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Old 12-22-2011, 08:14 PM   #21
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You could do a zero-cost refi if it looks like you might want to.........
Animorph, what is meant by a "zero cost refi"? I'm thinking about a re-fi myself but the only way I see to have zero costs is to just throw all of the costs into the loan amount. All that means is that you don't have to pay up front now but do so later. Could you help with an example of what is zero cost in a re-fi situation?
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Old 12-22-2011, 09:03 PM   #22
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Animorph, what is meant by a "zero cost refi"? I'm thinking about a re-fi myself but the only way I see to have zero costs is to just throw all of the costs into the loan amount. All that means is that you don't have to pay up front now but do so later. Could you help with an example of what is zero cost in a re-fi situation?
Many lenders will offeryou a true no cost refi in return for a higher note interest rate.
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Old 12-22-2011, 09:22 PM   #23
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My vote is C.

Figure what is a comfortable emergency cash cushion (say $10,000) and plunk the rest on the house. Blast the remaining mortgage for a few months until it is paid off, meanwhile you still have your $10,000 cash cushion to cover unexpected events.

With a mortgage balance of only $10,000 you are unlikely to find any refinance options. You may find no cost Home Equity or HELOC with attractive rates, so if you really want to get rid of your 5.5% you could. If it's only for a few months it likely doesn't matter much. You might find you want a HELOC with so much tied up in your home equity. You might decide you don't want the temptation.
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Old 12-22-2011, 09:33 PM   #24
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Option B sounds better. You need to have an emergency fund.
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Old 12-22-2011, 10:15 PM   #25
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You could pay off about 30k, leaving you some cash for an emergency. Then dump the 2k a month you are clearing into the remaining balance and you will be done in 5 months or less.

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Old 12-22-2011, 11:04 PM   #26
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I would keep investing the money.
With todays low interest rates, try to re-finance at a lower rate for a shorter amount of time. Where I iive, they are begging you to take mortgages at 3.9%.

When the house is paid off you will also have a larger savings, plus more free money to do with what you want.
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Old 12-23-2011, 08:27 AM   #27
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As the OP knows by now there are a bunch of differing perspectives on this. Faced with the same decision, what DW and I did was split the difference between savings and extra principal payments on the house.

It's nice to have no payments AT ALL, but we thought it unwise to put ourselves in a position where Murphy would see an opportunity to have the roof, CAC, furnace, and car transmission all fail in the same month.

But do what feels most comfortable for you.
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Old 12-23-2011, 06:58 PM   #28
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Something the OP didn't mention is what kind of retirement/investment dollars (if any) they have. I wouldn't try to answer this question without knowing what percentage of their net worth the house will be.

I wouldn't want anything close to 100% of my net worth tied up in my home.


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Old 12-23-2011, 09:29 PM   #29
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I'll go contrarian and say option A - pay it all off now. You are living on only 1 paycheck right now, so you'll have the other paycheck to live on should one of you lose a job. And if you are saving $2000 a month, you'll have $2000 in savings at the end of the month (plus what you were paying on a mortgage each month). Having a credit card or HELOC would be a good back up plan. Penfed and others allow you to get no closing cost HELOCs and that would act as your emergency fund short term if you need some quick cash (at a very low interest rate). Regardless of the HELOC, in 4-5 months you'll keep saving and have a tidy five figure savings account and probably not need to tap your HELOC.

Not having any debt payments at all reduces your need for monthly cash outlays.
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Old 12-24-2011, 10:12 AM   #30
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As a follow up from someone who is now spending his own money...

Thanks to a low home appraisal, I'm about to use all of my liquid cash reserves to close on a refi ($360 fee, 10 years, 3.25%, no points). I have about 10 months living expenses in a bond fund. Lots more in retirement accounts I don't want to touch for something like this. Credit cards could hold two years living expenses as well, in the event of a sudden large emergency.

Dual income household, my job is pretty secure, wife's is less so. We could get by on either income. Liquid savings have been about $1k a month lately, with another $1k per month going to the bond fund.

