Saving to payoff the house...need suggestions

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Woody999
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Saving to payoff the house...need suggestions

Post by Woody999 »

Hello everyone! :) Work has recently put me on a new out of town assignment and my salary has gone up significantly. I have $23k to start and plan to save another $5k per month until we have enough to pay our house off. We are also selling a condo worth ~100k. The amount owed on the house is ~$300k. In 2 years the payoff will be about $270k. We will have enough saved up in 2 to 2.5 years to only owe $50k on the house. At that point I will come home and get a local job taking around a %20 pay cut. If something bad happens we will have enough in Roth IRAs to go ahead and pay the house off thus eliminating the house payment. We could then live off my wife's salary if needed. So the goal is to save ~220k.

There is always a chance that this assignment could be cut short but it's unlikely. With that in mind, we are thinking about saving the money until we get the full payoff amount instead of paying it on the house along the way. The interest on the 15 year mortgage is 2.875%

Where should I put the initial $23k, ~$90k from selling the condo (for this exercise let's assume it sells in 8 months), and $5k per month? We are currently maxing out our 401k and both doing backdoor Roth IRAs so that isn't a savings option for this money. Currently I'm putting the money in a Money Market getting 0.75% int.

I would love to put it somewhere such that it's somewhat liquid but earning more than puting it on the house as we go would save us.

What are your suggestions on where we should put this money?

Thanks for your time! :sharebeer
Twins Fan
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Re: Saving to payoff the house...need suggestions

Post by Twins Fan »

Throw it all at the mortgage as soon as possible and keep throwing money at it as it comes!!

I don't see any point in "saving" to pay off debt. :confused I doubt anything "safe" out there right now beats your mortgage interest rate by enough to make it worthwhile to save up to pay off the mortgage. Now if savings accounts were giving 5% interest, that might be a different story. But, that's not the case now days.

Lowering the principal as much as possible SAVES you interest that you would have paid.
cherijoh
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Re: Saving to payoff the house...need suggestions

Post by cherijoh »

From a strictly financial standpoint, paying of the mortgage as you go will likely trump saving it and paying it off as a lump sum later. I doubt you will be able to find a safe alternative with that kind of return but without the risk of a loss in principle. But personally I would be hesitant to pay off a mortgage with under a 3% interest rate.

You may however be able to increase your return with a FDIC insured CD - especially if you have $25K or more to open the CD. Check out this site: http://www.bankaholic.com/rates/ to get an idea of rates.
4nursebee
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Re: Saving to payoff the house...need suggestions

Post by 4nursebee »

Paying off a house is a good idea.

Having said that, I like the idea of "paying myself first" to maximize early savings to compound over time. This paying of self first entailed maximizing Roth IRA and 401Ks, then using extra to pay down highest interest rate debt first.
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Topic Author
Woody999
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Re: Saving to payoff the house...need suggestions

Post by Woody999 »

Twins Fan wrote:Throw it all at the mortgage as soon as possible and keep throwing money at it as it comes!!

I don't see any point in "saving" to pay off debt. :confused I doubt anything "safe" out there right now beats your mortgage interest rate by enough to make it worthwhile to save up to pay off the mortgage. Now if savings accounts were giving 5% interest, that might be a different story. But, that's not the case now days.

Lowering the principal as much as possible SAVES you interest that you would have paid.
Thanks for the reply!

The reason I'm leaning toward saving the money until the end of the assignment instead of paying on the loan as we go is if the assignment ends early. Lets say the assignment ends in 4 months. If I pay as I go I will have paid ~$45k on the loan but of course the payment would be the same. When this assignment is over my job security will go down. My wife and I currently have emergency funds (2 Roth IRAs currently worth ~$24k). We could have added the $45k to the emergency funds instead of paying a small percentage on the mortgage.

I wonder how much paying as we save would save us. I'm not sure it would be substantial. If it is and we could pay the mortgage down to ~$50k sooner then that means I could come home sooner. That would be nice.
Topic Author
Woody999
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Re: Saving to payoff the house...need suggestions

Post by Woody999 »

cherijoh wrote:From a strictly financial standpoint, paying of the mortgage as you go will likely trump saving it and paying it off as a lump sum later. I doubt you will be able to find a safe alternative with that kind of return but without the risk of a loss in principle. But personally I would be hesitant to pay off a mortgage with under a 3% interest rate.

