Yet another should I pay off the mortgage thread

[Keim]

I know, I know, lots of threads on this subject. But I think my situation is a little different then the others I've seen addressed.

The facts:
A. Currently have a mortgage on my house at 6% for $49k. (Realize that is high, when we looked at refinancing we were told it really wasn't worth it by the time we figured in fees because the mortgage was so small)

B. Have enough savings to pay it off, and still have a nest egg in the lower to mid six figures. My wife and I are in the 35-40 age range, FWIW.

C. This is where I see my situation as slightly different then others I've read. Due to recent health issues I've had to cut back at work to half-time, while my wife continues to work full-time. This makes cash flow tight. We are getting by, but not able to save a lot each month. Getting rid of the mortgage would allow us to save some in our IRA's, etc each month.

What are the groups thoughts? Pay off the house, thus locking in that $49k to save the 6% on the loan (Then using the former monthly payment to invest in the market again)? Or continue to let the $49k follow the market, while cutting our already very tight budget to save what we can each month?

 

[jIMOh]

You can get no closing cost refis, so you could easily drop that rate down, keep your current payment and still pay off mortgage on current schedule (at a lower rate).

If you are working less, I would NOT pay off mortgage with a lump sum as you might need liquidity later (meaning might need cash to pay other bills).
If you are working less I would refi (no closing costs) to a rate as low as possible. 4.25% is what I am getting on my current refi (30 yr fixed) and I know others here are quoting even lower rates.

Maxing the IRAs is a good goal, I would focus on short term finances the most (make sure budget balances) and deal with debt pay down once you have a more concrete idea on future of you w*rking or retiring.

For example if your w*rk goes back to full time before April 15, you can still max the IRAs (the IRAs are a short term problem).

 

[Keim]

You can get no closing cost refis, so you could easily drop that rate down, keep your current payment and still pay off mortgage on current schedule (at a lower rate).

Thanks, jIMOh. I'll look into a no cost re-fi. I wonder if the group currently holding my mortgage, a Credit Union, offers such.

If you are working less, I would NOT pay off mortgage with a lump sum as you might need liquidity later (meaning might need cash to pay other bills).
If you are working less I would refi (no closing costs) to a rate as low as possible. 4.25% is what I am getting on my current refi (30 yr fixed) and I know others here are quoting even lower rates.

This is the part where I can't figure out what is best. Since my wife works full-time, and I'm able to do half we are getting by each month. I'd still have my emergency stash of cash for most unforeseen problems if I paid of the mortgage, and I REALLY don't like the thought of having to draw down on principal if I find myself needing cash to pay down on bills.

Being able to use that mortgage payment to supplement my savings looks mighty attractive. But then questions bubble up in my mind: What about opportunity cost as the stock market improves after you've locked in those losses? Is saving the 6% on the loan worth this? I just don't know...

Maxing the IRAs is a good goal, I would focus on short term finances the most (make sure budget balances) and deal with debt pay down once you have a more concrete idea on future of you w*rking or retiring.

For example if your w*rk goes back to full time before April 15, you can still max the IRAs (the IRAs are a short term problem).

Unfortunately I am stuck with a long term health issue. I don't expect to be able to return to full-time work anytime soon. With young kids at home we are also finding it nice to have someone home with them more. Am currently working on drawing up a budget that still has us saving a few hundred per month.

 

[jIMOh]

Thanks, jIMOh. I'll look into a no cost re-fi. I wonder if the group currently holding my mortgage, a Credit Union, offers such.

Look for a mortgage broker- someone which only closes loans and sells them.

I have a pending refi which the broker told me he would sell my loan for about $9600, and from that he would pay ALL CLOSING costs, then he gets half and his company gets half.

 

[Keim]

Thats interesting, jIMOh. It was a mortgage broker that told me it wasn't worth it since the loan was so small.

 

[ronocnikral]

Thats interesting, jIMOh. It was a mortgage broker that told me it wasn't worth it since the loan was so small.

not worth it for them. IIRC, a bulk of the fees and proceeds to the lenders are based on a %, not a flat fee.

 

[Keim]

SO then how do I find someone that will do a no or really low fee re-fi?

 

[travelover]

Obviously thing have changed a lot lately, but 7 years ago, I called around to various banks for a home equity loan and found one with no closing costs and refinanced the remaining $40K at a lower rate. At that time, I took out a 10 year loan.

 

[Htown Harry]

Obviously thing have changed a lot lately, but 7 years ago, I called around to various banks for a home equity loan and found one with no closing costs and refinanced the remaining $40K at a lower rate. At that time, I took out a 10 year loan.

I did something similar with Penfed 2-1/2 years ago - took out a no-cost, 5%, 10-year home equity loan. I recall that they took care of paying off the old mortgage as part of the closing. My payments went up because the term dropped, but I lowered my interest rate by a couple of points.

In OP's case, it sounds like you are more interested in dropping the monthly payment. Depending on the number of years remaining in your current mortgage, that may require a longer term than you will be able to find in a HEL or HELOC.

