Pay off mortgage even if house is upside down?

[wellison]

My question is if we should pay down our mortgage, if our house is upside down and we will eventually have to move (2-5 years). Would it be better to just save cash to be used when we have to sell to make up the difference or a down payment on our next home? Advice? What would Dave say?

[mek42]

Why will you have to move? Will you have to move again soon after this coming move? If so, perhaps you should consider renting. Or find a deal so that your next PITI is lower than renting would be.

In 2 - 5 years who knows what will happen to the housing market. Maybe you won't be upside down. Maybe you'll find a buyer who loves your house enough to offer a breakeven or even a profit price.

What would you do if you weren't upside down but otherwise in the same situation? Other than learning that renting is better while frequently moving, I don't think that being upside down is relevant to the decision. The price you paid for the house and thus the amount you decided to borrow is a sunk cost - it has already been done.

Expunge the notion of upside down from your mind and consider what you would be doing given the upcoming move. Then do that.

Oh, let me be the first to say, "Welcome to Frugal Village, oh ye with post count of 1!"



Consider that a nice warm welcome from me and our two dogs.

[Greebo]

The only downside to paying down your mortgage, upside down or not, is that you have less cash on hand.

Every dollar extra you put towards the mortgage now has a compound effect because the interest you WON'T pay going forward continues to grow, meaning every future payment has an even larger impact on your equity growth.

[OOwl]

Most people forget about the early 1980s. Lots of folks bought houses with really high interest rates and "creative" loans. My husband and I bought our first house that way. We were upside down for years! Almost everyone on our street defaulted on their loans and the properties were resold to investors and became rentals. It was rough to keep paying on that mortgage, but we did. Eventually we saved enough to refinance it (back then, they didn't roll all that expense into the loan); then we paid it off as quickly as possible. It took 20 years but we made our money back and the house was eventually worth TWICE what we paid for it. We both survived to go forward in life with no foreclosures or short sales on our financial record. Anyway, it was the right thing to do. We borrowed the money, signed our name to pay that amount, and because we COULD we felt we should. My heart goes out to all those in an upside down property, but there are advantages to sticking with it if you can. Best wishes to you on your decision.

[QM]

Every dollar extra you put towards the mortgage now has a compound effect because the interest you WON'T pay going forward continues to grow, meaning every future payment has an even larger impact on your equity growth.

Sorry, Greebo, but can you say it again but in an easier way to understand. I just recently got a new daycare child, so I'm putting the "extra" money onto our mortgage.

[Greebo]

Sorry, Greebo, but can you say it again but in an easier way to understand. I just recently got a new daycare child, so I'm putting the "extra" money onto our mortgage.

Sure.

The amount of interest you owe each month is based on your principal balance.

For simple math, consider the following:
$100,000 balance. 12% interest. Payment, $1,200 a month for P&I only, ignore escrow)

Figure interest each month as follows: Balance * (rate / 12)
Month 1: $100,000 * (.12/1) = $100,000 * .01 = $1,000
$1,000 of the $1,200 goes to interest. $200 goes to principal. New balance, $99,800.

Month 2: $99,800 * .01 = $998. $1200 - $998 interest = $202 principal. New balance = $99,598

Month 3: $99,598 * .01 = $995.98. $204.02 to principal. New balance $99,393.98.

And so forth.

IF in month one you put an extra $100 to the payment, however, then in Month 2 your balance would be $99,700, so your interest would be $997 instead of $998, so your new balance would then go to $99,497, and in month 3 it would drop to $99,291.97.

So: for every dollar put in extra NOW, the amount you SAVE in interest paid over time *continues* to grow. Pay $100 extra today on a 5% mortgage in month 1 and over 30 years you'll save $446.77 in cumulative interest not paid.

[QM]

Sure.

The amount of interest you owe each month is based on your principal balance.

For simple math, consider the following:
$100,000 balance. 12% interest. Payment, $1,200 a month for P&I only, ignore escrow)

Figure interest each month as follows: Balance * (rate / 12)
Month 1: $100,000 * (.12/1) = $100,000 * .01 = $1,000
$1,000 of the $1,200 goes to interest. $200 goes to principal. New balance, $99,800.

Month 2: $99,800 * .01 = $998. $1200 - $998 interest = $202 principal. New balance = $99,598

Month 3: $99,598 * .01 = $995.98. $204.02 to principal. New balance $99,393.98.

