Reader mailbag: Should you make a bigger mortgage payment?

You could make a bigger mortgage payment. But is it worth it?

It's better to plow 100 percent of your extra savings into savings than 80 percent of it into a bigger mortgage payment.

If you like a particular film and want to see more like it, see that movie in the theatere or buy the DVD or at least check it out from the library or watch it on a streaming service like Netflix. If you like a particular type of music, pick up a legal mp3 of it from Amazon or at least listen to it streaming on Pandora.

To put it simply, if you just complain about what’s available and buy nothing, you can’t realistically expect it to get better. In fact, if you put even a cent towards supporting stuff you don’t like (like going to a really bad movie), then you’re going to definitely get more of the same.

Your purchasing dollars are also a vote for what you want to see/hear/enjoy more of. Keep that in mind the next time you consider seeing an awful sequel or remake. Instead, go buy a discounted DVD of a really great movie from a few years ago and watch it at home with some friends.

So here’s my overall situation first. I am 26, unmarried, work for the Navy in a secure job as a GS-11. I’ve been here for almost three years now, and I enjoy it, but I’m not planning for this to be my job forever. Back in 2007, about a year after I had the job, I bought a small but comfortable house (~1000 sqft) with the extra cash I had saved for a 3% down payment. I have a decent interest rate (5.95%), no other debts (no school or car), put 5% of my check towards my TSP (with matching employer contributions of 5% as well, putting me around ~$10,000 there), save at least $600 a month, with a comfortable $13,000 in my “emergency fund” as of this month (in ING at 1.1%).

My question relates to my house. I am not sure if paying more towards the mortgage is a good idea at this point, since I doubt this house will be my final house. I do really like it, and it’s a good place for the moment, but all improvements I’ve done are with resale value in mind. I have plenty of other things I could think of to save for, or spend the money on. I’m sure you’d say Roth IRA, but I’m pretty hesitant and ignorant about investments/retirement stuff at the moment. Give me a break, I’ll get there eventually! I just worry that if I put money into my house, via payments towards principle on my mortgage, I won’t recoup it when I sell the house in a few years. Suggestions?
- Melody

Generally, when you make a mortgage payment, you don’t ever recoup the interest portion of the mortgage payment. Check out your statements – each payment you make has some portion going to interest and some portion going to principal. You’ll likely recoup the principle (assuming the housing market stays steady); you won’t recoup the interest.

I usually view mortgage interest as being roughly equivalent to rent on an apartment or other similar housing. In each case, you have a cost that’s not recoupable, but in exchange you do have a roof over your head for the next month. Thus, I usually encourage people to compare the interest on a mortgage against the cost of the rent and live in the place that is cheaper.

Don’t worry that much about how you specifically save. You’re far better off saving $100 in a savings account than saving $80 in virtually any investment in the world (at least for time frames less than 10-15 years). What’s important is saving.

Should you sell? I don’t know for sure what your housing situation is from your email. If I were you, I’d look at rental options (living on the base, perhaps?) as compared to the interest portion of your monthly mortgage payment. Your decision will probably follow from there.

I am an avid reader of TSD. How do you generate such article volume? I know you are a writer. I also know it takes time to create the quality and quantity that you post.
- Peyton

Part of it is practice. I simply write a lot of words each and every day, so over time it just becomes familiar and natural to me. It’s much like a person who jogs several miles every day – it’s easy and routine for them, but incredibly difficult for a person not in good shape.

Another part of it is that I intentionally write for The Simple Dollar in a conversational tone, which is easier to write. I make an effort to write in a way that is similar to how most people speak, more or less. This makes writing seem friendly and familiar, but not always highly authoritative. It does have the advantage of being quicker to produce than a polished, finished article a person might find in, say, The New Yorker. I get criticised for this sometimes, but I know why I write with this style and who I’m writing for, so I don’t really care about that criticism. I could certainly write such polished pieces (and sometimes I do), but I think this style works much better for a frequently updated blog called “The Simple Dollar.”

Another piece is the routine of writing. I keep a notebook (or some kind of note-taking equipment) with me constantly. Whenever I have an idea, whether it’s at the grocery store or at the doctor’s office or after waking up in the middle of the night after a dream, I jot it down immediately with as much structure as I can give it. Later, when I sit down to write, I usually have more ready-made ideas to choose from than I can write.

