Your opinion sought on mortgage payoff

[fern]

Yes, I know you've all seen this question a dozen times, but each situation is different, right?

Would love to get your feedback on whether I should pay off my 6% fixed rate mortgage now (balance is $32,000) or not. (I'm in year 15 of a 30-year mortgage.)

Here are the particulars:

I'm a 51-year-old single female. Currently unemployed. My total net assets, not including the house, are $486,000.

I have no other debt other than the mortgage and paying it off now would reduce my monthly expenses quite a bit. I would also save $5,453 in interest payments.

To pay off the mortgage I would draw from either a domestic equity or international equity mutual fund; have held both for probably 10 years; I would take a loss on the internat'l fund now, though, and just a slight gain on the domestic equity fund. My total taxable savings are $109,000.

Your thoughts?

 

[utrecht]

You could get a home equity loan from Pentagon Federal Credit Union for 10 years at 3.99% with no closing costs. Maybe that's a compromise between paying off the mortgage or not?

I meant that you would pay off the original mortgage with the H/E loan...if that wasn't clear.

 

[REWahoo]

I think you should do whatever helps you sleep better at night. Your $32K remaining balance is less than 7% of your total assets, so not a significant swing one way or the other.

 

[Texas Proud]

I think you should do whatever helps you sleep better at night. Your $32K remaining balance is less than 7% of your total assets, so not a significant swing one way or the other.

+1 on this...


But I also did what utrecht said on my last mortgage... took out a low interest rate loan and paid it off with that... it does not pay to refinance at your low balance and paying 6% is to high IMO...

If you can get a 4% fixed for 10 years with no closing.. that fixes the high interest... you still have to decide if you want to pay it off...

 

[fern]

Being unemployed, i don't think i'd qualify for any kind of loan right now

 

[Uncle Drew]

Fern,

If I were in your situation, I would not pay off the mortgage early. I like the flexibility that comes with having cash on hand when one doesn't have income coming in. Once that money is paid to the mortgage company, it will be more difficult ta access it if you needed it.

If (or when) you gain stable employment again, that would be a good time to reassess paying off the mortgage.

UD

 

[Rustic23]

Here is what Scott Burns says about it. Sometimes it is not a great idea.

Sometimes, Paying Off the Mortgage Isn

 

[Walt34]

I'm in Uncle Drew's camp on this one. Being unemployed for the moment and since when or if you will get another job is an unknown you may find having the cash availability is better than a paid-off mortgage.

As REWahoo notes it's not a huge amount of your total assets anyway so going either way will probably not have a significant outcome whatever you do.

But I'm just conservative and believe "there's no such thing as too much money in the bank". YMMV.

 

[fern]

Hmmm. Thanks for your input. It just would feel SO much better to not have a roughly $300 monthly shortfall in income vs. expenses but i get what you all are saying. That $5K in mortgage loan interest just keeps nagging at me but i suppose the prudent thing to do would be to wait til i get a perm job (who knows when) and then double up my mortgage payments, which I'd been doing during a recently ended temp job that happened to pay well.

OR, I'd love to use money that wouldn't be subject to cap gains taxes to pay down the mortgage, like the $10k or so i have in taxable money market funds, but of course, i need that $$ to supplement unemployment benefits and whatever freelance work i can muster up until i get the next (and hopefully last) perm job of my career.

Thanks.

 

[nun]

Hmmm. Thanks for your input. It just would feel SO much better to not have a roughly $300 monthly shortfall in income vs. expenses but i get what you all are saying.

Thanks.

In your current situation cash and liquidity are the most important things. What happens if your furnace needs changing or you have some big car expenses. Without regular income it's best to keep the mortgage and use your cash for living.

If you haven't done so yet look at how you can cut expenses. The big ones are food, utility bills and insurance. Last year I took to entering everything I spend into an app on my phone. It showed where my major expenses were. I cut my cable bill in half by getting rid of my landline phone ($50/mth) and a premium cable package ($40/mth). I also saved $500/year on my home insurance and $200/year on my car insurance just by going to different companies or asking for a better rate. The biggest expense is often food. I now go to the store every day and play a game with myself to see if i can leave with a bill under $10. If you do a big shop each week you can sometimes save by buying in bulk, but the temptation to buy crap and the amount of food you waste makes it a bad idea IMHO. I pass up prepared foods and stuff like cakes and brownies as they are expensive, so I'm eating better as I buy lots of fruit and veg. I get the specials at the meat/fish section and make a lot of stuff myself and I'm eating far better. I'm spending $300/mth less on food.

