tractor which I could pay off tom. but I took advantage of the 0% for 60.

I would like to be on a 3 or four year plan for buying a piece of property and being able to move there.

My question is should I keep making double house payments or should I take that monthly payment and some down money and go try and buy my piece of property? I will then be in double debt with a home and a land payment but I would try and sell the house asap after I bought the land..

Do you have an amortisation table for your mortgage? You should have gotten one. If not, request one from the lender. It will list each payment, how much goes to interest and how much goes to principle, escrow for taxes, etc...

Look at your first payment. Only a few dollars will go towards knocking down the principle owed and a HUGE chunk will go towards the interest. The lender gets paid first before your principle goes down. Then, with each monthly payment, look at the table. Your tiny principle payment goes up a little each month and the interest portion goes down until, finally at the end of your mortgage, your interest is payed off and you are done.

For example, we borrowed $18,000.00 for our first home. The mortgage payment was about $250.00 per month for 30 years. The first mortgage payment knocked about $2.00 off the principle (that's TWO dollars), and the rest went to interest. So we made the first payment of $250.00 and then we also put an additional $250.00 towards the principle (you have to specifiy that you want the additional money to go towards the principle!).

I'm going to type this in bold caps now because I am yelling to get my next point across.... so don't be offended....

THAT FIRST DOUBLE PAYMENT KNOCKED OFF 26 PAYMENTS FROM THE30 YEAR MORTGAGE!!!

That's over two years of payments off the end of the loan.
The next month we made another double payment and knocked off about 22 more payments.
We did it again and again....
By making double payments we paid off a 30 year mortgage in 5 years.
So, if you add everything up, we paid $500.00 per month X 12 months = $6000.00 X 5 years = $30,000.00 on an $18,000.00 loan.

That may sound bad. But look at it this way....

Had we paid it in 30 years, we would have paid $250.00 per month X 12 months = $3000.00 X 30 years = $90,000.00 on an $18,000.00 loan.


Now does it really make any sense to not pay them off sooner? :confused2:

 

[smstonypoint]

For example, we borrowed $18,000.00 for our first home. The mortgage payment was about $250.00 per month for 30 years.


Now does it really make any sense to not pay them off sooner? :confused2:

Based on my calculations, you must have taken out your mortgage back in the late 1970s/early 1980s when mortgage rates were sky high. If your numbers are correct, you were paying 16% or so in interest.

The savings aren't so dramatic in a low interest rate environment.

Steve

 

[sfloggie]

Moss,
Well written. We are doing so now.

We purchased our home in April 2008 with a 30 year, but will have our home paid off in 2015. Then I retire to the farm (literally).

This, as you said, is by paying an additional house payment toward the Principle each and every month.

Well done.
Jim

 

[MossRoad]

Based on my calculations, you must have taken out your mortgage back in the late 1970s/early 1980s when mortgage rates were sky high. If your numbers are correct, you were paying 16% or so in interest.

The savings aren't so dramatic in a low interest rate environment.

Steve

You are corrrect!
That was 1985 and we paid 3 points to get the interest rate down to 12.5%. There was also money removed from the payment for property tax escrow account in there.

The point is, regardless of how much you owe, you still owe. And the longer you take to pay it back, the more you will pay in interest.

Lets say the OP puts $600.00 in the bank every month instead of paying down the principle on his mortgage. So he gets $600.00 X 12 months = $7,200.00 in a year. In the bank you are lucky to get 1%. Cost of living increases about 3% each year (remember that food and gasoline are not figured in government cost of living increase reports). At the end of the year his money in the bank has lost 2% of its buying power.

Had he had put that down monthly on the principle on his mortgage, even at today's rate, how much will he save off the end of his mortgage? Without seeing his amortization table, I have no way of knowing. However, my guess is, it would be in the 10s of thousands of dollars VS losing 2% in value that year. :thumbsup:

 

[MossRoad]

Moss,
Well written. We are doing so now.

We purchased our home in April 2008 with a 30 year, but will have our home paid off in 2015. Then I retire to the farm (literally).

This, as you said, is by paying an additional house payment toward the Principle each and every month.