I’d also add in the fact that I read voraciously. I read two or three books a week. I read tons of articles and magazines and newspapers. Whenever they give me an idea, I jot it down somewhere and I usually follow up on those interesting ideas. If I see a word in print I don’t know or an idea I don’t understand, I write it down and look it up later. Simply put, I keep a fairly high flow of information going through my head and it certainly helps when it comes to writing as much as I do.

Currently because of costs associated with my son’s autism therapy (which we had to pay for out of pocket until just recently), a couple of cross-country moves and some plain stupid spending in the past we are in a lot of debt. Right now we have approx $55,000 in credit card debt, $26,000 at 12%, $21,000 at 14%, $4,800 at 16% and $3,000 at 24%. We also have a personal line of credit with my credit union of $20,000 at 12%. Plus I have a $1000 mortgage payment and a $300 second mortgage payment. At this current time we are about $800 in the hole every month. I have been covering this by getting money from my parents. My wife will be hopefully be getting a teaching job this August which will really help things out. My concern right now is my parents really can’t afford to keep giving us money for the next 3 months and I really don’t know where it will come from. My credit is ok because I do not have any late payments on any of my debts but of course I get killed on the fact that I have so much credit card debt. I have called the credit card companies and asked for lower rates but keep getting turned down. I have tried to get a new card with a low rate to do a balance transfer but have been turned down. My question is if I can’t make some payments for a couple of months should I call the credit card companies and explain the situation or will they not care? I basically just need to survive the next 3 months until my wife gets a job. I am desperately trying not to ruin our credit and want to be able to start paying down this debt.
- Chris

If I were you, I would simply be late on one of the credit card debts for a while, perhaps on a rotating basis to preserve my credit as best as I can. Your credit is already suffering because of your large amounts of outstanding debt (I’d imagine that your debt-to-credit ratios aren’t good).

Remember that a late payment is usually not reported to the credit agencies until you’re thirty days late on a payment. So, one method for doing this might be to keep most of the debts up to date (to avoid late fees), but allow one or two of them to be 20-25 days late before paying it. Yes, you’ll incur late fees, but it shouldn’t affect your credit.

You might also want to try stopping by a local credit union, laying out your entire situation, and seeking a personal loan to help consolidate your debt. This would work better if you had some form of collateral on the loan.

I really struggle with how much I should spend on an engagement ring for my girlfriend. We have dated for just over two years now and I’m starting to feel like the time is right. We live together, and I feel like she is the one. The thought of buying the engagement ring is overwhelming given the cost. How much is appropriate to spend? I have heard the conventional “norm” is three months of your gross salary. Which for me, is about $14,000 (Salary-[$55,000 / 12 months * 3 months] =$13,750). I think this is ridiculous quite honestly. On the other hand, I don’t want to be the cheapskate and I think something in the vicinity of $4,000 to $7,000 is pretty cheap. I want my girlfriend to be proud of the ring, but also realize that we can certainly “upgrade” it as time goes on. What do you think is appropriate?

I recently got done paying cash for my MBA program which I completed last spring and I also came up with a 15% down payment for my home. I was fortunate not to have any student loan debt from my undergraduate studies and my only current debt is a $160,000 mortgage loan and a $5,000 car loan which I plan to have paid off by this time next year. I have steered clear of credit card debt and plan to stay that way. I know I am still pretty young, but I am honestly a little tired of monthly payments and want to avoid debt at all costs. Given my current liquidity situation outlined below, I think I’d almost have to finance this purchase. I know of a couple of places with zero interest financing for two years. I’d clearly like to avoid financing, but I just don’t see how I can avoid it. I have $10,000 in an FNBO Direct account which I rarely touch ($8,000 from the First Time Homebuyer’s Credit plus a little extra), another $2,500 in a savings account at my brick and mortar bank which I contribute about $200 per month to. I consider this my “emergency fund” that I tap for car repairs and other unexpected expenses. I have about $25,000 in my 401k plan (which I think is pretty darn good considering my age and how bad the market has been) and another $6,000 in a Roth IRA I started about two years ago. Ideally, as my income increases and my car payment disappears, I want to start maxing this out.

So, as of right now, I have about $10,500 in cash plus whatever I have in checking at the time. What are your thoughts about how much I should spend? I certainly expect my income to increase (I know everyone says this, but given the industry I currently work, MBA, professional certifications I am acquiring, it is almost a given). I want to do the right thing. I want a ring that my girlfriend and I can both be proud of, but at the same time, I don’t want to be behind the proverbial 8-ball financially. Does this make me selfish?
- Martin

You’re asking this question of someone who gave his wife-to-be a $50 sterling silver engagement ring.

