Paying off mortgage early..

**gamecock43** · 07-14-2009, 04:23 PM

If you are planning to start aggressively paying it off in 3 yrs when you get a raise why not start paying it off now? I know you are thinking you might want to move- but you might not want to move. At this point... don't start planning to sell before you have moved in- just do what makes financial sense for you in your current situation. Getting in the habit of paying extra is probably something that would benefit you in the future.

**zetta** · 07-14-2009, 04:41 PM

According to my pay scale, I should be making $30,000 more in three years. I could then refinance to a 15 year mortgage (instead of my 30 year mortgage) and focus on aggressively paying it off. Right now I have a 30 year mortgage with a 5.35% interest rate. I put $37,200 down on my home that is $186,000. My mortgage will have a balance of $148,800.

Unless you can get a better interest rate on the 15 year mortgage, it's better to consult an amortization table and send in pre-payments that will pay it off in 15 years. That way, if something unexpected comes up, you have the option of reverting to the lower 30-year mortgage payment.

Of course, as I said in a similar thread that you started, given your situation I would vote for setting up a "house payoff" mutual fund and letting the money grow there until it is enough to pay off the house.

**sandrark** · 07-14-2009, 05:26 PM

Originally posted by zetta View Post

Of course, as I said in a similar thread that you started, given your situation I would vote for setting up a "house payoff" mutual fund and letting the money grow there until it is enough to pay off the house.

Oh yeah, that strategy would have worked SO WELL over the last 10 years...

One thing about the mortgage pre-payment is that it REDUCES RISK and provides a guaranteed return. Unlike the stock market.

OP, you don't give us enough info to answer your question. We don't know how much $$ you have in savings (does your 6 month EF include COBRA insurance payments, for example?); we don't know if you're maxing out your retirement accounts (not just funding a Roth - what about 401(k) or 403(b)?); we don't know what other debt you have.

In your shoes, IF you have no other debt, IF you are maxing out your retirement contributions, and IF you have 6 months of savings in cash in the bank, I'd say yes, pre-pay the mortgage.

If not, direct the funds elsewhere - MOST ESPECIALLY if you are forgoing an employer match in your retirement savings.

Sandi

**swanson719** · 07-14-2009, 10:17 PM

I just want to point out the difference between paying extra in principal and pre-paying a mortgage. Pre-paying includes paying the interest, whereas paying extra principal just pays down the remaining balance without covering a month to month difference. Semantics I know, but for those who don't understand, it can be a very costly mistake.

**zetta** · 07-15-2009, 03:14 AM

One thing about the mortgage pre-payment is that it REDUCES RISK and provides a guaranteed return. Unlike the stock market.

OP, you don't give us enough info to answer your question. We don't know how much $$ you have in savings (does your 6 month EF include COBRA insurance payments, for example?); we don't know if you're maxing out your retirement accounts (not just funding a Roth - what about 401(k) or 403(b)?); we don't know what other debt you have.

In the OP's previous related thread, she went over all this and has it covered. The money she is talking about is free to invest or prepay as she likes. Her interest rate is something like 5.25%, and after taxes her guaranteed return is around 4%. Over a 10 year period, an index fund in the stock market is likely, although not guaranteed, to give a higher return. Given where she is in her life (late 20's, single), and the amount she plans to prepay, I would put a higher value on liquidity than on having the guaranteed return.

Am I wasting time/money if I don't put anything extra toward my mortgage?

As long as you are investing the money rather than spending it, you are increasing your net worth and not wasting time/money.

**ScrimpAndSave** · 07-15-2009, 04:18 AM

Thank you all for your encouragement and I am sorry this post is so similiar to my other one. When I heard Suze Orman say, "Unless you are sure that you are going to stay in the home forever - do not pay extra toward the principal of the mortgage"...I was thrown for a loops.

**Like2Plan** · 07-15-2009, 04:49 AM

Originally posted by ScrimpAndSave View Post

When I heard Suze Orman say, "Unless you are sure that you are going to stay in the home forever - do not pay extra toward the principal of the mortgage"...I was thrown for a loops.

Yes--didn't Suze used to recommend paying off the mortgage early or was that someone else?

**kork13** · 07-15-2009, 06:04 AM

Originally posted by ScrimpAndSave View Post

Thank you all for your encouragement and I am sorry this post is so similiar to my other one. When I heard Suze Orman say, "Unless you are sure that you are going to stay in the home forever - do not pay extra toward the principal of the mortgage"...I was thrown for a loops.

I believe the context of that statement was in regards to someone without adequate emergency and retirement funds. The advice I've seen most frequently is to put those two first. You want to have no other (higher-interest) debt, make sure you're putting plenty to retirement and a suitable EF before starting to pay down your principle.

Paying down your mortgage is never BAD for you, it may just not be the BEST thing you can do. However, the more equity you gain in your home, if/when you do eventually sell it, more of the proceeds from that sale can be profit or put towards a new home.

