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

[LD1]

It is really easy for anyone to pull up an excell ammortization table. Anyone running excell 07 or newer already has the template. And you can play with different overpayment amounts and see the direct results.

Large overpayments early have a HUGE impact.

In the OP's example of 131,200 loan @ 5% for 30 years (360 payments) results in a $704/month payment. By simply paying an extra $704 for JUST the first 12 payments, cuts 22,000 off the total of the loan and knocks 47 payments off down to 313:confused2:

But doing so at say the 20 year mark, only saves ~4k in interest and only knocks off 18 payments by makeing 12 extra payments.

So extra money early really helps:thumbsup:

DisplacedPA:

Based on your last post, I would have to say do whatever you can to pay off the house ASAP. Because it appears you want more land than you can pay cash for. And thus you will be taking equity out until you sell your house and THEN payoff the equity loan.

Based on that and my above #'s of option 1 and 2 you have the following:
In 5 years, lets say your house is worth a nice even 150k

In option 1: you would have 50k banked and 36k equity. Total of 86K
In option 2: you would have 0 banked but 92k equity for a Total of 92K

In this case, I like option 2. ONLY because with the amout of land you want, you will have to finance or take out equity. Option 2 give you more capital and sooner:thumbsup:

Only way I would do option 1 would have been if you were looking for only 40-60k worth of land and would have been able to pay cash outright.

All that said, I really think you should look into a re-fi.

Because with that option 3, IF you re-fi now @ 126k and come up with the ~2k or so to close, and make the same $1544 payment as if you took option 2......
At the end of 5 years you would only owe 48k. Which would put you about 10k ahead of option 2 and it only would have cost the couple thousand to close.:thumbsup: and if you wait even longer than the 5 years, that 10k to the good will continue to increase:thumbsup:

 

[MossRoad]

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?

I meant that you can ususally get a house with land easier than you can get vacant land. And, you can usually get more acres of land with the house for less per acre as well.

 

[MossRoad]

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?

Also, I have mentioned before...

Get an amoritazation table from the lender. Do not rely on an on-line calculators. As you have found out, they do not take into account escrow, etc...

Then you can see just how many payments you can wipe off the mortgage by putting additional money towards the principle each month.

It is extremely important to make those "double" payments at the begining of your loan. Towards the end, it does little good. At the begining, it will save you tens of thousands of dollars!

 

[MossRoad]

It is really easy for anyone to pull up an excell ammortization table. Anyone running excell 07 or newer already has the template. And you can play with different overpayment amounts and see the direct results.

Large overpayments early have a HUGE impact.

In the OP's example of 131,200 loan @ 5% for 30 years (360 payments) results in a $704/month payment. By simply paying an extra $704 for JUST the first 12 payments, cuts 22,000 off the total of the loan and knocks 47 payments off down to 313:confused2:

But doing so at say the 20 year mark, only saves ~4k in interest and only knocks off 18 payments by makeing 12 extra payments.

So extra money early really helps:thumbsup:

I cannot agree with you any stronger! You are SO correct. No one tells young folks this stuff. Anyone that tells them not to make additional payments on the principal just does not understand how mortgage repayment works. :thumbsup: :thumbsup: :thumbsup: It could cost them tens of thousands of dollars in the future.

 

[ultrarunner]

I cannot agree with you any stronger! You are SO correct. No one tells young folks this stuff. Anyone that tells them not to make additional payments on the principal just does not understand how mortgage repayment works. :thumbsup: :thumbsup: :thumbsup: It could cost them tens of thousands of dollars in the future.

I remember the conventional wisdom back in school was to get the lowest payment possible and leverage as much as possible...

I never subscribed to that way of thinking...

Another thing bouncing around business school was the secret to success is OPM... other people's money.

Maybe this explains alot.

 

[zzvyb6]

There is another angle to this situation. Because of the surge in printing money by the Federal Reserve, (money not backed by value) inflation is fast approaching 10% and still climbing. In 10 or 20 years, the value of 'money' will be down by 50 to 90%. (Just like the 10 cent candy bars of 20 years ago now priced at $2.00). Your new Toyota or TATA minicar will cost $250,000.

So, if you have income that could be inflation proof (cost of living allowances, set your own prices for self-made goods, or printing your own money), then you will be paying back the loan over time in worthless dollars. Then you can be using today's money to build up an inflation proof reserve. That's why I feel buying land is a good choice (They stopped making it a long tme ago). Make sure that property taxes are aligned with your goals, too. I'd only buy agricultural land because property taxes here in my part of Michigan are going down or holding steady on ag land. They want you to panic and sell out so they can make some more McMansion subdivisions to make a LOT more property tax money. Residential property taxes are still going up big here in spite of home sale prices at 50% of value from 5 years ago, because the local government spending addictions have not been cured.

You could also consider buying certain "stuff" that will have value in the future. For example, scrappers are turnng a lot of cool metal things into future collectables.

just sayin'...

 

[buckeyefarmer]

Also, I have mentioned before...

Get an amoritazation table from the lender. Do not rely on an on-line calculators. As you have found out, they do not take into account escrow, etc...

