When to refinance? My latest thoughts.

Posted By Paul

It wasn't that long ago that I refinanced my mortgage and I remember that as we signed the papers the agent actually said: "Let's take a moment to appreciate how good a rate this is, it will never get much better than this."

Now I see that rates have dropped to the point where I am once again considering refinancing.

There are so many sources of advice on this topic everything from: "Only refinance if you can save at least one point on your rate." to complicated spreadsheets and formulas.

Well when I found myself trying to decide if I should refinance again, I realized that what I was really doing was deciding two things:

1) What was my primary goal?
2) What was I willing to commit to?

If you can answer these two questions then I think refinancing decisions become much more clear.

Here is what it was in my case:

What was my primary goal?
There are lots of perfectly valid answers to this question when it comes to refinancing.  Some of the most common are:
"I want to pay off my mortgage as fast as possible."
A great goal.  Once your mortgage is paid off then a huge monthly expense essentially disappears from your life.

"I want to pay as little in interest as possible."
This one often goes with the "fast as possible" one since the two often relate.  It's annoying paying all of this interest month after month.

"I want my monthly payment to be as little as possible."
Another perfectly valid choice.  A smaller payment can mean peace of mind.  Less money you have to come up with every month.

What was I willing to commit to?
Here are some things that might come up when you consider this question:

"Can I commit to paying the closing costs?"
Another simple one.  If you don't want to pay the money for the closing costs, then it simplifies your hunt considerably in that its becomes a question of the best rate you can get with zero closing.

"Can I commit to a bigger payment?"
If you refinance to a shorter mortgage (go from 30 year to 15 year) then not only do you get a better rate, but it generally means paying off quicker and less interest paid.  The problem?  It often means your monthly payment gets bigger (unless your rate increase is significant enough to offset it).  Ask yourself if you are willing to commit to being obligated to make that payment every month.

"Can I commit to being in this house for a certain period of time?"
If you are CERTAIN that you are going to move in a specified time, or if you are CERTAIN that you aren't then your choices become a little more clear.  For example, probably not much point in refinancing a house if you're going to move in a year anyway.

For me I found that my primary goal was to lower my monthly payment.  Even if it means I have to pay it longer and I end up paying more interest in the long run.  I also realized that I didn't want to commit to a bigger payment, and that even though I wasn't 100% sure that I wasn't going to move anytime soon, that I was at least able to commit to the idea that a move was not in my foreseeable future.   I was also able to commit to paying the closing costs.

Once I figured that out, the refi choices became much more clear.  For me I just did a straight refi to a 30 year fixed, and took the better rate.  Of course my payment drops thanks to the lower rate and "resetting the clock" on the 30 year mortgage, but it also means that the amount going to principal per payment drops.

In this process I did discover something interesting.  When I took the amount I paid in principal before the refi, and looked up how long it would take to reach that same amount of principal AFTER the refi if I just paid the minimum each month, the answer was that it would take me about 6 years.  Wow.

I also discovered that if I did the refi and took the lower payment but kept paying the amount of my OLD payment (applying the extra to the principal) then the total principal I would pay each month is more than the total principal I pay each month right now.  My thought is that I can keep doing that, but if something catastrophic happens where money gets really tight then I can just stop paying that extra and fall back to my nice small payment.

So I decided to go for it, so I am working on the refinance right now.  I know lots of people try to approach this problem purely mathematically, but I find that difficult to do since often there are just too many unknowns for me.  By focusing on two simple questions I felt like I was able to identify the choice that got me to my goals given the best information I had right now.

Avoiding mortgage modification scams.

Posted By Paul

A friend of mine got a letter in the mail giving a contact number and suggesting that they could help lower his mortgage payment.

He decided to call and they essentially said they were lawyers who would re-negotiate his mortgage at a lower rate. This service would cost $3000. They asked him who his mortgage was with and when he said bank X they said that they had worked with them before to negotiate 30 year fixed mortgages at a great rate.

Being smart, he called his bank next and asked if they had ever heard of this law firm. They essentially said:

1) They had never heard of this firm.
2) They don't offer a 30 year fixed mortgage.
3) They would be happy to renegotiate his rate directly.

Based on this he decided to not call the lawyers back. He discussed the terms of his mortgage with his bank, and they gave him some options that he is considering.