I feel no stress over this change in financial position - am pretty excited actually. Not as excited as I would be in your shoes, but still. It seems my original advice was a little less aggressive than what I would actually do.
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Option B With a Variant
Old 12-24-2011, 10:28 AM   #31
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Option B With a Variant

IMHO it is not a wise idea to be house rich and cash poor... even if you can build your savings (cash) quickly. A paid-off mortgage is great but not at the expense of having liquidity.

The option B variant that may make sense is double-up on payments and watch how quickly the mortgage balance is reduced. It will happen pretty quickly.

Continue your aggressive savings plan and build even more than $41k if possible. In one or two years your mortgage balance will be much lower and your savings balance will be much higher. At that point, pay off the house when you want - write a final check for $10k or whatever the balance is and say goodbye to debt!

Doing the above approach gives you plenty of cash if needed for unforeseen situations and pays off your mortgage in a short time.

While refinancing may make sense it hardly seems worth the trouble if your goal is to pay off the house quickly.
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Old 12-24-2011, 10:48 AM   #32
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A paid-off mortgage is great but not at the expense of having liquidity.
Very true. The exception would be if the property were income generating and paying off the mortgage would free up the income.
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Old 12-24-2011, 12:02 PM   #33
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Set aside 10K for you emergency fund now. Pay off 31K on the mortgage, then make double payments until it is gone. With this option you save a lot of 5.5% interest payments, you maintain an emergency fund, and you get the balance paid off in about 6 months by paying mostly principal and very little interest. And no gap without an emergency fund. The best of all worlds. Accomplishes exactly the same objective with lower risk and minimal cost.
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...refinance to a term with, say, a 3.5% rate. If inflation runs 2%, that drops your effective rate to 1.5%, and you can probably earn more than 1.5% via investments.
I think a combo of the above is the best choice:

1. Pay down ~$30K of the Mtge & keep remainder for emergency fund.
2. Lower your rate/payment. Get a no cost refi at a lower rate if you can do it with little or no fees. Another option I've seen is what PenFed calls a loan "recast." For a single $250 fee, they'll "recast" your loan with the same rate but lower monthly payment; this would allow more to go toward principle.
3. Make the highest extra monthly payments you can until the mortgage is paid.
4. Celebrate.
5. Keep paying yourself and invest it.
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Old 12-24-2011, 01:14 PM   #34
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IMO, if you won't feel comfortable with less than $X in the bank for emergency savings, wait until you have $X + the payoff amount, and then pay it off. Being mortgage-free is a good, secure financial feeling, but that is undermined by not having any cash in the bank to meet immediate, unexpected expenses.
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Old 12-24-2011, 01:21 PM   #35
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I don't have a mortgage payment, but it isn't awesome and I don't sleep any better at night than when I had a mortgage payment. I still need to pay the property taxes, mow the yard, clean up after storms, repair the roof, and take out the garbage.

A refinance may not be advisable as the principal amount would be low and the costs may not justify a refinance. You should look into it, but do not be surprised.

I would not use my entire stash to pay off a mortgage. I would want some way to overcome any medical or other emergency before I paid off my mortgage.
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Old 12-25-2011, 12:02 PM   #36
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I was in a very similar situation and here is what I did.

My mortgage was approximately 65k. I had the cash to pay it in full but still wanted a healthy amount of emergency cash available because you never know what life will throw at ya

I determined what my disposable income was each month -- basically what I could save each month. I then used 75% of that amount to pay down the mortgage. That left 25% for anything else. If I needed to access my cash account because of an unexpected expense I just took out the minimum needed to replenish my checking account. I've only had to do that a couple of times.

Meanwhile my mortgage is almost paid off and I still have my healthy cash account. Obviously you won't have the immediate satisfaction of paying it off but you would be surprised how fast that balance drops. Especially since you have 2k in savings each month.

I would suggest you try this for a few months and if the reduction in your balance is not quick enough for you increase your principal amount by accessing some of your cash each month.