You may however be able to increase your return with a FDIC insured CD - especially if you have $25K or more to open the CD. Check out this site: http://www.bankaholic.com/rates/ to get an idea of rates.
Why would you not pay off a house under 3% int?
Topic Author
Woody999
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Re: Saving to payoff the house...need suggestions

Post by Woody999 »

4nursebee wrote:Paying off a house is a good idea.

Having said that, I like the idea of "paying myself first" to maximize early savings to compound over time. This paying of self first entailed maximizing Roth IRA and 401Ks, then using extra to pay down highest interest rate debt first.
We already max out our 401k and back door Roth IRAs. The next thing on our list is to pay off the house thus removing the $2,400 monthly payment. Once this is removed form the equation we would be able to easily live like we want if one of us loses our job. While we are both working it would also allow us to save the $2,400 per month toward retirement or a cash fund for our next car, etc.
Grt2bOutdoors
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Re: Saving to payoff the house...need suggestions

Post by Grt2bOutdoors »

Woody999 wrote:
Twins Fan wrote:Throw it all at the mortgage as soon as possible and keep throwing money at it as it comes!!

I don't see any point in "saving" to pay off debt. :confused I doubt anything "safe" out there right now beats your mortgage interest rate by enough to make it worthwhile to save up to pay off the mortgage. Now if savings accounts were giving 5% interest, that might be a different story. But, that's not the case now days.

Lowering the principal as much as possible SAVES you interest that you would have paid.
Thanks for the reply!

The reason I'm leaning toward saving the money until the end of the assignment instead of paying on the loan as we go is if the assignment ends early. Lets say the assignment ends in 4 months. If I pay as I go I will have paid ~$45k on the loan but of course the payment would be the same. When this assignment is over my job security will go down. My wife and I currently have emergency funds (2 Roth IRAs currently worth ~$24k). We could have added the $45k to the emergency funds instead of paying a small percentage on the mortgage.

I wonder how much paying as we save would save us. I'm not sure it would be substantial. If it is and we could pay the mortgage down to ~$50k sooner then that means I could come home sooner. That would be nice.
Every 10K thrown at the mortgage will save you $287.50 or $23.96 per month in interest expense before tax. That means if you prepaid 1/12 of $10K into the mortgage each month ($833.33), your interest expense would decline by $2.00 per month. Let's assume your income tax rate is 28%, your after-tax savings would be $207 annually. If you invested $10K in a conservative investment, you would likely earn more than 2.875% per annum in return.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Twins Fan
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Re: Saving to payoff the house...need suggestions

Post by Twins Fan »

Woody999 wrote:
Twins Fan wrote:Throw it all at the mortgage as soon as possible and keep throwing money at it as it comes!!

I don't see any point in "saving" to pay off debt. :confused I doubt anything "safe" out there right now beats your mortgage interest rate by enough to make it worthwhile to save up to pay off the mortgage. Now if savings accounts were giving 5% interest, that might be a different story. But, that's not the case now days.

Lowering the principal as much as possible SAVES you interest that you would have paid.
Thanks for the reply!

The reason I'm leaning toward saving the money until the end of the assignment instead of paying on the loan as we go is if the assignment ends early. Lets say the assignment ends in 4 months. If I pay as I go I will have paid ~$45k on the loan but of course the payment would be the same. When this assignment is over my job security will go down. My wife and I currently have emergency funds (2 Roth IRAs currently worth ~$24k). We could have added the $45k to the emergency funds instead of paying a small percentage on the mortgage.

I wonder how much paying as we save would save us. I'm not sure it would be substantial. If it is and we could pay the mortgage down to ~$50k sooner then that means I could come home sooner. That would be nice.
That does makes sense. But, really what you're doing is building up your emergency fund then. You could build up your savings to where you're comfortable if the assignment ended early, or job security became sketchy, and then start throwing money at the mortgage. But, saving up the total amount to pay it off in anything "safe" now days is likely not as good as paying it off as you go.

