Okay, I want to pay my mortgage off early, but...

[Stein]

True, but in this specific case, you only need to find a taxable investment that returns more than 5.49% to come out ahead, and if you are in a tax-free account, like a Roth, it only needs to return 4.11%. You can absolutely do that with a guaranteed return. A money market account or bond would beat that.

You can't put $489 a month in a Roth IRA.

A Roth isn't tax-free, it is tax deferred.

It is hard to compare apples to apples when taxes and risk aren't factored in.

 

[Stein]

Being a blackjack fan, I could go into detail on this one, but let's just say that isn't a good comparison. Blackjack (which actually pays 3-2 by the way) is a far better risk because the house advantage is much, much smaller (0.8%)than it is for roulette (5.25%).

Exactly. The risk in the bets are different, thus leading to different expected outcomes.

My point is that comparing two possible rates of return and choosing the greater one is a very simplistic and incomplete comparison. If not, borrowing every time one could get their hands on and dumping it into a hedge fund would make great sense.

 

[me again]

Many years a:go we bought our first house for $80,000. It was valued at the time for about 90K, the guy needed to get out, a distress sale. Problem was most all his money was tied up in his home, he had to sell. Well, his loss our gain.

We took out a 15 year mortgage for about 10%, the going rate at the time, refinanced once for about 7%. Made double payments every month, ended up owning our home free and clear in 7 years!

The house is now valued at $240K, only going up in value. We have it rented for a positive cash flow, and the best thing is, we know we have a home to go to for retirement or if things ever got too tight where we are. Or we could sell for a nice profit, then invest the profit in stocks, etc, which could probably return more, but there's the risk factor. I consider the house part of our portfolio, part of our retirement plan, part of our disaster plan. The peace of mind it provides is worth much to me, regardless of whatever we will always have a home (assuming the taxes don't go sky high!)

 

[dcfromva]

How much is that satisfaction worth to you?

Here are the numbers:

To pay your loan in 11 years instead of 26, you need to pay an extra $489.02/month. Doing so will save you $65,332.75 in interest on the home. Sounds pretty darn good, right?

If, however, you just make the regular payment but invest that $489.02 each month and earn a 10% return, in 11 years that account will hold $118,269.97. Even if you earn a more achievable 8%, you will still end up with $104,153.56.

Prepaying a mortgage rarely makes sense unless the interest rate is really high, which yours isn't.

What happens if you carry on the calculations through year 26? The comparision is if you continue to put the extra $489/month into savings for the entire 26 years versus paying the mortgage off in 11 years and then investing $1700.00/month into savings at year 11 through year 26.

You would have 26 years of saving $489.00/month (at 8% ROR) (using MSN Money calculator) gives a final balance of $486,136

versus

If you paid the extra $489.00/month years 1-11 and paid off the mortgage, you save $65,332.75 in interest. Then, years 11 through 26, you take the entire payment amount of $1700.00 (assuming 8% ROR), the total cash in savings would be $ 573,931

-DC

 

[sk!mom]

What happens if you carry on the calculations through year 26? The comparision is if you continue to put the extra $489/month into savings for the entire 26 years versus paying the mortgage off in 11 years and then investing $1700.00/month into savings at year 11 through year 26.

You would have 26 years of saving $489.00/month (at 8% ROR) (using MSN Money calculator) gives a final balance of $486,136

versus

If you paid the extra $489.00/month years 1-11 and paid off the mortgage, you save $65,332.75 in interest. Then, years 11 through 26, you take the entire payment amount of $1700.00 (assuming 8% ROR), the total cash in savings would be $ 573,931
-DC

This is how my DH figured it and why we decided to pay off the mortgage early.

We also have a very low tolerance for debt so it is good for our peace of mind and security to pay off early. I understand that many feel differently but for us this made sense. We came to this decision just before the last big downturn in the market. Watching our investment accounts lose 40% made us feel even better about our decision. We are in the market for the long haul and know that things will average out but the paid off home is a sure thing with no waiting!

 

[Jon99]

At the rate the OP has, it makes no sense to pay the mortgage off early..

 

[sarahlovesmickey]

thank you all for your replies. After hemming and hawing with DH, we have decided that we are going to make it our goal to pay off the mortgage in 11 years. Our oldest will be 16 at that time and hopefully heading off to college shortly after that, so this seems to make sense for us. Thank you again for all your input.

 

[MrsPete]

We also have a very low tolerance for debt so it is good for our peace of mind and security to pay off early. I understand that many feel differently but for us this made sense. We came to this decision just before the last big downturn in the market. Watching our investment accounts lose 40% made us feel even better about our decision. We are in the market for the long haul and know that things will average out but the paid off home is a sure thing with no waiting!

