Mortgage payoff?

[Whoaru99]

If you could pay off your home mortgage today, but it would take half of your savings to do it, would you?

The amount remaining in savings after paying off the mortgage would be roughly 3 months salary.

[TruthWalleyes]

If you figure out the remaining months on your mortage based on your current payments...You should be able to calculate the interest saved by paying it off now...

Then only YOU can decide if the cost avoidance outweighs the Savings "Safety Net".

What major expenses could you see occuring within the next year that you would need your savings to cover? (Retorical Q)

[Heidi]

I estimated your income at $4000 month and a5%

rate on your loan and it would save you $50 month

until loan paid off

[leechlake]

its a two pronged decision, half emotional half financial.

The emotional part of me would prefer to keep a year of savings and pay off as much as I could as long as I kept 12 months of savings. I

The financial part is pretty complicated figuring tax savings with deductions etc.

[delcecchi]

I wouldn't do it, not with interest rates as low as they are. They are bound to go up in the next few years and you will be making money on the spread, in fact you could be now, depending on your risk tolerance.

Mortgages are at like 2.8 to 3.3 depending on term. Corporate bond etfs are paying from 3.5 to over 6 percent, (LQD and HYG are examples.) Or you could buy a dividend oriented stock etf/fund and take advantage of the lower rate for dividends but that is sort of dicey, since Obama wants to whack the low tax rate on dividends.

[CAMAN]

Also take a look at your mortgage, you may get penalized for paying off early.

[CANOPY SAM]

Pay it off! It's the American Dream, and you won't have that huge payment hanging over your head anymore. It's liberating.

Even if your homeowners property tax goes up you'll still have extra funds for other investment opportunities (without the mortgage payment).

Congrats man! Your almost there. Celebrate!

[aanderud]

Everyone's situation is different but I'd say it almost never makes FINANCIAL sense to pay off a mortgage early at today's rates (around 3%, and closer to 2% effective rate after the tax deduction). There's an opportunity cost there that you're missing what should be a higher return elsewhere on that same money.

However, the EMOTIONAL/stress factors can be a game changer. If you need flexibility with your work situation (say you want to quit your job and venture out into something new without having that looming house payment to make every month). It's up to you but I'd generally fall on the side of Del's advice on this one.

Congrats are do in either scenario, if you ask me. Whether you have your house paid off early, or if that money's sitting in some other accounts making you thousands per year, you should be proud. I will say that I know plenty of people carrying a mortgage who could have it paid off if they weren't saving money in other accounts (letting their money make them money).

There's an old saying that it takes money to make money. It's true, unfortunately -- and if your money's all wrapped up in your house, you're going to make less money overall. There's a reason banks push their leverage meters to 11, taking advantage of the most leverage they legally can....more money to be made.

If you could pay off your home mortgage today, but it would take half of your savings to do it, would you?

The amount remaining in savings after paying off the mortgage would be roughly 3 months salary.

As a general rule of thumb, rather than estimating savings account padding as months of your salary that you have saved up, it's better to estimate how much you need in savings in terms of how many months of expenditures one has. For instance, someone's expenses might be 4k per month (house payment, auto insurance, telecom bills, food, etc), but their salary might be 100k per year (~8k per month). There's a HUGE chunk of salary consumed by things like payroll taxes, income taxes, retirement savings, rainy-day savings, etc. If you lose your job and have to rely on your savings account to pay the bills, then you'll only NEED to cover your actual expenses until you get that job back -- retirement savings can wait. Depending on your situation, when figuring expenses be sure to figure in about 4x to 8x as much as you're currently paying for health insurance (if you use COBRA you'll be footing the bill for your normal portion plus your ex-employer's percentage).

[CANOPY SAM]

This is logical and good advice aanderud. I would think, based on how little is required to pay off his mortgage at this time (only eating up a few months of savings?), it would be worth it to simply pay it off, rather than continue to pay interest on the note to someone else? To maintain the note will save him some money monthly, but will it MAKE him any money?

Doesn't it make more sense to pay off, and eliminate that large payment as quickly as possible, and then reallocate those funds into something else that will actually appreciate in value?