If you're willing to risk a payment rise in five years, penfed currently have a 4.13% 5/5 variable rate HELOC that you can amortize out to as far as 15 years.

The fixed rate options are 4.99% for up to 10 years and a 5.99% for up to 20.

https://www.penfed.org/productsAndRates/mortgages/homeEquity.asp

In my opinion, however, you may be letting the tail wag the dog by focusing on fees and closing costs. Is the "not big enough to be worthwhile" standard calculation of re-fi benefits secondary to your need / desire to reduce the monthly payments and to keep your other assets liquid for investment opportunities and unforeseen events?

If so, I'd roll the couple of thousand dollars of closing costs into a new 30-year, $50k, sub-4.5% mortgage and enjoy the flexibility that a $250-a-month house payment brings.

 

[FIREd]

If I had $49K sitting in cash or bonds somewhere, I would pay off the mortgage personally.

 

[Keim]

Thats the direction I'm leaning at the moment, Harry. Enjoy the low payment now, pay it off later if I desire.

If so, I'd roll the couple of thousand dollars of closing costs into a new 30-year, $50k, sub-4.5% mortgage and enjoy the flexibility that a $250-a-month house payment brings.

 

[Keim]

Contacted my Credit Union this morning. Looks like they want to hit me with about $4k in fees. In their words-we don't do RE-FIs under $50k (I'm at $49). So, you'll need to include the fees in the mortgage, and possibly take out a few thousand. Also, we'll charge you 2% instead of one on the loan origination rate.

Don't you just love it when financial types want you to pay extra because you've been diligent in your financial ways?

 

[haha]

Contacted my Credit Union this morning. Looks like they want to hit me with about $4k in fees. In their words-we don't do RE-FIs under $50k (I'm at $49). So, you'll need to include the fees in the mortgage, and possibly take out a few thousand. Also, we'll charge you 2% instead of one on the loan origination rate.

Don't you just love it when financial types want you to pay extra because you've been diligent in your financial ways?

As long as you will have other sources of liquidity, just pay it off. That or let it be. Nothing else makes any sense.

Ha

 

[Texas Proud]

You can get no closing cost refis, so you could easily drop that rate down, keep your current payment and still pay off mortgage on current schedule (at a lower rate).

I don't think he will be able to get a no closing refi... what happens is they have to charge an interest rate to cover the closing costs... meaning higher than market.. and with such a low balance, the interest rate will have to be a lot higher than normal to get there...

Also, a number of places will not touch a loan so low... you might have to try a credit union or a local bank...

 

[Texas Proud]

Contacted my Credit Union this morning. Looks like they want to hit me with about $4k in fees. In their words-we don't do RE-FIs under $50k (I'm at $49). So, you'll need to include the fees in the mortgage, and possibly take out a few thousand. Also, we'll charge you 2% instead of one on the loan origination rate.

Don't you just love it when financial types want you to pay extra because you've been diligent in your financial ways?

Well, I see I should have read a number of the other posts before posting...


I agree with the few who say take out a no cost LOC... I did with my bank before the crisis and paid off a higher cost loan like you are looking at doing... mine was in the same range of principal... I went with variable since at that time the rate was a lot different... and I KNEW that if the rates went way up I would just pay it off.


I do have a question... what if the difference between paying off $49K now and taking out $500 per month for say 100 months Serious... you would be taking out the same amount of money? I know that it is a psychological (sp??) thing that taking out money each month is 'bad'.... but at the end of the time period the results are the same...

 

[Keim]

As long as you will have other sources of liquidity, just pay it off. That or let it be. Nothing else makes any sense.

Ha

Got the bank scenarios for 10-30 year loans on $50k. Wife and I talked over lunch. It galls both of us to have to pay approx. 6% of loan value in fees-especially when they feel like BS fees ($500 to appraise a house they've already held the loan on for 15 years? $530 credit risk adjustment? What risk!?!) The $300 per month added cash flow would be nice. But, gimme a break! With our credit rating, etc they should be bending over to keep our business. Not bending us over.

We are going to look at the portfolio and see about liquidating some of the dogs to retire the debt. That will improve the cashflow even more.

 

[ERD50]

But, gimme a break! With our credit rating, etc they should be bending over to keep our business. Not bending us over.

I don't follow this train of thought. You signed a contract for a 6% loan. Why should the bank be interested in giving you a discount on your contracted rate? If rates went up instead, would you be 'bending over backwards' to give them more money, just because they were financially sound?

It's already a bit of a one-way street, the bank can't yank your loan from you if rates go up if they can make more elsewhere. But when rates go down, you can yank the loan away and find a better one. I'm not so sure this is really the best means to create a stable mortgage market, but I guess it is what our politicians decided would be good for us? IIRC, we had a poster from Australia who was explaining that their mortgages were for a set 10 years, then you refinanced at prevailing rates. This limited the risk for the banks, and probably allowed them to make more and better mortgages. No early payment option (or maybe a penalty? - again, IIRC). You make a deal and you stick to it.