Side note, I also believe Suze Orman has gone off the deep end a bit in advocating "CASH IS KING" right now, so also consider that.... We all know you're in a pretty secure situation, so you can afford to stray a bit from the mainstream line of advice.

**disneysteve** · 07-15-2009, 06:22 AM

Originally posted by sandrark View Post

Oh yeah, that strategy would have worked SO WELL over the last 10 years...

Sandi, investing the money rather than making extra principal payments does not necessarily mean getting into the stock market. You could put the money in a variety of investments - stocks, bonds, treasury bills, CDs, etc.

Personally, for someone young and just starting out like the OP, I'd rather see them building accessible savings. I'm 44 and we've been in our home for 15 years and we just started making extra payments a few months ago (and we do plan to stay here forever or at least until retirement).

So I've vote for investing outside of the mortgage.

**wincrasher** · 07-15-2009, 06:24 AM

Well, just like everything else, it's a balancing act.

Suze is thinking that everyone is vulnerable to job loss right now, so you need an extraordinary EF to carry you thru. She's saying pay nothing down, hoard money. She could be right.

Others are saying that paying down a declining asset, like a house doesn't make sense until the market stabilizes. They see paying down, say $40k on house that is depreciating $40k in a year is just throwing away money. They say the money is better off used to invest and get a return. Perhaps. I guess in their minds, you can opt to default on the debt if the house really drops.

I don't see any plan that has the possibility of default in it as a viable plan. I say you have to put a value on your peace of mind and lifestyle. Paying down your debt will improve cash flow and reduce the size of a needed EF. Also, your home is still a valuable asset and you are king of it. Knowing that if all else fails, you still have a place to live is worth something. Paying off a mortgage at the expense of building retirement savings, investments and consumer debt reduction is probably not wise.

**ScrimpAndSave** · 07-15-2009, 06:27 AM

Thank you all. After my fully funded emergency fund and my maxed our Roth, I am going to go ahead and throw a little extra towards the principal. We are talking about $70 a month here - which is not a huge percentage of my savings overall.
The rest is going to be kept liquid for short term and long term savings.

**wincrasher** · 07-15-2009, 06:34 AM

Scrimp,

I've seen in other posts that you are expecting income rises based on your teacher's union contract over the next few years.

If I were you, I'd keep my budgeting based on what you are earning THIS year. Treat the future increases as a windfall.

With state tax reciepts declining, some drastic measures will have to be taken. It's not unprecedented that these agreements be renegotiated or breached. Security is an illusion. It all can be wiped out with the stroke of a pen.

**ScrimpAndSave** · 07-15-2009, 06:43 AM

Wincrasher,

This is exactly what I am doing and I am buying this home based on my income NOW. Any refinancing considerations will be made when and if I am given those raises.

**FrugalFish** · 07-15-2009, 08:05 AM

I've been thinking about this a lot lately. We've paid off a good deal of our mortgage in the 7 years we've had it and are continuing to pay it down. Moving any time soon was not in the master plan. Staying here forever (I can't imagine retiring here) is not necessarily the plan either. However, lately I've had a nagging feeling wondering how long we will actually want to stay here- maybe we will want to move sooner than later?

Even though our mortgage rate is low, I can't currently find a safe, secure investment to match the interest (we don't get a tax break). We are set up for adequate funding of retirement and plenty of liquid emergency fund.

What I got to thinking about was questioning if we move in 5 years- where will interest rates be if we have to take out a mortgage on a new house? Will we be looking at 10% or more? I don't know. Chances are we wouldn't move somewhere more expensive than where we live now, so whatever we own in this house we would have to put towards our next place- but if we don't prepay, how much of a mortgage at a potentially high interest rate would we have to take?

OTOH, if mortgage rates climb that much, chances are our savings, CDs, and money markets might start doing a little better. If/when the time comes that those types of savings match the interest we are currently paying out on the home loan, then we will stop prepaying and start saving the difference. Then if we eventually move, we will have the difference we would have prepaid available to us in savings if we want/need to put it towards a next home purchase- or eventually pay off this one in a lump sum.

I guess the simplified plan for us is to save for, or prepay, the mortgage- wherever it makes sense $$ wise at the time.

I have no regrets about paying down the mortgage. When we refinanced earlier this year, we had prepaid so much that our new required mortgage payment was less than half our original. Yes, that number is based on stretching the loan back to 30 years, but we will save 2 years over our old loan by simply paying the same amount P&I as we did on the old loan. Also, if we were to hit rough times, like an unemployment, halving our required mortgage payment reduces our necessity expenses immensely. I'm not able to find a down side to the situation, but then again we have never been even a little underwater on our loan, so anything we put in, we knew we'd get back eventually.

Paying off mortgage early..