How did that go over? I sat down with my wife-to-be and we just talked about all of this. The discussion went like this: “I have $X,000 to spend on an engagement ring and I’m happy to buy you something wonderful. However, if you’re happy with a $X00 ring instead, we could use that remaining money to pay off the car/make a house down payment/have a great honeymoon. What do you want to do, honey?”

I wouldn’t really worry about being “proud” of the ring. One big key of personal finance success is stop caring what other people think.

If you’re happy with and she’s happy with a $50 sterling silver ring, get that and save your money for something else. Just sit down with her and talk about it.

One of my medium-term goals is to go back to school for my PhD. I’m 25, completed my MA in 2008, and wanted to work for five or six years before going back into academia. While there are definitely options that will help offset the cost of working towards a PhD, such as a teaching position or research assistant, I want to save towards the expense but I’m not clear on the best way to do it. I’ve read about 529s, but I can’t figure if it’s available only for parents saving for their kids, or if adults saving for their education can do one as well. What would you reccomend?
- Sandy

An adult can absolutely start a 529 for themselves, and it’s probably the best option for you. It allows you to sock away money and not have to pay taxes on any interest earned as long as you use it towards your education. I’ve actually started an account for myself at College Savings Iowa (for a long-term goal of the University of Iowa’s Writer’s Workshop).

My suggestion would be to use a “targeted” fund when you start investing – most 529s have these. What “targeted” funds do is that they gradually scale back from aggressive investing to conservative investing as you grow closer to your target date for returning to school. Given that you seem to be three to five years out, you’ll already be fairly conservative (a good thing, because the stock market isn’t good for short term investing).

Good luck – and congratulations on your decision.

My husband and I are 29 and 25 years old respectively and I would like to think we are on the right path financially. We got into $8,000 in credit card debt when we moved to New York City three years ago but a combination of aggressive saving and job promotions/raises dug us out of the hole. I’m realizing that being comfortable financially can be just as stressful as being in debt — I’m always second guessing what I’m doing with my money.

Some vitals: we have $20,000 in an ING savings account (for emergencies as well as a down payment on a house someday), we both contribute 5% to our 401ks at our jobs, I have $4,500 in a Roth IRA and add $100 a month to it, we have $2,000 in a Schwab brokerage and no credit card debt. My husband’s monthly income after taxes is $5,400. Of that, rent is our biggest payment, at $1,400. Luckily we are able to save my entire paycheck (about $2,000 a month after taxes) to our ING savings account. Here’s the clincher: my husband is getting his MBA in addition to working and, when he is done in a year, will be carrying about $80,000 in student loans. We have started paying about $600 a month from his paychecks to the highest interest loans.

Here’s my question: Should we continue to put my paycheck in savings for a down payment on a house or should we start aggressively paying off the loans? What would be your priority? We hope to buy a home in the next five years and would like to have enough for a 20% down payment obviously. But the idea of paying off loans early is appealing as well. Kids (at least three) are also in our future. Any advice would be appreciated.
- KJ

From my perspective, the biggest factor is where you’re intending to buy a home in the future. Are you going to be buying it in a New York suburb where you’ll be paying hundreds of thousands of dollars and your monthly housing costs will go way up? Or are you moving somewhere else where housing costs will be way lower?

If your costs will be lower, you’ll likely be able to find a home that won’t escalate your monthly housing costs. In that case, I wouldn’t change a thing about what you’re doing right now, assuming the rates on the loan are reasonably low (8% or lower or so). If it’s way above that, focus on the debt first.

If your costs will be really high, you’re going to need to maximize your monthly cash flow to pull it off, and the best way to do that is to eliminate your debt as fast as you can. Hammer his student loan debt HARD and get rid of it quickly.