And so forth.

IF in month one you put an extra $100 to the payment, however, then in Month 2 your balance would be $99,700, so your interest would be $997 instead of $998, so your new balance would then go to $99,497, and in month 3 it would drop to $99,291.97.

So: for every dollar put in extra NOW, the amount you SAVE in interest paid over time *continues* to grow. Pay $100 extra today on a 5% mortgage in month 1 and over 30 years you'll save $446.77 in cumulative interest not paid.

Thanks for clarifying. The gist is...it's a good thing to put extra payments on your mortgage.

If I applied $142.50 every week, how would I figure how many years that would reduce my mortgage? I phoned the bank where our mortgage is at and the guy on the phone said he couldn't figure it out with their computer system and that I'd have to go to a branch. I'd like to save my time and a trip, so is there any way online I could figure it out if I keyed in all the details?

[Telephus44]

I don't know what Dave would say, but I suspect it would be easier to move if you had the cash on hand. I haven't been in this situation yet, but if you're trying to buy a new house and haven't sold your old (upside down) house yet, I imagine it would be a lot easier to talk to the bank if you have cash than if you just have equity.


I'm not addressing the interest costs, Greebo has that covered.

[Greebo]

Thanks for clarifying. The gist is...it's a good thing to put extra payments on your mortgage.

If I applied $142.50 every week, how would I figure how many years that would reduce my mortgage? I phoned the bank where our mortgage is at and the guy on the phone said he couldn't figure it out with their computer system and that I'd have to go to a branch. I'd like to save my time and a trip, so is there any way online I could figure it out if I keyed in all the details?

Mortgage Calculator

The trick using this link is to use your CURRENT balance, and set the length of your term to however long you have left as of today, so if you're 10 years into a 30 year mortgage, then put in your current balance and rate as a 20 year mortgage.

[Greebo]

I don't know what Dave would say, but I suspect it would be easier to move if you had the cash on hand. I haven't been in this situation yet, but if you're trying to buy a new house and haven't sold your old (upside down) house yet, I imagine it would be a lot easier to talk to the bank if you have cash than if you just have equity.

True, *if* you're gonna buy w/o selling.

Which Dave would tell you never to do, unless you want two mortgages to pay each month.

[QM]

Mortgage Calculator

The trick using this link is to use your CURRENT balance, and set the length of your term to however long you have left as of today, so if you're 10 years into a 30 year mortgage, then put in your current balance and rate as a 20 year mortgage.

Thanks so much, Greebo! If I did it right, our now 13 year 3 month mortgage will be reduced to 7 years! I hope it's right because it sounds too good to be true! The only "problem" with the progam is I'll be applying it weekly...not in a monthly lump sum. Will the fact that I'm applying it weekly speed up the paying it off faster or do mortgage companies just do a grand total for the month? The monthly way is how I had to key it in.

[Greebo]

Thanks so much, Greebo! If I did it right, our now 13 year 3 month mortgage will be reduced to 7 years! I hope it's right because it sounds too good to be true! The only "problem" with the progam is I'll be applying it weekly...not in a monthly lump sum. Will the fact that I'm applying it weekly speed up the paying it off faster or do mortgage companies just do a grand total for the month? The monthly way is how I had to key it in.

They only do it monthly, so making extra weekly payments doesn't really benefit you. Save the stamps, pay monthly.

[QM]

...Save the stamps, pay monthly.

Good to know. I don't mail it in; I phone up the bank and have them do it. So the stamps are saved!

[QM]

Another question, Greebo. I think I know your (and Dave's answer). I sold a few things on kijiji and have an extra $100 sitting around. Would you apply it to your Line of Credit or your mortgage. I keep thinking mortgage because I want the mortgage gone. If it was gone then I'd have $23,216.96 "extra" each year that I'm not throwing at my morgage. My Line of Credit is currently sitting at $12,602.12 thanks to the purchase of a pop-up trailer and a new roof. The prior "debt" that I had when I started FV is gone; I have new debt now thanks to newer purchases. lol! (When I first started at FV it was around $30,000.)

[QM]

Sorry to harrass you with all these question, Greebo, but I truly respect your wisdom. Not to say I'll follow your wisdom to the 't', but I really appreciate your input on FV.