Then just today I saw an article on avoiding mortgage modification scams. It sounds suspiciously similar to what my friend experienced. I wonder what would have happened IF he had decided to go forward and give them the $3000. Maybe they would have just disappeared with his money, or perhaps done some hand waving to make it look like they did a bunch of work to get him the same rate and terms that he got by just calling the bank directly. My friend gave them his email address and they sent him the list of info he would have to gather for them to proceed on his behalf and it was an identity thief's dream (tax returns, pay stubs, etc.).

I suppose it's possible that this people were for real, but I think you really can't be too careful these days, especially when calling someone that sent you a random letter in the mail.

Here is the article on avoiding these scams:

Avoiding mortgage modification scams

Also here are two stories I read about people who fell for these scams and how they ended up losing their homes:

Mortgage scam snags Idaho couple

Chicago owner loses home in mortgage scam

3.875 on a 30 year fixed? What's the catch?

Posted By Paul

This weekend I was looking in the paper and saw several ads offering 3.875% on a 30 year fixed mortgage.

Having just refinanced I was confused...since I know that at their best the banks were offering 4.3% for a 30 year fixed. I figured there had to be a catch.

Well after some research it looks like there is a catch....sort of.

This is called a 'builder buy down' loan. As with all mortgages there are all different types of builder buy down loans, but the basic idea is this:

Are you familiar with mortgage points? The idea is that a bank will lower your mortgage rate if you are willing to pay some money up front as a fee (1 point just means once percent of the loan as a fee).

So let's say your bank is offering a 30 year fixed loan at 5%, and you need to borrow $200k to buy your house. When a bank says they offer you 4.5% with one point, it just means that you pay 1% of the mortgage up front as a fee to get the better rate. So in this case you'd have pay $2k in fees to get the 4.5% rate.

So basically a builder buy down mortgage is where the builder pays the point(s) for you. Think of it from the standpoint of the builder.

Let's say you just built a house that you are trying to sell for $500,000. Maybe by paying $10,000 (two points) you might be able to offer a rate that will entice buyers. From the standpoint of the builder:

1) It gets the house sold - if real estate prices are falling then the builder probably want to unload the house before the value falls any more. Paying the $10k now is probably a no brainer if the builder is worried that in a few months the house will be worth $490k or less anyway.

2) The house is sold at its list price - you see this in the fine print of these loans. This is important because often the builder isn't just trying to sell one house, but many houses all in the same neighborhood. By paying the $10k to get you the lower rate, the house still goes on record as selling for $500k. This means that it will hopefully keep the appraised values of the other homes in the neighborhood higher. If instead of giving the bank the $10k to get the better rate the builder instead just knocked it off the price, and sold it to you for $490k then now every other similar house in the neighborhood could be viewed as being worth $490k. If you are the builder and you have 20 of these homes to sell a hit like that is something you'd like to avoid. It's much better to pay the points to the bank and keep the value high. It's kind of a sneaky way to make the value of the home SEEM higher than it is, but from the builder's standpoint it's a smart move.

So overall, a builder buy down is a sign that the builder is REALLY motivated to sell the property (this is no surprise in today's market). IF you want to get the house anyway then there's no harm in taking advantage of it, just keep in mind that:

1) A builder buy down of a mortgage is a sign that waiting could result in lower house prices.

2) The higher appraised value of the house could affect your property taxes.

3) There are all kinds of builder buy down loans some only lower the rate temporarily (like for the first few years) so make sure you understand the terms of the loan.

There is a great detailed article on builder buy down loans here:

Builder Buy-Down at Lendingtree

I thought that the article did a great job of summarizing how to view these offers so I thought I would quote the final paragraph of the article here:

"A buy-down can be very attractive, but it shouldn’t be the decisive factor in your home purchase. Regardless of the buy-down, you should shop around, compare loan products from different lenders and take care not to overextend your ability to make your mortgage payments after the buy-down expires."

Is it time to refinance?

Posted By Paul

So you've probably been hearing about the historic mortgage rates, and maybe you have been thinking about refinancing.

Well since I've been looking into it myself I thought I would share what I've learned from the process.

Before calling up a lender, there are a few items that are good to get clear in your head:

1) Your refinancing goal: Do you want to pay less interest in the long run? Do you want to pay off your house more quickly? Do you want to lower your monthly payment? It's important to be clear on these questions since various refinancing choices (or for that matter whether or not you should refinance) often come down to your refinance goal.

2) The timeline for your house: It's so hard to predict, but if you can make a guess as to how long you plan on staying in your house it helps make various decisions easier.

So if you have these items clear in your head, now what?