There is growing school of thought out there that being "mortgage free" and debt free, is a good thing to be. Considering how we caused this long-term recession thru undisciplined borrowing, and how we maintain it by "hoarding" funds, I think the old adage "If you can't pay for it with cash, don't buy it" is a good rule of thumb. But that's just me.

[Moose-Hunter]

If I was in your shoes... my mortgage would be history. Alas, my time table is still 15 months out.

Currently, living expenses aside, my house note is my only real debt. Vehicles, boat, bike, loans, plastic... All paid. I'm comfortable where I'm at career wise and don't see the financial need to carry any debt. With current tax law about to go into massive upheaval, who really knows what the future holds. With all the "given" info in my personal equation, it makes perfect sense. I only hope nothing drastically changes in the next year or so. And if "IT" happens on 12-21-12... And the Mayans were right... Nevermind.

As they say... your mileage may vary.

[aanderud]

To each his own. There are tons of emotional reasons one might want to be 'debt free', and it does provide a compelling argument.

Speaking from a perspective of simply maximizing your dollar potential, there's compelling reasons to leverage your house for as long as you can easily make those payments (i.e. as long as you are working a full time job). Putting that money to work rather than paying down your mortgage debt faster can yield tens of thousands of dollars PER YEAR in extra investment income, which after compounding will easily dwarf the measly interest on the mortgage (which should be less than 3% after tax deduction considerations). But then again, higher earning potential pretty much always comes with higher risk, more stress, etc.

At this point it sounds like you've got just a few months' salary left on your mortgage. As such, it isn't going to bring you 10s of thousands in investment income . You may very well be happier just paying it off. But then again it sounds like it'll be paid off in short order even if you didn't accelerate it.

[Whoaru99]

Interesting.

My rate is 5.25% fixed and the amount is (relatively) small so I think there little if any benefit to try refinancing to a lower rate. No tax benefits either. Standard deduction is still better than itemized. This is a modest but solid house, in a small town, we're talking about here.

Current mortgage payments would see the place paid off in ~2.5 years. Three months salary in the bank would, I believe, last quite a bit longer than 3 months if I had to reign it in.

This isn't thoughts about "money ahead", per se, I dont think there's enough in a couple points here and there to make or break. It's more along the lines of worst case economy. Lost job sort of thing (although I have no reason to believe that's coming). The mortgage payment is the single biggest debt owed by a long shot and the only thing I couldn't really go without (housing) should SHTF. Just seemed that it would be easier to get by on a "bagging groceries" income if I owned the house free and clear should that situation ever arise. Again, I dont't expect that to happen but who knows for sure what tomorrow holds?

[aanderud]

At this point you're right, it's definitely not worth refinancing. Yeah at that rate, and with no tax deduction, I think I'd reverse my position. You might be best off just paying the thing off, as there might not be anything available that's going to get you guaranteed returns of 5.25% in the short term anyway.

I say givr nuts, pay it off and enjoy paying just property-taxes and insurance on that thing!

[Stick in Mud]

Guaranteed returns of 5.25%?!? I'd kill my parents for their life insurance policies for that!

I'm in the same boat, actually, only I'm looking to buy a home. With interest rates so low (and no children), it's difficult to itemize deductions to make up for the standard deduction without buying a house that's way more than I need. After paying down 20% to avoid PMI etc., it doesn't make much sense to put any more down, considering my interest on a 15 yr is 2.65%, 30 yr 3.25. But then again, those lower monthly payments sure would be nice.

Why do my emotions seem programmed to make me do the exact WRONG thing when it comes to finance?!?

[Hoffer]

I have about 7 years left on mine...and when I get down to the last year I plan on paying it off. I think the pros and cons can be weighed back and forth and at the end of the day - its probably 6 of one and half dozen of the other. "money ahead" - wise your probably better off not paying it off. But the "emotional factor" in my opinion far outweighs the probably minimal benefits financially of not paying it off.

Last, I am no financial expert by any means...but have heard many financial counselors discuss strategy. The one thing they all discuss is paying off all debt if possible - and if you can pay off your biggest debt (usually your home) that is a good thing to do. I would love to put my feet up tomorrow knowing my home is free and clear and mine...all mine.

