Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Just paid down a big chunk of mortgage...but why does it feel wrong?
Old 08-23-2016, 09:02 AM   #1
Thinks s/he gets paid by the post
 
Join Date: Aug 2005
Posts: 2,034
Just paid down a big chunk of mortgage...but why does it feel wrong?

Hey guys and gals,

Today I made an extra big payment on my mortgage, which seems like the right thing to do, but now I'm beginning to second guess it.

Here's a little background. Initially, this mortgage was an HELOC. In early 2015, the draw period ended, and it converted to a 10 year fixed mortgage, at 4.99%. Not the best in the world. The initial balance was around $174,000. This is the only mortgage debt I have.

The monthly payment is $1847, which I've been rounding up to $2000. And, the first month in, I paid $3000. The payment is kind of high, but manageable. And I figured it would be a good test run to see if I would be comfortable with a bigger mortgage, which is bound to happen down the road, considering some of the houses I've been looking at.

Anyway, a month or so ago, I got tired of paying it, and figured I'd try refinancing, to free up some cash flow, and use that money to invest further. Initially, I got qualified for a $154,000 mortgage at 3.625%, for 30 years, which would drop the payment to about $700 per month. But then they dropped a bit of a bombshell on me. They won't approve the mortgage unless I get a roofing inspector to come in, and fix whatever he says needs fixing.

The problem here is that I intend to sell in around 4-5 years, and the house is essentially a tear-down...100 years old, small, outdated, too close to the road, etc, and on 4.28 acres of good, subdividable land in a fairly sought-after area. I'm sure an inspector could find a good $15-20,000 easy, in repairs. But it just doesn't make sense, in my opinion, to throw $15-20K, or more, into a house that'll just get torn down in the near future. When it comes time to sell, it's not going to increase the value any.

If this was a much larger mortgage, and/or if I was going to stay here longer, it might make sense. But, it was down to $150,400 before I made this big payment (The $154K loan included some closing costs and a higher loan balance at the time).

So, I decided to just forget about refinancing, and get a bit more aggressive about paying it down. With the $10K I just threw at it, it's now down to around $141,000. It feels good, to see the balance drop that much, but at the same time, it makes me feel a bit broke. It's also starting to make me question, when the time does come to retire, how hard is it going to be for me to make the switch from saving to spending?

I ran a few numbers. If I had just paid $1847 this month, the loan would have been paid in full in November 2024, with total interest payments of $45,787. Making this $10K payment moves it up a bit to May of 2024, with total interest of $41,801. So, it does save almost $4,000 over the life of the loan, but once you bring in tax writeoffs, time value of money, etc, it does muddle things up.

I have thought of a new game plan for attacking this mortgage. It might sound a bit convoluted, but here goes... Every month I hit a new $10K threshold in investable assets, I'm thinking about making a $10K payment. And for every month that my investable assets is better than the month before, I'll make a $3K payment. And if it's a down month, I'll still make a $2K payment.

I figure this way, it'll get paid off more quickly, but I won't strain myself financially in doing so. I had actually been planning for awhile to make a $10K payment, if my investable assets broke the $1.11M barrier. Just sort of an arbitrary figure...I wanted to hit at least $1.1M, and then go a bit beyond. Well, I broke that (barely) in July, and hit $1.125M earlier in the month. I held off initially, because of the refinancing process, but once that fell through I decided to go ahead and pay it down.

So now, my plan for the September payment is that if I'm up for the month, versus August 31, I'll pay $3K. If I manage to pop the $1.13M barrier, I'll pay $10K.

Anyway, I know this has gotten kinda long, so if any of you all read through it all, thanks! And if anybody has any thoughts or ideas, let me know!
__________________

__________________
Andre1969 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 08-23-2016, 09:22 AM   #2
Thinks s/he gets paid by the post
2017ish's Avatar
 
Join Date: Apr 2012
Posts: 1,637
So much depends upon what your liquid assets and free cash flow looks like. That is far from a good rate and you aren't going to do better in any remotely comparably safe investment than paying it down.