I'm single, 50, have a mortgage on a 2 family house, live in an expensive part of the country, drive 35 miles to work each day and go out for beers with friends most weekends. Over the last 6 months my expenses (excluding mortgage, house tax an medical insurance) have averaged $1000/mth.

 

[ziggy29]

I'd be inclined to pay it off once you find work that seems fairly stable. But I probably wouldn't pay it off while I was unemployed, especially not in this crappy job market.

 

[Independent]

I think you should do whatever helps you sleep better at night. Your $32K remaining balance is less than 7% of your total assets, so not a significant swing one way or the other.

+1

I'd pay it off because my personality says simplify my life and because I know I can't find a 6% fixed rate investment out there. But that's my personality.

 

[freebird5825]

In your current situation cash and liquidity are the most important things. What happens if your furnace needs changing or you have some big car expenses. Without regular income it's best to keep the mortgage and use your cash for living.

I heartily agree.
I am usually a proponent of paying off a mortgage to save on interest you really don't need to pay, while employed AND have the excess cash flow to do so.
Cut as many expenses as you can and set aside a little cash if possible. Tough to do while unemployed.
Once things get better for you, consider doing an extra mortgage payment here and there assuming you will not suffer any prepayment penalty. Apply a little against the principal at a time.
Good luck in your job search.

 

[fern]

Thanks again, all.

Nun, I am a master of frugal living. I, too, live in an expensive part of the country (southwestern CT), and I've been tracking my expenses (to the penny) for about 15 years now. [moderator edit]. I've averaged about $43,000 in annual expenses for the past 5 years, but in 2010, due to my mostly unemployed situation, I managed to shave down an already frugal budget to $35,000. If you check my expenses (at the blog link that's in my profile), there's really nothing excessive there except the $1,600 spent on clothes, and that's explained by the new temp job in 40th quarter that was not business casual, and, sadly, I gained 15 pounds.

My top 7 expenses in 2010 were mortgage/property taxes: $15,626 (this includes some prepayments), Food, $2,642 (this includes various toiletries), healthcare $2,435, which includes COBRA and out of pocket expenses; Clothing, $1,678 (mea culpa) "household," $1,664 (yes, this is sort of a dumping ground for expenses that don't neatly fit in other categories, but usually includes things for the home, like a $250 air purifier I recently bought when i was working) and Cats, $1,405 (1 trip to the vet for an ear infection cost me $400.

No, I've tightened my belt about as much as I can on the spending side, so I'll need to focus more on drumming up more freelance business and other ways to make money.

Last year i did everything from selling some gold jewelry to selling stuff on craig's list, including some tree branches that came down in my yard...cut it up and sold it as firewood, market research focus groups (they pay about $100 cash for a few hours of giving your opinion), medical research studies (the more invasive the procedures, the more they pay...i just had blood drawn) and even online market research studies, from which i earned an average of $55 a month. You may think that scrounging for this kind of money isn't worth it, but I can proudly say that I lived the entire year of underemployment without having to dig into savings. And I'm determined not to let that happen in 2011, either.

 

[kumquat]

I think everyone has given good advice. I'll add a [-]good[/-] possibly bad idea. When you get back on your feet employment-wise, and you will, consider paying off the mortgage if you can do so without triggering a big tax hit (a small one is probably inevitable). Then take out a HELOC. Don't use it, but it can be a buffer until you use the increased cash flow from no mortgage payments to build an emergency fund.

Disclaimer: I can't deduct mortgage interest so that may influence my suggestions. However, paying off our mortgage was the best move we ever made, both from a financial and 'peace of mind' perspective.

 

[haha]

Fern,

If I were in your situation, I would not pay off the mortgage early. I like the flexibility that comes with having cash on hand when one doesn't have income coming in. Once that money is paid to the mortgage company, it will be more difficult ta access it if you needed it.

If (or when) you gain stable employment again, that would be a good time to reassess paying off the mortgage.

UD

This is how I see it also. When you are unemployed, above all preserve your liquidity. BTW, you show impressive resourcefulness.
Ha

 

[Moemg]

I have to agree that you are resourceful . I would also cruise my closets for items I could sell on ebay .

