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Pay off 2nd mortgage or save?
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Anonymous
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DH and I bought a townhouse 4 1/2 years ago using an 80-15-5 set-up. Now it seems like we were incredibly dumb but at the time we were listening to all the "as long as you plan to stay for at least five years" pieces of advice, fell in love with the house, and really wanted to own.
We are outgrowing our house and will likely try to move within the next year or two. We are not underwater on our mortgage but if we sold right now we would likely walk away with nothing. Our second mortgage has a high interest rate (over 9%). We have enough extra money coming in to have it paid off within a year. DH and I are wondering whether it's smarter to funnel all our extra money towards paying that off, or whether we should keep it in savings to put towards a downpayment on the next place. Part of why we think it might be smarter to apply it to the mortgage is the interest rate is so high, and if we have it paid off we'll have more flexibility in deciding what terms to sell on or have a low enough mortgage payment on it that we could likely rent it out until the value goes up again. Just wondering if there are any downsides to doing it this way? What would dcum do if you were in my place? FWIW, we have about 8 months of expenses in savings now that we are not planning to touch. |
Anonymous
| Pay off second mortgage. 9% interest is high! |
Anonymous
| Pay off the 9% loan! You are not going to earn anywhere near that if you put that money in short-term savings. |
Anonymous
agreed - money market funds are paying less than 1%. we're actually using extra cash to pay down our 5% mortgage for this reason! The only reason not to would be if there is a good chance you'd stay in the house for a really long time and therefore not get your $ out if you needed it - but even then you could refi if you really needed it. |
Anonymous
| By paying off the 2nd mortgage, you are effectively saving for a down payment anyway (although the savings aren't liquid). And as PPs have pointed out, 9% is a much higher rate than you could get in any safe investment. Unless you may need the $$ liquid for other purposes, definitely pay off the mortgage. |
Anonymous
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Because the interest rate is so high, I say pay off the second mortgage. That said, we are in a slightly similar situation (not with a second mortgage but with a similar home equity line of credit with an interest rate that is MUCH lower - like 3% or something).
We choose to aggressively save instead of paying off the home equity line. We are buying this spring, but unlike you - we are renting out our place and not selling. We've rented out before so we know we can earn enough on the rental income to justify renting and we would prefer to wait until the housing market improves a bit to sell (or maybe we will just keep our current house as an investment). The thing is - we are able to do this b/c (1) we have a LOT of cash that we can use to put dow 20% in a second house and (2) we have a high enough HHI to qualify for the second mortgage on a new home (essentially, you have to qualify for the combined amount of the rented property and new property - rental income isn't used to offset until after 2 years). |
Anonymous
| I think it depends on your occupation. If you think one of you may lose your job in the next year and it will be difficult to find another one, then save $ until you have another 4 months of expenses. That way you'll be able to survive for a year if something happens. Then pay off the second mortgage. |
Anonymous
| Pay off 2nd mortgage. |
Anonymous
agree with this. when the going gets tough, the tough have cash. If you pay off your 2nd, you can't get that money back to pay your living expenses for an extended job hunt. |