Deplete EF to payoff house

[skives]

My wife and I have decided to use all the extra money we have to get our house paid off by summer 2023. We would be taking about $3,300 out of savings each month to make $5,200 payments. This would deplete all of our cash savings including our EF by next summer. We would the be able to build it back up at $1,700 a month.

what do you guys think of this and would you do it?

[disneysteve]

Why would you do this? What is the rate on the mortgage? What will you do for an EF in the meantime?

Your rate is probably low enough for this to not make sense. And I almost never think wiping out your EF for anything other than an emergency is wise.

[skives]

Our rate is 3.625% so it is low and I understand depleting our EF is not usually a good idea but we just want this last debt gone. I figured since we are not using all the savings at once if something comes up we will still be ok. Like I said we can build it back up pretty quick.

[kork13]

No, paying off the house doesn't make sense by the numbers. But there's an emotional, risk-averse, and instinctual benefit to owning your home outright that goes beyond the numbers. I've done it myself, and I will never dissuade anybody from paying off their home. It's an incredible, freeing feeling that just can't be beat.

My only advice would be to moderate it somewhat. Just as I'll never dissuade someone from paying off the house, I'll never advise living without an EF. My suggestion would be to preserve at least a month or three of your EF. It might slow down your payoff by a few months, but the security of maintaining the EF is worth it. It's also entirely possible that your investments may have gone up

When we bought our current house without a mortgage, we had to empty everything -- taxable investments, bank accounts, and the seat cushions in the couch & car. But we retained a 3-mo EF, because there's alot of risk involved in having zero cushion as a backdrop.

Love the decision, and congrats on arriving to it! I know you're excited for what that means, but make sure you do it right. CONGRATS!

[riverwed070707]

Sometimes I think I want to do this, especially with my rental properties so they cash flow more.... but then I run the numbers and I'm reminded why I leverage a mortgage against them. It simply doesn't make sense financially.

[skives]

I understand why everyone says not to do this but I think of it as saving money by saving of that interest we would of ended up paying. I feel like we made money. In the end we just don’t like having debt and this is our last debt we have.

[Jluke]

Seems like you already have your mind made up.

I would not do it in your situation.

so you have about 75k or so to go?

you already paid the majority of the interest.

pay extra if you want but not from your EF.

you could reach a point where you could take a lump from your EF and pay it off at once.

[skives]

Currently owe just under $50k. I have paid ahead till November of this year.

[disneysteve]

I understand why everyone says not to do this but I think of it as saving money by saving of that interest we would of ended up paying. I feel like we made money. In the end we just don’t like having debt and this is our last debt we have.

You will save some interest but I still don't think that's worth the risk of having no EF. Sounds like you've already made up your mind though. I hope it goes smoothly and nothing in the house or cars break while you have zero savings.

[kork13]

Currently owe just under $50k. I have paid ahead till November of this year.

wait.... "Paid ahead" ....? That generally implies that your excess payments are not being credited as principle payments (saves you money by reducing the principle by the full amount of the payment), but rather as pre-payments (saves you no money, only applies the amortized amount to future principle due and the remainder to pre-paid interest).

As you pay off your mortgage, you need to ensure that your excess payments are credited as PRINCIPLE-ONLY PAYMENTS. You shouldn't be paid ahead.... you should be paid down.

[disneysteve]

wait.... "Paid ahead" ....? That generally implies that your excess payments are not being credited as principle payments (saves you money by reducing the principle by the full amount of the payment), but rather as pre-payments (saves you no money, only applies the amortized amount to future principle due and the remainder to pre-paid interest).

As you pay off your mortgage, you need to ensure that your excess payments are credited as PRINCIPLE-ONLY PAYMENTS. You shouldn't be paid ahead.... you should be paid down.

Good catch. I skimmed right past that. Yes, you should NOT be paid ahead. That means they aren't applying the payments properly.

[ua_guy]

It’s not much, but how does any interest write-off at tax time help you by still carrying a balance?

I like the idea of paying a big sum off like that over a few months time, not all at once. Spread out the risk if you’re going to do it. If you burn your EF but zero out the home loan, that feels like putting yourself at risk in order to be debt-free. I get it, but, interest or personal risk can both be pricy. Maybe establish a minimum EF. $10k?

[skives]

I paid a couple months ahead but the normal payment is $557.84 so everything above that went to principle.

[kork13]

I paid a couple months ahead but the normal payment is $557.84 so everything above that went to principle.

Unfortunately, if the bank is telling you that a payment is not due until November, they did not credit the extra to principle. This is an extremely common issue with many banks -- people send in extra thinking it's going to go to principle, but the bank claims "We don't know what you want us to do with the extra!" So they apply it as pre-payments not principle.... Because that manner is more advantageous to them as the bank.

[disneysteve]

I paid a couple months ahead but the normal payment is $557.84 so everything above that went to principle.

This may be a semantics issue. Look at your current statement. When does it say your next payment is due? If it says September 1, that's good. If it says November 1, that means they didn't apply the extra payments to principal as you thought and instead treated it as advance payment.