If you have a good liquid position, I'd aggressively pay it down, particularly if you have good cash flow. Where are your 1.1 million in assets at? If in taxable accounts, I'd choose to liquidate some of them and get rid of the 5% debt.

Agree with the roof repair--but if the land is worth more than the loan amount, seems like you could find a lender that would focus on that, rather than the improvement.

Edited to Add Disclosure: We are currently refinancing the rest of our 10 year jumbo into a 2.75 apr 15 year note to free up liquidity for retirement.... We could easily write a check to pay it off, but DW convinced me to maintain liquidity. So I'm not extreme anti-debt, just don't like the 5% in your case....
__________________

__________________
OMY * 3 2ish
2017ish is offline   Reply With Quote
Old 08-23-2016, 09:42 AM   #3
Administrator
W2R's Avatar
 
Join Date: Jan 2007
Location: New Orleans
Posts: 37,096
Quote:
Originally Posted by Andre1969 View Post
I have thought of a new game plan for attacking this mortgage. It might sound a bit convoluted, but here goes... Every month I hit a new $10K threshold in investable assets, I'm thinking about making a $10K payment. And for every month that my investable assets is better than the month before, I'll make a $3K payment. And if it's a down month, I'll still make a $2K payment.
I like it! The nice thing about this plan is that you will always have some excess money for other things if needed.

I am speaking from experience because I foolishly paid my mortgage off, by pouring every spare cent into that effort. Eventually (due to excess enthusiasm) that included my emergency fund. Consequently I was caught flat-footed with no money in the bank to pay for my Katrina evacuation expenses. Not good.
__________________
Fairy tales are more than true: not because they tell us that dragons exist, but because they tell us that dragons can be beaten.

― N. Gaiman (2002)








W2R is offline   Reply With Quote
Old 08-23-2016, 09:51 AM   #4
Thinks s/he gets paid by the post
 
Join Date: Aug 2005
Posts: 2,034
Right now, about $591K is in taxable accounts, $427K in tax deferred (401ks and IRAs) and $92K is in a Roth. As for cash, maybe around $42,000 total, between my checking account and money market funds in the taxable accounts. I have a Scottrade brokerage account that I'm forecasting to throw off around $20-21K in dividends this year. I've been reinvesting all the dividends, to keep it growing, but I guess I could always use those dividends to pay down the mortgage if I had to.

As for the land, I tried to get this lender, PNC Bank, to focus on the value of the land, rather than the house, but they refuse to do it. I was tempted to try another lender, but I'm just worried they'd do the same thing.
__________________
Andre1969 is offline   Reply With Quote
Old 08-23-2016, 09:57 AM   #5
Dryer sheet wannabe
 
Join Date: Aug 2016
Posts: 13
My plan is similar but smaller numbers. I am currently refinancing to a fixed 15 year at 2.5% from a 30year. Once my liquid assets are back above a preset threshold I will begin paying $300/month extra. On top of that when liquid assets reach threshold plus $2k I will pay down the mortgage by that amount. Before anybody jumps on me for prepaying a 2.5% loan, for me it is debt aversion that rules not math.
__________________
You get what you inspect, not what you expect.
2Pizzas is offline   Reply With Quote
Old 08-23-2016, 10:38 AM   #6
Thinks s/he gets paid by the post
2017ish's Avatar
 
Join Date: Apr 2012
Posts: 1,637
How about cashing out 150 from the taxable account (selling the most tax efficient things) and paying it off tomorrow? Then just redirect the monthly payment into refilling the taxable account?

No strain on cashflow, you maintain good reserves, and you strike that 5% debt.

Either way you go, you are looking at it properly in wanting to aggressively pay down. Just a question of how fast/aggressive.
__________________
OMY * 3 2ish
2017ish is offline   Reply With Quote
Old 08-23-2016, 10:57 AM   #7
Dryer sheet aficionado
 
Join Date: Sep 2012
Location: Spring, Texas...but in Nigeria till ER !
Posts: 39
A69
Paying off the mortgage....Pro's and Con's and nauseating analysis....

We feel much better since we paid off our mortgage. Not saying it is the right thing to do or was the smartest....

But I can tell that for us - it was the right thing....