-ERD50

 

[WanderALot]

Got the bank scenarios for 10-30 year loans on $50k. Wife and I talked over lunch. It galls both of us to have to pay approx. 6% of loan value in fees-especially when they feel like BS fees ($500 to appraise a house they've already held the loan on for 15 years? $530 credit risk adjustment? What risk!?!) The $300 per month added cash flow would be nice. But, gimme a break! With our credit rating, etc they should be bending over to keep our business. Not bending us over.

I don't know if you took a look at PenFed as another poster suggested. Go here:

https://www.penfed.org/productsAndRates/mortgages/mortgageCenter.asp

Click on Mortgage Calculator and type in your info. I ran a quick scenario with 50K loan amount and got a monthly payment of about $230. If you go do the 5/5 ARM, you will have no origination fee and the calculator says your closing costs are about $1500. In my experience, it'll be lower than that because they'll pay your settlement charge. My total closing costs were about $500. This is all assuming your LTV is below 80%.

 

[ziggy29]

If you can't get a good rate without fees that are an excessive percentage of the loan amount, I'd probably just pay the thing off if your current income stream is secure. There's no way to get the equivalent of a safe, guaranteed 6% on anything today, or even close to it.

It does put a hit on your liquidity, BUT if your income stream is secure you could always replenish it with your improved cash flow.

 

[Keim]

I don't follow this train of thought. You signed a contract for a 6% loan. Why should the bank be interested in giving you a discount on your contracted rate? If rates went up instead, would you be 'bending over backwards' to give them more money, just because they were financially sound?

It's already a bit of a one-way street, the bank can't yank your loan from you if rates go up if they can make more elsewhere. But when rates go down, you can yank the loan away and find a better one. I'm not so sure this is really the best means to create a stable mortgage market, but I guess it is what our politicians decided would be good for us? IIRC, we had a poster from Australia who was explaining that their mortgages were for a set 10 years, then you refinanced at prevailing rates. This limited the risk for the banks, and probably allowed them to make more and better mortgages. No early payment option (or maybe a penalty? - again, IIRC). You make a deal and you stick to it.


-ERD50

Why should they? Because I am an excellent customer of their's (I have a great credit rating, pay my bills on time, etc) that they could lose to another bank that is willing to treat me better. It's the beauty of competition.

I did make a deal, and I have stuck to it. That deal was for a 30 yr fixed rate loan at 6% with no penalty for early termination. How am I not sticking to it by trying to negotiate a better deal? THey did say early termination was okay in the original contract. Its no different then looking for a job offer, then going back to your current employer and asking them to beat it.

 

[ERD50]

RE: the bank should 'bend over backwards'...

Why should they? Because I am an excellent customer of their's (I have a great credit rating, pay my bills on time, etc) that they could lose to another bank that is willing to treat me better. It's the beauty of competition.

Yes, but it seems you are finding the competition isn't interested in offering a better rate on that size loan w/o significant fees. So free markets rules say your bank does not need to 'bend over backwards' if the competition isn't.

I did make a deal, and I have stuck to it. That deal was for a 30 yr fixed rate loan at 6% with no penalty for early termination. How am I not sticking to it by trying to negotiate a better deal? THey did say early termination was okay in the original contract. Its no different then looking for a job offer, then going back to your current employer and asking them to beat it.

Agreed - my 'you make a deal, you stick to it' comment was in reference to those Australian style loans. You are sticking to your deal, because your deal included the option to pre-pay. I'm just having trouble following your idea that the bank should be bending over backwards to offer you a lower rate.

If you find a place willing to give you a good deal, you could always take that to your bank and see if they can better it. At that point, your good history may have enough value for them to do something to keep you. They are probably counting on you having trouble getting a re-fi for $49K, and/or $49K is just too small of an amount for them to spend any time negotiating or to even be on their radar screen.

-ERD50

 

[rescueme]

...I would pay off the mortgage personally.

Unless you could get somebody else to pay if off for you ..

(Sorry, the made me do it)...

 

[segfault]

Based on what you've posted, I think you can fund your IRAs from taxable savings, if need be. I'd keep the loan at least until you sort out your health issues. In the meantime, pay a little extra each month if you can.

 

[Fantasm]

Another poster approached it how I would ... how secure are your jobs?
If you feel that they are pretty secure, I would just go ahead and pay off the mortgage.
If you did lose your jobs, that would be one less payment you would need to find a way to cover, and less risk of being evicted and having to move out after you only owed $49K on the house.

For such a small loan, you could possibly find some "hard money" loans as long as there are no other liens on the house.
A private party would just pay off your mortgage and then become 1st TD with your house as collateral for your repayment.
Maybe you can find someone who would do it for 3-4%/year as a source of guaranteed return since the house is worth a lot more than $49K (im assuming)

 

[Keim]

And now you know the rest of the story...

We haven't actually done it yet. But, we will be paying of the mortgage. Decided our emergency stash would still remain comfortably large, while the improved cashflow would give us some breathing room every month. Most of that money will be used to increase our annual investing rate.

Gonna feel good to be debt free.