I’ve been thinking more about whether I should commit some additional funds to pay down the principal on my mortgage and reduce my interest paid.
There is already a good deal of discussion on this topic in my posts Why Paying Down Your Mortgage Early Can Be A Smart Investment and 10 Reasons You Should Never Pay Off Your Mortgage, but I’ve tried to summarize and update all the pertinent points into something more coherent below.
Other Higher Priorities?
I don’t think paying extra towards a mortgage should be the highest priority. If you have no emergency fund, high-interest credit card debt, proper insurance, or don’t have your IRAs/401ks maxed out, then you probably should focus on those things before worry about paying extra towards your mortgage.
What is your tax situation?
Next is the topic of tax-deductibility of mortgage interest. Everyone already gets the standard deduction, which in 2012 is $5,950 for singles, and $11,900 for married filing jointly. Only the amount that your itemized deductions exceed this amount actually saves you money. If you have a $200,000 mortgage at 4%, your interest is only $8,000 the first year (and decreasing in subsequent years). If that’s your only deduction as a married couple, you’re not getting any real tax benefit at all.
However, some people have a big cushion of deductions, like high property taxes, state income taxes, charitable contributions, etc. Some don’t. Some people are in high marginal tax brackets, where saving 35% sounds really nice. Some are in the 15% or lower tax brackets. As for us, we are in a high marginal tax brackets, and pay a good deal of state income tax, so the deductibility is definitely in effect.
Paying 4% mortgage interest fully-deductible would be perfectly counteracted with a bond earning 4% interest fully-taxable.
Comparing with other investment options
One major argument against paying extra towards a mortgage is that you can earn a better return elsewhere. Who cares about saving 4% interest annually when your money could be earning 8% somewhere else? As we’ve seen recently, stock market returns are not guaranteed, and also not without lots of heartburn. Do you really want to invest in stocks using borrowed money? If anything, you should compare your mortgage interest with a high-quality bond or bank account interest.
Liquidity
Another argument against paying extra is that it is hard to access the equity in your house. You may not get a home equity line of credit, or it may be frozen later. However, if your alternative investments are in IRAs or 401k’s, then those aren’t exactly liquid either. Also, if you have an adequate cash cushion (as we do) and proper insurance, then liquidity will become a lesser concern. I don’t need to have access to every penny of my portfolio at all times.
Inflation hedge
A nice thing about mortgage payments is that if you have a fixed mortgage, the payment stays the same each month. Meanwhile, rents will increase with inflation. If inflation starts to rise significantly, you’ll be very happy to have a loan at 4-5%. But we also may stay in an era of prolonged low interest rates.
A possible strategy?
After all that, my idea is to simply look at the current yield of a comparable U.S. Treasury bond and compare it to my mortgage interest rate. If my mortgage interest rate is a lot higher than the bond rate, then I should pay extra towards the mortgage. Otherwise, if the Treasury rate is higher, then I should invest in bonds or bank accounts directly instead. If it’s close, stick with liquidity.
As of 2012, my mortgage rate is now slightly under 4%. I expect to pay off my mortgage in under 10 years, ideally closer to 5-7 years. This means that I’ll effectively be earning 4% a year for 10 years, whereas the Treasury rate for a 10-year bond is only 2%. If rates do rise, then I’ll stop paying extra toward the mortgage. In the meantime, since I already have bonds in my asset allocation, I’d much rather earn 4% by paying down the mortgage than 2% in the market. (Remember, I’m already maxing out both IRAs and 401ks for the year.)
I really don’t like the idea of staying in debt longer just for the possibility of investing for higher return elsewhere, especially as the difference for such a short time is minimal. I have plenty of money in stocks and if they go up 8% a year over the next 5-7 years, then I’ll still be fine.
(Posted originally in 2009, but I have updated the numbers for 2012.)
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I always round my mortgage payment up to the next $100 when making a payment. At this time, I pay an extra $67 per month directly to the principal. This is an extra $800 per year. Not bad, and this will definately add up and help reduce the time it takes me to pay down my mortgage.
Not really picking up what your putting down about your bond strategy.
Perhaps you can explain it better? I just do not get what one has to do with the other (Treasury Bonds vs. mortgage rate)
I think the other reasons you provide more than give reason not to pay down the mortgage early.
Can you explain your possible strategy more clearly? I’m not getting it.
I go back and forth on the idea. I was paying extra for a while, the amount calculated to end my mortgage in 2029 (the earliest retirement year I could start my pension). I’ve decided to hold on to a bit more cash for a while, and I really feel like I may enjoy that inflation hedge in about 5 years, so currently I am not paying any extra.
For me the biggest issue is probably the liquidity question. While it is true that pretax IRAs and 401(k)s aren’t as liquid as some investments, they are way more liquid than the equity in your house. The idea of being in a pinch and having that money bound up is very unattractive to me. An emergency fund is something, and I have a good fund as well. But I suspect that the brain has a hard time imagining how profound the loss of an income is, so I haven’t taken a healthy emergency fund as license to tie up too much money in home equity.
I think another important factor to consider is how long you are planning to stay in the property. For example, if you planning for only next 4-5 years, then I do not think there is any point in paying extra towards your principal, especially in these times. However, if you plan to stay there for the next good 10+ years, then it definitely makes sense. Make sense?!!
Also, for those paying PMI, it is beneficial to pay down your mortgage until you no longer have to. In my situation, by paying down my mortgage, I am getting a guaranteed 6% return, plus, once I have 20% equity, I get a guaranteed $100 a month (from lack of paying PMI).
1. Why compare to T-bond? You can get a 5% 10y CD at tax-sheltered 529 plan now – http://www.collegeadvantage.com
2. do not forget about the fact for some people deduction start to phase-out. Also, Obama wants to limit deductibility as well even
Just two extra points.
I decided to find a date in the future, when it would be nice to have my mortgage paid off. That date was August, 2016, since that will be the date when my oldest child would enter college. I add enough monthly to reach that goal, which has become my baseline.
If I want to add more later, I can, but I will make it less of a priority than building up my emergency fund further, my retirment to the level of my employer’s match, Roth IRAs and 529s (which gets me a 20% tax credit from my state).
Granted, it is easier for me to do that, since my mortgage rate is only 4.625%.
Hi,
I think the only danger that you forget to mention is that in doing this you are in-advertantedly avoiding making more payments into the down stock market (your global asset allocation)… Just as you did when you dramatically increased the level of your emergency fund. Fine, these are safe plays, but the unsaid words are that the stock market is as risky as ever, which is a bit false because its obviously as safe as ever too after such dramatic falls…
In other words, make your plan, and stick with it… Don’t keep tweaking it from month to month (with the tweaks resulting in less investing in a down market), because you will be in danger of missing out on the full benefits value averaging…
Geoff
I’m torn on this, kind of.
I REALLY don’t like debt, so my instinct is to pay it off asap after I have a reasonable emergency fund in place. The thought of paying countless thousands after thousands of dollars in interest to the bank makes me sick to my stomach.
