should I pay off mortgage with extra $

[wrichards58]

our mortgage is at 4.87% AT 682.00 then an extra 250 so we pay around 932. a month. we owe 122,000 we have an extra 150,000 so do we pay off the mortgage ..we are already maxing out our 403b and ira. thanks............ we have 20 years left on the house .. we want to retire in three years..

 

[kumquat]

You'll get a variety of opinions here. Mine is pay it off, a debt free retirement is appealing. Tax considerations aside, paying it off gives you a 'risk-free' investment of 4.87%, can your investments do that? Other things to consider:
- do/will you have an emergency fund of 6 months expenses?
- are you likely to move in the next few years?

My opinion is tainted by living in Canada. Here:
- mortgage interest is not tax deductable (although there are games you can play to make it so).
- we can get mortgages with a 5 year interest rate fixed at < 3%.

 

[Mulligan]

kumquat is right based on the threads in the past. The one I wouldn't do is keep paying at that interest rate. If you are going to keep loan longer term you should refi. If nothing else a PenFed type 5/5 arm that is about 3% and no cost refi. I could have paid mine off, but it would severely wiped out my assets. So I recently refi'd under 4% from 5%. Since the P&I alone only account for 15% of my monthly check, I would rather keep my stash since my cash flow covers payment easily.

 

[rayvt]

You are not paying off your mortgage, you are paying down your mortgage. I wouldn't do that, from a risk and liquidity standpoint.

If you want to pay your mortgage off early, put the extra money into a separate account (savings, bonds, stocks, whatever) until that account has enough money to pay off the mortgage completely. Until then, keep the money out of the house.

If all you have is $150K, then you'll have only $28K cash if you pay off the mortgage. It's pretty risky to have the majority of your net worth in one piece of real-estate. Also, if you suddenly need a chunk of cash -- like my Uncle did when he had emergency quintuple heart bypass surgery -- you don't have it when you need it.

I would refi the house to a new 30 year fixed at about 3.75% and keep your cash. Nothing says "Apply for a job as Walmart greeter" like having a free-and-clear house but no cash in the bank.

 

[Walt34]

Nothing says "Apply for a job as Walmart greeter" like having a free-and-clear house but no cash in the bank.

Even that lofty aspiration is fading away as Walmart does away with greeters.

I guess there's still midnight shift 7-11 clerk.

 

[pb4uski]

It is hard to say what you should do without knowing the rest of your financial situation.

But, 4.87% is pretty high. To me, it depends on what the $150k is invested in and what it is earning and whether your are working or retired, if you are working how stable your job is, your personal risk appetite, etc.

If your risk appetite or investment return is low and $28k would be a sufficient emergency fund for you then pay off might make sense. Otherwise you could refi into a 15 year mortgage at probably less than 3% and as long as your $150k of investments earn more than 3% over the next 15 years you would come out ahead, but recognize that if your investments earn less than 3% then you will come out behind (assumes that interest income is taxable and interest paid is tax deductible - YMMV).

As for me, I am accepting of risk and believe my investments will earn more than my 3.375% mortgage interest rate in the long run so I refi'd earlier this year and sleep well at night knowing that if I wanted to or needed to I could pay off my mortgage anytime I wish to and that my mortgage is only about 10% of my nestegg.

 

[EvrClrx311]

No wrong answer here but in your position I would refinance into a 15-year fixed. If your credit is good you can get just under 3% which in my mind is a free loan as far as "real rate" goes. A Job, or SS inherently follows inflation - which may exceed historical averages of 3% over the next 15 years. We will certainly pay the price soon for all this money printing and market manipulation. Meaning that future payments on the house are 'cheaper' (or easier on your wallet) than today. Essentially... the interest you pay on that loan is pretty simple to beat over 15 years with a good AA.

 

[Dimsumkid]

kumquat is right based on the threads in the past. The one I wouldn't do is keep paying at that interest rate. If you are going to keep loan longer term you should refi. If nothing else a PenFed type 5/5 arm that is about 3% and no cost refi. I could have paid mine off, but it would severely wiped out my assets. So I recently refi'd under 4% from 5%. Since the P&I alone only account for 15% of my monthly check, I would rather keep my stash since my cash flow covers payment easily.

Ths PenFed 5/5 arm loan looks too good to be true. They pay up to $10k in closing costs, so no cost to you and the rate can't go up/down more than 2% on the 1st adjustment. Right now the rate is 2.75%, then worst case is 4.75% on the 1st adj in 60 months.

