Tuesday, August 3, 2010

Motivation Follow Up

Following up on my earlier Motivation post, I received some interesting feedback.

Anonymous # 1 said...
I just read an article on WSJ about people putting money in to refi their mortgages to get lower interest rates and shorten the term since the alternative of investing in the stock market seems so uncertain. After reading that article, I started looking at refi options and 15 yr mortgages are at all time lows. I am in the process of refi'ing our mortgage from a 30yr at 4.875% which we just got last yr and thought was great, to a 15yr at 3.75%. For an extra 35% each month we'll pay our house off in half the time. This rate seems unbelievable to me, but we just locked it in and I'm really excited about having each mortage pmt mainly going to paying down principal compared to interest in the past.

3.75% is a great rate.

Like you, we refinanced last year and went from a 30 year @6% rate to a 25 year 4.7% rate. In the process we shaved a year off the term and we shaved a few extra thousand off the principal as we had to pay down the principal a bit to get down to a certain ratio vs. the appraised value (at this point I'm a little fuzzy on the details). If we could find a 3.7% mortgage rate we would absolutely consider refinancing again. We did a little research, but we need to do more as so far the rates we are finding here in South Florida are not at that level.

Anonymous #2 said...
I found an online mortgage extra payment calculation website and played with different extra payments. I discovered I can pay off my mortgage comfortably in 6 years and still have funds for other needs. So I started it last month. While the economy is slow and stock market bouncing around and savings accounts paying low rates it is probably a better use/return on my funds to pay down the mortgage. If
inflation kicks back up it may not make sense to pay the extra amounts. I am not sure it pays to refinance, you can use the cost of the refinance to jump start the pay-down and maybe come out ahead.

We have played this game too and spent an hour or more with a mortgage calculator to see how quickly we could pay off our mortgage by adding $100 a month (this is our current extra payment), $500 a month, $1000 a month, etc. We can afford to put more towards our mortgage, we just need to come up with the plan and execute it.

SJ said...
At 24, I am wondering if I am going to be forced to move out of my home state in order to afford a house. H and I have stable jobs with good pay (~80k) but the average price for homes in our area is more than 3 times our combined salary. Even with a 30% downpayment the mortage + taxes will be nearly $2k/month plus extra
expenses. Any advice for the young future homebuyers?

SJ, it sounds like you are way ahead of where I was at 24, so kudos to you.

In general, your housing costs, mortgage payment plus taxes and insurance, should not be more than 28% of your gross monthly income. So, if you and hubby are earning $80,000 a year, your monthly housing costs should be @$1860 or less. You don't mention if you have other debt, i.e. student loans, car loan, credit card debt, etc., but if you do, your total debt service per month should not exceed 36% of your gross monthly income or @$2400.

So, my general advice would be as follows. First, focus on killing any debt that you might have before you think about purchasing a house. Second, if you want to stay in your home state and you want to buy an average price home, you should probably focus on saving up more for a down payment to reduce your monthly costs to a manageable level. Third, you might want to consider moving to a state with lower housing costs, but you'll want to consider job security, family connections, costs of moving, etc. Fourth, focus on increasing your income.

I'd also suggest considering whether or not you need or want an average price home, could you be happy and content with a less than average price home? Good luck to you.

1 comment:

Sj said...

So excited to see your follow up today!! Thanks for the great insight. We have no debt thankfully, but I think you hit the right mark with moving to a neighboring state with lower housing prices. In our current area (Central NJ) anything below the median is so run down it's not work the head ache to fix up or the area is not great. We are beginning to look in South Jersey, Delaware, and PA. It's a good motivator to get ahead in our careers for better options on the housing front! Saved this post, thanks again for following up with all three comments.