On the other hand, if you prepay $20,000 over the years and then fire/flood/tornado/whatever rears its head then in theory the insurance will cover you anyways right? Or if you die, then the your mortgage/life insurance will pay the balance off anyways. Time like that, it’d be nice to have that $20k in the bank/invested safely.
Or like you say, if the banks keep on printing money like mad and inflating the money supply then a $500 mortgage payment today will be chump change in 10 years or whatever.
Gah, what to do? All the above I suppose.
I vote yes, pay extra. If it was 1998 and we were all making 20% on investing in dot-coms, my answer would be different. But if you have a fully-stocked emergency fund (whether it’s Suze Orman’s 8 months or something less or more), paying off that mortgage early sure beats the -30% return so many people have gotten in the market the last year. Plus if the unthinkable happens down the road, you’ve got a roof over your head.
Disclaimer: We are not currently paying extra. Until last month we paid $700/month extra (on a $1400 mortgage), but just decided to redirect those overpays, temporarily, to stock the emergency fund more fully.
@ DM
What are you talking about DM? A 529 program must be used for higher education (or similar needed items).
That is not at all the point of the post?
This is tough, and I’ve read a lot of opinions on this topic, but what finally made my decision was the idea of not having a mortgage payment and freeing up X amount of $ each month. I’m on track to pay off my 30-year in 15 years right now, but my goal is 8 years.
That being said, I’m still maxing out both of our Roths and building up an emergency fund, but everything else I plan on throwing at the mortgage.
I just love the idea of having an extra $1,000+ of income each month freed up. And I’m really against the idea of debt now. Maybe I’ve listened to Dave Ramsey too much 🙂 (I disagree with a lot of his ideas for the record).
So… I paid our mortgage off. I was paying 6-1/4 plus FHA insurance fixed for the life of the loan, giving me an effective rate of 7% or more. When my wife and I were both working we were generating an extra $2000 a month in cash flow. The question was… invest this or pay down the mortgage? Well in 2006 we started paying it down. We sold all our taxable stocks and bonds (still contributed fully to IRAs and pension). And we paid the thing off last summer! Looking at what happened to our alternative (the stock market), paying off the house was by far the best investment decision I have ever made.
Now, we are down to one income because the kids are coming. Now, instead of making ends meet, we have a little bit of slush money to live more comfortably. My peace of mind and our quality of life and our balance sheet are all much better for paying the house down. I know its not for everyone but… seriously consider it!
Oh, I have a friend too who took a second mortgage to invest in the stock market and profit from the arbitrage. As you can guess he’s stopped bragging about all the “free” money he made!
I like your idea of correlating your mortage with a Treasury bond. However, it requires more time and worry than I care to give. Besides, it seems kind of arbitrary to pay some months on a home mortgage but not other months simply because of external rate fluctuations.
To me mortgaging the home and investing the proceeds is reasonable if… (1) The mortgage is low and fixed rate, (2) Your investments are exclusively in the stock market or something else high-return, (3) All your investments are liquid without a significant withdrawal penalty, and (4) You’re in a high tax bracket. In practice, this means you will not have a diversified portfolio and your investments will be outside tax-sheltered retirement accounts. It’s a risky strategy for a wealthy person.
Most of us would be better off building a large emergency fund, putting half of our “investment” money into a stock market 401k/IRA fund, and using the other half to pay off the house. The emergency fund reduces liquidity risk. Half of the investment is high-return, tax sheltered, and possibly employer-matched. The mortgage amortization has low-ish return but zero risk (even lower risk than US Treasury bonds). Once the house is paid off, you can begin buying bonds to diversify the investment portfolio. Although it’s true that amortizing the mortgage eliminates an inflation hedge, the stock and the real-estate (100% of your investments) are already inflation hedges.
Either way, it doesn’t make any sense to buy bonds until the mortgage is paid off unless it’s part of your emergency fund.
I’m in the same dilemma. I have an 80-10-10 loan. I purchased a house for $220K in 2006.
I currently owe about 18K on my second mortgage at 7.86% fixed for 28 years. I owe 168K on my first mortgage at 5.75% fixed. Paying off the second mortgage altogether would save me about $160/month.
I tried refinancing, but my house value has decreased by 10%, thus reducing my equity to only 7.5% now. So the bank wouldn’t refinance and even if they do, it would add $10K to the closing costs for a reduction in monthly payment of just $35. So it doesn’t seem worth to go that route.
I’ve saved 2 years worth of living expenses for my emergency fund plus fully funding ROTH IRA and 401K plan. I’m thinking about paying the second mortgage off, which will reduce my emergency cushion to only 1 year worth of savings. But I’m also going to save almost $2000 per year for reduced payment.
My rational mind thinks that I should pay off my second mortgage for an ROI of 7.86% even at the expense of reduced emergency cushion. Has someone in this situation taken the plunge?
I have no debt other than my mortgage and have ample taxable savings, so prepaying my mortgage for me is a no-brainer, especially when, in this economy, there’s not much earning an equivalent 6%.
I’ve been prepaying ever since i bought my house 14 years ago, ranging from an extra $100 a month to what i’ve been doing for the past year or so, an extra $425 a month. (I fully fund my 401k and IRA.) At this rate, i’ll have my 6% mortgage paid off in 6.5 more years, meaning, i will have paid off my 30-year loan in 20 years. Bravo for me!
My salary is well below 6 figures but i live very frugally.
Yesterday i called my mortgage holder to see if i would be better off refinancing on the remaining $65K balance (with about $2,000 in closing costs) to their current 15-year rate of 4.6% and continuing with my current payments but not the prepayments.
turns out the difference between doing that and continuing what i’m doing is just a few thousand dollars, not worth it, in my view, especially since if i lost my job i can easily stop the prepayments, while a refinanced loan would not give me that kind of flexibility. (And in fact there have been several times over the years when i did stop the prepayments due to job j loss.)
The inflation hedge argument is kind of dumb when you don’t even consider the other side, which is the opportunity cost of the money you have locked down in your house. Sure, his payment is only $300, but the money he has locked in the house could be making money elsewhere.
Can anybody comment about a scenario if one is not sure if he keeps the morgage the whole term. Let’s say, he is 5 years into the 30 year term, and plans to sell the house in 5 years and buy a bigger one. Should he still prepay?
A little off topic but have you checked out,
http://www.home-account.com
One of the founders, Bob Cringely talks about it hear,
http://www.cringely.com/2009/03/so-that%E2%80%99s-why-he%E2%80%99s-so-interested-in-mortgages/
I’ve been meaning to sign up to try it out but haven’t had a chance.
Add a couple extra hundred bucks toward the principal if you can comfortably afford it and have a decent cash reserve for emergencies and other spendings. You won’t miss it. I don’t think it’s worth weighing too much on the differences between various forms of investment. It’s nice to own your house outright. And if you can do it while not jeopardizing your financial security then I think it’s a good idea.
I started out with a 30-year mortgage in 1999. When the rates dropped, refinanced it into a 15-year mortgage in 2003. Paid down some principal and on the way to pay it off earlier than schedule. It feels great to be able to do this. And all that was done with negligible affect to my overall finance. Of course, I was lucky to buy before the RE boom and benefited from the rate drop, but I think the decision to slightly increase my mortgage payment to pay it off earlier was a good decision.