At that point you can call a mortgage person and have them run some numbers for you. Keep in mind that usually the way the whole thing works is that you refinance (which includes fees) and the good news is that you get a the new rate, but the bad news is that you pay the fees. You can of course roll the fees into the principal of your mortgage, that means no out of pocket costs to you (which is good) but the amount of principal you owe on your mortgage just went up (which is bad).

There are lots of mortgage calculators out there, some of which are specific to refinancing. Here is a page with a lot of them:

http://www.mortgage-calc.com/

I like the 'Simple Mortgage Refinance Calculator'. It asks you for the basic numbers of your refinance and then calculates your payment change and the number of months before the interest savings offsets the closing costs.

Where I am personally coming from in this refinance is that in these uncertain economic times, I'd like to lower my monthly payment. The refinance is a trade off for me. By refinancing I reset the clock on my mortgage (I'm now scheduled to pay off my house in 2038 if I stick to the payment schedule), and the fees (which I am rolling into the loan) makes the amount I owe go up slightly.

However my wife and I talked it over and we decided that in these uncertain times the fact that our required monthly payment goes down is worth it. We figure that we can always pay extra to the mortgage. In fact our plan is to continue to pay the "pre-refi" amount every month and just apply the extra towards the principal. The nice thing is that if things ever get dicey (like I get laid off or some other big expense comes up), we can always stop paying the extra.

We toyed with the idea of refinancing at a 15 year mortgage, but even with the better interest rate our payment would go up a good bit, and that just isn't our priority right now.

Lots of choices in refinancing, it really helps to figure out a few basic questions to guide you as you run the numbers.

Topic Revisited: Mortage Backed Securities

Posted By Paul

Considering the recent economic times I thought it would be a good exercise to revisit some of the earlier Frugalize posts regarding various investment vehicles. My goal is to look at the post and see if the information in it is still accurate considering the very different economic landscape from just a short year ago.

I thought I would start with the posting about:

Mortgage Backed Securities

If you've read the earlier post, one specific item I mentioned was:

"One problem is what if Joe B can't pay his mortgage? Well you have the house as collateral so that helps, and of course in a real MBS you are just one small part of a large conglomeration of mortgages so the risk of any one person defaulting on their loan is diluted."

This statement seems especially interesting in current times.

When I wrote the first article I found my information by doing some simple research on google. I did a similar thing today and an article on riskglossary.com had a very interesting paragraph that specifically mentioned how MBS were behaving in the last 8 years:

"Starting in the early 2000s, private label MBS were increasingly issued with little or no credit enhancement and on pools of risky sub-prime mortgages. For the first time, MBS posed significant credit risk. Because credit risk made these instruments fundamentally different from earlier mortgage pass-throughs, many market participants avoided calling them MBS, preferring to label them asset-backed securities instead. Volume in these risky instruments grew rapidly until 2007, when defaults accelerated and the market values of the instruments plunged. This caused a liquidity crisis that spilled into other segments of the capital markets. A number of hedge funds with leveraged exposures to sub-prime mortgages folded."

(for the full article that this came from click here)

It seems that the risk level of MBS were in some cases much higher than people suspected. I never invested in MBS but it would seem that people who did would have had a very rough time in the last year. I guess it just goes to show you that one year can make a big difference in the perceived risk of a particular investment.

If anyone out there has experienced the MBS roller-coaster first hand I would be very interested in hearing about it.

Shrinking the mortgage

Posted by Matt

When my wife and I first bought our house, I posted some thoughts about whether we should make any additional payments to the mortgage principal. We deferred, electing instead to focus our savings efforts on retirement and our son's education savings account.

Those efforts have been going along just fine; we've been making regular, automatic contributions to the 529 and I'm maximally funding my 401k, but still we had a little extra and felt like our emergency savings accounts were adequate for now.

So, that brought us back to the question: "Should we use the extra cash to reduce our mortgage?"

The arguments against:

1. The additional capital that we convert to home equity becomes inaccessible (well, OK, less accessible anyway; we could take out a HELOC, but that brings us right back to paying interest again.)


2. The extra money could effectively earn a greater return invested elsewhere.

These are both valid arguments that Paul and I have explored the pros and cons of previously. Now that we have "adequate" (debatable; the term is relative and you could make the case that more is ALWAYS better) cash on hand for emergencies, I wasn't too worried about the first argument, but I had a hard time getting past the second. What finally sold me is that the payoff scenarios I sketched out revealed that we could pay off the mortgage in a much shorter period than I had originally guessed.