I was just offered a Home Equity Installment Loan (HEIL) to refi my mortgage @ 2.94% for 12-72 months from PNC that would cost me $213 out of pocket and I have to decide by tomorrow. Anyone ever hear of a HEIL used to do a refi only? Also wondering if HEIL loans are 100% tax deductible for this purpose. I read some articles that limit them to 100k loan total.

Looks like the PenFed offer is less time sensitive and no out of pocket cost. In my situation, my current rate is 4.5% fixed 30 yr w/$329k outstanding amount. Our payment is $2021, but we're overpaying $5000 monthly to write it down faster, since I'm sitting on the cash from prior home sale to pay off the mortgage if I wanted. Guess I'm sitting on the fence on which way to go. Not sure if it's worth paying it off since I could refi for lower and still get tax deductions.

 

[wrichards58]

It is hard to say what you should do without knowing the rest of your financial situation.

But, 4.87% is pretty high. To me, it depends on what the $150k is invested in and what it is earning and whether your are working or retired, if you are working how stable your job is, your personal risk appetite, etc.

If your risk appetite or investment return is low and $28k would be a sufficient emergency fund for you then pay off might make sense. Otherwise you could refi into a 15 year mortgage at probably less than 3% and as long as your $150k of investments earn more than 3% over the next 15 years you would come out ahead, but recognize that if your investments earn less than 3% then you will come out behind (assumes that interest income is taxable and interest paid is tax deductible - YMMV).

As for me, I am accepting of risk and believe my investments will earn more than my 3.375% mortgage interest rate in the long run so I refi'd earlier this year and sleep well at night knowing that if I wanted to or needed to I could pay off my mortgage anytime I wish to and that my mortgage is only about 10% of my nestegg.

we have stable jobs. We will not retire until three years from now. We do not know if we will stay in the house. Our investments are in 403b which at this time have given us about 2.35% If I keep the money I will but it in Vanguard funds with make ? return... My husband likes the idea of paying off the house with it

 

[pb4uski]

Is this "extra" $150 k in taxable accounts or is it part of your 403b? f it is in taxable accounts, what is that earning?

IMO it would be a bad idea to raid your 403b to pay off your mortgage. It would create taxable income for any amounts withdrawn and would be subject to early withdrawal penalties as well.

 

[mathjak107]

The problem with trying to earn more on your money then you do paying interest on the mortgage is your interest rate varies.

Mortgages are usually front loaded with more interest in the early years and less in the later.

It can typically take 22 years just to pay off 1/2 the principal because of it.

You really dont get your agreed rate until you fly the empty seats at the end.

Since most folks move every 5-7 years you are paying far more interest than you think.

 

[pb4uski]

.....You really dont get your agreed rate until you fly the empty seats at the end.....

Huh? You get the agreed interest rate during the entire term of the loan since the interest is principal times rate.

 

[mathjak107]

I would think you do but im not so sure that the table actually works out that way.

21 years just to pay down 1/2 of the principal on a 30 year loan maY work out different.

We all know you pay more in the beginning because you owe more but im not so sure it works out to the rate until all is paid off.

I havent tried it yet myself but the internet is chock full of debates as to whether you do or not.

 

[gauss]

I swapped the 1st Mortgage (of which we had 5 years remaining at 3.5%) for a Home Equity Loan (HEL) from PenFed earlier this year.

They were offering fixed 1.99% for 60 months with no closing costs for my case.

edit:
Looks like PenFed is still running the 1.99% 60 month HEL. See this link for details.

Note that you may have to pay for an appraisal if their automated system cannot produce a home value estimate. You need 80% or less LTV and owner occupied.

 

[kumquat]

I would think you do but im not so sure that the table actually works out that way.

21 years just to pay down 1/2 of the principal on a 30 year loan maY work out different.

We all know you pay more in the beginning because you owe more but im not so sure it works out to the rate until all is paid off.

I havent tried it yet myself but the internet is chock full of debates as to whether you do or not.

The formula used is here, under amortization of loans. Yes, the interest is a much bigger part of the payment early on because the oustanding principle is much bigger. Why not try it yourself rather than rely on internet debates among people whio may or may not be numerate?

 

[pb4uski]

I would think you do but im not so sure that the table actually works out that way.

21 years just to pay down 1/2 of the principal on a 30 year loan maY work out different.