Well done.
Jim

Thanks. Same to you! :thumbsup:

We paid off our first home in 5 years. Got a blanket mortgage on that first home and 20 acres of rural land so we needed zero money down. Paid off the 20 acres in about 5 years. Got another blanket mortgage on that first house and our second house with no money down. Sold the first house and dumped that money on the 2nd house and were on track to pay that off in 5 years, but my father passed away and left us enough to pay it off in 3 instead of 5. But we would have made it on schedule in 5. With the money that we did not spend on paying all that mortgage interest, we sent our kids to good Catholic schools, saved a good chunk for their college funds, saved for our retirement, took some very good vacations, bought some decent used cars, a tractor, etc.... all on average wages for our area. We've been in the black since the day we said "I do" and have doubled our net worth approximately every 7 years for the past 32, with a slight "adjustment" in 2008! :laughing: But we are back on track. :thumbsup:

Technically, we still have a mortgage. It is a home equity line of credit. It gets us a mortgage exemption with the local property taxes that saves us hundreds of dollars each year. Last year we paid less than $40.00 in interest on it. That is THE only reason we carry that mortgage. So while we are not technically debt free, I consider us debt free for about the last 15 years or more. :licking:

 

[displacedPA]

You are corrrect!
That was 1985 and we paid 3 points to get the interest rate down to 12.5%. There was also money removed from the payment for property tax escrow account in there.

The point is, regardless of how much you owe, you still owe. And the longer you take to pay it back, the more you will pay in interest.

Lets say the OP puts $600.00 in the bank every month instead of paying down the principle on his mortgage. So he gets $600.00 X 12 months = $7,200.00 in a year. In the bank you are lucky to get 1%. Cost of living increases about 3% each year (remember that food and gasoline are not figured in government cost of living increase reports). At the end of the year his money in the bank has lost 2% of its buying power.

Had he had put that down monthly on the principle on his mortgage, even at today's rate, how much will he save off the end of his mortgage? Without seeing his amortization table, I have no way of knowing. However, my guess is, it would be in the 10s of thousands of dollars VS losing 2% in value that year. :thumbsup:

I ran all the numbers last night and it makes more sense to pay the house off.
If i add and additional principle payment each month of 839.00 I will not have quite paid it off in 5 year more like 7. However at the end of five years I will owe 60K or so. and have saved 84K in intrest

To pay off the house in five years completley we would have to make out normal 839 per month payment and add an additional 1600 towards principle. this could be done and would make me sleep better at night know the house was ours. This would strap us considerably though... if could be done thought.... We would also save 95K in intrest
What would you guys think is better? between the two above options? or do you have another option?

After the end of that five years I could really start saving. if I found a peice of property by lets say year four I think I could take a home equity loan as a down payment get the land then sell our house and use that money to pay for the land cash... that is my goal at least. Then we have no payments we may have to live in a fith wheel or something on the property for a year but man could i save some money in a years time with no house payments!!!

 

[sfloggie]

DisplacedPA,

Your last paragraph (plan) is what we did for our land in OK and in VA. Your plan looks good.

We brought the land in OK in 2006 with down payment from a home equity and financed through Farm Credit. For reasons shown, we sold the land in 2007 for profit and paid off the home equity retaining the balance of the profit.

In 2008 we sold our home and brought a condo. We used the home equity in the condo plus some old 401k roll over money for a down payment on the land we still own.

We are working on a Conservation Purchase or Easement for land near and at the river. The money we receive will be used to pay down the farm loan, or pay off the home equity.

In 2015 we will have both the home and land paid off thus being debt free as you are working toward. Moss was smarter than me starting the debt free process long before me. I am thankful he and others share their experience..it is never too late.

Best to you and your family,
Jim

Jim

 

[displacedPA]

DisplacedPA,

Your last paragraph (plan) is what we did for our land in OK and in VA. Your plan looks good.

We brought the land in OK in 2006 with down payment from a home equity and financed through Farm Credit. For reasons shown, we sold the land in 2007 for profit and paid off the home equity retaining the balance of the profit.


Jim

Jim I have been doing my research on farm credit. I found a branch near the area that we would like to buy land. I have one question about how farm credit works> Will I be able to take a home line of credit to pay for a down payment for the land even if my home is not paid off I would thnik yes. how much would you borrow for a down payment for the land? 20% 25% jsut curious?

If you were in my shoes would you go for the five year plan and have it paid off. or go for the seven year plan. If I go with the seven year plan by year five I will owe 60k on our current morgage.

 

[bucktaker]

If it was me I would do both, pay extra principle and save the cash for a land purchase. Large land purchases without a residence are hard to justify to the banks,

It also depends on the current interest rate and term of your mortgae, check your rates and term, if better are available refi, to better terms. Its money in your pocket....

Also given the ecomony who is to say if your current property is at the bottom of its price drop you could be sending more money to the bank that you never recoup on a sale???