I have a feeling that you will feel that way also....

All the best, gamboolman & gamboolgal.....
__________________
gamboolman is offline   Reply With Quote
Old 08-23-2016, 11:03 AM   #8
Thinks s/he gets paid by the post
 
Join Date: Aug 2005
Posts: 2,034
I think I'd be a bit leery of taking $140K out of the market all at once. That might be a little *too* aggressive for me! I'd worry about the possibility of losing out on future gains. Although there's always the possibility that the market tanks, and it cuts out future losses, as well!

Anyway, I just ran a few more numbers. If I pay $2000 per month as planned, which isn't that much above the $1847 minimum, it gets the loan paid off in August 2023. $3000 per month gets is paid off in January 2021. And tentatively, April 2021 is when I want to retire.

I'm not hell-bent on having this mortgage retired by the time I retire, but I at least want to see the light at the end of the tunnel.
__________________
Andre1969 is offline   Reply With Quote
Old 08-23-2016, 12:29 PM   #9
Thinks s/he gets paid by the post
DrRoy's Avatar
 
Join Date: Dec 2015
Location: Michigan
Posts: 1,358
I looked at paying down/paying off my mortgage like investing in a taxable bond at the same rate. Do it if it seems like a good investment relative to other opportunities.
__________________
"The mountains are calling, and I must go." John Muir
DrRoy is offline   Reply With Quote
Old 08-23-2016, 12:53 PM   #10
Thinks s/he gets paid by the post
Sunset's Avatar
 
Join Date: Jul 2014
Location: Chicago
Posts: 3,593
Quote:
Originally Posted by Andre1969 View Post
...
I ran a few numbers. If I had just paid $1847 this month, the loan would have been paid in full in November 2024, with total interest payments of $45,787. Making this $10K payment moves it up a bit to May of 2024, with total interest of $41,801. So, it does save almost $4,000 over the life of the loan, but once you bring in tax writeoffs, time value of money, etc, it does muddle things up.

.....
Are you sure about this, Did you create a new amortization schedule based on the lower total, the same monthly payments and interest ?
Or just divide the 10K by $1847 (which would be wrong).
__________________
Sunset is online now   Reply With Quote
Old 08-23-2016, 12:55 PM   #11
Thinks s/he gets paid by the post
Sunset's Avatar
 
Join Date: Jul 2014
Location: Chicago
Posts: 3,593
Quote:
Originally Posted by DrRoy View Post
I looked at paying down/paying off my mortgage like investing in a taxable bond at the same rate. Do it if it seems like a good investment relative to other opportunities.
+1,

That is how I look at it, and it's pretty hard to get a 4.99% bond these days
__________________
Sunset is online now   Reply With Quote
Old 08-23-2016, 01:08 PM   #12
Full time employment: Posting here.
 
Join Date: Jun 2016
Posts: 931
Quote:
Originally Posted by DrRoy View Post
I looked at paying down/paying off my mortgage like investing in a taxable bond at the same rate. Do it if it seems like a good investment relative to other opportunities.
It can be more complicated than that. Does the deduction keep me under the AGI for zero capital gains, allow me to itemize, keep me under the subsidy limit for ACA? What about diversification, are all my eggs nearly in one basket?
All questions we need to answer individually of course, but it is not always as easy as just comparing returns.
__________________
COcheesehead is offline   Reply With Quote
Old 08-23-2016, 01:11 PM   #13
Thinks s/he gets paid by the post
RetireAge50's Avatar
 
Join Date: Aug 2013
Posts: 1,020
You said worry quite a few times, seems like it is paralyzing you. If it were me I would either refinance or pay off immediately.