I look at my home as a mid-term investment rather than a long-term investment. It’s unlikely that I’ll stay in the house for 30 years, maybe 5-10. With a low interest rates and stagnant real estate, I don’t see a reason to have money trapped in home equity.
I would prefer to stay liquid, so I don’t have to sell one home to buy another. Otherwise, you have no flexibility when home shopping. And if you’re ever forced or need to change jobs, you have much more control over your situation (as long as you can afford two house payments). I also don’t believe that your house payment should be more than 20% of your gross income (live within your means).
Does AMT figure into your calculation?
We were hit by amt this year and couldn’t deduct our mortgage interest.
And as someone above pointed out that deductions will be limited soon…
Random thoughts:
I think that you believe you should compare the rates for investments with maturities that equal the number of remaining years on the mortgage. Right now, comparing a 30-year Treasury Note to a 29-year remaining mortgage term is reasonable — but it won’t be so reasonable 15 years from now. If I understand you correctly, in 15 years, you will be looking at 15-year notes, not 30-year notes.
I would normally say to invest long-term funds in equities, mid-term in debt instruments, and short-term in cash equivalents. Your strategy effectively says to invest all terms in debt instruments.
If you’re in the 25% tax bracket, that mortgage is costing you about 3.8% after Federal Income Taxes — less if you pay State Income Taxes.
Your credit rating is dependent on having different types of credit. If you pay off the mortgage, you could easily harm your credit rating — fairly typical for retirees.
Mortgage rates are at historic lows with abnormal pressures keeping them there. Long-term equity assets are also down significantly — the combination is not likely to repeat.
If there’s even a remote chance of children later, then you should reevaluate your whole thinking process — kids have a major effect on your financial plans.
I have always tried to pay off my mortgages early — but lately, I find myself valuing flexibility much more. I’m actually looking at refinancing into a longer term to provide more flexibility, help my kid with college, and increase my saving rate. I have that option because I did pay down my current mortgage in the past. Sometimes the right answer can change…
You neglected to mention that paying off principle decreases the investment leverage that your house provides. I guess this may be a good thing now that prices are dropping (hence, the leverage magnifies your losses), but if house prices increase, you paying off principle will decrease your effective return.
Just one more dimension to the equation.
Also, to quantify the benefit/cost of paying off your mortgage in X years assuming an opportunity cost of Y% return in other investments, the NYT Rent/buy applet is handy. Just compare the cost of “buying” for different combinations of X and Y. (http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html)
There is another alternative. Say your mortgage is a 5.125% gross number. After tax deductions considered, you’re looking at a 3.5-3.75% net number. The question is, can you earn an average of 3.76% or more on an investment over the next 29 years to make not paying down the mortgage make more sense? Comparing this to the short-term moving of the market is not an apples-to-apples comparison, as you’re comparing 2+ years to almost 30.
One of the posters above made the comment of, “Look at me, I sold all my investments to pay off my house.” Friend, you now have zero cash maneuverability for any major situation. Good luck.
My solution to this would be to look at a guaranteed investment that offered rates above or beyond 3.75% net. To this, I’d say buy muni bonds. I personally have bought some in the past 3 months that are paying 5.65% net and ar AA- and above rated. I’m making a 2% spread on your 3.75% from an ultra-safe investment. To me, that is a better solution than cashing everything out because it gives you liquidity like an online savings account and provides tax-free income.
Stewie – A mortgage is a bond in terms of the lender. You borrow, and pay interest each month. But if you pay down the principal, you save that interest, effectively “earning” it. It’s like buying a bond yourself, where you earn interest in exchange for tying up your money for a while.
Don – This is true, but how much liquidity do you need? Let’s say you have 12 months of expenses and $50k in 401ks and IRAs and $50k in taxable investments. In what scenario would you desperately want back the $500 extra a month you put towards a mortgage? At some point you don’t need every last drop of liquidity.
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I’m not an AMT expert, but I thought mortgage interest deduction was allowed under AMT – “up to $1,000,000 of home acquisition debt for your main home and secondary residence.”
As you know I am not a fan of paying down a mortgage.
The key thing to me is that paying down a mortgage reduces your leverage. When it comes to making money over the long term, “safe” leverage (backed by a solid asset like a house) is a huge advantage.
My plan until I have so much money that I never have to worry about working again, would be to invest any “extra” money rather than pay down a mortgage.
I don’t agree with the concept of keeping “extra” money in safe assets when you are young. In my mind anything you can afford to expose to the market for 10+ years, you should until you are financially set – then you protect what you’ve got with a “safer” mix of assets.
The fact that financial news is so bad right now (and that treasuries are so low), is the reason not to change strategy – stocks may be very cheap right now and your “Savings” of tax-deductible interest may look measly in comparison to where your profits from investments made right now may end up.
If a person doesn’t have the discipline to invest regularly – then the advice is the opposite – pay down your mortgage. You will be less bad off then if you left it in a bank account – BUT the important thing is you will be worse off than if you invest (over time assuming we don’t go into the great depression again).
“The inflation hedge argument is kind of dumb when you don’t even consider the other side, which is the opportunity cost of the money you have locked down in your house. Sure, his payment is only $300, but the money he has locked in the house could be making money elsewhere.”
The opportunity cost was already discussed… let’s say he extracts money from the house with a home equity loan… what investment can you earn 6% with no risk for 10 years?
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Length of mortgage / keeping the house.
I thought about this as well. But if you assume that if you sell your house, you’ll simply get another mortgage, the benefit basically carries forward. You’ll get back your additional principal payments when selling, and also have paid less interest during that time.
You have the right idea: compare the AFTER TAX mortgage savings with what you can earn elsewhere, but comparing to the cash / bond rate is too conservative for most people.
Look, you’re in this for the long-term (eg do you have 20+ years left before you plan to retire?), so put your money where you can get the best 20+ year return; this is the order:
Businesses
Real-Estate
Individual Stocks
Index Funds
Bonds
CD’s
Cash
Start as close to the top as you feel comfortable handling eg
You may have no interest/aptitude in either real-estate, businesses, or even learning about how to value companies/stocks, so you may simply buy a low cost Index Fund and wait 20+ years for your return …
Another strategy that should often be considered if you are going to pay off a chunk of principal is “recasting” or “reamortization”.
We wanted to pay off 20k or our mortgage last year, but were also concerned about what would happen if we got in trouble (liquidity issues), so we asked for a “recast” and reduced our payments. We applied the principal, our loan was reamortized and we reduced our payments from 1200 to 900. It cost us $100 and didn’t add any time to the loan.
The benefit is that if we get into trouble, we have already reduced our payment and we’re sure we could cover our loan payments with savings and won’t be out looking for a re-fi or home equity loan when we’re unemployed. In the meantime, we continue to make our old house payment and pay down equity or save the cash each month to build a substantial cushion.
Not all loans allow you to do this. And some banks will only do the paper work if you’re going to pay down at least 5k or 10k. But instead of getting rid of your cash and still being stuck with a higher payment, I’d recast for a few bucks and then if you get into a situation where you are facing a reduced salary, you won’t regret letting go of some of your savings. It’s a win/win situation.
