I paid off our mortgage last week

[Finance Dave]

Well, sorta.

We had a 15-year fixed at 5.375, and were 12 years into it.

We recently opened a HELOC for purchasing rental homes.

After opening, realized that the current HELOC rate is 3.5%, which is almost 2% lower than our mortgage.

So, we used part of the HELOC, paid off our mortgage, and now only owe on the HELOC. Basically we refinanced at a lower rate without realizing that's what we did.

You might wonder "why didn't you just refinance"? Well, the closing costs are typically high here on a refi. But our Credit Union had a deal on HELOCs that the closing costs would be $449, and they would pay $400 of that so long as you keep the HELOC open for 2 years (you don't have to borrow on it, just keep it open). As a result, our total closing costs were $49.

There is one downside...it reduces our liquidity to buy rentals. HOwever, we got a big enough line to buy 3 properties, and this reduces it by 1....so we can still get two, and hopefully have the portion of the HELOC used on our primary residence paid off in 30 months and free this up again.

Essentially this move saved us $7,000 in interest, and allows us to pay off our home in 30 months rather than 36 on the old schedule.

 

[Finance Dave]

I should clarify something...

Our plan is not to use the HELOC as a long-term financing option...as the rates are variable. Our goal is to use it to initially purchase the property because we can act FAST, then once a tenant is in we can refi to a 7 year balloon amortized over either 15 or 30. We plan to put 40% down on each property to avoid being upside down and to pay off the equity relatively quickly. I realize this is counter to some experts who advise using OPM (Other People's Money) for rentals, essentially financing them as long as you can, but that doesn't fit my risk profile.

 

[Amethyst]

Congratulations! We just "refinanced" our mortgage with a lower-rate HEL, too (see Hometown Harry's recent post on Penfed's 3% HEL).

Good luck with the rental business.

Amethyst

 

[warrentalbot]

I am going to focus on the huge news of paying off your mortgage. It is so rare to meet someone that gets close enough to pay it off that they can simply use a smaller HELOC to pay it all off. This is a great move and sounds like you are way down the path to owning your house free and clear in just a couple years.

Nice work and thank you for sharing!

 

[Finance Dave]

I am going to focus on the huge news of paying off your mortgage. It is so rare to meet someone that gets close enough to pay it off that they can simply use a smaller HELOC to pay it all off. This is a great move and sounds like you are way down the path to owning your house free and clear in just a couple years.

Nice work and thank you for sharing!

Thanks Warren, I posted in your thread so nice to meet you.

I must admit it's not really paid off, but we have a definite plan to get there in 2.5 years...at which time I'll be 52.

 

[arebelspy]

Congrats. Sounds like a smart, well thought out strategy.

 

[Surewhitey]

We did the same with a HEL back in 03'. Paid it off in 05'...great feeling and all we had to pay was a loan app fee of $100, no closing costs through our credit union.

 

[BOBOT]

Our last pmt will be 12/1/11. Tax was just paid out of escrow and insurance is paid up until June.
There's been a bottle of champagne in the back of the fridge for a while.....

 

[vttlarry]

We paid off our mortgage in December 2009. Great feeling. We do not own an expensive house ($160+), but we OWN it.

 

[ripper1]

Now start the clock over again and get another big long mortgage.

 

[BOBOT]

Now start the clock over again and get another big long mortgage.

Not gonna doit! Wouldn' be prudent!

 

[ripper1]

I know I am going to get beat up for this one. Everybody's situation is different. I busted my butt to pay off our last house and never really had any extra money. Ended up taking out a HELOC to pay for kids education. So ended up paying interest on the money I used to pay off the house. In my new house I just put down 20% and kept the rest for investments and cash. I rather have access to my cash than be tied up in the walls of the house. Like I said everybody is different. My pension easily handles the mortgage. Your house is only a place to live and not an investment.

 

[BOBOT]

I know I am going to get beat up for this one. Everybody's situation is different. I busted my butt to pay off our last house and never really had any extra money. Ended up taking out a HELOC to pay for kids education. So ended up paying interest on the money I used to pay off the house. In my new house I just put down 20% and kept the rest for investments and cash. I rather have access to my cash than be tied up in the walls of the house. Like I said everybody is different. My pension easily handles the mortgage. Your house is only a place to live and not an investment.

Well I hope you don't get beat up. Everything you say is perfectly reasonable- especially the last sentence.

 

[SpencerM]

Well I hope you don't get beat up. Everything you say is perfectly reasonable- especially the last sentence.

True, college and retirement savings should be fully funded along the way. However, I question anyone who criticizes paying off your primary residence as part of that plan - sounds like an excuse for lack of financial discipline.

Anyone who _plans_ to have a mortgage hanging around while retired is a bit foolish, in my opinion...


M

 

[ERD50]

Anyone who _plans_ to have a mortgage hanging around while retired is a bit foolish, in my opinion...


M

And, in my opinion..., that is a foolish thing to say.


-ERD50

 

[Hamlet]

Depends on your risk tolerance and what you do with the money instead.

With interest rates at all time lows, and some solid large cap stocks at extremely low valuations, I'm not exactly rushing to pay off my mortgage.

Ultimately, it is a very personal decision.

Getting yourself in a position to make that decision is the real triumph.

Anyone who _plans_ to have a mortgage hanging around while retired is a bit foolish, in my opinion...

