Need help planning for the future

[diana_of_the_dunes]

Here are the basics: DH and I both work FT, and we are fortunate enough to have a comfortable income.  We just refinanced our house to a 20 year mortgage, and we have no debt (though we are going to be borrowing $5k or less to remodel our bathroom in the very near future).  We do not want to live in this house forever, but it has the advantage that we can afford it on one income if we seriously pinch pennies.  If/when the right property comes along, we are VERY open to moving, and this is our ultimate goal.  I will be vested in my employer's retirement program in another 3.5 years, and at that point, I am considering becoming a SAHM to homeschool DS (and a sibling - we are TTC). 

Once we're paying for the bathroom, we'll have between $500 and $700 a month "extra".  This doesn't include putting any money into savings.

I'm wondering if it would be wiser to pay extra on the house, in hopes that we will have more equity when it comes time to sell, or sock the money away into a savings account (or something else, but all rates are terrible right now.  Savings accounts have a .1% APY, CDs are about .35% for 12 month).  Putting the money into the house would be wise if we refinance if/when I stop working, as it would lower our monthly payment.  But having a big chunk in savings never hurt anyone either.  I'm just not sure how to make this decision, or what pros and cons I should be considering. 

[carmel23]

I would set a goal and put in in savings (10,000? 5,000?)--so if you need to do house stuff in the future, you can pay for cash, etc. And homeschooling isn't cheap, either!

And then after that is established, pay more on the house... 

but that's my two cents.

[velochic]

This is a tough one because with interest rates how they are, it appears that by paying down the mortgage faster, it saves you money in the long run.  Not knowing the details of your situation, I'm going to make some assumptions.  It sounds like you don't have significant savings right now (because you are borrowing $5000 for the renovation).  Depending on where that $5000 comes from, you are going to be paying more or less interest on that borrowed money than your mortgage interest, but definitely more than you would earn on an interest-bearing savings account.  So, although it seems that the less than 1% you earn for savings isn't significant, what that savings would actually be doing is preventing you from *paying* more in interest when you need extra cash.  If you think of it that way, perhaps it will help you decide.  Sometimes savings isn't about how much interest you earn on it... sometimes it's about the money it saves you from having to get a loan with interest that you will pay.  You may not have earned much on $5000 in a savings account, but it would have saved you a few percentage points on what you now have to borrow because you don't have it liquid.  (I hope that rambling explanation made some sense.)

IMO, before paying off a mortgage early, especially if it's not your forever home, you should look into making sure you are maxing your contributions at work (up to match, even though you're not fully vested yet), that you have an 8-month emergency fund (8 months of expenses in a savings account) and that you are contributing to a Roth IRA.  I think too little emphasis is put on retirement these days and it's the one thing that, under any circumstances, *cannot* be financed.  You cannot borrow to retire.  College, housing, cars, etc. can be financed, though.  Looking 20, 30 (maybe even 40) years down the road is just as important as the short-term financial goals you set for yourself.  It sounds like you have the short term goals established, but I'm not sure (based on your post) that you've looked long-term.  When I say long-term, I mean at least 20 years in the future.

All that being said, I don't think it has to be all or nothing - savings OR mortgage pre-payment.  You can save a larger portion and pay down your mortgage a little, then once you have what you want in savings, flip-flop the portions (or even reallocate to do other types of investing such as a 529 or taxable investing).  You said that you "hope" that extra payments will build equity.  Does that mean that where you live, the housing market has not reached its low?  Most haven't.  You definitely don't want to put all of your eggs into one basket, having no savings and all of your money tied up in your house, then not be able to tap into it with a home equity loan.  What if you don't build enough equity and when you need a sum of money (such as the $5000), you can't get it because you're upside down?  The past few years have shown us that we have no control over that.  The housing market can take a sudden turn for the (even) worse and all that money put into the mortgage could be lost.  Building equity is no longer a guarantee.  Something to think about.

I find that an extra payment calculator can be beneficial to know just how much you are saving when you make extra payments or larger payments than usual on your mortgage.  You can get your numbers then determine if it's worth it.  In the long run, it probably is, but I think there are other investment avenues you would want to explore before doing so, such as an emergency fund, sinking funds for home repair, appliance replacement, vehicle replacement, Roth IRA, college funds, etc.  If it was your forever home, I would have a different opinion.  Each financial situation is unique, so none of this may apply to you or not be right for your situation.  We are probably older than you (well, you're TTC, so I know we're older than you), so there is some personal experience I'm tapping into and advice given to us by professionals in the past.  Good luck with your decision.

