What are your thoughts about paying off a mortgage early??

[momtofour]

I would love to hear thoughts concerning paying off a mortgage early. I am debating whether or not I should continue sending in extra principal to my existing payment. If I stay on task, this mortgage will be finished in early 2006. I have no other debt, and the present rate of interest on this loan is 4.5%. (fixed) I know there is the general thought that with an interest rate this low, extra money should be invested and should be able to beat that rate of return. Unfortunately, the stock market has not produced the kind of returns we were hoping for in the past couple of years so I am not sure I really buy into that. ...We are a few years away from our oldest going off to college and I envision that she will be at a private college at $40,000+ per year!! Yikes!! What are your thoughts, pro or con, concerning this issue? Thanks in advance for any viewpoints!!!!

 

[simonmunro]

Keep in mind I know next to nothing about finance but I THINK you can pre-pay into a college fund. Does this lock in the rate at that school? Would you even know which college you're interested in at this early point. I just think that I'd put that money somewhere that I'd get a deal on college because it sky rockets daily and if you need help with the costs then nobody will give you the money at 4.5%.

That's just my .02 cents which is just about all I have because as my DH will tell you I've spent the rest in Disney World over the past 15 years.

 

[leslieh]

MOMTOFOUR, I have two dds, one just graduated from college in 5-04, 2nd DD soph. at UM. We paid off our mortage last year, 13 years, had two years left, because we wanted to pay for all the college costs up front. We have spent over $75,000 (no loans, but did use CC to get free air tickets to pay for colleges, I can see the light at the end of tunnel. DH wants to retire this year, waiting to see how things go! Good Luck, each has to make their own decision, we were down to getting hardly any interest/tax break from our mortage.

 

[PrincessDadx2]

With that short of a term and that low of a rate you will not save much interest by prepaying. I would probably look into a 529 plan for the extra. Interest is tax free until withdrawn and I believe it is totally tax free until 2010??

If I was going to pay the bill myself vs. having my child take out loans, work or scholarships etc. I would also investigate doing a cash out refinance now with investment into a 529 vs. paying cash as you go after the mortgage is paid off. You would probably discover some interesting tradeoffs.

 

[MELSMICE]

JMO - but I think that paying off your mortgage early is a great thing. We are on track to pay ours off early also. Wanted it to be paid off within 3 or 4 years, but things changed with DH's job, so it may take us a little longer, but it will be paid off early.

We will most likely save between $60,000 - $75,000 in interest by paying the mortage off early. We will have college expenses when it is paid & also hope to buy a condo in Florida at that time.

 

[garettdoyle]

Do not forget the tax implications of paying off a mortage. For many people, mortage interest is their largest deduction. It may bump you up into a higher tax bracket or prevent you from itemizing your taxes.

Debt is a financial tool like a hammer is a carpenter tool. If used wisely, can create beautiful things. If used foolishly, can cause much damage.

I would consult two professionals in your decision.

1) Tax Accountant

2) Financial Planner

Just because you pay off your mortage now, doesn't mean you can't borrow against the value of your home in the future (long term or short term instruments).

I think we all dream of being in the position to payoff our mortages. This is a great dilemma to have. Good luck.

 

[mudnuri]

well, what we did, and now do is the following

Back in 1997, we refinanced an original 30 year mortgage, with a variable rate, (had 21 years left) to a 15 year, with a fixed rate. We cut 6 years off, almost 200K in interest alone, and our payment went UP by $7.00

what we TRY to do is every month pay an additional $200 towards the principal. HOWEVER, we only have 8 years left on this mortgage to begin with.

We do invest in funds/etc. for DD's college etc. so its not an "either or"...we also both have retirement funds.

I remember the day we came home from the refinance. We did not take out a mortgage larger than what was owed, and the feeling of cutting 200K off our mortgage, for VERY little money just felt so darn good!...I cant wait till 2012 when I send the final mortgage payment in!...

Of course, if we sell, and buy a new house, we'll start all over again, but I'll never go with another 30 year!

