Ask Money

Mortgage vs. savings

Chris Farrell Apr 7, 2009

Question: Should I be making additional payments on my mortgage? We live in California and bought our home about 3 years ago, near the peak of the market. At the time, we put down 10% and took out an 80/10 30 yr fixed, and could well afford the house. We make pretty good money and normally paid extra on the loans. We finished paying off the 2nd late last year. In a normal environment, we would have moved our extra payments to the 1st mortgage, but given the current economy I have been hesitant to do so. The value of the house is down some 60%, so we are very underwater, and I feel like I’m throwing money down the tube if I make extra payments. My thought is to just ride out the market and put the extra money away in case some other opportunity or emergency arises. To further spook me, I was laid off in December, but thankfully managed to get another job in about a month. Otherwise, we are debt free, fully fund all of our 401k’s, IRA, and have six months of emergency savings. Donny, Suisun City, CA

Answer: I like your thought: Stockpile the extra savings for now in a safe place, such as an FDIC insured savings account or certificate of deposit. You are in good financial shape overall. But it sure doesn’t hurt to add to savings while the economy is in a tailspin. I imagine you still face some real job insecurity since you haven’t been employed at your new place for very long, either.

Your job circumstances will improve and the economy will get better some time in the (hopefully very near) future. At some point, you’ll figure out the best use of that savings. Don’t let it burn a hole in your pocket. You’ve worked hard for it. The money could go toward accelerating mortgage payments, to pay for a career change, additional training and education or some other investment. What’s important for now is that you’re creating both a flush emergency savings account and a flush opportunity fund. They’re really two sides of the same coin.

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