 

[LD1]

I think a realistic timeline of your goals (when you want to buy new land and when you want to sell your current house) really needs to be laid out for sure.

Interest rates from the bank usually arent as good on a LAND-ONLY purchase. So....If you plan on buying in say....2 years, are you going to need to finance that new peice of land? And at what interest rate compaired to what you have now? You'll have to run the #'s because I dont know where you are with your current loan and @ what rate. But IF you buy new land in 2-3 years and finance it, are you really going to be money ahead vs saving your double payment so that way you can just pay cash when you find land you want????

The longer it is you want to wait before purchasing the land, the better it is going to be to get your current mortgage paid down.:thumbsup: An extra ~$840/month to pay down your current mortgage is ~$50k in 5 years. How much will be left on your current mortgage vs if you just made the minimum payments is going to be how much you actually save. You say IF you do that, you will still owe 60k, but how much would you owe in 5 years IF you DONT make the extra $840/month pymt????

 

[displacedPA]

I think a realistic timeline of your goals (when you
The longer it is you want to wait before purchasing the land, the better it is going to be to get your current mortgage paid down.:thumbsup: An extra ~$840/month to pay down your current mortgage is ~$50k in 5 years. How much will be left on your current mortgage vs if you just made the minimum payments is going to be how much you actually save. You say IF you do that, you will still owe 60k, but how much would you owe in 5 years IF you DONT make the extra $840/month pymt????

I would owe 115K in five years if I dont make any extra priniple payments.

 

[smstonypoint]

I am always happy to tell other people what they should do.

I thought I read in a post that the OP was in his 20s, but I can't find the post now. At any rate, I would advise the OP to take into account his options for saving for retirement. If your employer offers funding matches for a 401-K, contribute up to the maximum provided by the employer. Also, take a look at Roth IRAs. The earlier you start saving/investing for retirement, the easier it is to accumulate a nest egg.

Steve

 

[beppington]

I am always happy to tell other people what they should do.

I thought I read in a post that the OP was in his 20s, but I can't find the post now. At any rate, I would advise the OP to take into account his options for saving for retirement. If your employer offers funding matches for a 401-K, contribute up to the maximum provided by the employer. Also, take a look at Roth IRAs. The earlier you start saving/investing for retirement, the easier it is to accumulate a nest egg.

Steve

IMO this statement could also read, "The sooner you pay off your house, the easier it is to accumulate a nest egg."

In your suggestion, money is put away that shouldn't reasonably be accessible until retirement ... which is good. In my suggestion, the typically huge amount of interest to be paid is reduced significantly ... also good.

Some people sleep better with a nice nest egg. Others sleep better in a paid-off house. I myself like the idea that no mortgage co can foreclose on me :thumbsup: To each his own, though, of course. Although even if one prefers a paid-off house, one should still make sure one at least has a sufficient emergency fund.

 

[MoKelly]

IMO this statement could also read, "The sooner you pay off your house, the easier it is to accumulate a nest egg."

In your suggestion, money is put away that shouldn't reasonably be accessible until retirement ... which is good. In my suggestion, the typically huge amount of interest to be paid is reduced significantly ... also good.

Some people sleep better with a nice nest egg. Others sleep better in a paid-off house. I myself like the idea that no mortgage co can foreclose on me :thumbsup: To each his own, though, of course. Although even if one prefers a paid-off house, one should still make sure one at least has a sufficient emergency fund.

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 ....

 

[LD1]

I would owe 115K in five years if I dont make any extra priniple payments.

Something just isnt adding up then:confused2:

IF you pay an extra 839/month over the next 5 years.....you would owe 60k on the house. IF you dont make any extra payments, 115k would be the #. That is a 55k difference.

BUT...839/month x 12 months x 5 years = 50k.

So.........if that is correct, you must have a pretty darn good interest....or I am figuring something wrong. Because at those figures, you are really only saving 5k in the 5 years.

And in the situation you are in, and wanting to buy land if the right opportunity presents itself, I personally would rather have 50k in the bank vs owing 55k less on the house.

Yes, it is still going to cost you 5k more when it comes time to sell the house, BUT, if that 50k in the bank saves you from financing the new land, that alone would be worth it. Plus the closing costs are going to be ~5k or so less if you pay cash for the new land vs finance.

 

[LD1]

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:

>I owe 126K on the house I paid 164k.

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

I would owe 115K in five years if I dont make any extra priniple payments.

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