Analyzing the mortgage payoff option

[kz]

Originally Posted by Notth

Lastly, I see that most people nearing ER or in retirement seek the no-debt strategy as making the most sense.* Excepting specific people who have cola'd pensions paying their bills, zero bond allocations, and who firmly intend to never move, that appears to make the most sense.

Notth


I have to agree with this statement. Even though hubby and I are part of the "excepting specific people" you talk about we'd still like to pay off our mortgage asap even though it's at 4.75%. We just have an aversion to any debt in retirement.

And now a question for you two. Do you have any other hobbies

[laurence]

The thing is, rates are at historic lows, if you are a young dreamer like me, and like your house, and think paying off the house by retirement is the way to go, get in a shorter term loan, like 15 years, so you can also get the lower interest rate, as opposed to just making extra payments. I remember when I first started learning about mortgages, the rule of thumb is you pay for your house three times, once in principle and twice in interest. But by taking advantage of recent times, I'll actually pay less in interest than in principle over the life of the loan.

[sgeeeee]

Originally Posted by kz

And now a question for you two. Do you have any other hobbies

Sure. Want to talk about archaeology. I spend about 2 weeks a month as a volunteer at various archaeology sites. Next week I'll be in Illinois at a Mississippian mound site. And two weeks from now I'll be in South Dakota recording pre-historic rock art.

Also, my DW and I go out dancing 2 or three nights a week.

I also do a lot of volunteer work for professional (engineering) publications -- a magazine and several book publishers. I always enjoyed this kind of thing but never had much time for it while I was working. Now, it's the basis for an interesting hobby.

I go stretches of a week or so when I don't have access to the internet. I have to leave it to others to police the activity here when that happens.

[sgeeeee]

Originally Posted by Have Funds, Will Retire

. . . I do, however, want to bring it to zero by retirement, if for no other reason than the warm/fuzzy feeling.

That's a good reason if it works for you and seems to apply to a lot of people. Some people don't even want to look at the financial analysis. They are uncomfortable with a mortgage and they want it paid off. Even if the numbers say payoff is highly likely to cost more than keeping the mortgage, when you are more driven by a discomfort with debt than by the numbers, then that's what you should do. One of the things the simulations showed me is that the financial implications of payoff vs keeping the mortgage has a second order effect on my own retirement planning.

Out of curiosity, have you run the simulations for your case? Would it matter what the results say?

[sgeeeee]

Originally Posted by Laurence

. . .* I remember when I first started learning about mortgages, the rule of thumb is you pay for your house three times, once in principle and twice in interest.* But by taking advantage of recent times, I'll actually pay less in interest than in principle over the life of the loan.*

Yes. When I bought my first house many years ago, the amount of interest I was going to pay played a major part in my loan decisions. I realize today that this arguement is not very sophisticated because it completely ignores the time value of money. A shorter term loan can work to your long term advantage, but it isn't guaranteed to. The long term loan gives the economy a better chance to smooth out any short term kinks that could work against you.

[HFWR]

Haven't run the numbers officially, but being in the 25% bracket, and a 5.5% IR, it wouldn't be hard to beat 4.125%. Not to mention the tax-deferred status of the 401k money. Don't want all my eggs in one basket kinda thing...

[sgeeeee]

An alternative strategy. *I was talking with a friend last week who lives in Schaumburg, IL. *He has been re-financing his house about every other year for the past 10+ years using very low interest ARM loas. *He's way ahead of where he would have been had he paid off his house or financed with a conventional loan. *He has the money to pay off his loan at any time, so there really is no risk. *I don't know how you could perform an analysis of the historical value of such a strategy, but it is pretty easy to see how this has worked to his advantage so far. *

[laurence]

Even including the refi cost? Does he roll that into the loan or take a higher rate to get credit with the lender?

[HFWR]

Attending a closing EVERY year!! Just go ahead and shoot me...

[cute fuzzy bunny]

Originally Posted by - SG

The problem, TH, is that you have completely polluted those threads with your nonsense accusations. Nobody wants to read that crap -- not even you or me.

To be truthful, this is as far as I've read or will read of this foolishness. The 'accusations' occur only between your ears.

You're right. You are the good mortgage fairy, I'm the wicked mortgage witch of the west.

[unclemick]

Pssst - RENT!

Not that I take my own advice though. She made me an offer I couldn't refuse.

