Taking Our Savings And Paying Down Our Mortgage
I have previously analysized the mortgage on House #3 and determined we could earn a 6.77% after tax return by paying down the mortgage to get rid of the private mortgage insurance. I have been on the fence this as 1) I am not sure how quickly we could get the PMI cancelled, 2) we have been focusing our income on saving up for a down payment on a new more permanent home.
After taking a step back and seeing bank interest rates being lowered, I have decided (with my wife's OK) to take a portion of our savings start paying down the mortgage. Heres why:
- The money is for a $80,000 savings goal to be used as a down payment for our new house
- The money is currently earning about 3.5% before tax in high yield savings accounts and rates are going lower; ignoring the PMI the money will be effectivley earning ~3.4% after tax savings losses by paying down the mortgage balance.
- We don't know what we are going to do with our exsiting house, but we will either sell it and put the proceeds in our new home, or two rent it out (only if cash flow positive).
- We think $80k will be more than needed for the minimum 20% down payment and closing costs that I think we need to buy a house.
So the bottom line is it will earn a better return by paying down the mortgage, and it won't affect our house buying plans -- it just may raise the balance of our new mortgage if we decide to rent the house out. As long as aren't faced with PMI or need to take a 2nd mortgage to close the deal we will come out ahead with this move.
I plan on paying about $15k towards the mortgage over the next month or so. That won't get us to the 78% balance we need to cancel PMI, but it will get us in the ballpark. I'll then call our mortgage company and start pursuing cancellation of the PMI.
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