Paying Down Mortgage vs. Saving

[mochimama]

I'm sure there have been threads about this before, but I can't find any recent ones. Dh and I have just come out of a major "take care of expensive business out-of-pocket" time where he built himself a shop (he's self-employed), we had to buy a propane tank, we spent some upfront money on land consolidations to make things cheaper in the long-run, we payed for our homebirth, etc. etc.
It looks like in coming months we are going to have a surplus of about $100-$200 a month.
How would you allocate that money in terms of savings versus paying off the mortgage during these interesting economic times? (we don't have cc debt)
We are currently fresh out of savings and definitely need to build that up again, but we really want to be debt free as well. Is there a compromise? We currently have two mortgages, a home mortgage and a home equipty. I want to pay that home equity loan off so bad (to save us $500 a month), but we have $56,000 to go. I hate owing money.
If you vote for savings, how much would you save before starting to work on the mortgage? Is it really something like 6 months of your salary?

[Softmama]

I have no advice but am hoping someone will reply as I have the same questions!

[wife&mommy]

I have been wondering the same thing as well

[mtm]

I'd pay off the home equity loan after you build a small emergency fund (1000-2000)then once that's done I'd put 6 months expenses away and then decide on paying off the mortgage vs retirement.

[Oonah]

I think the standard advice is to pay off high interest debt and up your retirement contributions before paying extra on you mortgage.http://www.kiplinger.com/basics/mana...save-debt.html

[tamagotchi]

We put any extra money towards savings rather than our mortgage, because we might need the saved money in an emergency. I am really happy we had savings because DH got laid off this month and we have no income now.

[annethcz]

I'd build up a comfortable amount of savings before prepaying the mortgage. If a job loss or other major financial hardship occurred, you could live off your savings for a short period of time. But paying down the principal on your mortgage probably wouldn't help you weather any sort of financial storm.

I don't think it's a bad idea to pay down your mortgage- I know several people who have paid off their mortgage completely in a relatively short amount of time by agressively prepaying their mortgage. But I wouldn't do it unless I had at least 3-6 months of living expenses in the bank.

[orangefoot]

I think if you have spare cash, work out your living expenses for a month then build up a buffer of 6 times that, then pay down your mortgage. Smaller mortgage = less interest = quicker to pay off.

[CameronsMama]

I would definitely build up some savings first, at least a few months of living expenses, then I'd start working on the mortgage.

[Guinevere]

Given the current economy, I'd definitely do savings first (3-6 mos.' worth, if at all possible), then work on the home equity loan, then evaluate retirement savings before working on the primary mortgage.

We've been house-rich and cash-poor twice before, and it ended up being much more stressful when crises happened or unexpected expenses cropped up. Having a lot of equity built up in your home is great, but unless you refinance, your mortgage payments stay the same no matter how much more $ you are paying every month, so you lose access to that $ for quite a long time, access you may well need if the unexpected happens, as we have found out.

Guin

[tree-hugger]

It depends on interest rates--if you can get a savings account or money market or cd or whatever that pays a higher interest rate than the debt, then save. If the interst rate on the loans are higher, then pay extra to the loan with the highest interest rate.

[SuzyLee]

We are trying to pay off our HEL also. It started at 50,000, we got it down to 27,000 before DS came. We have put all extra money towards savings since I got PG, but now we have enough in savings to last several months, so we are going to go back to paying down the HEL. When we can, we will use most of our savings to pay off the rest of the HEL and depend on credit in case of emergency until we build savings up again.

[sunnysandiegan]

We have gone through similar times of changing priorities. We tend to go back and forth a bit, depending on a variety of factors.

If we were in your situation, we would put all the "extra" towards savings for now (while maintaining appropriate payments on the Home Equity and Mortgage, of course). Once we got to about 3 months' worth of basic expenses in savings, then we would split the "extra". The split would depend on interest rates and balance, etc. Do you have any retirement savings? Do you wish to pay for college tuition for your children? How old are you/DH? How old are your children? All those answers would determine how we would split that "extra" AFTER (and only AFTER) we had at least 3 months' worth of basic living expenses in a liquid savings vehicle.

Best wishes!!!

[laohaire]

It doesn't depend on the interest rate. That's only a mathematical equation that doesn't take into account what money is for.

You say you have no savings. You need a cushion first. If your car needs work or your toilet cracks, then being really great prepaying the mortgage is not going to help you. You need the savings, regardless of what the interest rate is.

After you have a buffer of savings - then, go for it. Equity loan first, then the mortgage. If you can pay off your debt you will be in a much more secure financial position, and then you can take that same money you used to allocate toward debt and invest it.

[McFeelings]

Just echoing those above me:

Sock away 3 months of savings.
Pay down/off that HELOC (the interest rate is comparable to a "good" credit card rate so I'd view it as such).
Once the HELOC is paid off, take that "extra" $500 in your budget each month and put it toward either retirement or paying off your mortgage or a bit of both, depending on your ages, previous retirement savings, etc.

[Denvergirlie]

Same thing as the others have stated.

Save a nice emergency fund - 3 months of expenses would be a nice safe amount considering today's current economy
Pay off the HELOC
Increase to 6+ months of expenses
Retirement savings
College education savings (if desired)
Pay off mortage

[Mallori]

We put any extra money towards savings rather than our mortgage, because we might need the saved money in an emergency. I am really happy we had savings because DH got laid off this month and we have no income now.

Ditto, except dh's hours were cut, not laid off. IMO, you NEED 6 months of living expenses in savings. I know that sounds like a lot, and it really is. Like others though, I would build that cushion and then after that allocate a portion continuing into savings and the rest into loans. The only other way is to bring more money in, or cut something else to make more money.

I think it'd be totally worth it to cut all things you can live without, like cable, and watch all spending to make this happen sooner.

[mochimama]

Thanks so much for all your replies. It seems like there is great consensus, so I definitely have the advice I need.
Can't wait to put that first $100 away!

[phathui5]

My dh has been unemployed since July and I am so glad we had our emergency fund. We had 6 months of expenses in savings and thanks to unemployment pay, that'll stretch a lot longer if we need it to.

[lilyka]

emergancy fund - $2000
pay cc dabt etc
increase savings fund to 3 months salary
start paying off mortage

that said I have none of that but still put a litle extra topwrds my motage each month but when I say little I round up. its like $10.