I just did a refi on my mortgage and simultaneously paid down about $145k of principal, so that my new mortgage qualifies as a “premium conforming” loan. (Previously I was “jumbo conforming.”) In doing so, I lowered our mortgage rate to from 6% to 4.75%. Over the course of the loan, the savings from the lower interest rate is about $300,000 (assuming we stay for life–no plans either way yet, but we have no plans to move for the foreseeable future). Paying down the principal leaves me with about $300k in savings to invest in stocks and bonds, either through taxable or retirement accounts. I could have invested the entire $450k in the stock market, but I figured this was a safer way to hedge my bets and lower my mortgage payments.
I have a job that if I get laid off, and not fired, I will have 6 months severance pay. That is my emergency fund. I put enough into 401K to maximize company match. No credit card debt, and a 7K car loan at 4.25%. I started paying my mortgage twice a week, therefore I get a couple extra payments in, and I’m kicking extra towards principal. I just got a raise, and am going to bump my “extra towards principal” up by more. I want to get the deed to my house on my 40th birthday (6 more years). Why have I chosen this path? One thing I never want to happen is be homeless. (now this will get a little deep into doom and gloom.. but…) My 401K balance is an electronic 5 digit number. I have no idea what the future holds in this economy, and theoretically, that electronic number could be come 4 digit or smaller, and then what do I have? However, if I loose my job, can’t find another one, but have my house paid for, they can’t take that (as long as I continue to pay taxes). Plus, I hate debt. When I get my house paid off, that will be a very nice savings each month, and now 100% of that house payment is all mine, and I can invest however I choose.
Correlation with current Treasury bond (or any other) yield is only part of the story. You should be looking at the likely yields over the entire time you plan to be in the house – because once the money has gone into paying down the mortgage it will not be easily available for anything else until/unless you sell.
Basically, paying down the mortgage has an opportunity cost, whereas placing it in an easily-sold non-retirement account (probably taxable) does not.
Right now, yields and inflation are low. But I would guess that they will go up some time in the next 20 or 30 years. My grandparents and parents both had ridiculously low payments on the last houses they bought – the ones they had lived in for many years. I plan to be in the same boat.
After hearing from multiple friends who were laid off, I vote for paying off the mortgage. My laid off friends don’t want to dip into savings or retirement. They want to stop spending as much as they can.
Currently you have a non-negotiable expense every month. If you lose your job, or become disabled (a stroke or a seizure that keeps you from even this job), you will be looking for ways to get your monthly obligations as low as possible, and that is much easier without a mortgage. Also, if I remember correctly, you are planning on living on one income in the future, and having kids. The one-income cushion becomes even more risky (especially in the case of disability, where you may need your wife to help with your care as well as your child).
My new comment lately is that I’m not planning for early retirement, I’m planning for an early lay-off…..
@AP – I too have a second mortgage and am trying to get myself to just pay the whole thing off. I have over a year of an emergency fund, plus a hefty down payment for our next place. We’re maxing out 401ks, Roth IRAs, and also contributing a standard amount to a regular, taxable index funds every month. We’re also paying extra on law school loans on a monthly basis. But in spite of the fact that the student loan interest is slightly higher (6.3% vs. 5.75%), it’s still more psychologically satisfying for me to pay down the second mortgage – rationale being that I will get that money back eventually. I was planning to just pay the whole thing off at once ($22k), but had trouble making myself do it. So I sent in a $5k check and have the goal of paying it off, in increments, over the course of the year.
My feeling is why give the bank your money, pay off your mortgage asap. The thing to do is to put as much of your income in your pocket and less of it in anyone elses. Debt to me never seems like a “good” thing
FYI about banks freezing and taking away HELOCs:
They aren’t allowed to do it without giving you a good reason why. If I heard it correctly it’s illegal for them to. If you bank took away a HELOC and didn’t tell you why, they can get in trouble for it. I heard this on the Clark Howard show a few weeks back. Banks are doing it anway because no one says anything.
With HELOC’s being like 3% anyone thought of just paying off/down a higher mortgage (say 7%) with the HELOC and starting a plan to pay off that within say, 3-5 years? Alot would depend on how long rates stay down but if you are at 7% you can refi to 5% with 2-4k of fees too. Just wondering if anyone has mortgages small enough. For example, 200k house. Owe 125k. Have 60k HELOC with no balance. 100-200k in cash. Pay down 125k mortgage to 60k with cash in bank, then the rest with the 60k HELOC. Then pay down the 60k @ 3% for a few months-year and if it even goes to 5% you are still doing well and if it actually got back to 7% say in 2-3 years you’d still break even if not better then on a refi. Confused yet? LOL.
I have read alot about this topic from both sides of the argument. For me it was a no brainer, after my wife and I both agreed upon the strategy we took after buying our house, we have never looked back. We have other goals that are going to be able to met going forward with no worries about the house. I considered it the perfect way to diversify. We max out our 401k (both of us) and pay all bills (obviously) keep a small slush fund and pay everything else to the house. We bought the house in 2002 with one job and one negative income (my way of explaining tuition for grad school). We now make more than triple what we did in the beginning but have not changed our lifestyles much at all. We set a lofty goal (seemed more like a dream actually) of 7 years to pay off the house. Barring a catastrophe in the next 2 months, we will complete that goal 7 days early. I have never felt more free in my life and things seem to be wide open going forward. I know everyone has different ideas, but if it is important to you, go for it, the peace of mind is worth more than you can imagine. I honestly don’t care that much if I lose my job – plenty of fun things to do that can occupy my time and working at McDonald’s can pay my taxes 🙂 I cannot think of a better tax free investment that I could have done for part of our portfolio over the last 7 years. For those of you who worry about paying into being upside down in a house, we were much more likely to be upside down had we paid more than the entire purchase price once over into the interest on a 30 year loan, rather than paying less than 1/4 of the purchase price into the 7 years we took to pay everything off…..
I’ve seen numerous comments indicating one should compare the “after tax” cost of the mortgage to the alternative investment when considering the prepayment decision. Such statements are, at best, greatly over simplifying the analysis.
If you don’t understand why, check out http://www.mtgprofessor.com/A%20-%20Early%20Payoff/how_do_taxes_figure_into_the_loan_repayment_decision.htm
Another thing to worry about: Inflation
Every dollar you “pre-pay” into a mortgage becomes a dollar that is locked into losing value due to inflation – and if predictions are true about the current government spending possibly creating hyper inflation, your money will be trapped in a inflation-losing bucket.
Why pay extra every month on a depreciating asset? Invest in the stock market it will bounce back faster than California real estate. Remember, California is ground zero for the subprime scam inflicted upon the country. Combine this fact with lower immigration into the country means lower or flat housing in California for a long time.
There are number of factors to consider:
1) Is your mortgage interest tax deductible for you? For both federal and state taxes or just federal? For people who live in high tax states like NY, state income taxes for most people cover most of federal standard deduction, but they aren’t tax deductible from state taxes. In other states and at lower incomes this may not be the case.