Here's a fun calculator to mess around with and see early payoff numbers...

http://www.mtgprofessor.com/calculators ... tor2a.html

To address another question you asked... Many would say not to pay off your mortgage early because you have a low rate 15 year mortgage. The interest you will/would pay is not all that significant... all things considered. If you were to invest any extra money over the 15 years, it would likely beat the low interest rate you have on your mortgage. You make money that way by investing and not paying off the mortgage. But, that is going to mean risky investing... not talking CDs, most bond funds, or things like that. In your 3 year or so timeframe, you don't want to be taking risk like that.

Others, like me, would say there's never anything bad about paying off a mortgage or debt. But, I wouldn't save up to do it. :D
Twins Fan
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Re: Saving to payoff the house...need suggestions

Post by Twins Fan »

Grt2bOutdoors wrote:
Woody999 wrote:
Twins Fan wrote:Throw it all at the mortgage as soon as possible and keep throwing money at it as it comes!!

I don't see any point in "saving" to pay off debt. :confused I doubt anything "safe" out there right now beats your mortgage interest rate by enough to make it worthwhile to save up to pay off the mortgage. Now if savings accounts were giving 5% interest, that might be a different story. But, that's not the case now days.

Lowering the principal as much as possible SAVES you interest that you would have paid.
Thanks for the reply!

The reason I'm leaning toward saving the money until the end of the assignment instead of paying on the loan as we go is if the assignment ends early. Lets say the assignment ends in 4 months. If I pay as I go I will have paid ~$45k on the loan but of course the payment would be the same. When this assignment is over my job security will go down. My wife and I currently have emergency funds (2 Roth IRAs currently worth ~$24k). We could have added the $45k to the emergency funds instead of paying a small percentage on the mortgage.

I wonder how much paying as we save would save us. I'm not sure it would be substantial. If it is and we could pay the mortgage down to ~$50k sooner then that means I could come home sooner. That would be nice.
Every 10K thrown at the mortgage will save you $287.50 or $23.96 per month in interest expense before tax. That means if you prepaid 1/12 of $10K into the mortgage each month ($833.33), your interest expense would decline by $2.00 per month. Let's assume your income tax rate is 28%, your after-tax savings would be $207 annually. If you invested $10K in a conservative investment, you would likely earn more than 2.875% per annum in return.
Then feel free to offer up a suggestion of what conservative investment might do that in the timeframe being talked about. You know, like the OP is asking for. :D
cherijoh
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Re: Saving to payoff the house...need suggestions

Post by cherijoh »

Woody999 wrote:
cherijoh wrote:From a strictly financial standpoint, paying of the mortgage as you go will likely trump saving it and paying it off as a lump sum later. I doubt you will be able to find a safe alternative with that kind of return but without the risk of a loss in principle. But personally I would be hesitant to pay off a mortgage with under a 3% interest rate.

You may however be able to increase your return with a FDIC insured CD - especially if you have $25K or more to open the CD. Check out this site: http://www.bankaholic.com/rates/ to get an idea of rates.
Why would you not pay off a house under 3% int?
This is extremely low from a historical standpoint for mortgages, so it is an excellent hedge against future inflation. It is quite likely (but not guaranteed) that inflation will increase to over 3% per year during the life of your mortgage - in which case you would be paying your mortgage P&I with dollars that are worth less on a real basis. I was a teenager still living at home during the high inflation 70s and recall that my parents got frequent communications from their mortgage holder with incentives to pay off their 4.75% mortgage - but at the time you could get an FDIC guaranteed bank CD with a double digit interest rate! Under those circumstances it was definitely NOT a good idea to pay down your mortgage early.
Topic Author
Woody999
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Re: Saving to payoff the house...need suggestions

Post by Woody999 »

Grt2bOutdoors wrote:
Woody999 wrote:
Twins Fan wrote:Throw it all at the mortgage as soon as possible and keep throwing money at it as it comes!!

I don't see any point in "saving" to pay off debt. :confused I doubt anything "safe" out there right now beats your mortgage interest rate by enough to make it worthwhile to save up to pay off the mortgage. Now if savings accounts were giving 5% interest, that might be a different story. But, that's not the case now days.

Lowering the principal as much as possible SAVES you interest that you would have paid.
Thanks for the reply!