M

 

[ripper1]

True, college and retirement savings should be fully funded along the way. However, I question anyone who criticizes paying off your primary residence as part of that plan - sounds like an excuse for lack of financial discipline.

Anyone who _plans_ to have a mortgage hanging around while retired is a bit foolish, in my opinion...


M

Well, that's your opinion. Like I posted earlier everybody's situation is different. To me it is a wealth creator. I have the assets to pay off my mortgage but I'd rather have the liquidity and add to my investments. If I paid off the house my diversification would go out the window. Housing is a poor investment to me right now and still going down. But you got to live somewhere and to me it is just cheap rent.

 

[ripper1]

And, in my opinion..., that is a foolish thing to say.


-ERD50

Thanks, ERD50

 

[sheehs1]

Well, sorta.

We had a 15-year fixed at 5.375, and were 12 years into it.

We recently opened a HELOC for purchasing rental homes.

After opening, realized that the current HELOC rate is 3.5%, which is almost 2% lower than our mortgage.

So, we used part of the HELOC, paid off our mortgage, and now only owe on the HELOC. Basically we refinanced at a lower rate without realizing that's what we did.

You might wonder "why didn't you just refinance"? Well, the closing costs are typically high here on a refi. But our Credit Union had a deal on HELOCs that the closing costs would be $449, and they would pay $400 of that so long as you keep the HELOC open for 2 years (you don't have to borrow on it, just keep it open). As a result, our total closing costs were $49.

There is one downside...it reduces our liquidity to buy rentals. HOwever, we got a big enough line to buy 3 properties, and this reduces it by 1....so we can still get two, and hopefully have the portion of the HELOC used on our primary residence paid off in 30 months and free this up again.

Essentially this move saved us $7,000 in interest, and allows us to pay off our home in 30 months rather than 36 on the old schedule.

I sort of did the same thing before the housing bubble busted for the same reason. My primary mortgage was paid off....and I wanted a credit line in the event we wanted to buy a second home. Like yourself, I did not want to mess with the banks and closing costs for down payments etc. As you can imagine...at that time...the bank gave me 90% equity OVER the phone. At this time, the limit is probably over 100% equity with what has happened in the housing market and the bank has not reduced it. I used this line to do some things....and don't want to totally pay it off ...as that would probably close out the credit line. At that time...the banks gave me Prime MINUS one percentage point, so I am paying 2.25% on this HELOC.
Today...I owe only 10% of the available line and will probably try to never pay it off...until rates start to go up.
Who would have thought the Fed Funds Rate would be so low for so long!
Thanks Ben Bernake!

 

[SpencerM]

Ripper and ERD50,

My comment was not to criticize someones personal decision, do not misunderstand. If it is by design as part of a careful strategy that is OK. However there are many of us who head into retirement wishing to be debt free, perhaps for many reasons. Having seem many people fall into the belief that their home is like a bank, to withdraw money from, etc. to fund other things, I believe also it is somewhere to live, really. I just prefer not make a large payment to a bank in my late 50's+. Also, tax benefits dwindle as your income is reduced in retirement.

I think it best as a goal which is very achievable not to not owe anything, as long as I do not do that at the expense of funding other important things over the years.

 

[ripper1]

Spencer, everybody has to have their own comfort zone and obviously having a mortgage in retirement is not for everybody. Good Luck to you.

 

[ERD50]

Ripper and ERD50,

My comment was not to criticize someones personal decision, do not misunderstand. If it is by design as part of a careful strategy that is OK.

That really does not reconcile with what you actually said (bold mine):

Anyone who _plans_ to have a mortgage hanging around while retired is a bit foolish, in my opinion...


M

What is to misunderstand? You said that you think a number of us are a bit foolish for having a mortgage in retirement. How is that not criticizing someones personal decision?

-ERD50

 

[Mulligan]

That really does not reconcile with what you actually said (bold mine):

What is to misunderstand? You said that you think a number of us are a bit foolish for having a mortgage in retirement. How is that not criticizing someones personal decision?

-ERD50

I would love to have my mortgage paid off, but it didnt work out that way. The payment is only about 18% of my monthly net income. With no debt, I can handle the payment in retirement with no problem. But, if the criteria was "paid off mortgage" before I could retire, that would have delayed retirement another 10 years for know apparent reason other than to have it paid off. It will get paid off in time, but not a real concern.

 

[Aiming_4_55]

Congrats Dave. Reducing the housing expense is always a good thing.

 

[Aiming_4_55]

I view mortgage and college funding just expense lines. If one is retired, do they have the income to support the budgeted expense. Sure some prefer not to worry about that monthly bill, automated or not.

I'm not ER'd yet, but have my mortgage paid off. In the event it makes sense to refi and get a 1st mortgage or HELOC, it will be a consideration (meaning lowest cost of capital with everything considered).

As for college for my kids, I'll have a nice chunk (100% of projected tuition/housing) before ER, but will probably have an expense line for monthly contributions when I ER. I personally view that as an emergency cushion and flexible. I'm accounting for 500 a month in ER, but that's just me.

True, college and retirement savings should be fully funded along the way. However, I question anyone who criticizes paying off your primary residence as part of that plan - sounds like an excuse for lack of financial discipline.

Anyone who _plans_ to have a mortgage hanging around while retired is a bit foolish, in my opinion...


M