2) Can you repay everything quickly e.g. with a single lump sum or are you just slightly decreasing the number of years you’ll pay it? In the former case, repaying may make you feel more secure – you’ll no longer have payments, but then you’ll have a lot of money locked in a single place (your home). In the latter case, if you keep making extra payments, you’ll have less cash on hand for (really serious) emergencies but still have the same payments. In this economy even a 12 months emergency fund may not be enough.
3) Do you expect inflation or deflation? This would’ve been the main consideration for me. Continued low interest rates or higher interest rates? Right now there seem to be two opposite forces. On the one hand, the government is borrowing more and more and also printing money, so the money supply is growing. Plus, at some point Chinese and others may just lose appetite for the US debt. Right now the government is able to borrow at a ridiculously low rate and the value of government bonds is way to high. This is bound to change. If the rates go up, we’ll get higher interest rates.
At the same time, the velocity of money is virtually nil. Many banks are insolvent, more and more people are getting laid off and those who are still employed are afraid to spend money. With people not buying anything more and more businesses may close, more people will lose their job, creating a vicious cycle of contraction and unemployment and, yes, lower prices. There is a high risk of commercial mortgages defaults and credit card defaults. More trouble for banks. This is a deflationary force.
Which one is going to win? The government is doing everything to prevent deflation since it is a bigger problem to deal with to the point of Bernanke promising to dump money from helicopters if need be. So, IMHO, the chance of inflation couple of years from now is pretty high. But my guess is as good as yours, so what is important is what you believe in.
4) How old are you? How long do you have before retirement? Most people probably don’t want to have mortgage in retirement. Plus, when you retire, you are less likely to have enough income to deduct mortgage payments.
5) What makes you happy.
So everything really depends on your individual situation. If you believe we’ll have inflation, there is no point in making extra payments. I paid off my mortgage some years ago with a lump sum, but I probably wouldn’t do it now. I’d wait, keep making payments and see where the economy is going, and hoard the money both “just in case” and to see what happens with inflation. If I were to “upgrade” now, I’d definitely take a mortgage even if with the property I am thinking about I could pay the difference in prices in cash. But I might be wrong. I do have to say that having a paid off mortgage is nice psychologically, but at the same time, having a lot of money locked in your house is worrisome.
take the extra, put it in i-bond (im over 6% on one right now), and if the rate drops, then pull it out and pay it towards the mortgage.
as long as you can beat the mortgage rate, build the interest.
chances are, you will refinance or move at some point, avg mortgage only lasts 7 years.
i would rather have the liquidity and be able to pay down at some point if i needed to… ie in my case we did a refi from 30 to 20 yrs, cut interest rate by over 1.5%, and only had to throw down a little bit to get to 80% loan to value. having the cash lets you get just to 20% if you need it – why pay what you dont have to if you have the cash on hand.
There is nothing like living in a home that you know no one can take away from you. It took me 3 years of paying some serious extra principal to pay off my house 8 years early. The mortgage was 8%, so it was definitely worth my while. I love the freedom of knowing that even if we lost our jobs we wouldn’t be out on the streets.
You can do all the figuring you want about whether you come out ahead to pay it off or not, but it was one of the best decisions I have ever made. Now my biggest problem is deciding what to do with all that money I saved, thus made (and am still saving) 8% on.
I’ve got this anti-interest policy…I’ll do anything not to have to pay interest on anything. I’m only in to earning interest now.
Nothing feels better than having a paid-for house, especially in this economy. If you have a decent emergency fund and have your retirement on autopilot, use the extra to get rid of that house payment as soon as possible.
I was watching a personal finance show on TV the other day and someone called in asking if they should pay off their house (they had the money). The idiot on the show said to “not give up those fabulous tax advantages”. What a joke! Why pay $1 in interest to save maybe 35 cents?? That’s the kind of advice that makes people poor. If it’s that great of a deal, I’m offering anybody that wants to take advantage of it an even better deal. I’d probably be willing to give back 90 cents for every dollar you give me. Let me know if we have a deal.
I paid off a small rental house mortgage April of 2008 before things got so bad. The couple renting the house were going to stay for years but ….due to President Obama’s $8000 bonus they quickly bought. Advertising yielded no tenants so I faced a vacancy or lowered rent or having to sell. My stress was lowered immensely by having the sucker paid off. In the end I took a lease through November for more money.
I’m rolling my HELOC and first mortage into a 4.8% loan at present. I don’t want a variable anything and I want to keep my cash. With real estate you never know how bad things will get especially with government incentives for first time home buyers. Hey, isn’t that what got us in this fix to begin with? People who couldn’t afford to buy were induced to buy? When will we learn?
Two questions:
1) Would you take an equity loan on a property valued at close 950,00 that is free and clear, and bank it (income from the building is ~$2000)
2) Would you invest 75% of your savings ~ ($40,000) to buy down your mortgage from 5 7/8% to 4 7/8%? The fees total ~ $6,000, the rest would go toward the principal. The principal would be reduced to $280,00 and the payments would be reduced by $450 per month. Wells Fargo appraisal had me upside down; my second appraisal still short of what I need to avoid PMI without buydown . Need some objective opinions, please. 25 1/2 years left on the mortgage. Will probably keep the house for at least another five years. It is secondary residence so I don’t qualify for any of these wonderful bailout programs. Credit is excellent, no missed payments.
Thanks for your comments
Here’s my situation. I am looking for a little advice. I am young and bought my first house at the height of the market, and have found myself pretty far underwater (60-70K). This is a very uncomfortable feeling. I have an interest rate of 8.6% on my second mortgage and owe about 43K on that. I am currently funding an IRA to the max as well as getting my company match on the 401K. I am also putting a couple hundred dollars into extra payments on the mortgage.
This is a hard decision because stock prices are so attractive right now, but I am thinking of diverting my contributions from my IRA to the mortgage. I think after tax considerations I would be looking at about 6.5-7% return on this money.
Well, this kinda seems like a no brainer, but I hope that I am not missing something. What would you do?
Well, I have answered my own question. I think that I had been overlooking the short term situation. It is more important for me to be able to move than to have a fat nest egg. In order to do that, I have to get out from underwater. Money diverted to mortgage.
They issue I have with the “why save 6% when you could make 10%” is the fact there is never a guarantee that you will make 10%. The only financial guarantee is that you will still owe your mortgage at the end of the day. That mentality is if I save enough nothing bad will happen, anyone looked in their 401K lately. You may make 10% now but later you may lose 50%, however, again I say it, you will always owe that 6%. Besides, pay your mortgage off early then take that money and start investing it.
Many folks don’t realize how little it takes in extra payments to reduce the interest. Just one or two extra house payments a year divided by 12 and paid with your monthly premium will start an immediate reduction in the amount of interest you pay each month. Before you know it, it starts to snowball.
I looked at my principal balance one time… and then checked it a few months later, and was saddened to notice there wasn’t a drop in the $1,000’s place of the balance.
So I calculated how much more I would have had to pay in order to have seen a drop in the $1,000’s place of the balance. The additional amount was $250.
And I pay an extra $250/mo ever since.