Heh, heh, heh, heh.

[sgeeeee]

Originally Posted by Laurence

Even including the refi cost?* Does he roll that into the loan or take a higher rate to get credit with the lender?

Hi Laurence,

I don't really know the details. I just looked up rates on one of the online mortgage calculators and it claimed the going rate on 30 year fixed was 5.21% while the 5/1 ARM was 4.6%. That would translate into loan payments of $6596.76 for the 30 year fixed and $6151.68 for the ARM on $100,000. The saving would be $445.08 per year per $100,000. He indicated that he refinanced approximately every other year, so he would be saving about $900 per $100,000 over that period. My reccolection is that the spread between 30 year fixed and ARMs has been greater than that in recent years, but I'm not sure. I think that would probably more than pay for the refi charges, but it wouldn't pay enough to make me want to fill out the paper work.

Have funds will travel:

Attending a closing EVERY year!! Just go ahead and shoot me...

I agree.

[sgeeeee]

Originally Posted by Notth

. . .
You're right.* You are the good mortgage fairy, I'm the wicked mortgage witch of the west.

Ahhhhh. . . At last you have realized the truth. I am glad I was able to lead you down the road to enlightenment. I'll work on your other problems later -- in another thread.

[laurence]

Originally Posted by - SG

Yes. When I bought my first house many years ago, the amount of interest I was going to pay played a major part in my loan decisions. I realize today that this arguement is not very sophisticated because it completely ignores the time value of money. A shorter term loan can work to your long term advantage, but it isn't guaranteed to. The long term loan gives the economy a better chance to smooth out any short term kinks that could work against you.

My point there was specifically for those advocating paying off the loan early. If you want to do that, do it the right way and get a lower rate while you are at it.

Paying off the house is like any conservative investment. Nobody seems to have a problem with holding some bonds in your portfolio. But I get it, there are scenarios that could play out to the advantage of investing vs. early payoff.

BTW, even if your friend made $3600 minus closing costs every two years, I don't think it's worth the years off his life going attending all those closings!

[MRGALT2U]

Originally Posted by - SG

Ahhhhh. . . At last you have realized the truth.* * * I am glad I was able to lead you down the road to enlightenment.* I'll work on your other problems later -- in another thread.

I question whether this site has the capacity to cover those "other problems". However, if you enjoy it, why hold back? Good luck with
this

JG

[MRGALT2U]

Originally Posted by Laurence

My point there was specifically for those advocating paying off the loan early.* If you want to do that, do it the right way and get a lower rate while you are at it.

Paying off the house is like any conservative investment.* Nobody seems to have a problem with holding some bonds in your portfolio.* But I get it, there are scenarios that could play out to the advantage of investing vs. early payoff.

BTW, even if your friend made $3600 minus closing costs every two years, I don't think it's worth the years off his life going attending all those closings!*

That's pretty interesting. I enjoy real estate closings, but then I still
am partial to real estate of all kinds. Doubt very much if any more closings are in my future. We discussed this recently. DW says she "loves" it where
we are (I am much less enthused) and our southern digs are in place
now. So............... But, if I was 10 years younger I'd be back in with
both feet.

JG

[HFWR]

Originally Posted by Laurence

My point there was specifically for those advocating paying off the loan early.* If you want to do that, do it the right way and get a lower rate while you are at it.

Paying off the house is like any conservative investment.* Nobody seems to have a problem with holding some bonds in your portfolio.* But I get it, there are scenarios that could play out to the advantage of investing vs. early payoff.

BTW, even if your friend made $3600 minus closing costs every two years, I don't think it's worth the years off his life going attending all those closings!*

I chose a 30yr to keep my minimum payment lower, in case of emergency.

[laurence]

Who knows, if I get close to ER, but have three years worth of payments on the house, I may refi into a 40 year loan and plan on paying $100 a month for the rest of my life....if interest rates are low enough.

[REWahoo]

Originally Posted by Laurence

Who knows, if I get close to ER, but have three years worth of payments on the house, I may refi into a 40 year loan and plan on paying $100 a month for the rest of my life....if interest rates are low enough.

When I had paid off 75% of our mortgage, I took out a home equity line of credit (lower interest rate than my mortgage, no closing costs, no fees, etc.). I used the LOC to pay off the mortgage, then over the next couple of years paid off the LOC. Now I have the LOC as an emergency source of funds if needed.

REW