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Thoughts On A Goal

March 8th, 2013 at 07:28 am

We are now debt free except for the mortgage! I really like saying that. Smile

This mortgage was taken out on our brand new home in our new town in July 2012. It is our first VA loan, which did not require any down payment. This means we paid an insurance fee to do so. I can't say I'm too proud of those last two statements. My thought process was to get into a house without our equity, so that in the next move, we have the down payment ready to go in cash, without needing to sell the house.

Our rate is 2.75%. It is adjustable, but fixed for five years. After five years it can go up 1% per year, up to five percent. The maximum rate the loan could ever go is 7.75%, which isn't a bad rate historically. However, we won't be here for much more than six years and maybe only three. I'm also not too proud of buying a house considering the need to move frequently.

Were there houses to rent here? Yes. Did I see too many that met my standards, would allow cats and had a fair rent for the space? No. I actually did some calculations that put us at spending the same amount for housing whether we rented or bought. If we rented the rent would be high, but would equal our house payment, plus real estate agent fee when we sold. So, I chose the house. We get to deduct interest. We get to decide if we paint or not. We get to keep our cats with us. We are in control.

In the next 2.5 years, I would like to build our house equity and down payment fund to a total of 20% of the original value of the home. We had over 10%, but not the full 20%. I actually may increase that goal, but for now I think it is the most logical and obtainable.

The proceeds from our last house are in a money market account earning 0.85%APR. I'm on the lookout for a better rate right now. I have thought about sending it in to the mortgage, but that would not jive with my original thought process. Sending the money in would decrease the balance owed and decrease the amount of interest we are paying each month...thus increasing our equity faster. I do know that! And it is a little appealing.

I'm thinking that an additional principal payment every month to the mortgage would be the best. It increases the equity and reduced the interest paid each additional month, just not in the same way as sending in that lump sum. I will need to run some numbers to see where we might end up in 2.5 years and see what the difference would be. I know which will be better, but by how much is the real question.

So, the main goal going forward is to increase net worth, which will increase easily as we save and continue to pay down the mortgage. I will likely start tracking this soon on the blog, so stay tuned.

I think I opened up a big discussion topic here, so feel free to chime in with your thoughts and ideas. Be nice, but honest, please! What would you do based on the situation outlined above?

8 Responses to “Thoughts On A Goal”

  1. Bob B. Says:

    A military life is a situation not many of us live. My hat is off to all of the families that sacrifice so much for our country.

    But, yes, an extra mortgage payment per year at 2.75 - 7.75% max sounds like a good idea, if you compare it to MM at 0.85%.

    BTW, are you going to change your name to Nonmortgagedebtfree now?

    Also, your blog shows up as really small on my screen. None of the others do. Not sure why.

  2. creditcardfree Says:

    Thanks, Bob B. Not planning to change the name. Do you think my blog is smaller because of the tickers? It looks fine on my end. If anyone else sees it smaller let me know!

  3. CB in the City Says:

    It looks just like the others on my screen.

    I have a similar interest rate on an ARM. I pay more than double on it when I can. I'm not moving in the future, but I want to get the balance down before I refinance, and I also want to get the balance down for the sake of my heirs.

  4. Petunia 100 Says:

    If you're sure you have enough cash to put 20% plus closing down on the next house, then hit the mortgage hard. If there's some question, then focus on savings instead.

    Do you know where you will move next?

  5. snafu Says:

    If I were in your shoes, with .85% on savings, I would open a Vanguard Mutual Fund a/c and split the sum formerly used for truck payment into Index MF & Corporate Bond MF using DCA [Dollar Cost Average] system. The risk is moderate and you can withdraw the money in two business days if needed.

    In my opinion, the highest risk is savings because of the loss of buying power. .85% is not staying equal to inflation and you are losing about 2%. This must be balanced with your RISK tolerance and being able to sleep at night while the equity and bond market continues it's roller coaster ride.

    I was under the impression that military were not charged realtor fees either as sellers or buyers. Is this cultural and dependent on location?

  6. Beawealthywarrior Says:

    I follow Dave Ramsey and these are his baby steps.

    1. $1000 in Emergency Fund(I'm sure you have this done)
    2. Payy off all debts excluding the house(U just did this, congrats again!!)
    3. Save 3-6 months for Full Emergency Fund(Based on your previous post, I think u have this done too)
    ......Since u want to save for a down payment, then the next step would be step 3b.
    4. Save for retirement
    5. Save for College
    6. Pay off Mortgage
    7. Live like noone else!!!

    So basically I'm saying I would save for down payment before paying extra on mortgage

  7. scfr Says:

    Doesn't it feel GREAT to be able to turn your focus to the mortgage?

    Here are some random thoughts & questions from me:

    1. Was the insurance fee a one-time paid-in-full-upfront deal, or is it an on-going monthly part of your mortgage payment? Usually with less than 20% equity, you pay PMI monthly as part of your monthly mortgage payment but I don't know if that is how it works with VA loans.

    2. If the answer to number one is "we pay monthly PMI" then think about adding another option to your list: Make it a priority to eliminate the PMI. Keep saving up until you have enough to either pay down the mortgage to where you have at least 20% equity (proven to your lender by doing whatever they require, such as getting an assessment done by one of their approved assessors), or refinance with 20% or more equity. Don't forget that if the home has increased in value, so has your equity. Not saying that this would be your best option (since you are the one who has to crunch the actual numbers), but it's worth considering.

    3. Regarding the rate you are earning on your savings, I have been scouring for the best possible rates for years, and have never found a better resource than this web site: http://www.depositaccounts.com/blog/ It takes some time to become familiar with the site (it takes some time to navigate but that is partly due to the incredible amount of detailed information available) but once you do I'm sure you'll find something a bit better than what you are getting now. 0.85% is really pretty good, but you could get at least 1%, with Barclays for example) And don't forget to walk in to some local banks when you are out running errands and ask if they have non-published promotional rates or programs available.

    4. Finally, I don't want to be a "Debbie Downer" but since you mentioned costs at time of sale, are you 100% sure that you won't have to pay any sales tax when you sell? Some states/counties require it. I don't know how common it is, but I know we had to pay it where we used to live (Seattle). Hopefully you won't have to pay it, but if you do, better to be prepared.

  8. Looking Forward Says:

    If it's not the house you plan to live in for very long (doesn't sound like it) then I would put all my "extra" money to savings. I wouldn't bother with extra to the mortgage, but I'd be watching home values in my area closely.

    I would seriously consider investing some of the savings in a low risk, no-load, long established mutual fund at T.Rowe Price, Vanguard or similar.

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