No matter what you do (or don't do) you'll be fine. I wouldn't worry about making the perfect financial decision as it it is kind of a toss up.
__________________
RetireAge50 is online now   Reply With Quote
Old 08-23-2016, 01:14 PM   #14
Moderator
MichaelB's Avatar
 
Join Date: Jan 2008
Location: Rocky Inlets
Posts: 22,867
Quote:
Originally Posted by Sunset View Post
That is how I look at it, and it's pretty hard to get a 4.99% bond these days
+2 Even more difficult to get that rate of return, guaranteed, zero default risk, and after tax.
__________________
MichaelB is offline   Reply With Quote
Old 08-23-2016, 01:21 PM   #15
Thinks s/he gets paid by the post
 
Join Date: Aug 2005
Posts: 2,034
Quote:
Originally Posted by Sunset View Post
Are you sure about this, Did you create a new amortization schedule based on the lower total, the same monthly payments and interest ?
Or just divide the 10K by $1847 (which would be wrong).
Same amortization table, which is an excel spreadsheet, just with a $10,000 entered in for this month, where it would normally be $1847.
__________________
Andre1969 is offline   Reply With Quote
Old 08-23-2016, 01:27 PM   #16
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2005
Posts: 12,341
Quote:
Originally Posted by 2017ish View Post
How about cashing out 150 from the taxable account (selling the most tax efficient things) and paying it off tomorrow? Then just redirect the monthly payment into refilling the taxable account?

No strain on cashflow, you maintain good reserves, and you strike that 5% debt.

Either way you go, you are looking at it properly in wanting to aggressively pay down. Just a question of how fast/aggressive.


If you go this way I would sell the bonds... IOW, think of the house as a place holder for your bond allocation and you will fill it up over the next 10 years or less if you pay more into it..... then go back to what you were doing investment wise afterwards...
__________________
Texas Proud is online now   Reply With Quote
Old 08-24-2016, 06:52 AM   #17
Full time employment: Posting here.
 
Join Date: Jun 2014
Posts: 921
I keep a "anti-mortgage" stock account. Instead of paying down the mortgage, i put after tax bucks in stocks, and when that account equals my outstanding debt, i can decide to kill the mortgage, pay the payments from that account, or just keep going.

But the point is, I have options and didn't tie the money up in a hard to sell asset, and played interest arbitrage hopefully.


Sent from my iPhone using Early Retirement Forum
__________________
dallas27 is offline   Reply With Quote
Old 08-24-2016, 07:34 AM   #18
Recycles dryer sheets
Cassius King's Avatar
 
Join Date: May 2010
Location: Cincinnati
Posts: 159
Dallas27, I'm doing the same thing. I didn't want to have all my money tied up in the house and not be liquid. So I opened an account, and am putting the extra money in it. At the time it reaches the mortgage balance, I can then either decide to pay it off, or keep on as planned.
I want to be debt free, but not at the expense of my liquidity or freedom to do what I want.
__________________
Cassius King is offline   Reply With Quote
Old 08-24-2016, 11:16 AM   #19
Full time employment: Posting here.
 
Join Date: Jun 2014
Posts: 921
Quote:
Originally Posted by Cassius King View Post
Dallas27, I'm doing the same thing. I didn't want to have all my money tied up in the house and not be liquid. So I opened an account, and am putting the extra money in it. At the time it reaches the mortgage balance, I can then either decide to pay it off, or keep on as planned.
I want to be debt free, but not at the expense of my liquidity or freedom to do what I want.

It is always good to find a likewise thinker to reinforce my pre-existing beliefs, then together we can perpetuate our personal delusions of strategic optimization. :-)


Sent from my iPhone using Early Retirement Forum
__________________
dallas27 is offline   Reply With Quote
Old 08-24-2016, 11:55 AM   #20
Recycles dryer sheets
 
Join Date: May 2014
Posts: 185
Mortgage should be considered as a negative safe investment. How could you find a safe investment with a guaranteed annual return of 4.99%?
__________________

__________________
flyingaway 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


Similar Threads
Thread Thread Starter Forum Replies Last Post
Just paid off the mortgage. Putting the pay off the mortgage question to rest. FUEGO FIRE and Money 65 06-08-2015 05:08 PM
Pay down existing mortgage or save up for big down payment? Andre1969 Young Dreamers 13 04-29-2010 10:05 AM
big chunk, dollar cost average? Spartacus FIRE and Money 47 11-24-2009 12:28 PM
What to do with a big chunk of change justin FIRE and Money 9 06-23-2005 06:39 PM

 

 
All times are GMT -6. The time now is 11:07 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.