Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
should I pay off mortgage with extra $
Old 09-09-2012, 04:25 PM   #1
Recycles dryer sheets
 
Join Date: Jul 2012
Posts: 60
should I pay off mortgage with extra $

our mortgage is at 4.87% AT 682.00 then an extra 250 so we pay around 932. a month. we owe 122,000 we have an extra 150,000 so do we pay off the mortgage ..we are already maxing out our 403b and ira. thanks............ we have 20 years left on the house .. we want to retire in three years..
__________________

__________________
wrichards58 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 09-09-2012, 05:33 PM   #2
Thinks s/he gets paid by the post
 
Join Date: Nov 2005
Location: North of Montana
Posts: 2,753
You'll get a variety of opinions here. Mine is pay it off, a debt free retirement is appealing. Tax considerations aside, paying it off gives you a 'risk-free' investment of 4.87%, can your investments do that? Other things to consider:
- do/will you have an emergency fund of 6 months expenses?
- are you likely to move in the next few years?

My opinion is tainted by living in Canada. Here:
- mortgage interest is not tax deductable (although there are games you can play to make it so).
- we can get mortgages with a 5 year interest rate fixed at < 3%.
__________________

__________________
There are two kinds of people in the world: those who can extrapolate conclusions from insufficient data and ..
kumquat is offline   Reply With Quote
Old 09-09-2012, 05:56 PM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Mulligan's Avatar
 
Join Date: May 2009
Posts: 7,381
kumquat is right based on the threads in the past. The one I wouldn't do is keep paying at that interest rate. If you are going to keep loan longer term you should refi. If nothing else a PenFed type 5/5 arm that is about 3% and no cost refi. I could have paid mine off, but it would severely wiped out my assets. So I recently refi'd under 4% from 5%. Since the P&I alone only account for 15% of my monthly check, I would rather keep my stash since my cash flow covers payment easily.
__________________
Mulligan is offline   Reply With Quote
Old 09-09-2012, 06:33 PM   #4
Full time employment: Posting here.
 
Join Date: Sep 2007
Posts: 718
You are not paying off your mortgage, you are paying down your mortgage. I wouldn't do that, from a risk and liquidity standpoint.

If you want to pay your mortgage off early, put the extra money into a separate account (savings, bonds, stocks, whatever) until that account has enough money to pay off the mortgage completely. Until then, keep the money out of the house.

If all you have is $150K, then you'll have only $28K cash if you pay off the mortgage. It's pretty risky to have the majority of your net worth in one piece of real-estate. Also, if you suddenly need a chunk of cash -- like my Uncle did when he had emergency quintuple heart bypass surgery -- you don't have it when you need it.

I would refi the house to a new 30 year fixed at about 3.75% and keep your cash. Nothing says "Apply for a job as Walmart greeter" like having a free-and-clear house but no cash in the bank.
__________________
rayvt is offline   Reply With Quote
Old 09-10-2012, 06:51 AM   #5
Moderator
Walt34's Avatar
 
Join Date: Dec 2007
Location: Eastern WV Panhandle
Posts: 16,544
Quote:
Originally Posted by rayvt View Post
Nothing says "Apply for a job as Walmart greeter" like having a free-and-clear house but no cash in the bank.
Even that lofty aspiration is fading away as Walmart does away with greeters.

I guess there's still midnight shift 7-11 clerk.
__________________
I heard the call to do nothing. So I answered it.
Walt34 is offline   Reply With Quote
Old 09-10-2012, 07:03 AM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,450
It is hard to say what you should do without knowing the rest of your financial situation.

But, 4.87% is pretty high. To me, it depends on what the $150k is invested in and what it is earning and whether your are working or retired, if you are working how stable your job is, your personal risk appetite, etc.

If your risk appetite or investment return is low and $28k would be a sufficient emergency fund for you then pay off might make sense. Otherwise you could refi into a 15 year mortgage at probably less than 3% and as long as your $150k of investments earn more than 3% over the next 15 years you would come out ahead, but recognize that if your investments earn less than 3% then you will come out behind (assumes that interest income is taxable and interest paid is tax deductible - YMMV).

As for me, I am accepting of risk and believe my investments will earn more than my 3.375% mortgage interest rate in the long run so I refi'd earlier this year and sleep well at night knowing that if I wanted to or needed to I could pay off my mortgage anytime I wish to and that my mortgage is only about 10% of my nestegg.
__________________
pb4uski is online now   Reply With Quote
Old 09-10-2012, 07:34 AM   #7
Full time employment: Posting here.
EvrClrx311's Avatar
 
Join Date: Feb 2012
Posts: 524
No wrong answer here but in your position I would refinance into a 15-year fixed. If your credit is good you can get just under 3% which in my mind is a free loan as far as "real rate" goes. A Job, or SS inherently follows inflation - which may exceed historical averages of 3% over the next 15 years. We will certainly pay the price soon for all this money printing and market manipulation. Meaning that future payments on the house are 'cheaper' (or easier on your wallet) than today. Essentially... the interest you pay on that loan is pretty simple to beat over 15 years with a good AA.
__________________
EvrClrx311 is offline   Reply With Quote
Old 09-10-2012, 12:39 PM   #8
Thinks s/he gets paid by the post
 