Then you can see just how many payments you can wipe off the mortgage by putting additional money towards the principle each month.

It is extremely important to make those "double" payments at the begining of your loan. Towards the end, it does little good. At the begining, it will save you tens of thousands of dollars!

Don't mix apples and oranges. An amortization table from the lender had better agree to the cent to the on-line amortization calculator. escrow does not go into the equation, that's just your property tax money they hold to ensure your tax bill gets paid. If the lender adds this to your monthly payment, you have to subtract to get your principal & interest payment. One online one to play with is at Mortgage Rates Credit Cards Refinance Home CD Rates by Bankrate.com. they also have good mortgage advice.

 

[MossRoad]

Don't mix apples and oranges. An amortization table from the lender had better agree to the cent to the on-line amortization calculator. escrow does not go into the equation, that's just your property tax money they hold to ensure your tax bill gets paid. If the lender adds this to your monthly payment, you have to subtract to get your principal & interest payment. One online one to play with is at Mortgage Rates Credit Cards Refinance Home CD Rates by Bankrate.com. they also have good mortgage advice.

I don't see how that's mixing apples and oranges.

 

[newbury]

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. <snip>
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..

You should build up your available cash on hand AS SOON AS POSSIBLE.

Money SHOUTS, potential loans without cash don't talk as loud.

My basis is past experience. I originally believed in "don't borrow" "pay it off". Then I saw some of the "deals" I was missing because some sellers needed the $$ and interest rates are low. Even though I usually ended up borrowing the money at these hysterically low interest rates, when we've walked into a deal, and showed the buyer that we could pay cash or have enough cash to ENSURE financing they've been agreeable to "work with" us, instead of continuing to try and sell it.

In this economy there are some great deals out there. If your frugal and you've got the cash you can buy that implement that's been discounted 70% because the seller needs the $$. Or if you need to have 20% down to get a good interest rate.

Right now Navy Federal (for example) is offering a 30yr loan for 3.75%, for my house and that means I'm out of pocket about $625 (principal and interest) on a 170K house w/ 20% down. Interest rates can't go down more than 3.75%, but they can soar.
Most readers are too young to remember the rates in '84. They were up to 13% February 1984 Mortgage Rates, been there done that.

They can go back there again.
/edit - as long a you live frugal and don't borrow more than you can pay monthly

 

[LD1]

You should build up your available cash on hand AS SOON AS POSSIBLE.

Money SHOUTS, potential loans without cash don't talk as loud.

That would be fine IF he were going to be taking out a new loan for this new peice of property.

BUT...he isnt. Currently he is going to use a home-equity line to buy land, and then sell the house and pay off the home equity loan.

In a case like this, I'd rather have an extra 56k in equity than 50k in the bank.

And another thought....IF he doesnt get land when he is planning, and IF he doesnt re-fi....here are the options.

1. Put $840 on the principal like he wants. Only has 99 more payments and then he owes NOTHING on the house.
2. IF he puts that $840 in the bank, in 99 months he will STILL owe 103k on the house, BUT...will only have 83k in the bank.

I think paying off the loan ASAP is the smartest thing he can do

 

[buckeyefarmer]

I don't see how that's mixing apples and oranges.

orange = payment that includes principal, interest & escrow.
Apple = payment is principal and interest.
You said in post 63 to get an amortization table from the lender since the online one's don't include escrow. An amortization table shouldn't show escrow. An amortization table is principal, interest, and balance. This will agree with an online amortization calculation, or one done in excel. If your lender also requires escrow, that get's added to your monthly payment, but the escrow part is not included in calculating your interest due, therefor the lenders amortization table had better agree with any other amortization table if done properly.


If you can pay extra principal early in the loan, it really helps. At the end of the loan, paying extra principal just helps pay the loan off earlier, but does not effect interest much, since interest is very low at this point.

 

[tractchores]

There is another angle to this situation. Because of the surge in printing money by the Federal Reserve, (money not backed by value) inflation is fast approaching 10% and still climbing. In 10 or 20 years, the value of 'money' will be down by 50 to 90%. (Just like the 10 cent candy bars of 20 years ago now priced at $2.00). Your new Toyota or TATA minicar will cost $250,000.

I personally belong to this school of thought and the macro economic situation points to this... however there have been mitigating factors over the last ~10 years or so that have kept US inflation low (basically the monetary policy of countries like China). Eventually those policies will be impossible to maintain and we'll see a jump in inflation. So if you save the money be sure to keep that in mind. Real-estate is a good 'inflation proof' investment, though it's not that liquid. Cash generating real-estate (i.e. rent your house) with fixed interest debt is one of the best things you can have in a high inflation scenario and personally that's where the majority of my money is. Given the situation at hand you can calculate the various scenarios and know EXACTLY what each one will cost you and then make an intelligent decision. The liquid value of cash can be important if you're going to buy a new property or can't get liquidity in your current house. One way to mitigate that is to refi your current house and make a portion of the loan a home equity line that you can draw against should you need it. This way you can pay your house down (pay that line down) and should you need liquid cash for the new property you can use that line to get liquidity from your current property before selling it. I personally do this and it works out really well as you can get decent fixed rate credit lines up to a surprising amount. Personally in my case I make double payments against that line knowing that its a guaranteed return and that within 20 years I can get that money back out just by writing a check.