I just graduated from college (with no student loans to pay off) and am looking to start up my own freelance web design business. Admittedly I know plenty about my career but almost nothing about running a business and a lot of the tips I’ve gotten have raised as many questions as they’ve answered. I know I’ll probably want to register as a LLC as well as needing to set up my own bank account for the business. My biggest concern is the money management aspect of it and most pressing on my mind is how to avoid getting slammed come tax seasons. I save my receipts for business based purchases but I also know that’s only a start. Do you have any advice and tips about how to start off on the right foot?
- James

It really depends on what this business is going to entail. Is it just going to be you or are you going to be hiring a team? When some people hear “small business,” they imagine several employees, but I’m not sure that’s the case here. Also, do you have a lot of clients lined up or are you going to be starting completely from scratch? Are you going to have a separate office or are you going to be doing this from home?

If it’s just going to be you and it’s going to be very simple at the start (which is what I think you’re saying), I would just do it as a sole proprietorship at first until I was sure that it was going to take off. Basically, that means you just keep track of your income and expenses on your own, don’t actually form a LLC, and file the taxes on this as an extension of your personal income tax.

If it’s going to be a larger operation, you should seek out forming an LLC. Transitioning from a sole proprietorship to an LLC is pretty easy, provided you were keeping track of things as a sole proprietorship.

I have a home which is paid for. Also have about 300K for investment. Was thinking of buying second home and converting first to a rental. Have been looking for deal but yet to find good one. In mean time where can I invest which will give me fluidity to take out if I find a home while giving me secure and better than saving or CD interest rates
- Vikram

If you want liquidity and security, you pay the price of not having a strong return.

All investments have some amount of liquidity, some amount of security, and some amount of return. The reason people diversify their investments is because no investment is great in all of these areas.

A savings account is liquid and secure, but returns poorly. Stock market investments return well (over a long time scale) and is fairly liquid, but isn’t secure at all (remember 2008?). Owning property usually returns fairly well and is pretty secure, but is very illiquid.

There really isn’t anything out there that is liquid and secure that beats a savings account. You should just shop around for a while. You can find banks that offer savings rates over 3% right now.

Currently my husband and I have a 2 bedroom townhouse that I bought back in 2006 before we even met. I have a 30 year mortgage at 6.25%. The monthly payment, including insurance and property taxes, is $837. We are hoping to start a family soon and would likely want to move into a house with its own yard in about 5 years. We are currently putting $400 a month into a saving acoount for a down payment for this future home. We should be able to bump this savings up in the coming months as we will both be getting raises this year. We do not have much equity in the townhouse, but it has held its value since the purchase in 2006. Luckily there was no housing bubble where we live! Would we be better served paying down the mortgage as quickly as possible instead of just parking the money in an ING account? Maybe save half and pay down the mortgage with the other fast of the savings? I’ve looked for advise on this subject, but almost everything I’ve found assumes that you are saving for a down payment on a first home. Thanks so much for any insight you can provide.
- Lauren

Provided you have a healthy emergency fund, the best thing you can do with your money is to put it wherever you’ll get the best interest rate. Since your mortgage is at 6.25% and most savings accounts earn 2% or less right now, you should be paying down that mortgage.

Of course, this could change over time. Within the last few years, some banks have offered interest rates over 6% on their savings accounts and this could easily happen again during the later years of the next economic upturn. If you can find a savings opportunity that returns more than 6%, you should sock your money away there.

Is there any advantage/disadvantage to getting a 30 year mortgage and planning to make higher payments each month than getting a 20 year mortgage? I think of the lower payment as a bit of a safety net should something happen, but would rather pay less on the house in interest.
- John

First of all, a 30 year mortgage will usually have a worse interest rate than a 20 year mortgage. This means you’ll spend far more in interest over the life of the mortgage than you would with a 20 year mortgage.

Second, most people don’t consistently pay “optional” bills. When you realize that you’re spending $200 a month (or whatever amount it is) on an unnecessary bill, you have a very high likelihood of finding something else to do with it, even if your intentions are good.

The best bet is to simply get the mortgage with the lowest interest rate, provided you can make ends meet on the monthly payments.

When you first started doing reader mailbags, they were about 50% personal finance and 50% questions related to other stuff like pop culture and politics. Lately, they’re almost all personal finance. What gives?
- Kenny

I’d say the balance is about 80%/20% now, but there’s still a definite trend in that direction.

Why did I do this? Quite often, the non-personal finance questions ended up in flamewars with name calling and other rude behaviors that simply took away from the readers who wrote in with genuine personal finance situations and were asking for genuine help.

So, as time has gone on, I’ve moved the non personal finance stuff to other places, like I still touch on such topics here, I just give a lot more room to the readers that actually need help.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag. However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

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