Join Date: Jul 2010
Location: Chicago
Posts: 1,001
Quote:
Originally Posted by Mulligan View Post
kumquat is right based on the threads in the past. The one I wouldn't do is keep paying at that interest rate. If you are going to keep loan longer term you should refi. If nothing else a PenFed type 5/5 arm that is about 3% and no cost refi. I could have paid mine off, but it would severely wiped out my assets. So I recently refi'd under 4% from 5%. Since the P&I alone only account for 15% of my monthly check, I would rather keep my stash since my cash flow covers payment easily.
Ths PenFed 5/5 arm loan looks too good to be true. They pay up to $10k in closing costs, so no cost to you and the rate can't go up/down more than 2% on the 1st adjustment. Right now the rate is 2.75%, then worst case is 4.75% on the 1st adj in 60 months.

I was just offered a Home Equity Installment Loan (HEIL) to refi my mortgage @ 2.94% for 12-72 months from PNC that would cost me $213 out of pocket and I have to decide by tomorrow. Anyone ever hear of a HEIL used to do a refi only? Also wondering if HEIL loans are 100% tax deductible for this purpose. I read some articles that limit them to 100k loan total.

Looks like the PenFed offer is less time sensitive and no out of pocket cost. In my situation, my current rate is 4.5% fixed 30 yr w/$329k outstanding amount. Our payment is $2021, but we're overpaying $5000 monthly to write it down faster, since I'm sitting on the cash from prior home sale to pay off the mortgage if I wanted. Guess I'm sitting on the fence on which way to go. Not sure if it's worth paying it off since I could refi for lower and still get tax deductions.
__________________
Dimsumkid is offline   Reply With Quote
Old 09-10-2012, 08:45 PM   #9
Recycles dryer sheets
 
Join Date: Jul 2012
Posts: 60
Quote:
Originally Posted by pb4uski View Post
It is hard to say what you should do without knowing the rest of your financial situation.

But, 4.87% is pretty high. To me, it depends on what the $150k is invested in and what it is earning and whether your are working or retired, if you are working how stable your job is, your personal risk appetite, etc.

If your risk appetite or investment return is low and $28k would be a sufficient emergency fund for you then pay off might make sense. Otherwise you could refi into a 15 year mortgage at probably less than 3% and as long as your $150k of investments earn more than 3% over the next 15 years you would come out ahead, but recognize that if your investments earn less than 3% then you will come out behind (assumes that interest income is taxable and interest paid is tax deductible - YMMV).

As for me, I am accepting of risk and believe my investments will earn more than my 3.375% mortgage interest rate in the long run so I refi'd earlier this year and sleep well at night knowing that if I wanted to or needed to I could pay off my mortgage anytime I wish to and that my mortgage is only about 10% of my nestegg.
we have stable jobs. We will not retire until three years from now. We do not know if we will stay in the house. Our investments are in 403b which at this time have given us about 2.35% If I keep the money I will but it in Vanguard funds with make ? return... My husband likes the idea of paying off the house with it
__________________
wrichards58 is offline   Reply With Quote
Old 09-10-2012, 10:36 PM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,450
Is this "extra" $150 k in taxable accounts or is it part of your 403b? f it is in taxable accounts, what is that earning?

IMO it would be a bad idea to raid your 403b to pay off your mortgage. It would create taxable income for any amounts withdrawn and would be subject to early withdrawal penalties as well.
__________________
pb4uski is online now   Reply With Quote
Old 09-11-2012, 07:29 PM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,414
The problem with trying to earn more on your money then you do paying interest on the mortgage is your interest rate varies.

Mortgages are usually front loaded with more interest in the early years and less in the later.

It can typically take 22 years just to pay off 1/2 the principal because of it.

You really dont get your agreed rate until you fly the empty seats at the end.

Since most folks move every 5-7 years you are paying far more interest than you think.
__________________
mathjak107 is offline   Reply With Quote
Old 09-11-2012, 07:47 PM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,450
Quote:
Originally Posted by mathjak107 View Post
.....You really dont get your agreed rate until you fly the empty seats at the end.....
Huh? You get the agreed interest rate during the entire term of the loan since the interest is principal times rate.
__________________
pb4uski is online now   Reply With Quote
Old 09-11-2012, 07:56 PM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,414
I would think you do but im not so sure that the table actually works out that way.

21 years just to pay down 1/2 of the principal on a 30 year loan maY work out different.

We all know you pay more in the beginning because you owe more but im not so sure it works out to the rate until all is paid off.