You and I think alike! On paper, it may make sense to invest in other areas, but as long as I owe ANYTHING, I'm worrying about it. Things can happen. Unforseen things. And the hypothetical savings others are describing will only amass IF one actually saves and invests every single month -- most people just don't do that. There's no peace of mind like knowing that my house is MY house, and no one else has any right to a single brick of it. In addition to our house, we have solid investments in a variety of places. I'm very satisifed with our decisions.

I am perfectly aware that I feel this way -- in part anyway -- because I grew up with little financial security as a child, and that's made me risk-averse.

 

[bellarella]

DisneySteve, the reason I want to do it is just to have this house paid off in 15 years, as opposed to 30. I want the satisfaction of owning my own home. yes, I agree it is a good interest rate and we got a lot of home for what money we paid to build it. I just want to really see the numbers. Who knows if it is even something we will be able to do, but I am just curious to see the numbers. I tried to do it on Bankrate.com and just got confused. thanks..

Yes, but if you invested the money rather than prepaying your mortgage, you could pay your house off even sooner.

If you prepay your mortgage:
1. You put the money under lock and key and may not be able to access it if you had an emergency.
2. You cap your maximum interest rate that you earn on your money at the rate of your mortgage, which is quite low.

If you diligently invest the money with a conservative to moderate investment plan you can preserve the liquidity of the money and be able to pay off the mortgage if you wanted to, likely sooner than the 11 years it would take by sending the extra payment to the mortgage company.

 

[sarahlovesmickey]

Yes, but if you invested the money rather than prepaying your mortgage, you could pay your house off even sooner.

If you prepay your mortgage:
1. You put the money under lock and key and may not be able to access it if you had an emergency.
2. You cap your maximum interest rate that you earn on your money at the rate of your mortgage, which is quite low.

If you diligently invest the money with a conservative to moderate investment plan you can preserve the liquidity of the money and be able to pay off the mortgage if you wanted to, likely sooner than the 11 years it would take by sending the extra payment to the mortgage company.

We are not putting any of this in writing. I will just include the money in our mortgage each month and check the appropriate box. We still have a savings account which we can access any time. Having the security of owning my home is priceless really.

 

[bellarella]

The risk is that the market could tanks another 40% like last time and as a result, one could be laid off. The house fund would be almost cut in half and no paycheck while the bank still looks for payments every month.

The answer here is still risk. If you have been prepaying principle, you aren't letting yourself off the hook for future payments until the house is paid off. If you loose your job during your pay off period you still need to make that minimum monthly payment on your mortgage. You don't get access to that money you prepaid. In case of job loss your ability to access that extra "equity" you have in your house is greatly diminished. You may be forced to sell the home to get that money back. And in periods where you have lost your job, chances are very good that you will be looking at a week housing market, which means you could very well have lost some of the money you prepaid.

If, however, you have been investing the money responsibly, chances are good that you will have a good cushion, even assuming a large drop in the market, to be able to continue to pay on your mortgage with a job loss.

There are many ways to mitigate the "risk" you speak of in investing instead of prepaying your mortgage. When you are sitting on a low interest mortgage, you usually put yourself at more risk by prepaying.

 

[bellarella]

We are not putting any of this in writing. I will just include the money in our mortgage each month and check the appropriate box. We still have a savings account which we can access any time. Having the security of owning my home is priceless really.

If it is security you are looking for, you will get more out of doing a parallel savings account rather than sending the money.

Think of it this way. By sending money to the mortgage company you are locking it up. It is not available to you in an emergency. You won't get to skip a payment if you needed to (because you aren't prepaying with the extra money, you are paying towards principle). So if you were to be faced with a prolonged job loss during the next 11 years you will still be responsible for the minimum mortgage payment. If your cash reserves run low, to get access to that money you would either need to take a line of credit/second mortgage out on the home, which will a) almost certainly have an interest rate that will wipe out whatever progress you had made by prepaying or worse b) might not be available to you at all -- it is hard to qualify for loans against your home when you have no income and have depleted your reserves; or alternatively sell your home. Keeping your home was supposed to be the goal of prepaying, so you will have defeated that. Plus, if you are facing a prolonged job loss there is a good chance that you will also be looking at a soft housing market, which means selling may force you to take a loss on your home (you may not need to write a check at closing, but you may very well get less for your home than you actually paid into it, which is still a loss of funds).

Now if instead you put that money into a separate account each month, were you to run into financial difficulty, you can simply tap those funds and continue to pay your mortgage. Interest rates on savings accounts are so high right now that if you wanted your money to be 100% safe, you would probably only push your loan pay off date back by 1 year if you just put all the money into a HYS account. A small price to pay for real security, IMHO. If you were comfortable with a small amount of risk, you could divide the investment into two parts, half (or some amount you are comfortable with) going to a HYS account or similar, and the rest going to an index fund. In that case you will still maintain liquidity on the account, but also make it likely than instead of paying off your mortgage in 11 years you could do it *sooner* if you chose.