We all know you pay more in the beginning because you owe more but im not so sure it works out to the rate until all is paid off.

I havent tried it yet myself but the internet is chock full of debates as to whether you do or not.

With all due respect, if you're just guessing/hypothesizing then you would be better off not to say anything at all until you know what you're talking about. Besides, with a screen name like mathjak people might get the impression that you know what you are talking about.

For each payment you make, the interest is the principal balance before the payment times the interest rate divided by 12. The principal reduction is the total payment for the month less the interest. The new principal balance is the previous principal balance less the principal reduction for the month.

It's that simple. Repeat each month until the principal is gone.

You get the agreed rate each month of the loan but pay more interest early in the term of the loan because the principal balance is higher.

 

[mathjak107]

i just actually tried it and yes the rate does hold true. all those articles about it not are not true,.

its more a case of semantincs that can be twisted and spun. here is why..

when you think of a loan at 6% your first vision is 6% of the payment is for interest each year. because mortgages are kept as affordable as possible they are not amortized that way..

If you look at an amortization schedule for a $200K loan at a 6% fixed rate for 30 years, you see the monthly payment is $1199.10. the first month the interest payment is $1000 and the principal payment is $199.10. over 83% of the first payment goes toward interest


is it a 6% loan, yep it is but compound interest does some interesting things.

 

[pb4uski]

.....when you think of a loan at 6% your first vision is 6% of the payment is for interest each year. .....

Not sure why anyone would think of it this way since it is pretty well established that i = p * r but whatever.

Yes, the interest in the first month is $1,000, or p * r or $200,000 * 6%/12 months.

 

[rayvt]

Not sure why anyone would think of it this way...

Mathjak actually said why, although not explicitly.

It's a con. The people who say it this way are twisting and spinning the truth. Usually they are trying to sell a system (hello, money merge account) that supposedly will save you money. The con only works if their marks believe what mathjak originally believed.

 

[ducky911]

I vote for invest in yourself and pay it off. The feel of owning your home outright is great. It is going to put you in the mood for retirement. Plus protect that money. You do loose the tax angle so it like buying a risk free 4.8% taxable investment...if tthat was available to me I be jumping on it with both feet.

 

[Finance Dave]

I faced this situation about a year ago, and we paid ours off...even at 3.85%. I cannot earn that amount safely anywhere today, so it seemed like the right choice.

In the interest of full disclosure, we do have a HELOC on our house, with a small balance, which was used to buy a rental property about 2 years ago. Wife and I made a pact that if we are going to use the HELOC to buy rentals, we'd commit to paying off any amount borrowed in 3 years to avoid a "surprise" when interest rates go up. We owe about $22k still on this one, which will be paid off in about a year.

Fortunately we have sufficient incomes where we can do this. You might ask why we don't just pay off the $22k with savings. We could, but there are the following reasons we did not:

1) I'm in the midst of a career change, and we want to maintain liquidity.
2) When we opened the HELOC, we agreed to keep it "active" (keep a balance) for 3 years minimum (it was a no-fee HELOC, so they wanted a guarantee to earn something)
3) Most of our investments are in accounts that we cannot get to easily until age 59 1/2...and we're a few years away from that.

We are happy with where we're at. No "first" mortgage, a small HELOC that's backed by income on two rentals that are worth significantly more than the HELOC balance, two high-paying jobs, and significant savings ready for a semi-FIRE in the near future (more on that in a thread I'll start shortly).

 

[rayvt]

it like buying a risk free 4.8% taxable investment...if tthat was available to me I be jumping on it with both feet.

Actually, no. If you want to think of not having as mortgage as is it were an investment (which is common, even though faulty), then it's like 3.25%.

The amount of saving equivalent is not the current mortgage rate but the rate you could get on a refi.

 

[Speculator]

When I retired from my first career, I paid off my mortgage. Was it the absolute best financial decision to make? Maybe, maybe not.

Did I sleep really well at night knowing that no matter what happened, I would always own my home? Absolutely!

 

[mathjak107]

i have always been a believer in setting goals.

if one of my goals has been to have a paid off house then when i can achieve that i dont take the money and throw it back in the risk pool again.

the other money is left on the table to grow but as each goal is met i pull that off the table.

 

[wrichards58]

Just to let everyone know that we paid off our mortgage and our equity loan...we have no debt not even credit cards at the age of 58 and three years to retire, it feels good. Thanks for all your response.