To me this is the best of both worlds.
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Old 01-01-2012, 09:41 AM   #37
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Originally Posted by l2ridehd
I like option c. Yes I know, you didn't list an option c. So here is what option c should be. Set aside 10K for you emergency fund now. Pay off 31K on the mortgage, then make double payments until it is gone. With this option you save a lot of 5.5% interest payments, you maintain an emergency fund, and you get the balance paid off in about 6 months by paying mostly principal and very little interest. And no gap without an emergency fund. The best of all worlds. Accomplishes exactly the same objective with lower risk and minimal cost.
+1

Put a chunk onto the mortgage (5.5% rate of return), moves you towards your goal and ensures you don't wake up one day suddenly deciding you need a new car. You're a great, disciplined saver but we're all susceptible to those types of temporary shifts in priorities. Idle cash is the devil's playground.

My own suggestion: put $21k down on your mortgage. Knocks off 50% and leaves you with a bigger emergency fund. Save through November and then blow away the mortgage in December.

Good luck! We're chasing the same goal but we're way behind you!
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Old 01-01-2012, 12:08 PM   #38
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+1

You should have X months living expenses in liquid reserves, where X is determined by your job security and tolerance for risk. This is not an all or nothing proposition.

Determine X, keep it in the bank, put the rest towards the mortgage.

Yeah, the numbers would probably say do a refinance, invest the $41k.. blah blah blah. The reality is it's $41k. If you net an extra 1% return on that over having used the money to pay off the mortgage, you'll clear a whopping $410 dollars a year. No thanks, I'd rather have the peace of mind that comes with owning the home.

I qouted the above response because it is pretty much a duplicate of what I have to say.

An emergency fund is an absolute necessity for one to have at all times, particularly if you have accumulated some assets in life, because the more you have, the more you have to lose. The amount of your emergency fund should be determined by your income, your expenses, and other risks you face in life (job insecurity, etc.). After you have taken out x dollars to put into a separate emergency fund account in a money market or a very, very conservative bond fund, contribute to whatever is left of your 41k in the bank. At your rate of savings, you should have enough money to pay off your mortgage by the end of 2012. By the end of 2012, you will be in financial heaven because you will be debt free, and you will have a cushion of cash for any emergency that may pop up. After your home is paid off, DON'T TOUCH IT!! I say this because you will undoubtly be solicited by every loan shark (many disguised as banks) to use your home as an ATM for free. A free and clear home is something to be proud of and should contribute to your good health.

DO NOT play games with the lenders!! By that I mean, do not refinance, take out a HELOC or any other type of a loan, and be sure to adhere to the terms of your mortgage by paying your agreed upon monthly payment, not more or less. Refinancing or any other type of loan, including a "no cost" HELOC, will only cost you money. If you are working hard to be debt free, why would you want to give any more of your money to the banks? Besides, HELOCS can be cancelled at any time for no reason, sometimes as soon as your house has been appraised and the loan has been set up; I've seen it happen all too often. Do you see in the media the trouble that people are having with mortgage companies in this crisis, some of whom are beginning foreclosure actions on properties that they never even lent money on? And you are thinking of giving these morons employed by a lender more money each month and/or a lump sum of your hard earned money hoping that they will apply it to the proper loan account, reduce the balance, and charge you less interest Good luck on that!! That is not a strategy for hard working, frugal people.

By the way, this answer comes from someone who was a former investment sales rep and mortgage salesman. My jobs were to encourage people to take out mortgages and invest the money. LOL
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Old 01-03-2012, 09:40 AM   #39
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Checking Back..

Original Poster here checking back in, with an update.

I have started to implement "the plan" as discussed.

We wrote the December mortgage payment for $5000. (normally about $600?)

Then, we have already written out January's, and due to our holiday bonuses, We are sending in $6500 for the January cycle.

I guess the "new goal" is to make about 8 months worth of payments each in the $5000 dollar range. This will cover the entire $40,000, and allow us to keep a nice "emergency fund", and still have this thing paid off by mid year. Maybe the 4th of July should be our new target (?) not sure yet.

Either way, just wanted to let you all know that we survived the holidays, and have a plan in place going forward. Thanks again for all the advice!

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Old 01-03-2012, 10:23 AM   #40
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e wrote the December mortgage payment for $5000. (normally about $600?)
Hopefully, you instructed the lender that the excess was to be applied against the outstanding balance, not to be considered prepament of future monthly payments.

Sometimes, lenders do not execute the application of the "extra money" in the manner you wished (been there, done that)...
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