This is a sort of psychological benchmark. It’s as little lost liquidity as possible to meet a useful psychological hurdle. It hurts too much to feel like I’m making no progress! And it’s worth noting that $1000 in extra principal saves me $50 this year in interest… and $50 every year from now on. Plus it’s forced savings… maybe there’s an advantage to reducing liquidity. Necessity is the mother of invention. However, it can be hard to secure credit these days.
I have always prepaid on my mortgages with the sole purpose of home ownership. I ignore everything else (e.g. tax benefits, investment earnings, etc) simply because ownership is better to me than being in debt. This is my own personal choice, but I remember at least two conversations with friends, who are investors, who chided me for my prepayment program and advised me to invest in the Stock Market instead because I could earn much more (e.g., at least 10% over markets life span) than I was getting from prepayment on my mortgage. If I had followed their advise my invesment portfolio would be 40% less today in value. Since I did not follow their advice my mortgage prepayment program is on schedule with 100% of all prepayments reducing my mortgage by larger amounts each month. I have lost nothing in reducing my mortgage debt; where as I would have loss 40% of my portfolio’s value had I invested as advised. So I ask you, who was right? To me it is all an individual choice. My advice is prepay aggressively on your mortgage with the goal of ownership.
Ask yourself this question, if you have a $1700 (pi) monthly mortgage payment, how much money would you have to have invested to generate $1700 as a monthly income from your investment? That’s $20,400 per year. At 3% return you would need $680,000 invested to generate the $20,400. With a good prepayment plan you can own your home in 10 to 15 years and free up the $1700 payment for investment purposes.
One last thought, I do both mortgage prepayment and regular investment in tax deferred programs because “time” is money and the sooner you begin both programs the better off you will be.
The key here is what would the money be used for otherwise. Lets say you are currently paying $200/month extra towards a mortgage for example. If you were to cease that extra payment and not allocate that money towards saving elsewhere, and essentially spend that money on going out to the movies, a new motorcycle, etc., then it makes sense to be paying it towards the mortgage.
On the other hand, if you are going to take the money and put it into some type of investment vehicle you are going to have 1) more flexibility, 2)more liquidity, 3) more savings. You can increase your 401(k) contribution to bring down taxes even further, invest it in a mutual fund to create liquid savings in case you lose your job (which you most likely wouldn’t be able to get out of your home equity because if you have no job you are unlikely to be approved for a home equity loan), or put it towards other priorities like credit cards or life/health insurance needs.
Essentially, I believe the only reason to pay more than the required amount on your mortgage is if you are going to waste it on consumer products otherwise.
I pay 3,000+ per yr to the principle. we’re only 3 yrs into the mortgage, it will save us about 8 yrs…we have a 4%fixed rate. 19yrs to go!
“Essentially, I believe the only reason to pay more than the required amount on your mortgage is if you are going to waste it on consumer products otherwise.”
Matt, I’m completely confused about your quote I just copied/pasted above? Am I missing something? We are saving 6 digits on our mortgage by paying extra to the principle. it is money101, you pay off your debts as soon as possible: cars, C.C., etc. Do you only make the minimum pymnts on credit cards even the ones in debt that you don’t use anymore? Momey101 would be to pay the C.C. off by using your saved income. I can retire in 17yrs…they will force me to retire in 20yrs(agency w/federal govt).
Let’s face it: mortgage is a healthy debt. Also, it is a monster that can suck your cash in with seemingly no end in sight and a feeling of loss because you might not see the results. Example: I can put every cent I have towards the principle, but then I would have no money and still a mortgage. Still though, there is a healthy balance that can greatly benefit you. And that $300,000 house or whatever its worth someday with inflation or what it is worth now, is cash if liquified someday during retirement. Me personally, my kids can do that after my wife and I are gone.
Yes, I would agree to paying down some mortgage principal, however, make sure the math adds up. Max out all 401(k) contributions, IRA contributions, HSA contributions first. These deductions are about a 30% return (in my case) compared to the 4% on principal payments.
Also, your primary residence is a cheaper way to invest in other things. I have done a few Cash-Out refinances to invest in Real Estate. Usually commercial real estate loans are more expensive to finance than your primary residence. You can then deduct the interest on your Schedule E instead of itemizing. My wife just loves it when we about have the house paid-off and then we cash-out and start over again!
I think definitely a good decision.
The opposite argument has its points, but “never pay off your mortgage early” is ridiculously one-sided advice that will not apply to everyone. I think your situation is the perfect example to pay off early.
As for us personally, we put 20% down on our home/fixed 30 year and I have had a lot of input over the years that we were *stupid* to do so. All those people who gave me that input have since lost their homes to foreclosure. !! {In comparison, we have a low house payment and some decent equity}. We’ve never prepaid anything on our mortgage (12-ish years?) but my spouse has been unemployed and we’ve taken a huge financial hit to have kids, etc., etc. ANYWAY, we are currently refinancing to 4% (still 30 years), and looks like we will easily be paying more principal than interest. WOW. All of our tax-deferred options are maxed out and we have never had any other debt. We have always had cash for a rainy day. The input I get to pay a little extra (but far less than any other mortgage we have ever had prior) is that this is *stupid.* ??? Someone literally told me I needed “taxable investing.” Paying off the mortgage actually keeps me out of taxable investments and simplifies my taxes, so it is a bit of a tax consideration. Obviously I will want to build more wealth than my tax-deferred accounts at some point. But I am not sure why I should be rushing headfirst to increase my taxes. ?? As is I have taxable investing – that is where I keep my cash. All my stocks are in a ROTH growing tax free, as it should be. 😉 The advice was I need to put all my cash in the stock market, I guess. Um, no thanks! Trust me, I have plenty of sock market exposure.
For reference, our families have done very well (mortgage free around age 50) and I have a lot of wealthy clients. They paid their mortgages early. They didn’t tie up every spare dime to pay it off ASAP. But, they did make the effort to be mortgage free generally by age 50. I am amused when random people try to give me financial advice and tell me how stupid I am. I’ll be taking my financial advice from people I know who have done VERY well over the long run, thanks. 😉 But I do find it sad that such sound financial planning is often chalked up as “extreme.” It is not extreme to pay down your house early when all your tax-deferred accounts are consistently being maxed out, while you have high income, and when it isn’t hurting your cash flow to do so. IT’s the obvious next step in a solid financial plan – lose the debt.
My wife and I (we’re both 25) just recently purchased a house with a 15 year loan at 3.5% interest. We currently have about 22% equity in the house and owe about $270k on the house. My wife and I have about 200k in savings that we, theoretically could put towards the house to leave just a few years until the house is paid off. Of this 200k, $105k is earning 3% in 5 year CDs, $30k is earning 2% in rewards checking accounts, $20k is in a brokerage account where I am playing around a little bit in the stock market, and the other $45k is just in 0.8% savings account. What are your thoughts on what we should do with some of this savings? I don’t mind leaving the money in the CDs and the rewards checking account since the spread between those earned interest rates and my mortgage rate isn’t huge and I still get to maintain some emergency cushion with those monies. But I really would like to do something with the $45k that is earning hardly anything in savings accounts. By the way, we are already maxing out our 401k and IRAs, so that isn’t an option.
