Paying Mortgage Early

[Big Country]

I know in year;s past we have had several threads that went into great details on the pros/cons of paying off a mortgage early. Well, lately I have been relooking at this. Generally I was of the opinion that I could likely make a greater return by investing elsewhere and just making my normal monthly payments, figuring to come out ahead in the long term. Lately, I am not so sure. Not sure if having a third child on the way is making me more interested in trying to be near debt free come college time (about 12 years away for my oldest), the volatility of the market has me less sure of being out ahead by investing elsewhere, etc. I'm currently looking at making monthly principal only payments, and also looking at areas where I can cut back (do I really need all the premium movie channels when I can just stream Netflix?, I can cut HBO after Hard Knocks), etc.

 

So, not to just rehash the same debate, but has anyone changed their view on this or have insight perhaps into what their approach may be?

[paulzale]

I pay more on the principle each month than necessary. I would really like to convince the wife that this should be our focus over the next several years. My reasoning behind this is that once you eliminate all debt, then you are essentially retired, i.e. you work because you want to do so and don't have to do it. If our house is paid for we can make all our bills on minimum wage, that would be a nice thing to know especially in times like this. Imagine all the good you could do each month with that mortgage payment!

[polksalet]

We owe about half as much on farm as we do on crib. We are snowballing on farm and when it is done we will throw it all on house. I want to move to farm but my wife seems to really like debt.

[Avernus]

We owe about half as much on farm as we do on crib. We are snowballing on farm and when it is done we will throw it all on house. I want to move to farm but my wife seems to really like debt.

 

 

why even pay your mortgage?...quite a few Americans don't even pay their mortgage anymore and get to live in their house for free

 

it's the new American way!!! buy a house for FREE..

 

"if it's free, it's for me"

[yo mama]

I haven't changed my tune at all: prepaying any debt is a great idea (assuming there are no penalties for prepayments). My "financial advisers" told me I was crazy for taking that approach 4 years ago, but it doesn't look so crazy anymore.

 

Look, if you're got at a 4-5% effective interest rate (after factoring in the benefit of the tax deduction) that's a freakin' sweet deal these days. Where else are you going to get:

- a GUARANTEED 4-5% effective rate of return;

- that lasts for a GUARANTEED investment horizon (i.e., the time it takes to pay the mortgage off); and

- immediately boosts your monthly cash flow upon completion of the investment objective.

 

Plus, *IF* you plan on being in your house long term then every dollar of principle you prepay is virtually guaranteed to stay put like a dollar in a coffee can. (Yes, the VALUE of your home may go up and down based on the appreciation component of value - but your equity investment remains constant). And while the investment lacks liquidity, you can still get to it free of tax through an equity line if you need to. Sales of your primary residence are also tax-benefited (first $250k of capital gain is not taxed; $500k if you're married). Most after-tax investment alternatives don't have those kinds of benefits.

 

In an environment where people are investing money in "cash," paying down your mortgage (or student loans, or car note, and especially credit cards) is vastly superior IMO. Sure, you *might* do better investing in the market if you're willing to incur a ton of risk. But I'll take the guaranteed return. Because, in the worst case scenario, my mortgage is paid off (hypothetically) ten years earlier. The worst case scenario of gambling in the market when you've got significant debt is much, much worse.

[TimC]

Assuming you have no other debt, it's the best thing. I recently refinanced my interest rate down and saved $150 a month. I'm going to pay the same amount I was paying previously to knock it down faster. Being mortgage-free would be the greatest thing ever. Do it!

 

Definitely cut out the fluff for awhile if you're that close to it. Like Dave Ramsay says, "Live like no one else so you can live like no one else.

 

I was less than $50k in 2006 when I sold my house. It still pains me to think how close I was to it and now starting over, but I had to with the way the neighborhood was heading.

[Big Country]

Thanks for the input fellas. I'm gonna do some number crunching over the next few days to see what we could put in to it, what we could save on, etc. and what the effect would be on the term of the mortgage. I've always told my wife that my plan is to bust my ass now so she can stay home and raise the kids, and she wants to go back to work once they are all full time school age (with new one on the way, time frame pushed back about 4 years), but that I wanted to at least semi-retire around age 55-58. Live the dream a bit.