Brandy

 

[crisi]

I love the idea and have been working hard to do ours. I like the idea of having increased cash flow or lower monthly obligations - depending on what I decide to do with that freedom. I love the security of knowing I own my house. I have this huge irrational fear of getting thrown out of my house with my kids (which may not be completely irrational - it happened to one of my former neighbors - but her circumstances were very odd).

As to the tax savings - its a deduction. You have to spend the money (in interest) to save as much as 36(?)% of it. Spending a buck I don't need to in order to save $.36 has never been my idea of saving.

But I don't know if its a great idea for you guys. Will the difference in not paying the mortgage enable you to pay a monthly college bill? - then it might be a great idea. You won't need to go into debt to pay for college and your standard of living won't change. But if the mortgage payments won't pay the college bill, you might be better off just continuing to pay the mortgage - and perhaps even refinancing to get college costs out of the house.

 

[sheilafri]

I think paying off the mortgage is a great idea. I am so excited because next month we will make our last house payment. Yeah! We will have paid off a 15 year mortgage in 8 years. Just in time as we have both DS20 and DS18 in private colleges!

I agree with Crisi, why pay a buck to save $.36. With interest rates being so low, there seems to be no safe way to guarantee a 4.5% return on your money if invested. Having less of a monthly obligation makes you better equipped to handle unfortunate events which may occur.

 

[hookedup]

Just make sure your taxes aren't going to go way up without the deduction of your interest. If the tax issue is not one that will hurt you then I am a fan of it. I subscribe to the "be debt free" school of thought.

 

[DisneyBill]

Only tax payers with AGI of over 319.1k will pay 36% tax rate. Taxpayers with AGIs between 58.1-117.250 are taxed at 25%. Something tells me that if anyone's income is over the 319.1 threshold, paying for college vs paying other living expenses would not be an issue.

There is nothing like having a paid for home, you can navigate your priorities with a new sense of financial strength.

If anyone really wants to keep paying-out 100 cent dollars to a mortgage company in return for a likely 25% tax deduction, you can accomplish the same deduction by giving to a church or charity. Or multiple charities.

 

[ceecee]

We paid off our 30 year mortgage in 12 years (our initial interest rate was 9.5% in 1989) We refinanced and cut the loan to 15 yrs then added as many additional principal payments as we could. This was a priority for us. It is SO nice not to have a house payment!!!
I agree with Crisi and Disneybill.....any tax deduction you are saving now, you are paying a lot for. 4.5% is a lot lower than we ever had, but for us paying off the mortgage was the right decision. My husband is a financial advisor (not that he would always recommend that). It worked best for us in our situation. We had no other debts with higher interest (ie credit cards) The security it brings makes it worth it.

 

[crisi]

Originally posted by DisneyBill
Only tax payers with AGI of over 319.1k will pay 36% tax rate. Taxpayers with AGIs between 58.1-117.250 are taxed at 25%. Something tells me that if anyone's income is over the 319.1 threshold, paying for college vs paying other living expenses would not be an issue.

There is nothing like having a paid for home, you can navigate your priorities with a new sense of financial strength.

If anyone really wants to keep paying-out 100 cent dollars to a mortgage company in return for a likely 25% tax deduction, you can accomplish the same deduction by giving to a church or charity. Or multiple charities.

yep. Although even people making $319.1k a year can struggle - if they have a big mortgage and a few kids in expensive private colleges. Look at the rumor about Tom Ridge quitting because he needs to make more money to afford college for his kids (though we don't pay him $300,000 a year).

 

[SlightlyGoofy]

I would almost always advise to pay off your house, you can save almost $2-3 for every dollar you pay ahead. We paid ours off in just ten years and it has been the most liberating feeling and has enabled us to save much more for our retirement years and not having a mortgage to pay on our fixed income is a lifesaver BUT if you are going to apply for grants or loans for the college monies I believe that they take into account what your bills are and having fewer bills might mean that you will have to pay more out of pocket. Not having had any actual experience in this area (kids were too stubborn to go to college) someone else might have more insight. I have heard of people who went out and did remodeling or bought a new car just before applying for college money.

Best wishes and congratulations on having children who want to be educated.

SG/Linda