I still have some confidence that the stock market will outperform my other investments over the long term, but over the short term, I'm much less optimistic. In the short term, I decided to go for the guaranteed return of reducing our total interest expense on the mortgage. So toward that end, we transferred our first extra principal payment (a very easy online option since our mortgage and checking accounts are held by the same bank) this month. Because we just bought this house last year, we're still in that frustrating stage of mortgage repayment where most of the payment gets applied toward interest (read this if you're not familiar with how amortization works). Now I'll be watching much more intently for our principal balance to drop off more and more steeply.

Another part of the plan that I like is that we've got an easy out. I didn't automate the extra payments (which is unusual for me), but this allows us to be flexible in how much extra we pay. I'll target a set amount each month, but there will certainly be months where we need to adjust it up or down, e.g. during the holidays or months when we have travel expenses.

In case that isn't enough for you, here's another bonus I thought of: we'll be able to reduce our life insurance coverage eventually. When I was evaluating life insurance, I decided to pay for adequate coverage to pay off our mortgage if I die. As our principal drops, I can periodically reduce my insurance payments until I get to the point where the basic coverage that my employer provides will cover the remainder. Okay, this one is less significant than the other benefits, providing maybe 4-digit savings as opposed to 6-digit savings achieved through reduction of interest payments, but every little bit helps!

Let me end by acknowledging that this strategy isn't going to apply for everyone. My wife and I are grateful that we are fortunate enough to be in a position to even have to consider where to put our "extra" money each month. But I hope that everyone who reads this, whether they have a little extra money each month or a lot, will at least appreciate the benefits of prioritizing spending. As I mentioned above, this strategy only achieved priority after we'd eliminated car and student loan debt, carefully filled up our emergency funds and ensured that we are saving adequately for retirement and our son's education.

The upside of paying two mortgage payments

Posted by Matt

I felt bad about posting the bad news about falling interest rates on a Friday, so let me redeem myself with a positive story about falling interest rates.

My wife and I have been making two mortgage payments each month for the last five months. No, that's NOT the good news. It's painful, no doubt, but could get worse...I spoke to a friend of mine who paid double mortgage payments for almost a year before he was able to sell his last house. He's smart with his finances and so he's always had good credit scores, but making double payments on time paid off by pushing him past the 800 mark! As a result, he is refinancing his mortgage and expects to drop his interest rate by between 1.5 and 2 percent.

I was already looking forward to selling the house and rerouting that mortgage payment into my savings account, but suddenly the light at the end of the tunnel just got a tiny bit brighter.

Article: Retirement Plan Interrupted

Posted By Paul

An interesting article on CNN Money about how stretching your housing expenses too far can put you in a tight situation:

Retirement Plan Interrupted.

Article: 6 Money Dilemmas

Posted By Paul

Found a cool article on CNN Money today that listed some of the classic "which should I do" scenarios and gave suggestions and information.

The six scenarios the article talks about are:

1) Pay off a credit card OR fund your 401(k)

2) Save in a Roth 401(k) OR a regular 401(k)

3) Lease a car OR buy a car

4) Prepay your mortgage OR invest

5) Buy a home OR rent a home

6) Take Social Security early OR late

Here is the link to the article:

Six Money Dilemmas

What is a Mortgage Backed Security

Posted By Paul

I was recently asked about Mortgage Backed Securities (which I'd never heard of before), so I've been doing some research into them which I thought might be of interest to the group. Here's what I've found so far:

A Mortgage Backed Security (MBS) is a way to invest in the mortgage market by buying a share in a conglomerate of mortgages. I'm going to talk about something called a pass-through MBS which is the simplest type.

Let's start with how you get one. You contact a bank or broker and put some minimum investment into an MBS (I read that the minimum is usually at least $1000).

So just as an example, let's say that you take $10000 and put it into an MBS. What exactly did you do?

Well you took your 10 grand and put it into a fund that is a conglomeration of a bunch of mortgages. It's almost like you loaned someone a $10,000 mortgage.

In fact, a lot of the interesting facets of an MBS can be understood by imagining that you took your $10,000 and loaned it to someone. So I'm going to illustrate what I've learned about MBS by comparing it to loaning the money to someone (we'll call this fictional person Joe Borrower) as a mortgage.

So first off, to invest in an MBS you need to go to your bank or broker and buy a share of an MBS. You give them your $10,000 and in return you get a bond for that amount with a specific maturity and a specific interest rate.

Using our metaphor, buying the bond is very much like making a fixed rate mortgage loan to Joe B. his mortgage will have a term (let's say 30 years) and a specific interest rate (let's say 5%).

