Should we pay off the mortgage if we "lock in a loss"?

[Tractor guy]

IMOP, the decision to pay off the mortgage is a short term decision that has got nothing to do with the financials on selling the house and whether or not the house is worth more than you paid for it. Lets say that you have decided that you are moving in 3 years when you retire and that housing goes up by 4%/year in your area (I picked a number out of the air).
Scenario A: you pay off the mortgage now so you are no longer paying interest.
Cost to you today: $330K
Cost of mortgage for 3 years: 0
Income from sale of house: = $400K + 3*.04*400 = 448K Actually its a bit more than this because of compounding but I'm too lazy to look that up.

Net: 448-330 = 118K realized from the sale

Scenario B: You keep the mortgage
Cost today: 0
Cost of the mortgage over 3 years: ~$43K in interest (I've not included principal reduction here because I've put it in the next line)
Financials when you sell:
Income: Same as before $448K
Payment to bank: $330K

Net take home: 448-330-43 = $75K

The bottom line is that unless you can guarantee that you can beat 4.5% interest with the 300K you have in the bank to pay off the mortgage, you are money ahead to pay it off. It doesn't matter if you sell the house or not. Note that I've also not put the original purchase price anywhere in this analysis as it doesn't matter to the result. The decision to buy the house is water under the bridge that can't be called back.

 

[bad_LNIP]

The bottom line is that unless you can guarantee that you can beat 4.5% interest with the 300K you have in the bank to pay off the mortgage, you are money ahead to pay it off.

That's not the bottom line. OP is leaving out that they are eating HOA and property taxes to the tune of 18k per year. In your year example, subtract 60k from both of the realized sale amounts, and it becomes pretty clear what you should do.

OP is seeking confirmation that hoping real estate prices are going to rise in the future is a good idea, and I will tell you it isn't a good idea.

 

[Cheesehead]

Thanks all! I'm going to print these out and go over them with the wife and a calculator this weekend.

 

[target2019]

If you bought during the bubble, then you may be 10 years into your payments. Take time to understand your amortization schedule. At this point you are making larger interest payments.

I wouldn't take a third of retirement savings and put it against the house.

 

[pb4uski]

The first decision you need to make is how long you plan to be in this house. What you initially paid for it is not relevant to the decision (what is called a "sunk" cost). What is relevant is its current value of $400k and your best guess as to what home prices will do in your area and your personal needs/plans.

If you plan to keep it for more than a couple years, I would refinance to a lower cost loan even if you have to put money in to get the mortgage down to 80% of the value. The purpose of refinancing is only to reduce your interest costs without depleting your nestegg. If you are more comfortable with it, you could pay off the high interest 4.8% mortgage and your nestegg would be replenished with the proceeds from the when you do sell - in a way that is like "making" 4.8% less whatever you expect to make on what that $333k is invested in now.

 

[NgineER]

Any money put in to the mortgage you will get back when you sell, unless you plan to default. You are above water, so short sale is not an option.

Good luck with your decision.

 

[HawkeyeNFO]

Are you expecting a different response from the last thread you started on this?

http://www.early-retirement.org/forums/f28/should-we-pay-off-mortgage-if-it-is-a-loss-74275.html

Pay it off.

 

[HawkeyeNFO]

Pay it off.

Don't listen to that jackass, only a fool would pay it off!

 

[pb4uski]

I never knew HawkeyeNFO was bi-polar.