 

The more I look at things, I think that being mortgage free is a hugh step towards making my dream scenario a reality.

 

Back to work.... then run numbers tonight.

[Sugar Magnolia]

We paid off my mortgage in 7 years, owning our house outright in 2000. We retired (well I do work 20 hours a week because I choose to do so) in 2004 at the age of 47 and 49. People thought we were crazy to pay off our mortgage, but now many are wishing they had. It may not have been the wisest investment strategy, but it is very uplifting

[The Irish Doggy]

I'd make sure I maxed my IRA/401K first.

[yo mama]

I'd make sure I maxed my IRA/401K first.

Agreed.

[Azazello1313]

I'd say it's not such a bad idea at all. it should come after any tax-free retirement savings (and ESPECIALLY after any employer match), and as always I would say it's a good idea to have several months' expenses socked away in a savings account. but paying down the mortgage seems like a good idea after that. yeah your return on investment is fairly modest, but it has several advantages over other investment vehicles: 1) it is guaranteed, 2) it is enhanced by tax ramifications as yo mama pointed out (although this cuts both ways), and 3) it gets you closer to that "finish line" of not having a house payment anymore.

 

also, there are other tangible ways to benefit from a greater equity position in your property. if you're under 20% equity, getting to 20% can save you PMI or whatever other risk premium you are paying -- and that is a significant chunk of change. also, if you're in a 30 year loan and you get your balance low enough, you can possibly jump into a shorter term loan (like a 15 year) at a lower interest rate, saving you another significant amount of money in the long term.

[Ursa Majoris]

if you're in a 30 year loan and you get your balance low enough, you can possibly jump into a shorter term loan (like a 15 year) at a lower interest rate, saving you another significant amount of money in the long term.

Exactly what I did. It will save me over $100k.

[JoJoTheWebToedBoy]

I'd make sure I maxed my IRA/401K first.

 

+1, and I double the principle each month......

[TimC]

I'd make sure I maxed my IRA/401K first.

 

Meh...your million dollar IRA/401k will buy you a Coke when you retire. Might as well make your present value dollars work for you.

[Kid Cid]

I just had this conversation about the truck I bought. Instead of financing it, I paid cash. they weren't offering anything better than 4.9% on the loan I wasn't going to come out ahead by taking the loan and investing. I'll just make that car payment to my savings every month and rebuild. and not get taking on the interest. Same thing with the house. The faster I can get out from under it, the better off we'll be.

[paulzale]

OK, I need to get my wife to read this thread. We are on track to payoff our mortgage in 15 years (30 year term), however I want to accelerate that even further, but she isn't sure, i.e. doesn't want to sacrifice. We already put a bunch into 401k's and have a savings account that will support us for 6 months to a year. I want to get the mortgage done in less than 10 years, we will be right at 50 and it would give us great flexibility to work by choice vs. need. (my vision of retirement)

[Ursa Majoris]

OK, I need to get my wife to read this thread. We are on track to payoff our mortgage in 15 years (30 year term), however I want to accelerate that even further, but she isn't sure, i.e. doesn't want to sacrifice. We already put a bunch into 401k's and have a savings account that will support us for 6 months to a year. I want to get the mortgage done in less than 10 years, we will be right at 50 and it would give us great flexibility to work by choice vs. need. (my vision of retirement)

Congratulations. The earlier the better IMO as long as it is paid off in the right precedence e.g. no other more expensive debt outstanding, IRAs etc maxed out and so on.

 

The advantages go beyond the additional money available - having a paid off house means there are very few ways you can lose it, absent public domain or total foolishness. Many of life's bumps don't matter as much e.g. being laid off and also your ability to direct your own life and choose what you want to do (or not do) is massively enhanced.

