Pay down principal or save as cash?

Question

I am trying to figure out if paying down the principal or saving that money as cash would prove to be better.

I am in an 5 year Arm that will adjust in 3 years (1 more year left of pre-payment penalties). I took 126K and owe 123K but as of lately i am able to make additional principal payments of 6-700 extra a month. Considering a down payment of 10% is probably needed when I refinance (which I would like to do once the pre-pmt expires in 12 months) I am trying to figure out if holding the cash or using towards my principal is a better route. I have a credit score in the 740's. My credit/debt ratio is like 10% if that. income over 70K annually a moderate increase annually. no debt except for a car loan.

all advice is appreciated.

Answer 1

I am a firm believer that you are almost always better off saving cash.  

While paying down your mtg might add to your equity, getting to that equity might be difficult if a situation arose where you needed cash quickly.

Your mortgage is fixed for the next 3 years and 1 more before the PPP expires.  You purchased the house 2 years ago so let's assume that it is worth a little less than when you purchased it.  If the value of the house is worth $120K and you put an additional 3K into right now.. and needed that money next week, you wouldn't be able to get it out of the house. Because you wouldn't be able to refinance it at more than its worth.

Put the money in the bank or investments, save for retirement, safe for children's college education.  Create a cushion, in this economic climate "cash is King".  Equity in your home doesn't earn interest.  

Three years from now the current crisis will have sorted itself out.  House values will have turned around a bit.  Your ARM might even adjust to a rate that is similar to what it is now, rates and indexes are still low.  Even if you needed to re-fi in 1 or 2 years, you will be able to with your scores and use of available credit. Even over 90%. You might even be able to take advantage of one of these rediculous government bail out programs that will turn your loan into a fixed rate at current property values, reducing the outstanding principal.  

What you need to do right now is find out how your loan adjusts, what is the index, what is the margin and what are the caps.  All these things should be in your loan package in the Adjustable Rate Rider at the back of the mortgage.

If you like send me some info (using the link in my profile) and I can run you some worst case scenarios as to what your payment will be going forward.

Answer 2

1. pae off the kar lone first.

2. Save as much as yu kan over the next yeer & plan tu yuze as much av it as yu kan tu pae down morgage wen yu refi.

3. if yu oe 123k$ on a hous werth 126k, yu kood get in trubel.

Hous prieses R falling bout 15%/yeer.  If yer hous value go down 15%, yer underwater. (werth107k, so yer 16k under).

How long wood it take tu save 16,000$?

Answer 3

If you are planning on refinancing, then just pay what you must on your mortgage and save your additional money up for a down payment in a few years.  What is the total price of the house you now own, and what is the market value today?  You are planning on staying there for a long time?  Also, what is your current interest rate today?  Please give a few more details.  

I think it is better to start a separate savings account right now, for your future downpayment as you said, and for other unexpected expenses. Do you have an emergency fund right now equal to 6 months of expenses?  And pay off that car loan first!

To add: For your updated info, my original advice stands, pay off the car, save your cash first, don't pay any more for your mortgage right now then you have too, see what happens with values, interest rates in 3 years.  If you can save up $700 a month ahead that is $9000 in a year?  In 3 years you can have nearly $30,000, maybe more if you get good salary increases.  Good luck!

** Also, I hope that you are maxing out your 401K (or equivalent)  at 15% or so of your salary, if your employer matches that is free money!