I understand the desire to be debt free. What I think a lot of people miss, though, is the risk they put themselves at during their pay down period by directing the extra funds to their mortgage company rather than to an account they control. Once you have the funds in hand, go ahead and write the big check and be done with the mortgage. But to get there, if you are sitting on a low interest mortgage, keep control of your money so that you don't find yourself in a situation where you are sitting on a bunch of "equity" but still might be forced to lose your house.

Just my $.02.

 

[disneysteve]

You can't put $489 a month in a Roth IRA.

True. Currently, you can put $333/month in. Beginning Jan. 1, it will be $416.

A Roth isn't tax-free, it is tax deferred.

You contribute to a Roth with after-tax money. The Roth grows tax-free and withdrawals are tax-free in retirement.

 

[hercamore]

Hi,

We've lived in our house for 30 years ...we paid off our mortgage l5 years ago. Best thing we ever did. One less worry.

herc.

 

[Jon99]

Too much risk in being house rich and cash poor that people don't think about..

 

[disneysteve]

I consider the house part of our portfolio, part of our retirement plan

Here is the difference in ways of thinking (neither of which is right or wrong). I DO NOT consider our home to be part of our portfolio or our retirement plan. I don't plan to sell it if the value goes up. I don't plan to unload it if the value goes down. I didn't buy it as an investment. I bought it as a place to live. An investment is something purchased for the purpose of making money and that is not why we bought our house.

 

[Stein]

Back to the OP, the short answer is about $500, or if you will give your original loan balance and the date of the first payment, I could run it exact for you.

 

[MrsPete]

Too much risk in being house rich and cash poor that people don't think about..

People who pay off their houses early aren't always in this cash poor situation. I don't think anyone with good financial sense would advocate NOT diversifying one's assets.

My husband and I paid off our house in a little less than 13 years, BUT at the same time we built up an emergency fund, we put money aside for the children's college educations, we put money aside for short-term goals like cars and vacations, and we maxed out our 401Ks from our very first professional paychecks. Diversification.

When we were first married and first bought our house, we were poor in every way . . . but we have never been house-rich and cash-poor. At this point, our house is paid-for, but our other investments are worth more than our house.

 

[MrsPete]

If you loose your job during your pay off period you still need to make that minimum monthly payment on your mortgage. You don't get access to that money you prepaid. In case of job loss your ability to access that extra "equity" you have in your house is greatly diminished. You may be forced to sell the home to get that money back. And in periods where you have lost your job, chances are very good that you will be looking at a week housing market, which means you could very well have lost some of the money you prepaid.

You're assuming that a large number of things would go wrong simultaneously:

The hypothetical person would lose his job.
He's unable to find another job.
He's been foolish enough not to have an emergency fund.
He's living in an area with a housing slump.

COULD these things all happen? Sure. Are they all likely to happen? Not really, and by having an emergency fund, one can minimize the risk. Also, the hypothetical person could re-finance his mortgage, or in a real emergency he could borrow against his equity.

On the other hand, my husband and I live in a paid-for house. If one of us were to lose our job, we'd cut back a bit, but we could live very comfortably on one of our salaries -- without touching our savings.

If, however, you have been investing the money responsibly, chances are good that you will have a good cushion, even assuming a large drop in the market, to be able to continue to pay on your mortgage with a job loss.

Just as you assumed that the pre-paying person would ignore other savings needs in order to pay off the house ASAP, you're assuming that the paying-on-schedule person is making all the wise financial choices: investing what he could've been pre-paying, etc. If we trust what we read in financial magazines, the average American family isn't making these wise decisions.

 

[MrsPete]

Here is the difference in ways of thinking (neither of which is right or wrong). I DO NOT consider our home to be part of our portfolio or our retirement plan. I don't plan to sell it if the value goes up. I don't plan to unload it if the value goes down. I didn't buy it as an investment. I bought it as a place to live. An investment is something purchased for the purpose of making money and that is not why we bought our house.

I do and don't consider our home a part of our portfolio /retirement plan. First, I don't see how anyone can expect to retire comfortably if his house isn't completely his; perhaps that's more of a retirement goal or a step towards retirement more than a portion of the portfolio.

Our house is large and comfortable, and it's ideally located -- but once the kids are out of the house, we agree that we'd like something smaller -- we do not enjoy the upkeep of the house and the yard, and we do want to travel in our retirement years. We intend to sell the house and buy a nice condo on the lake. So in a roundabout way, the house in which I live now IS an investment in a future retirement home . . . but I also value it for its usefulness right now.

I do care about its resale value for future years (and because this area's growing, we should make a killing), but that money won't be cash I can use to buy groceries and pay the phone bill -- it'll go back into another dwelling.

If anything, I'd consider the value of my house to be a portion of my kids' inheritance. I expect I'll maintain a home of my own for the rest of my life, so the money I have tied up in my home will remain "tied up" as long as I'm alive.