I was hoping I would be able to pay ahead the next year’s worth of mortgage payments now, that way, I could put more towards principal now and save some on interest, and I could still maintain some flexibility and be able to just not make any mortgage payments for the next year in case an emergency strikes. However, I inquired with Wells Fargo and they said that I would not be saving on interest by doing this because the mortgage would still follow the same ammortization schedule. Is this common practice? Seems like if I were to make mortgage payments way before the due date I should save on interest?
Thanks for any advice anyone can provide. Sorry for the lengthy post. Love the site Mr. MMB!
I really hate having any kind of debt (I got this from my father) so the idea of owing money for 15-30 years always rubbed me the wrong way. Yes, it was necessary in order to buy a house, but as soon as I could, I paid it off and have never looked back. For me it was about being free from the debt and also having a certain stability, that I didn’t have to guess what was going to happen in the future regarding my employment, the economy, interest rates, etc, etc.
I don’t think you can go seriously wrong paying off mortgage with “spare” cash. But I think it is not the optimal course of action right now. I think we can all agree that interest rates will go up significantly at some point in the next decade or two or three. So here are some alternatives:
1) Refinance into a sub-4% 30-year mortgage and invest into a PenFed 2.76% 7-year CD with that “spare” cash. Yes, you will be losing about 1%/year in interest. But in return you get a nearly free “put” against severe rise in interest rates (the CD can be broken with just 6 months of interest penalty) in case inflation kicks up or interest rates go up simply because US and global economic situation stabilizes. If long-term rates go up by 1.5-2% in the next few years which would put them at roughly long-term average you’d win in this scenario. If they go up even more (probably due to inflation) you’d really cash in.
2) Refinance into sub-4% 30-year mortgage and invest the “spare cash” in zero-coupon 30-year treasury bonds which have YTM of about 3.4% for individual bonds or 3.2% for Vanguard ETF EDV (which would probably be my choice since it pays out interest). Yes, you will lose out on about 0.5%/year in interest but that big chunk of 30-year zero coupon treasuries will nicely offset losses in equities in the next deflationary/recessionary market plunge. A 50%/50% portfolio of S&P500 and 30-year zero coupon bonds actually was UP in 2008 and in the summer of 2011, when the world was supposedly coming to the end. Granted, rates were higher back then, but the diversification power remains. At worst, interest rates rise and you use the interest thrown off by EDV to repay your mortgage (losing about 0.5% in interest per year).
3) Refinance into sub-4% 30-year mortgage and invest “spare cash” into a long-term investment grade bond portfolio such as Vanguard VWESX. With YTM of about 4.6% and historical losses to to banruptcy of well under 0.2%/year you are likely to make about 0.5% per year in interest relative to repaying the mortgage.
In all three cases you could also simply walk away from the mortgage should some terrible calamity strike and your house plunge in value.
I am not saying that paying off the mortage is definitely a bad idea, but I think any of the three options above are probably even better since they all give you a “put” against plunge in your home value as well as either insurance against violent market moves or slight long-term profit.
I’m like you Dee. Chedv, you make good points, and as noted in other comments…you can make more interest on ivestments while not doing the house. personally, I agree with the cons mentioned in many comments about why not to do this, but it is a personal choice for everyone. One example: you are gambling by doing investments other than the house. One person gave a perfect example in the comments, and he did the opposite everyone else recommended. I am not a juggler; there is only so much i can do(in my opinion). When it becomes “work”, then I would rather just pay off the house. I can’t wait until I have the feeling many comments mentioned about the pride and ‘high’ one gets by Owning their home. Also, Chedv…again just me…I plan to not refinance ever(I hope).
Another point is, my wife and I cannot afford to save in an IRA(I guess can’t might be too strong of a word and you might have me beat on that Chedv). I also want to retire in 17yrs(my wife in 18 will have 35yrs as an elementary school teacher). If I don’t do the mortgage thing, I’m looking at 8 more yrs of mortgage…not my cup of tea. I want to retire in my early 50’s(I can try anyways and I do mean it).
As far as retirement, let’s say the max is 16,500 dollars(just example). I divide that by 27 and add maybe 5 dollars. I only have 26payperiods a yr. This is my “safety” so I don’t go over what I am allowed. And you know what? every 7yrs we have 27payperiods. 2012 is 27 payperiods for my govt job. Turns out I knew what I was doing by coincidence…someone just happened to mention this last week. My wife has 24 payperiods. I divide the 16,500 as an example by 25 and add like 10bucks so we won’t go over by accident. i can live with those amounts. I know a HUGE misconception is people calculate their match from the company not to go over. what they match means nothing! All that matters is that YOU don’t save more than allowed..you are clear if you do this. I think it is 17 grand starting 2012. I am not an expert…most of you could probably school me. I would like to do the IRA sometime, but my wife might kill me!!LOL. I do make sure I save at least some money(even if very small amount) every paycheck to put in money mkt. for a couple yrs I made the mistake of using it all every paycheck to do my ‘stuff’
and how about 529s vs paying down the mortgage
thought experiment: if I had a windfall of 600k (about the size of my mortgage currently), would I pay off the entire mortgage right now?
if not, what would I use the $ for and if the answer is no, then I should NOT be paying extra principal monthly/yearly…
I have a 15yr at 3.5%, 35% tax bracket, and yes it helps my tax situation to take the interest deduction.
I do wonder if actually a 30yr at 4% would be better – crazy to think anyone can know that rates won’t be higher in 15+ yrs…
without the FHA, 30 yr fixed loans would NOT exist (at these rates at least) – way too much risk for the lender
that usually means a borrower would be foolish not to take that type of loan…
and yet I switched from a 30 to a 15 a few yrs ago to capture the rate spread of 50 bps – but still I wonder…
There is a balance on a big chunk of money you own whether to pay the home off or not(in my opinion). Knowing me, w/the 600grand, I would probably just pay off the 200+grand I still owe(hopefully taxes aren’t owed on the 600grand). That is a real good question though. If I had a million, I would try to get 5% compound interest investment set in stone. Literally i could just quit my job and live off the interest: 50grand per year gross income before taxes. that way i could still pay the mortgage without paying it off. If I am going to keep working though, i would probably just cut a check, send a few thousand extra, and then call them for My refund check from them about a month later.
^stever sr – in your case the thought experiment is whehter a 200k windfall would lead you to pay off your whole mtg balance…
For some people, there is a huge psychological benefit to paying off the house. That was my experience, in any case.
i agree, bluecat. i think it really comes down to what allows you to “sleep at night.” Some folks dont like the idea of having debt and dont want to owe anybody, anything. Others see debt as “other people’s money” and look to leverage that money to make even more money. To each their own. There is certainly good debt and bad debt (there is no way I could consistently earn more than credit card interest – get rid of that debt first and foremost!!).
I am probably a little north of the middle when it comes to risk. Back in 2006-2007, I was paying more on my mortgage, because the investments I was looking at didnt seem to have a good probability for a strong return profile. At the end of 2008 and 2009, I was buying up as much real estate (ETFs), preferred shares (also ETFs), and even some bonds, as I could. Their risk/return profile just looked better than saving my then (5-6%) on my house. Now in Feb of 2012, the alternative investments look very skewed. I think that some investments like CDs and Bonds – look horrible!! Stocks? They don’t seem like a really good “no brainer” deal like they did in early 2009. I do still see what look like some decent opportunities in real estate, but it is geographically pocketed and not all types of real estate are equal right now. That being said, I have seen even this getting quite a bit more expensive in just the last 3 months, so I fear that window is closing quickly too.