 

[displacedPA]

Given the situation at hand you can calculate the various scenarios and know EXACTLY what each one will cost you and then make an intelligent decision. The liquid value of cash can be important if you're going to buy a new property or can't get liquidity in your current house. One way to mitigate that is to refi your current house and make a portion of the loan a home equity line that you can draw against should you need it. This way you can pay your house down (pay that line down) and should you need liquid cash for the new property you can use that line to get liquidity from your current property before selling it. I personally do this and it works out really well as you can get decent fixed rate credit lines up to a surprising amount. Personally in my case I make double payments against that line knowing that its a guaranteed return and that within 20 years I can get that money back out just by writing a check.

I understand this line of thought. Im curious if I refi and take out a line of credit until our house sells would I have to use that line of credit? In other words could I apply for it and not uses the extra line of credit if our house sells? use it just as a back up as liquid cash for a property purchase?

 

[LD1]

I understand this line of thought. Im curious if I refi and take out a line of credit until our house sells would I have to use that line of credit? In other words could I apply for it and not uses the extra line of credit if our house sells? use it just as a back up as liquid cash for a property purchase?

I am not sure what you are asking. If you have a line of credit, and sell the house, I believe you HAVE to repay the loan. Because after all, the loan is based on the house as collateral, and if you sell the house......

kinda like ya cant sell a car if you have a lean on it without paying it off

 

[tractchores]

I understand this line of thought. Im curious if I refi and take out a line of credit until our house sells would I have to use that line of credit? In other words could I apply for it and not uses the extra line of credit if our house sells? use it just as a back up as liquid cash for a property purchase?

Typically you can have a line of credit with a zero balance and that's fine. Any balance would have to be paid back upon sale of the house. In my case once I pay mine down to zero I'll keep it there and my terms allow me to have the line of credit for up to 20 years at the agreed upon rate. The line of credit of course can only take you up to whatever LTV the bank allows (in my case I have a lot of equity and the property is very expensive so I can have a large line of credit without getting into trouble with the LTV).

LTV = loan to value ratio

 

[MossRoad]

orange = payment that includes principal, interest & escrow.
Apple = payment is principal and interest.
You said in post 63 to get an amortization table from the lender since the online one's don't include escrow. An amortization table shouldn't show escrow. An amortization table is principal, interest, and balance. This will agree with an online amortization calculation, or one done in excel. If your lender also requires escrow, that get's added to your monthly payment, but the escrow part is not included in calculating your interest due, therefor the lenders amortization table had better agree with any other amortization table if done properly.


If you can pay extra principal early in the loan, it really helps. At the end of the loan, paying extra principal just helps pay the loan off earlier, but does not effect interest much, since interest is very low at this point.

I didn't say on line calculators don't include escrow. I said " As you have found out, they do not take into account escrow, etc..."

If you use an on line calculator to figure out that you will be making $500.00 a month loan payments and then you go to the lender and find out you are going to have to write a check for $750.00 each month it is a rude awakening.

 

[displacedPA]

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.

So it has been few months here and we are still on track with things. However I think I need help on figuring out this bi-weekly payments are really going to help me. I ran some numbers in a 7 year time line. it looks like bi-weekely can save us 5200 aprox. over seven years at 5%. So my plan is to go talk to my local farm credit this week and inquire about a refii and getting a loan with bi-weekly payments. My current lender does not offer bi-weekly payments.. What we would save in interst if we get a rate like 3.75 would be placed back towards the house. This would then allow us to pay off the house in five years not seven.
Not sure if any of that makes sense it made sense in my head and on paper... any other advice?

 

[Alan L.]

Paying on the current house note is NOT a waste of money. However considering the economy AND if you know you will be purchasing another property it might make sense to purchase the other property before the price goes up and pay on both. Consider holding on to the current house until the market improves, then sell it. Some of the decision will be based on interest rates. If you have a relatively high rate, like 6% or more and don't want to refinance (since you might get out of it soon and you wouldn't have time to recover the closing costs) then it makes sense paying on the current house. The lower the rate, the more sense it makes to put your money elsewhere. However savings earns under 1% so it makes no sense to divert the payment from the house note to savings except to make the cash available for an opportunity.

Keep in mind that interest accrues only on the remaining balance. So if you owe $100,000 the interest for one month at 6% is $500. So if you pay $800 its allocated $500 to interest and $300 to principal. But if you pay $1,600 there is still only $500 applied to interest and $1100 applied to principal. Whatever payment you make is first allocated to interest and then to principal.

 

[displacedPA]

well our refi finally went throught today and we closed. 15year fixed at 3%. This is going to greatly help us pay off the house quicker. We will be set up for Bi-weekly payments as well. Thanks to those of you that recomended that. The will cut additional time off of our loan.

 

[ultrarunner]

Congratulations... it's a great feeling taking charge of your financial future!