Strategy 67 of 107
Move idle savings above the emergency fund to principal
What it is
Build the emergency fund first.
Steps
- Build the emergency fund first.
- Money above that, earning less after tax than the mortgage rate, can go to principal.
- Ask for a recast after a large payment.
Repeat: Once, then whenever savings pile up.
Measure: Amount moved (enter as a one-time amount).
Try it in the calculator Enter its amount in "One-time amount to principal". Add a payoff goal of 5 years to see what is still needed.
Risks
- Money in the house is hard to get back; a lost job does not pause the mortgage.
- Keep retirement contributions going, especially any employer match.
Who it fits
Average household, Higher earners, Higher net worth, with assets, Business owners, Newlyweds, Married couples, College students, Single, Grandmas and grandpas (62 and over), No high school diploma, No college degree
Needs
Savings or investments beyond the emergency fund
How predictable
Most predictable: once in place, the payoff date is arithmetic
A worked example (hypothetical, not guaranteed)
Picture a hypothetical household (average household). They owe $300,000 at 6.5% with 30 years left. The required payment is $1,896 a month, and that payment, which comes from income, never changes in this example.
They follow the steps: build the emergency fund first.
Suppose it brings a one-time $30,000 on principal. The loan would be paid off in 22 years 10 months instead of 30 years, saving about $134,798 in interest. To finish in five years, they would still need about $3,387 a month more from other strategies. That is why the five-year sequences stack several at once.
The amount above is chosen only to show the arithmetic. It is not an estimate of what this strategy will produce for anyone. Put real numbers from the fact finder into the calculator.
Sequences that use it
- Servicer check-up: Make sure the servicer credits every extra dollar, drop mortgage insurance on time, fix the escrow, then put idle savings to work.
- Five-year sprint: move out and rent it: The whole rent goes to principal for up to three years, idle savings go in, and each recast lowers the required payment. Move back in time to keep the home-sale exclusion.
Sources and more information
- CFPB: An essential guide to building an emergency fund consumerfinance.gov
- FDIC: Your insured deposits fdic.gov
Where to get help
- CFPB: Find a HUD-approved housing counselor (free or low cost) consumerfinance.gov
Related strategies
- 71. Sell in a high-cost area and buy for cash somewhere less expensive
- 72. Live-in improve and sell, every two years, tax-free gain each time
- 73. Sell a rental property and pay off the home
- 74. Sell all or part of a business
- 59. Sell a timeshare or vacation property that costs more than it gives
- 75. Sell vested employer shares you already own