So in the mortgage world Joe B gets a monthly bill for his payment. His payment starts off as being mostly interest with some principal going to the $10,000 he borrowed from you. As the years go by more and more of each payment will go towards the principal.

An MBS works the same way. Every month you'll get a check for a certain amount. At the beginning the amount will mostly be interest, but some amount of it will also be part of the $10,000 that you invested in the first place. As time goes by the interest will decline and the principal will increase.

Now lets say that Joe B always pays his mortgage the standard amount. Then for 30 years he will get a bill for the exact same amount and will pay that exact amount. At the end of the 30 years he will have paid off the $10,000 (along with a lot of interest).

It's the same for an MBS. In an ideal case you will get the same amount every month. At the beginning it will be mostly interest, and will gradually transition. At the end of the 30 years you will have your $10,000 back plus the interest that you received over the years.

It's a lot like YOU are the mortgage lender. Sounds pretty cool right? Well here are a couple of small wrinkles. You'll notice above that I said that your payment in an ideal case remains the same. What do I mean by that?

One problem is what if Joe B can't pay his mortgage? Well you have the house as collateral so that helps, and of course in a real MBS you are just one small part of a large conglomeration of mortgages so the risk of any one person defaulting on their loan is diluted.

Another concern with an MBS is what does it mean to you if a lot of the holders of the mortgages in your MBS start to pay off their mortgage early? Well it means exactly the same thing as if Joe B decided to put extra money towards his mortgage payment every month. The total payment you get would get bigger (because he's putting the extra money towards it) but in the long run you're not making as much interest as you would have if he had stuck to the standard payments. So if Joe B keeps paying his mortgage down early then you will end up getting your $10,000 back sooner, but you won't get as much interest.

Other problems relate to interest rates. Let's say that after a year interest rates have gone from 5% down to 2.5%. What is Joe B likely to do? He'll refinance of course to take advantage of the better rate. What does this mean to you? Well it essentially means that he pays off his entire loan early (the refinance pays off the old loan and creates a new one, but you don't own a piece of the new one). If a lot of people in your MBS conglomeration start refinancing then instead of getting your money back slowly over 30 years with a specific amount of interest you could get a bunch of your money back right at the start and then be done in a much shorter time with less interest paid to you.

Another scenario, let's say that a year after making your loan to Joe B at 5% interest rates have shot up to 15%. What's Joe B going to do? He's going to hold onto that mortgage for dear life because he wants to keep his awesomely low interest rate. What's the problem here? Well if interest rates have shot up to 15% you might be able to get a much better return on your $10,000 with a CD or a plain old savings account, but you don't have the $10,000 because it's been lent out to Joe B. You'll get it all back eventually (with interest) but you may be hating that you're making a mere 5% on your money when you could be making more in some other low risk investment.

So can you get out of the MBS early? Apparently yes by selling your bond, but using our metaphor again let's say you want to sell your mortgage to Joe B to someone else. They pay you some amount and they take over the loan. Well how excited do you think people will be to take over Joe B's 5% mortgage when they could take over a new mortgage paying 15% instead? In this case you may have to sell your mortgage at a discounted rate if you really want to unload it.

So I paint a somewhat gloomy picture of the MBS, but look at it from a different standpoint. If people in your MBS pay off early then the worst thing that will happen is that you'll get your $10,000 back sooner and you won't make as much interest as you'd hoped. If interest rates shoot up and you do nothing then the worst that will happen is that you'll end up with your $10,000 back plus some interest, just maybe not as much as you could have made elsewhere.

Compare this to stocks where if you invest $10,000 then you could easily lose all or part of your initial investment. This is why MBS investments are considered to be quite conservative.

This is a pretty rough description of what an MBS is, and this is just from my own research into it. I read that often the minimums to get into an MBS are high (in the range of $10,000-$25,000), but that it's considered a very safe investment.

Also, you may be thinking that there are administrative costs related to keeping track of all of these mortgages and sending out payments, and wondering how those expenses are paid. You're correct to think that and the answer is that some small percentage of your interest goes to administrative costs to maintain the MBS.

I'm curious enough about mortgage backed securities that I'm going to keep doing some research into them. If nothing else it's interesting to think about how a mortgage is viewed from the lender's side (and a mortgage lender is more or less what you become when you put money into an MBS).

If anyone out there has invested in Mortgage Backed Securities I would be very interested in hearing from them to get a first hand account of the process. Also if anyone sees any mistakes in what I've written here please let me know. Since I'm so new to MBS investment vehicles I might have misinterpreted something I read at some point.