The reason I'm leaning toward saving the money until the end of the assignment instead of paying on the loan as we go is if the assignment ends early. Lets say the assignment ends in 4 months. If I pay as I go I will have paid ~$45k on the loan but of course the payment would be the same. When this assignment is over my job security will go down. My wife and I currently have emergency funds (2 Roth IRAs currently worth ~$24k). We could have added the $45k to the emergency funds instead of paying a small percentage on the mortgage.

I wonder how much paying as we save would save us. I'm not sure it would be substantial. If it is and we could pay the mortgage down to ~$50k sooner then that means I could come home sooner. That would be nice.
Every 10K thrown at the mortgage will save you $287.50 or $23.96 per month in interest expense before tax. That means if you prepaid 1/12 of $10K into the mortgage each month ($833.33), your interest expense would decline by $2.00 per month. Let's assume your income tax rate is 28%, your after-tax savings would be $207 annually. If you invested $10K in a conservative investment, you would likely earn more than 2.875% per annum in return.

I'm interested. What type investment would do this? Is it fairly conservative/safe? $207 annually sure isnt much. Thanks for your help!
Topic Author
Woody999
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Re: Saving to payoff the house...need suggestions

Post by Woody999 »

Twins Fan wrote:
Woody999 wrote:
Twins Fan wrote:Throw it all at the mortgage as soon as possible and keep throwing money at it as it comes!!

I don't see any point in "saving" to pay off debt. :confused I doubt anything "safe" out there right now beats your mortgage interest rate by enough to make it worthwhile to save up to pay off the mortgage. Now if savings accounts were giving 5% interest, that might be a different story. But, that's not the case now days.

Lowering the principal as much as possible SAVES you interest that you would have paid.
Thanks for the reply!

The reason I'm leaning toward saving the money until the end of the assignment instead of paying on the loan as we go is if the assignment ends early. Lets say the assignment ends in 4 months. If I pay as I go I will have paid ~$45k on the loan but of course the payment would be the same. When this assignment is over my job security will go down. My wife and I currently have emergency funds (2 Roth IRAs currently worth ~$24k). We could have added the $45k to the emergency funds instead of paying a small percentage on the mortgage.

I wonder how much paying as we save would save us. I'm not sure it would be substantial. If it is and we could pay the mortgage down to ~$50k sooner then that means I could come home sooner. That would be nice.
That does makes sense. But, really what you're doing is building up your emergency fund then. You could build up your savings to where you're comfortable if the assignment ended early, or job security became sketchy, and then start throwing money at the mortgage. But, saving up the total amount to pay it off in anything "safe" now days is likely not as good as paying it off as you go.

Here's a fun calculator to mess around with and see early payoff numbers...

http://www.mtgprofessor.com/calculators ... tor2a.html

To address another question you asked... Many would say not to pay off your mortgage early because you have a low rate 15 year mortgage. The interest you will/would pay is not all that significant... all things considered. If you were to invest any extra money over the 15 years, it would likely beat the low interest rate you have on your mortgage. You make money that way by investing and not paying off the mortgage. But, that is going to mean risky investing... not talking CDs, most bond funds, or things like that. In your 3 year or so timeframe, you don't want to be taking risk like that.

Others, like me, would say there's never anything bad about paying off a mortgage or debt. But, I wouldn't save up to do it. :D
Yeah maybe I could save up a little more then start putting the cash on the mortgage instead of savings. I'm curious how the other poster would suggest saving it instead. I'll check out the calculator!

Thanks again!
Twins Fan
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Re: Saving to payoff the house...need suggestions

Post by Twins Fan »

Woody999 wrote:
Grt2bOutdoors wrote:
Woody999 wrote:
Twins Fan wrote:Throw it all at the mortgage as soon as possible and keep throwing money at it as it comes!!

I don't see any point in "saving" to pay off debt. :confused I doubt anything "safe" out there right now beats your mortgage interest rate by enough to make it worthwhile to save up to pay off the mortgage. Now if savings accounts were giving 5% interest, that might be a different story. But, that's not the case now days.

Lowering the principal as much as possible SAVES you interest that you would have paid.
Thanks for the reply!

