Should I pay extra on a mortgage if I know I will only be in the home about 5 more years?

Real Estate
#1

I’m in what I know is only a starter home, and I’m saving towards buying in the future something a bit bigger (not a mansion, just… something a bit more to my taste that would be my ‘forever home’ that I would stay in until they took me out feet first.)

Right now, I make biweekly payments towards my mortgage, so I essentially end up making an extra full payment each year on my mortgage (Monthly payment is around $1400, so every two weeks I pay $700, so instead of 12 payments/year of $1400 I end up making 13 payments/year of $700.) It works out better with how I get paid because it is less of a mental exercise to account for my budget in each paycheck (i.e. I get paid biweekly, so I know out of each paycheck $700 is going towards my mortgage.) The interest rate on my mortgage is 4.5%. The home is worth approximately $220,000, and I owe approximately $180,000 on the home.

Since I know that my home is not my ‘permanent’ home, I’m wondering if it makes sense to keep doing this since the long-term effect may be negated by the fact that I very, very likely won’t be in the home for the life of the loan.

One other note: my home is a townhouse in an area that has a lot of townhomes. I’m concerned with my ability to sell once I’m ready to move, as the market is a bit saturated and it may make more sense to rent out the house instead of trying to sell.

#2

Hey @GingerNinja!

So when you make extra payments, the long-term effect definitely won’t be negated. You’ll just get that money out when you sell. i.e. If your place is worth $200k and right now you owe $150K on the the mortgage, when you sell you get a check for $50K. If you make a bunch of extra payments such that the debt is only $100K when you sell, then you’ll get a check for $100K. Or to think about it another way, you’re basically just putting that money toward the down payment for your next house. And putting it against your current mortgage is probably the perfect place for it, because it’s saving you way more on mortgage interest than any savings account would pay.

So basically, as long as your other finances are in order (you’re on phase 6), then yeah, throw that money towards your mortgage.

When you say the market is saturated, are there tons of homes for sale are you that aren’t selling? Are you keeping an eye on how many are listed, how fast they’re selling and at what price? A lot of homes doesn’t mean a saturated market. A lot of sellers, and few buyers does. Right now in most of the country it’s really a “sellers” market. Lots of people want to move up in home because they’re saving money on travel and all that, but not a lot of new inventory on the market because of covid.

#3

Oh, it’s definitely saturated. My neighbor, who has essentially the identical house as mine, took almost a year to finally sell. The average turnaround for a sale in a home comparable to mine is about 6 months, and is a bit longer in my neighborhood since they are still building (people are opting for a brand new home instead of buying one that has been lived in). Detached homes in my zip code move WAY faster than townhouses.

I am not quite on phase 6, which is why i ask. I’ve been aggressively paying off all my other debt, and should be debt free, except my mortgage and federal student loans, by this time next year. My federal loans will be paid off in approximately 2 years. I’m wondering, especially now, if it would be better to put that money into my Emergency fund (savings that earns 1%), my target date index fund (I make too much to go Roth IRA), or into my retirement (I’m a federal employee).

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#4

What area out of curiosity?

And yeah, if you have non-mortgage debt, I would pay the minimum on your mortgage and go HAM on the debt. When you have no other payments except the house, then you can go after that one. I’d prioritize my dollars based on the phase of investing:

Invest or payoff home
#5

Great, thank you! I prefer your steps (although there is a typo… :grin:) because that OTHER person with their baby steps just didn’t make sense to me. I mean, why wouldn’t you max out your 401K to what your employer matches??? That is free money that you’re losing if you don’t take it all. And saving $1k first over everything… how does that help? I didn’t get it. I feel like your steps fit me better.

I am in Hanover, PA - we are just over the border from MD, and are about an hour outside a lot of metro-ish areas (Baltimore, Frederick, MD, Harrisburg; Philly and DC are 2 hours) so there has been a trend, especially with Maryland and their hella high taxes, to leave these metro areas and head towards this area that has comparably lower taxes and housing and better schools (hell, it’s why I left - I lived in Baltimore with the highest tax rates in the state and the worst schools, infrastructure, and crime. Plus, with the new federal tax laws capping the state and local tax deductions at $10k, I was losing out on that end, too, since I paid almost $10k alone in local taxes.) You can get a 3br, 3ba townhouse here with a bit of land for anywhere from $160K-$230K, and because these townhouses are selling like hotcakes, the farmers in the area are selling their farms which aren’t making money and developers are plopping down these new neighborhoods EVERYWHERE.

Anyhow, short term, it saved me a LOT of money since I downsized when I moved, but I just know this isn’t my “long term” home. I’ll adjust what I’m paying every month on my mortgage and just go gangbusters on all that debt with the extra money. It may not be a lot, but every little bit helps, right?

#6

Hi @GingerNinja! Just wanted to give a bit of clarity: (assuming the OTHER person is Dave) Dave Ramsey does “suggest” getting the employer match and investing before paying off the mortgage debt. Investing 15% of your income would far and away get any modern employer match.Additionally, on podcast episodes, he encourages callers to get the match and the steps indicate that this would be definitely before paying off a house. While I disagree with his completely anti-credit card approach and his financial professionals set-up, his debt payment path is awesome and investing principles are right in line.

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#7

What I take issue with is that when you start the Baby Steps according to Dave Ramsey, he wants you to STOP investing into your 401k. He is VERY clear on that. He wants you to stop putting ANY extra money towards ANY investments of any kind until you have your $1000 saved (Step 1) and all your other non-mortgage debts paid off (Step 2) and 3-6 months emergency funds put away (Step 3). You’re not supposed to start re-investing in retirement until Step 4 according to Dave. I am not stopping my retirement contributions while I pay off my non-mortgage debts.

#8

I think his attitude on that is largely due to the kind of people that need his services. The person he is telling that to is the person with a boat load of debt and a shaky view on how they’re going to pay it off. In short, these people do not know how to handle money and will likely be poor for the rest of their lives. These people need the heavy handed “dad” character to tell them NO. Additionally, these people may not understand the complexities of interest rates vs. return on investment, potential profits vs. guaranteed “profit” of paying off debt etc. And rather than explaining all of that to people, it’s more effective to say GET OUT OF DEBT STUPID. At least, these have been my observations. With this in mind, I take his advice with a grain of salt and adapt it to my particular situation. For you, the difference between stopping or continuing your investments for the next year isn’t going to make you rich or leave you poor. But, for someone else who has $100k in student loans and it will take them 30 years to pay it off, yeah. They should be focusing on that and not investing yet.

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#9

Ha! I am still that person with over $100k in student loan debt. That should be a whole other thread… but in my situation, my federal loans will be paid off in 2022, and my private loans in 2025 (I’m on the most aggressive payoff plans my budget can handle right now - one of the reasons I downsized and moved somewhere cheaper.) I would hate to lose out on five years of 401K matching - at 41, that would be devastating to my retirement plan!

But I agree - I think his tone is heavy handed to be a more general blanket for those who aren’t as fiscally savvy and to make it more palatable for a larger, broader audience.