Save, or pay down mortgage?

[JamieCatheryn]

We are looking at actually being out of debt before too much longer, now DH and I disagree a bit on what to do next. We own a 100,000 home in a nice quiet neighborhood not far from the university, and owe 80,000 on it now (in a 30yr fixed). Our goal is in 2017 to buy land in the country an hour away from here and start building a house, garden, orchard, sheep pasture, and chicken coop. After better funding the emergency fund and getting a new(used) car cash, should we

1: Put everything we have to spare toward paying down the mortgage until then, or
2: put everything we have into a low risk savings.

and then, should we

A: Sell the house and use that money (plus savings if we have any) to buy the land, or
B: refinance on this house to pay for the land and then rent out the house.

I know it can depend on the housing market and the interest rates at the time, KY house prices don't tend to change very much though.

Either way we'd need another loan to build the house, we cannot save enough to pay for that cash or on this house's equity and won't delay an extra 10 years til we can.

[Smithie]

I think I'd try very hard to save the money to buy the LAND (or get a loan for the land and focus on paying that down), rather than paying down the mortgage on your existing house. Having the right piece of property is obviously a big part of your dream. Once that is squared away, you can look at the larger real estate picture when you are ready to make your move and decide whether selling or refi-and-rent seems like the best choice at that time. (And then, like my parents, you can live in a crappy trailer or a tent while you are building your country estate. )

So, at the moment, I am voting for saving the extra $$$ and shopping for your lot.

[velveeta]

Hi there,

It sounds like you already know a lot about how to decide this. Make sure your emergency fund is at least 8 months' expenses worth (you probably already know this). And, then, actually it does depend a lot on the interest rate that you are getting. As you know, there is good and bad debt, and it can sometimes be in your interest to have a mortgage that you are paying off.

At the moment, as so many people are *painfully* aware, a house is not a great place to put your money -- you just don't know whether you will recover it or not. You are ahead of so very many American homeowners since you are not upside down with your mortgage at the moment.

Our mortgage is 3.875%, so we would do well to pay on it for a long time to come. We can definitely get a much more reliable and consistent return on any monies that we might otherwise have used to pay down the mortgage. Like you, we own more than 20% on our house, so we feel comfortable going this route.

At your stage, the numbers are everything -- if you can get a higher return on money that you would invest into your house at this time, you should use that money in another way than paying down your mortgage.

IMO, people get a false sense of security from paying that money down on their homes when it can serve them better in another investment.

Also, as a rule, you should *never* put everything you have into any one thing. You must diversify -- it is the only way to make your investments more secure. Putting all your money into a low-risk savings is low-risk, yes, but with a little thinking and planning, you can make your money work BETTER for you.

I didn't address the second part of your question b/c your actions later depend so much on what you do now. I think that the motleyfool.com website is a good place to learn a little about investment strategies. The best tool that you can have in investing and saving is PATIENCE.

I look forward to reading others' opinions on this. Good luck!

[jentilla]

A house is not a sure financial investment. It is an investment in having a place to live. If you do not plan on living in your current home forever then I would not pay it off. I would pay ahead a year, but for reasons that include dollar devaluation and unemployment protection. It's just the same as saving it. And with a currency collapse you would retain your value better than ANY savings account. Then I would get a loan now for your land and start paying it off. While you are paying it off you can make some of the improvements and begin planting trees, etc. Finally, I would start a house building fund and sell your house.

[SunshineJ]

Given the economy I'd be afraid to put everything away towards a house right now to be honest. And I don't think an 8 month emergency fund is enough - I know a LOT of people who've ended up out of work for over a year right now. I'll be honest, my thoughts on this have drastically changed in the past couple years. What I'd do is sock all of it away in savings, then at the end of each year put a chunk of that to the house or to the land. Once things stabilize more my answer would change, but right now? Cash in hand is a huge advantage.

[bluebunny]

I just read in a magazine that a financial planner recommends paying down your mortgage after you have one to two YEARS worth of living expenses in a savings fund. I was astounded by that number (two years) but it makes sense in the current economic climate. I think the old rule of thumb (prior to the economic downturn) was 3-6 months of living expenses in an emergency fund.

With that said, I would not pay down the mortgage until you have at least one year's worth of living expenses in a savings fund. Since you are not planning on staying in your house, I would probably save the money elsewhere instead of paying down the mortgage unless the rate of return in savings is nil. I would be tempted to find the land first and start saving for all of your dream expenses than pay down your current mortgage.

[mnnice]

I would propose that it really doesn't matter all that much. Your mortgage interest deduction can't be very large so there is no real tax advantages to carrying the debt. Both the interest you would earn on your money if you saved it or the interest expense you would save if you paid it down aren't that great (assuming current rate environment and that your current terms are pretty good)

If you are going to be more motivated by paying down your debt or saving money? If watching your balance grown on your monthly saving account statements is more motivating than watching your debt shrink save. If watching your interest paid go down and your loan balance shrink pay down the mortgage. Which choice is going to motivate you to better the behavior need to meet the eventual goal? For me it was getting rid of debt, but I know it might not be for everyone.

[weliveintheforest]

maybe you could do half and half? split your extra between the mortgage and savings, so you are paying off your house a little faster but also protecting yourself.

[mom of B]

If you have a pretty low rate, I would save the money to put down on the land. When we bought our land, rates for raw land without a house were 1-2% higher than a standard home loan, plus we had some trouble finding anyone to finance longer than 10 years.
Rates right now are really low, and may be a lot higher when you go to buy. I know in the late 70's interest rates were around 17%.

[zinemama]

Save the money. Don't put it into the house.

[SeekingJoy]

I would actually be the voice of dissent and would suggest you consider paying off your house right AFTER you save up an adequate down payment for the land. Then, if you need to refinance the house to pull money out to buy the land -- you can. If you need to refinance the house for a drastically reduced payment so you can rent it -- you can. Being debt free, or closer to it, makes a big difference in your options.

That said, this advice changes as interest rates shift and depending on what your mortgage interest rate is. Above 6%? Below 4%?

[PJJ]

dissent too...

If your rate is 5% or more on the loan, then I would pay down.
I look at a mortgage as a DEBT, and either way, it has to be paid either down or at settlement for the new place.

The BEST savings rates right now are less than 1.75%, so I do the math and with taxes that can be ~1.2 to 1.6 % rate of return after taxes.

I think most folks categorize debt and I see a mortgage as a debt with a slight tax right off discount if you live in the USA.
Folks said don't put money into your house, but it STILL has to be paid off.

Good luck with your decision.

I have SEVERAL relatives that have paid off their mortgage prior to age 50 and the freedom/lifestyle possibilities have meant a lot to them.

Hope you end up in the place of your dreams.