Just paid down a big chunk of mortgage...but why does it feel wrong?

[ERD50]

If someone has decided to pay off the mortgage, I don't understand the rational of making larger payments along the way. Wouldn't it be better to save up the balance, and do it all at once?

I doubt you knock off much interest with the interim payments, you hurt your cash flow in the process, and the money you put in is locked up. Having it invested keeps it liquid, and then, wham!, you're done.

-ERD50

 

[2HOTinPHX]

Having it invested keeps it liquid, and then, wham!, you're done.

-ERD50

If you are gonna keep it invested why would you ever want pay the house off...just keep it invested... what about RISK of a market down turn just when you decide to pay it off....

 

[COcheesehead]

I worry about sticking a bunch into something that it is hard to get back out of. Liquid = options.

 

[Texas Proud]

If you are gonna keep it invested why would you ever want pay the house off...just keep it invested... what about RISK of a market down turn just when you decide to pay it off....

Who said you need to risk it

There are very safe investments that can be made... no risk of losing principal... not a great return right now, but no risk at all....

 

[mpeirce]

If someone has decided to pay off the mortgage, I don't understand the rational of making larger payments along the way.
-ERD50

It's not math, it's psychology. I know people who have convinced themselves it good to pay extra on their mortgage, but if they had extra funds sitting in an account would definitely spend it.

Out of sight out of mind.

 

[jazz4cash]

I have a vague idea of the area you live in. I think you should shop around for a better mortgage lender. Your property should qualify with a tiny LTV even with no house on the property. You definitely need to get rid of the loan you have. I am looking to do a refi at around 3.0 for 30 yrs at Andrews FCU. NASA FCU has good rates also.

 

[Andre1969]

Hey guys, figured I'd give an update on my mortgage situation. Now that it's over and done with, I feel a lot better about making that $10,000 payment. I think I was just going through a bit of "buyer's remorse" right after making the decision...sort of like the feeling you might get after buying a new car. I remember one of my friends buying a new Cadillac a few years back, and afterwards joking that the buyer's remorse was so bad that he should've been put on suicide watch!

Anyway, I think I'm going to forge ahead with my original plan, where I pay $2000 during a down month, $3000 during an up month, and $10000 in a month where my investable assets hit a new $10M threshold.

I know the month has just begun, but as of right now, it looks like September might be a $3K month. If I can get 1.3% out of the market this month, it'll be another $10-K'er

 

[Andre1969]

I figured I'd give an update on my progress here, since it's been about 5 months since I made that $10,000 payment on my mortgage. At the time, I still owed about $141K, and the mortgage was scheduled to be paid off in May of 2024.

Well, I made a $4K payment in September, $2K in October, $2K in November, $2K in December, and then $10K for this month (January). The required minimum is $1847.

Now, the outstanding balance is down to $123,845.04, and if I do $2K per month from here on out, it'll be paid off in January 2023...so just six more years!

I'll admit, I did have a small wave of "buyer's remorse" after I did this second $10K payment, but now that it's a done deal, I'm over it. I've been re-thinking my strategy though, of paying extra on it as my net worth hits new thresholds. I made that $10K payment because I popped the $1,130,000 threshold, and that was my plan. But, now I think I might just make one more $10K payment, but do it when the time feels "right". And after that, just stick to $2000 per month. Now that I'm down to 6 years, it just feels like it'll get paid off soon enough, regardless.

 

[UnrealizedPotential]

Paying off the mortgage is a kind of depends issue. I know in California it could make a lot of sense if you are sitting on a lot of equity and have the means to pay the rest of the mortgage down. Why? Well, the first 250k profit for a single person is tax free. If its more than that it might be 15%, too lazy to look it up now. But it's still a very good deal IF you walk away with a lot of profit. Some states might not be as good of a deal. Just my two cents . Of course paying down the mortgage assumes you are selling the house, condo, etc, and cashing out. Otherwise I am not sure it makes sense.

 

[ChiliPepr]

Paying off the mortgage is a kind of depends issue. I know in California it could make a lot of sense if you are sitting on a lot of equity and have the means to pay the rest of the mortgage down. Why? Well, the first 250k profit for a single person is tax free. If its more than that it might be 15%, too lazy to look it up now. But it's still a very good deal IF you walk away with a lot of profit. Some states might not be as good of a deal. Just my two cents . Of course paying down the mortgage assumes you are selling the house, condo, etc, and cashing out. Otherwise I am not sure it makes sense.

Not sure I understand what you are saying here... Paying down the mortgage does not affect the profit on a sale in any way.

 

[UnrealizedPotential]

Not sure I understand what you are saying here... Paying down the mortgage does not affect the profit on a sale in any way.

Not during the selling process no, but say for two years paying off the mortgage prior to selling the house, it most certainly does make a difference. The more you pay down a mortgage, the more equity you gain. The more equity you gain , the more you can walk away with.

 

[GrayHare]

Not during the selling process no, but say for two years paying off the mortgage prior to selling the house, it most certainly does make a difference. The more you pay down a mortgage, the more equity you gain. The more equity you gain , the more you can walk away with.

Perhaps California has different rules, but typically even if you have $0 equity in a house, when you sell it the profit (or loss) is all yours.

 

[RunningBum]

Not during the selling process no, but say for two years paying off the mortgage prior to selling the house, it most certainly does make a difference. The more you pay down a mortgage, the more equity you gain. The more equity you gain , the more you can walk away with.

