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scoobygsx · Joined: 01 Jul 2011 Posts: 3 1.73 Dollars($)

I'm in the military. There is no place to rent around here, so I'm buying a house. My question is..if I know I will be moving within 5 years, & I have a 30-year mortgage, is it even worth it to make additional principal payments? Will it save me any money if I'm just going to sell the place within 5 years? Or am I better off just investing that extra money elsewhere?

chrisgummerson · Posted: Fri Jul 01, 2011 9:34 am Post subject:

If you make additional payments, you will add equity to the home. As long as the home retains or gains in value, any principal additions you make, you will get when you sell the home. Since you will be selling anyway, you probably could just put that money in a CD for next few years.

scoobygsx · Joined: 01 Jul 2011 Posts: 3 1.73 Dollars($)

In the end though, is it even worth it to make additional principal payments? I don't want to do it if in the end I'll only break even & get my money back. I'd rather put that extra money in a money market account or CD or something. I'm just wondering if it will make a difference in the interest that accumulates on the mortgage.

Posted: Sun Jul 03, 2011 10:35 pm Post subject:

The principal amount will get reduced if you make extra payments. This will help you in paying off your mortgage faster compared to term of the loan.

scoobygsx · Joined: 01 Jul 2011 Posts: 3 1.73 Dollars($)

I'm not trying to pay off the loan though, I'm only gonna be here 3-5 years.

gmakerley · Posted: Tue Jul 05, 2011 7:52 am Post subject:

Scooby, it seems like you've got your mind made up not to add an additional sum to the principal. The benefit of so doing is that you'll be able to reduce the amount of interest you pay - of course the amount you add would determine if that's slight or substantial.

What will happen with property values in the coming 3-5 years is something we can't predict. We've seen increases in various markets in the last year or so, but that's certainly not everywhere.

If you can reap a reasonable return on your money by investing in a CD, then that's probably what you will end up doing.

jimgilly · Posted: Wed Jul 06, 2011 1:53 am Post subject:

First, if you know for certain you will be moving in 5 years or so get a 5 year ARM - not a 30 year fixed rate mortgage. Right now there is a sizable spread in interest rates between the 30 year fixed rate mortgage and 5 year adjustable rate mortgage.

Example of a current online lender using a $100,000 loan amount - 4.625 % 30 year fixed rate monthly payment is $514.00 per month and a 5 year adjustable rate mortgage with the same fees would be $442.00 per month.
($200,000 loan would be $1028/$884 etc.)

I don't know what you will qualify for, the purchase price/down payment or loan program (VA, conventional) you are looking at but the difference in rates between a 30 year fixed and 5 year ARM should still be substantial.Something you definitetly need to check into.

Regarding whether or not it is better to make extra payments or invest elsewhere depends on several factors. CDs and money market funds are only paying a little over 1% or less which would be less than whatever interest rate you end up paying on your mortgage. Stocks, bonds, REITs, mutual funds and the like could provide higher returns but come with higher risks, so that is a decision call you will have to make.

The other factor is do you already have adequate liquid funds for a rainy day. If not, then making extra principal payments on your home loan wouldn't be advisable. Better to keep the extra funds readily available for that unexpected expense we all run into.

gmakerley · Posted: Sat Jul 09, 2011 10:47 am Post subject:

Jim, I think your last statement is worth repeating to people. Rainy day funds are far too few (believe me, I know), and we've become inured to the need to have a reserve fund of any sort.

Thanks for bringing that into the conversation.

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