One View On Paying Off The Mortgage Early

Posted By Paul

Matt posted an article called The mortgage prepayment conundrum, but I wanted to share one other viewpoint I heard when talking to a friend.

The idea was this:

The main arguments against taking extra money and applying it to the mortgage are:

1) Any money you put towards paying off your mortgage early can only be accessed by a home equity loan or by selling the house. It can't be accessed easily in case of emergency.

2) Any money you put towards paying off your mortgage early could be put in an investment that can beat the interest rate you're paying on your mortgage. (You can make a greater amount of money by investing a dollar than you can save by applying that dollar to your mortgage). This argument also includes the fact that mortgage interest can be deducted from your taxes so your interest rate is effectively less.

The view I heard addressed both of these arguments by saying:

1) If you have an emergency fund built up, the need to access money you put towards your mortgage becomes less important (you won't need the money you gave the mortgage, that's what your emergency fund is for).

2) Yes you can POSSIBLY make more money investing that dollar than you save by applying it to your mortgage, but that generally assumes some sort of investment that involves some risk (like a mutual fund or stocks). The super safe investments (like Savings Bonds, CD's, savings accounts) give you smaller returns, but a dollar put towards paying down the mortgage is guaranteed to save you money.

I thought these were both valid points which made me think about my own finances. As I mentioned in the article A Simple System For Saving Money I periodically transfer money from my checking account to savings. My wife and I decided that for the next few months we're going to try transferring half of the money into savings and the other half to our mortgage, and see how that works out for us.

The mortgage pre-payment conundrum

Posted by Matt
If you've been reading any of the recent posts on this blog, you'll know that I just bought a house and will be moving soon. For the last month or so, I've been trying to figure out what type of repayment plan (or prepayment plan) for the mortgage makes the most sense. I've heard and read about money-merge accounts, bi-weekly payment plans, extra principal payments, etc., etc.

I've finally made my decision, but let me take you through the options.

1. Money merge accounts - these are popular in Australia, but I'm having a hard time coming up with a simple way to explain how they work. I usually take that as a sign that I should steer clear. If you want to read more on the topic, check out wikipedia or just google "money merge"; there are suddenly tons of articles about them.


2. Bi-weekly payments - this is a comparatively straight-forward option. Bi-weekly mortgage payments mean that you make the equivalent of one extra monthly mortgage payment per year, and the more frequent payments also forestall interest accumulation. Using a simple calculator, I determined that a bi-weekly payment schedule would cut 5 years off our repayment and save $73867.04. Sounds good, right? One warning: if you decide to do this, DO NOT sign up with one of the many fly-by night companies that sends out junk mail offering to set it up for you, as they will tack on hefty and unnecessary fees. It is a free option at our bank and probably most others.


3. Extra principal payments - probably the simplest and most flexible method. Wells Fargo bank allows us to transfer extra money to the mortgage from one of our other accounts. At some banks, extra payments are applied toward future interest payments, so make sure you follow your bank's requirements for applying payments directly to the principal balance. Wells Fargo does this for us automatically and even provides an option to schedule automatic extra payments.

After giving it the options a lot of thought and doing some more research, I decided that I don't want to prepay at all due to an important concept called "opportunity costs" (which I actually remembered from a college economics course, so I guess I got my money's worth that day!) Say I have $100 burning a hole in my pocket and decide to throw it toward the mortgage. In doing so, I give up the opportunity to spend that money elsewhere. An economist would advise that each spending decision you make first requires an evaluation of whether there is a more rewarding opportunity available.

So, here are some of the options I have to weigh and determine which has the greatest reward:

1. extra principal payments to my mortgage
2. additional contributions to my emergency savings account
3. additional contributions to my retirement accounts
4. Contributions to my son's 529 education savings account

I tried to come up with an exact algorithm that would determine which of these would put me the furthest ahead strictly in terms of my future net worth, but the number of variables make it very tricky. There's a great paper on the topic with some scary equations, but I felt like it really required one too many looks into the crystal ball (what will my investment returns be? what tax bracket will I be in later in life?). My takeaway is that options 3 and 4 above are probably the highest priorities for me right now, with one caveat: whichever option I choose, I must set up a system to regularly and automatically fund it. The main strength of the bi-weekly mortgage payment plan, for example, is that it is automatic, so it could potentially be a better choice for some people if they feel that they lack the discipline to regularly make manual contributions to their IRA.

So, my wife and I will revise our budget (after we complete our move) and figure out where the extra money should go and how we can make sure it gets there!