The great news, is that it doesnt have to be a digital event. Not sure what the best investment is (I know many times, I am not 100% convinced), then take some of your money and pay extra on your house and take some of your money and put into different investments. We are not “right”, all of the time…….
Cheers,
shckr7
IF you were asking, Sir…I would mail a $200,000 check to the house in a heartbeat as extra principle. My mortgage pymnt is an automatic…mailing 200grand is like mailing 300grand due to eventual interest and probably more than that(not a math genius).
I found moneyblog via savings bond google searches recently. I am very saddened one can’t own paper bonds anymore. Only I bonds in paper can be gotten, and one must use their tax refund to get them. this is a shame!! Is there anyway these people will have a 180 happen on this someway somehow?
I’m having trouble finding links and stuff to respond. I have to click on link just to find this correct one, but my droid gets messages I can’t see here.
to the 25yr old seemingly dong well w/investments:
I need 5dollars to keep my savings acct and then the whole acct open w/my credit union(same one I have had since I was three…there are two branchs in the world…it is out of state…lol). my mom-in-law lets me hear that when I want a check cashed thru her the old fashioned way. I keep a little money in there just so interest isn’t stagnant every quarter(it earns a little). I have small accts for children too. now my acct I only keep about a grand in checking just to make sure check doesn’t bounce. main point – your 45grand is in a savings acct?? under the same member # which has checking acct, savings acct,IRA acct, etc, you can have a money market acct. it can be used same way as savings acct and money can transfer to checking to cover checks, etc, etc. mine earns more interest than savings acct with 1000dollars in it. If I have ten thousand dollars and one cent(or more in acct), it earns even a higher interest. your 45grand should be in there and save at least a smal amount every paycheck so it grows at the very least very slowly. the interest will earn more there than a savings. guranteed you can do this in 5minutes without even changing member stuff…they just add another acct #.
my house thing is also the fact like said when it is paid the debt is paid. I can make extra money but then I am responsible not to spend any of it? obviously retirement stuff comes out 1st nusiness day of the calendar yr I turn 59(with no penalty). so if done a different way, I have to have extreme discipline to earn extra interest instead of paying off house, and then someday pay that money. life happens: sickness, wife could leave and take money one day, gambling addictions. it starts becoming ‘work’. I’ll pay the house…then it is a done deal. My name is on that home(as well as my spouse). you are gambling the other route: you can earn more money but it is a workout and demands constant vigilence. i already have 4% interest. I consider myself lucky. I am keeping that contract and not refinancing(things do change but that is plan).
to 25yr old family: either way seems good for you but I hope mny mkt info helped. I would put towards home, but you’re not wrong not doing that. do what many heavy hitters do: mail one mortgage pymnt and one extra principle pymnt every month for same amount. That is too steep for me w/retirement and other stuff. you seem like you can handle it.
one other thing I do, I have extremely good credit. I use american express for every purchase that takes it. I am grandfathered on old rewards program(they try to get me to change). I get 5cents on every dollar I spend on gas, groceries(if a stand alone grocery store like food lion but Not like a walmart which isn’t a “stand alone” grocery store), and also 5 cents on every dollar spent at pharmacies. I get 1.5% on every other dollar spent no matter where or what: verizon bill, dominos pizza, etc, etc. I make over a grand every yr this way easy and have a mastercard I never use from college for emergencies, carry a little cash and I just pay(for free no fee) over the phone the american express bill before the interest gets taped on. i pay in full before due date.
I think it’s smart to view your mortgage payoff as an investment. Why gamble when you can take a guaranteed return? Great post – thanks for the reference material.
Jonathan,
My wife and i are in almost your exact situation… 31 yr olds with good incomes, 6 figs each. We do live in a much lower cost of living area. With that said, our NW will reach 7 figures this year, entirely from savings and investments.
We have paid off our house for all of the reasons you mention. In addition I noticed you were going to move to a more conservative investment profile as well. For individuals who are able to accrue substantial resources, as you have, there is not the need to take as much equity risk We have done this with our own money, and are currently at under 50% equities in our overall portfolio.
Primary motivator was that, at this point, the home residence is a small % of our net assets, so paying it off was a small way of diversifying total assets. Same goes for reducing stock portions… the need to take risks in equities is no longer necessary, because we already have plenty in equities.
I think your approach is spot on. As you say, you already have plenty in stocks, so there just isn’t any point in holding a mortgage for longer than needed so that you might… might… get a higher return. Eliminating your mortgage will reduce your total expenses, which puts you closer to your goal of replacing all expenses with income from investments.
-Brian
Here’s another way of looking at it… if you’re willing to be a landlord, you could probably earn a cash on cash return of 20% or more by putting the minimum down on a property and renting it out, although obviously that depends on a lot of different things. Basically, I’m suggesting buying a new house instead of paying down the old one. As long as both homes hold their value (and does anyone really believe home prices are not at or close to bottom?), you’ll come out far ahead in comparison to spending all your cashing paying down your mortgage.
The Dow has doubled since it’s 2008/2009 lows. Why do people out of the market keep saying things like “have u checked your 401k lately” and “i would be down 40% if i stayed in the market”. Not really.
Is there a formula that can be used to determine how much of your income can go to extra mortgage payment? I currently add $100.00 a month, and will be saving 450. Should I bump up my extra payment?
Can anyone tell me if I’m even close to saving enough for retirement? I’m in my mid-50’s. My spouse and I have paid for our daughter’s college, wedding and helped them with a down payment for their house. Our son is going to graduate from college in a couple of weeks – debt free ’cause we paid for that too (altho he’s thinking about going to law school and with the current economy I don’t know if that’s advisable or not). We’ve got $400,000 house with $150,000 left on the mortgage. We’ve got just over $500,000 in our retirement funds. Should we start throwing everything at the mortgage or should we put what we would be throwing at the mortgage (which has a 3.37% interest rate) in a savings account and wait until the mortgage is down to $75,000 and we’ve got $75,000 cash for the house only and then just make 1 lump payment? I’m kind of afraid of having a huge amount of cash in the bank ’cause I could be tempted to spend some (maybe a lot) of that on traveling. Suggestions? Thanks.
So you said you are already maxing ‘both you and your wifes IRA’s and 401k’s”. For married couples is 10,000$ (IRA x2) and 16,000 (per 401k) x 2= 32,000$ So you are investing 42,000 a year in your retirement?? Is that correct??
Wow! Very impressive poster. I wish I could do that.
So if you have this much money to throw at retirement right now each year why on earth don’t you just pay off your house immediately and be done with it??
When you pay off a home the asset is now yours and allows you to use that to back other investments such as buying more real estate etc etc. That is the road to wealth building.
We are paying $500 extra towards principal each month we are planning to sell in the next year. Should we continue this practice?
Thanks