Still makes no sense. You've just been paying yourself.

 

[UnrealizedPotential]

Perhaps California has different rules, but typically even if you have $0 equity in a house, when you sell it the profit (or loss) is all yours.

How can it be otherwise?

 

[UnrealizedPotential]

Still makes no sense. You've just been paying yourself.

Please explain how getting more equity is not helping me make money when I sell? I am not trying to argue. Just trying to understand.

 

[frayne]

Would you pay 100% cash for a house today?

Yes and I have for my last two houses. Being debt free is a great feeling that most people will never attain. To me it was almost the equivalent of achieving self actualization on Maslow's hierarchy of needs, at least in a financial sense.

 

[ERD50]

Please explain how getting more equity is not helping me make money when I sell? I am not trying to argue. Just trying to understand.

Because the equity increase came from your own money. It was a transfer.

I think this example was used before: Say you agree to sell your used car for $5,000. Then you go to the buyer, and say "I am going to put ten $100 bills on the dashboard, but now I want $6,000 for the car"

I suppose you can say you got more money for the car, but your net worth is the same either way.

You could discount this by any lower interest that was paid on the mortgage, but you could also offset that by any opportunity cost of not having those funds liquid and available for investment.

IOW, transferring money from one account to another does not make you richer. If it did, I'd be making transfers each and every day!

-ERD50

 

[ERD50]

... Being debt free is a great feeling that most people will never attain. To me it was almost the equivalent of achieving self actualization on Maslow's hierarchy of needs, at least in a financial sense.

But that's not true for everyone. For me, I get an awesome, powerful, "putting it to the man" feeling when I see I have a sub 3% mortgage while the market has been soaring. And I could pay it off in a heartbeat if I wanted.

-ERD50

 

[UnrealizedPotential]

Because the equity increase came from your own money. It was a transfer.

I think this example was used before: Say you agree to sell your used car for $5,000. Then you go to the buyer, and say "I am going to put ten $100 bills on the dashboard, but now I want $6,000 for the car"

I suppose you can say you got more money for the car, but your net worth is the same either way.

You could discount this by any lower interest that was paid on the mortgage, but you could also offset that by any opportunity cost of not having those funds liquid and available for investment.

IOW, transferring money from one account to another does not make you richer. If it did, I'd be making transfers each and every day!

-ERD50

I see what you and Running Bum are saying. Thank you for the explanation.

 

[RunningBum]

Please explain how getting more equity is not helping me make money when I sell? I am not trying to argue. Just trying to understand.

Say you buy a house for $100K, and sell it for $150 K a few years later. That's $50K in profit, no matter how much you owe on it.

Case 1, you make extra payments of $20K, so you have $30K in equity, owing $70K. You get $80K cash at closing.

Case 2, you invest the extra $20K elsewhere and make normal payments. So you $10K in equity, which means you still owe $90K. You get $60K cash at closing. But you also have that $20K elsewhere, so you still have $80K cash.

This ignores the return you made on your $20K investment in case 2, and any interest you saved by paying down the mortgage in case 1.

 

[RobbieB]

If you pay the loan faster than planned you save the interest.

 

[Sunset]

I figured I'd give an update on my progress here, since it's been about 5 months since I made that $10,000 payment on my mortgage. At the time, I still owed about $141K, and the mortgage was scheduled to be paid off in May of 2024.

Well, I made a $4K payment in September, $2K in October, $2K in November, $2K in December, and then $10K for this month (January). The required minimum is $1847.

Now, the outstanding balance is down to $123,845.04, and if I do $2K per month from here on out, it'll be paid off in January 2023...so just six more years!

....

Are you saying the mortgage was 141K - 20K = 123,845
Are you being credited with paying down the principle vs just pre-paying the mortgage payment ?

 

[JustCurious]

+1,

That is how I look at it, and it's pretty hard to get a 4.99% bond these days

It's not that hard. The Vanguard Long Term Corporate Bond Index Fund (VLTCX) has more than one thousand of them with an average coupon rate of 5.2%.

https://personal.vanguard.com/us/funds/snapshot?FundIntExt=INT&FundId=1947#tab=2

 

[calmloki]

We took out a couple 5/5 Penfed loans on places we had free and clear. At the same time, we had Penfed CDs that paid the same 3% rate they were charging us for the loans. It made great sense to me, because we could leave the CDs alone and use the borrowed money in our lending adventures rather than have the house equity just sit there. Now we've received notice that our Penfed home loan interest is bumping up to 4%. While 4% is still a remarkable rate looking back over the last 30+ years I don't really have a use for the funds. The Penfed CDs mature 1/18 and having borrowed money sit in a savings account earning 1% while we pay 4% seems wasteful. First world problem for sure. We will probably pull the loan payoff money out of the 1% savings account and get rid of the house payment. While last year we made some equity gains in the stock market we only broke even with the California tax free bond fund, so unless we want to really be pushing our lending and making that money work I don't feel real secure with being able to have it make 3% or better. Wurra wurra.

 

[Andre1969]

Are you saying the mortgage was 141K - 20K = 123,845
Are you being credited with paying down the principle vs just pre-paying the mortgage payment ?

Yeah, it's going to paying down the principal. Do they even make mortgages or other loans where paying extra just goes toward pre-paying the interest? That sounds like it shouldn't be legal to me. Also, what advantage would there be to simply pre-paying interest, rather than paying down the principal?