 

[fern]

Thanks for the kind words. Ebay is too "complicated" for me to sit down and learn, and besides, for all everyone raves about it, I think it's fairly time-consuming to have to package things up, schlep down to the PO to ship it out, etc. I consider Craig's List much better becus the buyer comes to your doorstep and there's no added cost.

For me, it's just a matter of survival. That may sound odd coming from someone with a fair amount of assets, but as i said, it would positively kill me to have to dig into the stash i've worked so hard to accumulate. Plus, I think i have a little "bag lady syndrome."

 

[Aiming_4_55]

If you have time, you might want to monitor the Free section of Craigslist. If it's worth your time, pick it up and accumulate a few items to sell.

Some may say that's not the intent of the free section, but it's survival.

Given it will cost you your time and gas. YMMV

 

[sheehs1]

Fern...you might sesriously consider an equity line whose rates follow prime. I did this several years ago and have been paying 2 1/2% thru this financial mess. At the time was able to negotiate prime minus 1.0 ...with the bank. Probably would not be able to get that today. In the past, the banks have paid all the closing costs on these equity lines. Don't know what they are doing today.
Mine is also an "interest only" equity line. While I pay way more than interest only....I would not have to if I had a situation that required more money that month or year.
It is the only loan I have against my house. Currently owe about $45K on it. I too could pay it off but choose not to. When or if rates move up....beyond what I could get investing the money...I plan to pay it off.
The risks is that interest rates have no where to go but up. Who knows when that will happen. I don't think they will go up significantly anytime soon...with unemployment high and the housing market in the shape it is still in. All of it would tank...further...if rates went too high.
Think of it this way: The interests rate on a equity line might be less than any fixed rate you can get at the moment. For the months or years the equity line rate is cheaper than the 30 year fixed....you are that much farther ahead presumably without closing costs. Plus the equity line moves up and down with the Fed Funds rate.

 

[fern]

Getting a home equity loan is a perfectly good idea but i'm generally debt-averse. I can see how a HELOC could save me money, but i'd rather just focus on getting rid of the debt asap. Perhaps this a character fault of mine, I don't know. Although I wonder if having an open line of credit, possibly even one that's untapped, could boost my credit score. Cus after I pay off the mortgage, i my current sterling score (801, last i checked) could drop a little with the elimination of installment debt.

 

[omni550]

fern,

I haven't read all of the responses you received. Here's an article I found in the NYT the other day. Perhaps you might find it useful.

A Little-Known Strategy for Cutting Mortgage Payments
http://www.nytimes.com/2011/01/02/realestate/mortgages/02Mort.html?_r=1&src=me&ref=general

omni

 

[fern]

very very interesting.

So recasting would lower my monthly payments but elongate the time til i paid it off, whereas just throwing prepayments at the mortgage would shorten the time til i paid it off but not lower monthly payments.

 

[sheehs1]

Fern...I was talking about an equity line.. used to pay off your primary mortgage. You would eliminate your first mortgage and be left with just the equity line....so basically the same amount of actual debt. The rate on your equity line could be less than your current mortgage..so you are throwing more net dollars towards your principal every month. Only works if the equity line rate is less than your current mortgage rate. Only works as long as rates stay below your current mortgage percentage.. etc.etc.
As you said also...the unused portion could sit out there not being used but is available in the event you need it.
Haven't read the recasting link....yet.

 

[veremchuka]

fern i'm confused. your balance on the mortgage is $30k and you are 15 years into a 30 year loan. you're paying $5k+ in interest? at 15 years i'd think your interest would be low with only $30k owed?

preserve capital because you are not working. as it was stated many times what ifs happen and you're better off with extra cash for expensive problems that can happen vs having no mortgage and less cash.

if your choice is taxable account money vs tax deferred i'd use taxable, delay paying taxes as long as possible.

i paid off my mortgage in june of last year in year 7 of a 30 year loan. i am retired and like you was tired of having to dip into savings to cover monthly expenses, i lbmm too. so i depleted virtually all my cash and i wonder if i did the right thing. my payment with taxes was $1225 a month but i still have to pay $480 in taxes a month so my savings is $745 a month. i was disgusted paying $6400 in interest each year. if something big happens i only have $5800 in cash and taxes for 6 months are due in 3 weeks dropping that to $3560. i say all this because while you have a lot more in cash vs the loan balance than i do there is a lot to be said about having cash just in case.... especially if you don't have a job.