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June 01, 2013


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Since this is your first home, I would keep that money available for any house related expenses that come up. You never know when something will break down and you suddenly have expensive things you need to replace! For example, this month alone we will be paying for chimney repair AND an interior drain system. 7k right there! Not every month is that expensive, but you need to be prepared for unexpected breakdowns.

Sorry - just reread and saw that you have no other debt than the mortgage - good for you!

I cant answer the question without knowing more about their finances. Do they have an emergency fund? What other debt do they have. Are they planning on keeping this house for a while for selling in a few years.

Without any other info I would agree with the author that they should save the money for house related expenses. If after a year or two they haven't had to pay for anything they can put half of it towards the house payment.

If you have a large enough emergency fund, I would put the extra into the mortgage till its paid down enough to get rid of PMI - this will create a pretty good risk free rate of return. Also, I wouldn't trust any investment company that normally has a sales charge like that - look into low cost investing through a company like Vanguard and do some comparisons before you by default decide to go with your brother.

How long are you financing the house for? If a 30 year look at a 15 year.

Keep in mind that a new house also has alot of items that need to be purchased that you don't have and if it does not come with the house. Washer, dryer, furniture, carpet, paint and then there are the unexpected like plumbing back up, roof leak.

So make sure you have enough in the emergency fund for those items also.

Goal should be to get rid of that PMI since the effective rate of your borrowing on the next 10% of mortgage principle is very high.....

My approach would be to stay liquid with that money -- in some sort of savings vehicle-- and then try to pay off mortgage in relatively big chunk to get rid of PMI.

I agree with some of the other comments. Since it's your first home if you haven't put a budget together I would do so. That way you know how much money you can spend and where. You WILL need money for home maintenance each month especially being new homeowners. IF you let your number one investment (your home) fall apart you have more problems than you will ever imagine. I also agree that having an emergency fund is important as well as investing in your future. It's not an easy answer without more information. We chose to balance everything out. Pay extra on the mortgage, have a budget and invest. Our mortgage is now 4 years into a 5 year term and we will be paying it in full this month. (that's the plan at least. Best of luck, lots of great tips in the comments here for you.

It depends on whether you are conservative or aggressive by nature. The conservative route (which I would take) is to pay the extra towards the principal of the mortgage. If you want to be aggressive and don't mind risk, invest it.

I wouldn't be buying a house in the first place without having at least 20% down and a 6 to 8 month emergency savings account. Also, I suspect you feel obligated to give your brother business on investments, but you can pick up a large number of funds without having to pay a sales charge. I happen (and many people here) happen to be large fans of Vanguard. The sales charge is only one expense, you do have to look at the ongoing fees that are embedded in the ongoing support of the fund.

That PMI is expensive. To illustrate :
Lets say you've got a $200,000 house and you put $20,000 down. THats a $180,000 loan at 3.75% interest your payment for principal and interest would be $833 and your PMI would be $93. That equates to $1,116 in PMI per year you'd be paying on that loan. If you could come up with $20,000 right now and put it towards that loan it would save you $1,116 per year or equate to a 1116/20000 return = 5.558%. Thats in addition to the 3.75% interest you're paying. Combining the cost of the PMI and the interest that a total cost of 9.33% for that $20,000 in equity you're short. 9.3% guaranteed return is almost a no brainer.

Now having said that, given your situatoin I don't know the best answer. $150 a month towards the principal, won't impact PMI very fast. You're probably in the balpark of a $200,000 house so you're about $20000 short. It would take you 11 years to get rid of PMI at that rate.

You'd be best to make sure you have an emergency fund of 6 months or so, max your 401k contributions to the employer match, max out a Roth IRA. Then if you still have money left over you could either invest it wisely seeking a high return if you're agressive go ahead and pay down the mortgage.

Without knowing about your savings it's hard to advise but here would be my advice. Assuming you already have a nice emergency fund (or are actively saving towards it) I would split the $150 difference between your payment and what you are willing/budgeted to spend between home repairs/improvements and extra principle. If it were me, I'd put $50 extra towards the mortgage each month ($600 a year extra) (this is partially because I person simply can't stand to pay the minimum payment on anything) and the remaining $100 into a separate savings account to be used for home improvements (paint, rugs, furniture projects all add up quickly) and necessary tools (will you need a lawn mower, weed eater, etc). Just a few thoughts from someone who just moved into a new home as well!

The cost of extended PMI probably doesn't make investing a good alternative. Pay toward the house if you have a good emergency fund, put it in savings for now if you don't.

As long as you don't use it to inflate your SOL (add $150 to your spending budget elsewhere), I don't think any choice will make that big a difference.

Save it for a year. Then decide.

All depends on the terms of your PMI...For instance, when I bought my house 3 years ago I only put about 5% down on it. My monthly PMI is $50 and expires when I have 20% equity in the house or after 60 payments (5 years), which ever comes first.

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