[Big Country]

OK, I need to get my wife to read this thread. We are on track to payoff our mortgage in 15 years (30 year term), however I want to accelerate that even further, but she isn't sure, i.e. doesn't want to sacrifice. We already put a bunch into 401k's and have a savings account that will support us for 6 months to a year. I want to get the mortgage done in less than 10 years, we will be right at 50 and it would give us great flexibility to work by choice vs. need. (my vision of retirement)

 

I am in the same boat (with the same definition of retirement being a work by choice rather than need), and I think my wife will be easy to convince of the benefits of paying off the mortgage as quick as possible. The hard sell will be convincing her of the importance of continuing to contribute to the IRA, as she is quite upset with the losses/low returns from the last couple of years and very nervous about putting any money into the stock market via mutual funds, etc. I am maxing out my 401K and, rather than have to remember to make a lums sum contribution to the IRA at the end of the year, will be changing that up to a monthly contribution. To appease the wife, I think we'll reallocate her IRA to a heavier bond/cash mix (currently aboot 30% of her portfolio) and keep mine more into mutual funds/equities, figure it all balances out and provides proper diversification when looked at as a whole. From there, put extra into the mortgage.

 

One consideration that I have not fully explored is perhaps putting less into my wife's IRA and instead allocate those funds towards the 529 we have set up for the kids. We basically started that with a lump sum when my first son was born (he'll be 6 in October) and it is diversifed in a few mutual funds from different classes and has had basically zero growth in that time, and we have not made extra contributions to it, instead focusing on retirement. I guess my thoughts are that if we can successfully have the mortgage paid off before college starts, that frees up cash flow to cover those expenses that we can't get financial aid to cover.

 

Congratulations. The earlier the better IMO as long as it is paid off in the right precedence e.g. no other more expensive debt outstanding, IRAs etc maxed out and so on.

 

The advantages go beyond the additional money available - having a paid off house means there are very few ways you can lose it, absent public domain or total foolishness. Many of life's bumps don't matter as much e.g. being laid off and also your ability to direct your own life and choose what you want to do (or not do) is massively enhanced.

 

In my ideal scenario, I'll have the house paid off in 12-14 years, just in time to start sending kids off to college.

[Square]

In my ideal scenario, I'll have the house paid off in 12-14 years, just in time to start sending kids off to college.

I think once you calculate things like stress and risk into the situation, paying off the mortgage earlier is a no brainer. I'm a bit of a Dave Ramsey follower as well and it's made a world of difference doing things early (like eliminate debt). I'm really eyeballing having the house paid off by 45 (50 at worse). Like you, I plan on enjoying myself with work, life, freedom once the kids are out of the house. No need to be living check to check when you are 50+ and sweating out how you can pay the mortgage and retire on time if your 401k doesn't improve (like so many people are doing currently).

[gbpfan1231]

Exactly what I did. It will save me over $100k.

Sounds like you will have some extra cash to voluntarily pay some extra taxes to help stimulate the economy - the less fortunate in this world don't have the ability to do what you did so your smarts and common sense approach should go towards them not you. Plus you are saving the economy!!!!!!!!!!!!

[Big John]

Sounds like you will have some extra cash to voluntarily pay some extra taxes to help stimulate the economy - the less fortunate in this world don't have the ability to do what you did so your smarts and common sense approach should go towards them not you. Plus you are saving the economy!!!!!!!!!!!!

That is foregoing the mortgage interest deduction from the IRS, thus paying more to them.

[gbpfan1231]

That is foregoing the mortgage interest deduction from the IRS, thus paying more to them.

Well then the economy will be thriving!!!!

[Square]

Sounds like you will have some extra cash to voluntarily pay some extra taxes to help stimulate the economy - the less fortunate in this world don't have the ability to do what you did so your smarts and common sense approach should go towards them not you. Plus you are saving the economy!!!!!!!!!!!!

Aw c'mon. No perching the thread!

[TimC]

Big Country, you need to take a second mortgage, a home equity and use your house as a pot growing manufacturing residence. Only then will you be bailed out the next time. Don't listen to these "responsible" pansies. They didn't get paid over the last 2 years. Suckers.