[diana_of_the_dunes]

Velochic - You are correct in assuming we don't have any significant savings right now.  We did have a decent emergency fund, up to about 3 months of expenses, but it got wiped out this spring and summer due to car repairs, house repairs, hospital bills, and the fact that I had to take a month off of work, largely unpaid.  Everything crashed in at once, and while I'm glad we had the savings, it isn't fun to go back to nothing.  Our home is still in need of plumbing and electrical repairs, and we've decided to simply gut the bathroom to uncover the remaining problems and fix them before they cause more costly repairs.  I desperately wish we could put this off until we had the money saved up, but right now our toilet is sitting on a plywood "pedestal", and you can see into the kitchen below from the bathroom.  It is not safe for our toddler, and I don't see any way around going into debt to fix this.  It's also our only bathroom.  The loan will be through my mom, and we will pay it off in a year or less. 

I do not contribute to my own retirement fund.  The way it is set up, my employer makes a contribution in my name (about $800 month), and I have no say in the amount and no ability to match.  Then when I retire, I get a percentage of my highest paid 3 years - up to 75%.  It's an awesome deal if I stay for 20 years, but I'm not certain whether I will.  DH contributes to the fullest for his retirement, and we also have an IRA set up in his name that we contribute to.  My uncle lost his retirement when the company he worked for went bankrupt and was bought out, so we have taken steps to ensure the same will not happen to us.  DH and I both work for our local government, so I feel our retirement is a bit more secure, but I don't want to take chances.

I also should have mentioned that any sort of major payments on the house would happen after we had rebuilt our emergency fund.  I don't like not having any money in the bank, and we're already working on fixing that.

Our area was not hit very hard by the housing crash, but values are a bit lower.  We aren't upside-down, and I don't think we would be even if values drop again.  But by paying an extra $500 on our house every month, it would be paid off in 8 years 11 months and save us $24,000 in interest.

Looking at it from strictly a financial standpoint, it would be stupid of me to quit my job before the house is paid off, since another 9 years of work will put us in a completely different monetary situation.  I just don't know how to weigh that with my desire to homeschool and spend more time with my family.

[carmel23]

It sounds like you know exactly what you want to do... which is great! 

Although, I think it is hard to plan 9 years in the future (not that you shouldn't).  You never know if someone will lose a job, want to relocate, etc.

And I found homeschooling to be very expensive--having a nest egg to do that was really helpful. I know a lot of families do it for cheap, but I found that we spent more money....

But really, no one homeschools/cuts back on work to get rich or be financially secure.  Most families do it because they realize that there are other facotrs besides financial security. It sounds like you are struggling with this, and really only you will know what will make you happy.  You could do everything right from a financial perspective, and realize that isn't what will make you happy. 

[nd_deadhead]

You've gotten good advice so far. I agree that building a savings account and retirement savings come before mortgage repayment. I completely understand the desire to unload that mortgage interest - $24,000 is a huge chunk of change!

Looking at your numbers, it looks like your mortgage is around $100K. If you pay an extra $500/month for 3.5 years, then refinance for another 20 years, your payment will go down by about $168/month (no counting the cost of refinancing). I assume you would refinance to reduce your payment when you drop your income (DH and I did this when he went to grad school). But if you put that $500/month in savings, you will have $21K that you use to make your regular mortgage payment - and save the refinancing fees, and have the mortgage paid off in 20 years (rather than extend it out again). The other thing to consider is that mortgage rates may very well go up again in the next few years, making a refinance less attractive.

I suggest a compromise - put $100 more per month on the mortgage, which will cut about 4 years off the loan, and save you about $10K in interest - while putting away $400/month toward retirement or savings.

[TiredX2]

You said in the OP that your ultimate goal is to move, and you want to do so if the perfect house becomes available.  Since you say this, I would definately not prioritize putting extra money into your current house.  Instead, put savings away so if that perfect house comes up you have cash on hand to make an offer.

I would, additionally, invest in an IRA for you *and* pay off the loan for the repairs as quickly as possible.  Once you've paid off that loan, I would put the money you were putting towards it into savings for your future house.

Good luck