Three to six months of monthly expenses is recommended.
Enough that if you lose your job, you have reasonably likelihood of finding another one. You just need a few months float to cover the gap.
Neither. If you pull out a mortgage calculator you'll see that paying a little extra toward the mortgage each month will have the same impact over 30 years that making a $50k lump sum payment will. Save the money in an interest bearing account and use it to pay for emergency repairs and potentially refinance down the road if rates fall to a point that makes it worthwhile.
What? that is not at all true a lump sump of 50k now is definitely going to reduce the total mortgage significantly more than paying $50k more over the course of 30 years. Interest compounds daily on mortgages.
For the typical US- based mortgage, interest accrues monthly at rate/12 except in partial months when it calculated on a specific number of days. It compounds monthly. But compounding is irrelevant if you make on time payments, because you will never pay interest on interest.
>Interest compounds daily on \*many\* mortgages.
That is not universally true. Federally backed loans like FHA and VA loans compound monthly. Conventional loans will often go as you say, but even then it's not guaranteed.
That said, you're overall point is absolutely correct, an upfront lumpsum payment will always yield a greater return than an equal amount paid down over time.
In addition to reducing the principle immediately, it also forces more funds being applied to the principle in future payments as the P&I portion mortgage payment itself is fixed for the life of the loan but the interest accrued each payment is reduced. This affect is may often be small, but not exactly negligible. With a 12% principle reduction it won't even be that small.
With the information available I'd say absolutely. Money saved now is always better than hypothetical money saved at an indeterminate point in the future. A lot can change between now and then, but the money you save on interest now will continue to compound through the future.
Other options could be to invest the money in other vehicles with greater potential returns, but I'd first need to ask your risk-tolerances, current interest rates, and how long you expect to keep the mortgage. You may be able to get better returns in market, but you gain a greater risk profile, lose the piece of mind of reducing debt and future flexibility of recasting your mortgage if the times get lean. You gain potentially a modest increase in return (depending on interest rates and tax scenarios) and a secondary potential savings to tap in to, though it may not always be beneficial to access it when it's needed and can't be counted on.
Do you have a fully funded emergency fund or is the 50k it?
We have 100k in a 4% annual savings, not including 403bs.
That is a massive emergency fund. Any particular reason?
Not typical for us, just had a few things pay out recently. What is your recommendation?
Three to six months of monthly expenses is recommended. Enough that if you lose your job, you have reasonably likelihood of finding another one. You just need a few months float to cover the gap.
I don't think you can buy a rate down after closing, that would be a refi.
Right. I didn't word the question well. We have a "free" refi within the next 3 years. I meant should we save to buy down when further then.
Is it actually free or do they just roll the costs into the loan for you?
It’s never actually free
I know, I was just trying to make OP say that
I'm aware it's not "free" but there are reduced costs!
Why not just invest it. That way it grows and you always have it if something unexpected comes up.
Neither. If you pull out a mortgage calculator you'll see that paying a little extra toward the mortgage each month will have the same impact over 30 years that making a $50k lump sum payment will. Save the money in an interest bearing account and use it to pay for emergency repairs and potentially refinance down the road if rates fall to a point that makes it worthwhile.
What? that is not at all true a lump sump of 50k now is definitely going to reduce the total mortgage significantly more than paying $50k more over the course of 30 years. Interest compounds daily on mortgages.
For the typical US- based mortgage, interest accrues monthly at rate/12 except in partial months when it calculated on a specific number of days. It compounds monthly. But compounding is irrelevant if you make on time payments, because you will never pay interest on interest.
>Interest compounds daily on \*many\* mortgages. That is not universally true. Federally backed loans like FHA and VA loans compound monthly. Conventional loans will often go as you say, but even then it's not guaranteed. That said, you're overall point is absolutely correct, an upfront lumpsum payment will always yield a greater return than an equal amount paid down over time. In addition to reducing the principle immediately, it also forces more funds being applied to the principle in future payments as the P&I portion mortgage payment itself is fixed for the life of the loan but the interest accrued each payment is reduced. This affect is may often be small, but not exactly negligible. With a 12% principle reduction it won't even be that small.
Is your recommendation to pay a lump sum?
With the information available I'd say absolutely. Money saved now is always better than hypothetical money saved at an indeterminate point in the future. A lot can change between now and then, but the money you save on interest now will continue to compound through the future. Other options could be to invest the money in other vehicles with greater potential returns, but I'd first need to ask your risk-tolerances, current interest rates, and how long you expect to keep the mortgage. You may be able to get better returns in market, but you gain a greater risk profile, lose the piece of mind of reducing debt and future flexibility of recasting your mortgage if the times get lean. You gain potentially a modest increase in return (depending on interest rates and tax scenarios) and a secondary potential savings to tap in to, though it may not always be beneficial to access it when it's needed and can't be counted on.