[flyfisher03]

If you do pay it off early the money that was tied up in paying the mortgage can then be invested to earn more money. If your interest rate is at 5.25% and if you can invest even at 3% you would still be ahead, because you would be earning the interest and not your mortgage lender.

The ability to write off the interest on the mortgage payment would not be there, however if you can put your money that would be a payment on the mortgage (invest it) into a Roth IRA then the money drawn on that account during retirement is non-taxable (because the tax was already taken out before investing).

And the peace of mind that your house is totally owned by you and not the bank.

[RumRiverRat]

Not having a mortgage is the best thing ever.

I paid cash for my current home after making a killing selling my previous house in 2007.

Think of the amount of money you could be investing in something that could yield an easy 5 to 8% return if you did not have a mortgage payment.

[delcecchi]

Not having a mortgage is the best thing ever.

I paid cash for my current home after making a killing selling my previous house in 2007.

Think of the amount of money you could be investing in something that could yield an easy 5 to 8% return if you did not have a mortgage payment.

And what would be returning that easy 5 to 8%, especially if not itemizing deductions? (ie after tax 5 to 8%) (3.6% on a 200k loan is 7200, standard deduction for married filing jointly is 12,200)

Oh and it has to be risk free.... 30 year treasury is at 2.86 percent

[RumRiverRat]

Gold for starters. Along with gas and oil stocks. Then silver. Guns and ammo.

I have 1oz and 10oz gold bars that I paid $400/oz for, spot price on gold is currently 1454.37/oz. That is a 263.65% increase in value.

I have 1oz and 10oz silver bars that I paid $5/oz. Current spot price is $23.52/oz. That is 370.6% increase in value.

Highest closing price on gold was $1889.70/oz on 8/22/2011.

So if I sold my gold on that date I would have had a 372.43% increase in value.

Deals done with cash means no taxes on all my profits.

[Down Deep]

If you pay off your mortgage you could work on other long term goals like maximizing pension options or starting a regimented savings program, doing delayed home improvements, saving for the kids college, etc. I just depends on where you are in your life cycle. The thing is you can't do a look back and gauge future earnings of specific investments. You have to deal current day realities. I've earned over 46% on my 401K in the last 18 months, but 4 years ago that was a 28% drop and then no gain for 2 years. Precious metals are an OK investment, but over the long term you could do a lot better with index funds bought at no commission. A dollar invested on the DOW around 1980 would have returned you about $12,000 today, but you have to account for inflation and all investments are subject to inflation.

My personal preference would be to pay off the house which enhances a persons financial stability.

[Eric Wettschreck]

I am in no way any type of financial expert, nor did I stay at a Holiday Inn Express last night.

Legal disclaimers out of the way, I'd be paying that sucker off in a New York minute.

Others here have given good advice, most of which is over my head, but for me being totally out of debt is a goal that's darn near close to reality. I'll take the money I've been dropping on the mortgage and putting it back into some type of savings. Not sure what quite yet.......increased 401, IRA, savings, blah, blah....I dunno. I do know this, tho......I want that debt gone.

[pushbutton]

I went to the same school in investment training that Eric did, I don't remember any fancy names of anything I learned either....except that the debt free is a good thing. I get the logic behind investing the spread between the rates of what you are borrowing and what you COULD be making....but the operative word here is COULD. If you feel confident enough of your ability to play that spread in the face of the most "interesting" financial environment since the depression.......go for it!!! Remember you will not have the luxery of a government bailout like the banks, GM, all the airlines ect, ect....... if your wrong

[delcecchi]

Gold for starters. Along with gas and oil stocks. Then silver. Guns and ammo.

I have 1oz and 10oz gold bars that I paid $400/oz for, spot price on gold is currently 1454.37/oz. That is a 263.65% increase in value.

I have 1oz and 10oz silver bars that I paid $5/oz. Current spot price is $23.52/oz. That is 370.6% increase in value.

Highest closing price on gold was $1889.70/oz on 8/22/2011.

So if I sold my gold on that date I would have had a 372.43% increase in value.

Deals done with cash means no taxes on all my profits.

So you are a tax evader? The dealer doesn't report the earnings?

A little checkup. Today gold is at $1274 per ounce

On May 1, it was about $1465. Not such a great call in the way of advice.