I havent tried it yet myself but the internet is chock full of debates as to whether you do or not.
__________________
mathjak107 is offline   Reply With Quote
Old 09-11-2012, 07:59 PM   #14
Thinks s/he gets paid by the post
gauss's Avatar
 
Join Date: Aug 2011
Posts: 1,712
I swapped the 1st Mortgage (of which we had 5 years remaining at 3.5%) for a Home Equity Loan (HEL) from PenFed earlier this year.

They were offering fixed 1.99% for 60 months with no closing costs for my case.

edit:
Looks like PenFed is still running the 1.99% 60 month HEL. See this link for details.

Note that you may have to pay for an appraisal if their automated system cannot produce a home value estimate. You need 80% or less LTV and owner occupied.
__________________
gauss is offline   Reply With Quote
Old 09-11-2012, 08:21 PM   #15
Thinks s/he gets paid by the post
 
Join Date: Nov 2005
Location: North of Montana
Posts: 2,753
Quote:
Originally Posted by mathjak107 View Post
I would think you do but im not so sure that the table actually works out that way.

21 years just to pay down 1/2 of the principal on a 30 year loan maY work out different.

We all know you pay more in the beginning because you owe more but im not so sure it works out to the rate until all is paid off.

I havent tried it yet myself but the internet is chock full of debates as to whether you do or not.
The formula used is here, under amortization of loans. Yes, the interest is a much bigger part of the payment early on because the oustanding principle is much bigger. Why not try it yourself rather than rely on internet debates among people whio may or may not be numerate?
__________________
There are two kinds of people in the world: those who can extrapolate conclusions from insufficient data and ..
kumquat is offline   Reply With Quote
Old 09-11-2012, 08:51 PM   #16
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,450
Quote:
Originally Posted by mathjak107 View Post
I would think you do but im not so sure that the table actually works out that way.

21 years just to pay down 1/2 of the principal on a 30 year loan maY work out different.

We all know you pay more in the beginning because you owe more but im not so sure it works out to the rate until all is paid off.

I havent tried it yet myself but the internet is chock full of debates as to whether you do or not.
With all due respect, if you're just guessing/hypothesizing then you would be better off not to say anything at all until you know what you're talking about. Besides, with a screen name like mathjak people might get the impression that you know what you are talking about.

For each payment you make, the interest is the principal balance before the payment times the interest rate divided by 12. The principal reduction is the total payment for the month less the interest. The new principal balance is the previous principal balance less the principal reduction for the month.

It's that simple. Repeat each month until the principal is gone.

You get the agreed rate each month of the loan but pay more interest early in the term of the loan because the principal balance is higher.
__________________
pb4uski is online now   Reply With Quote
Old 09-12-2012, 03:00 AM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,414
i just actually tried it and yes the rate does hold true. all those articles about it not are not true,.

its more a case of semantincs that can be twisted and spun. here is why..

when you think of a loan at 6% your first vision is 6% of the payment is for interest each year. because mortgages are kept as affordable as possible they are not amortized that way..

If you look at an amortization schedule for a $200K loan at a 6% fixed rate for 30 years, you see the monthly payment is $1199.10. the first month the interest payment is $1000 and the principal payment is $199.10. over 83% of the first payment goes toward interest


is it a 6% loan, yep it is but compound interest does some interesting things.
__________________
mathjak107 is offline   Reply With Quote
Old 09-12-2012, 07:13 AM   #18
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,450
Quote:
Originally Posted by mathjak107 View Post
.....when you think of a loan at 6% your first vision is 6% of the payment is for interest each year. .....
Not sure why anyone would think of it this way since it is pretty well established that i = p * r but whatever.

Yes, the interest in the first month is $1,000, or p * r or $200,000 * 6%/12 months.
__________________
pb4uski is online now   Reply With Quote
Old 09-12-2012, 08:31 AM   #19
Full time employment: Posting here.
 
Join Date: Sep 2007
Posts: 718
Quote:
Originally Posted by pb4uski View Post
Not sure why anyone would think of it this way...
Mathjak actually said why, although not explicitly.

It's a con. The people who say it this way are twisting and spinning the truth. Usually they are trying to sell a system (hello, money merge account) that supposedly will save you money. The con only works if their marks believe what mathjak originally believed.
__________________
rayvt is offline   Reply With Quote
Old 09-12-2012, 09:56 AM   #20
Recycles dryer sheets
ducky911's Avatar
 
Join Date: May 2010
Posts: 397
I vote for invest in yourself and pay it off. The feel of owning your home outright is great. It is going to put you in the mood for retirement. Plus protect that money. You do loose the tax angle so it like buying a risk free 4.8% taxable investment...if tthat was available to me I be jumping on it with both feet.
__________________

__________________
You've got to ask yourself one question: Do I feel lucky? Well, do ya, punk?
I hate (despise) loads and fees
Retired July '11 investments 55/45 in very low cost index and mutual funds, balance once a year at best.
ducky911 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


 

 
All times are GMT -6. The time now is 09:14 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.