The reason I'm leaning toward saving the money until the end of the assignment instead of paying on the loan as we go is if the assignment ends early. Lets say the assignment ends in 4 months. If I pay as I go I will have paid ~$45k on the loan but of course the payment would be the same. When this assignment is over my job security will go down. My wife and I currently have emergency funds (2 Roth IRAs currently worth ~$24k). We could have added the $45k to the emergency funds instead of paying a small percentage on the mortgage.

I wonder how much paying as we save would save us. I'm not sure it would be substantial. If it is and we could pay the mortgage down to ~$50k sooner then that means I could come home sooner. That would be nice.
Every 10K thrown at the mortgage will save you $287.50 or $23.96 per month in interest expense before tax. That means if you prepaid 1/12 of $10K into the mortgage each month ($833.33), your interest expense would decline by $2.00 per month. Let's assume your income tax rate is 28%, your after-tax savings would be $207 annually. If you invested $10K in a conservative investment, you would likely earn more than 2.875% per annum in return.

I'm interested. What type investment would do this? Is it fairly conservative/safe? $207 annually sure isnt much. Thanks for your help!
That's becasue there was some careful selection of numbers there. Try out that calculator posted earlier and see what throwing $23k, soon to be $90k, and $60k a year at your mortgage, you know, your numbers, and see what that would save you.
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Watty
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Re: Saving to payoff the house...need suggestions

Post by Watty »

The interest on the 15 year mortgage is 2.875%
PenFed had five year CD's that are paying 3% right now.

https://www.penfed.org/money-market-certificate/

You could put the money have right now into that and then decide in five years if paying off the mortgage makes sense then.

For the money that you will be saving you can just buy another CD every couple of months as long as the interest rate is as high as your mortgage interest rate.
Topic Author
Woody999
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Re: Saving to payoff the house...need suggestions

Post by Woody999 »

If my calculation approximations are correct, paying it off as we go would yield a balance ~$8k lower than saving it and paying it off in the end. Saving it at 0.75% will gain about $1300 making the true difference something like $6700. :|

Now I just need to decide it having it liquid along the way is worth $6700.

Thoughts? :confused

Thanks for all the help! :mrgreen:

PS. The 5 year CD wouldn't work in this case as I'm on a 2 year plan.
Texas hold em71
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Re: Saving to payoff the house...need suggestions

Post by Texas hold em71 »

Woody999 wrote:If my calculation approximations are correct, paying it off as we go would yield a balance ~$8k lower than saving it and paying it off in the end. Saving it at 0.75% will gain about $1300 making the true difference something like $6700. :|

Now I just need to decide it having it liquid along the way is worth $6700.

Thoughts? :confused

Thanks for all the help! :mrgreen:

PS. The 5 year CD wouldn't work in this case as I'm on a 2 year plan.
Plus you have the tax deduction for the interest in the meantime further reducing the 6,700 difference.

If you are really concerned about job security, I think the saving to payoff option makes more sense since liquidity will allow you flexibility in the event the assignment ends early.
Topic Author
Woody999
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Re: Saving to payoff the house...need suggestions

Post by Woody999 »

So if I were to save the money until I get the payoff amount in something liquid what are my choices besides...

Guaranteed not to lose options:
Savings Acct
Money Market Acct
CD

Are there any options that are not guaranteed but have little risk?

Thanks! 8-)
ktwalrus
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Re: Saving to payoff the house...need suggestions

Post by ktwalrus »

I wouldn't payoff your mortgage until you have at least double that amount of money in an investment account. You don't want to be "house poor" where the bulk of your net worth is tied up in your house.

If I were you, I would aggressively save as much as I can into an investment account. I would invest the bulk of this account in stock index funds (with a long term focus). Over a 15 year period, the stock market will likely out perform all other passive investment options. If you lose your job or get in a pinch, you can always use a small amount from the investment account to pay your mortgage and other expenses. Also, I would really try never to touch my retirement savings until I actually retire. The key to having enough in retirement is to have the maximum time "in the market" as you can. The dollars you put away now are the most important for your retirement.

If your mortgage was at a high interest rate, I might aggressively try to pay it off, but that is not the case here.
Texas hold em71
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Re: Saving to payoff the house...need suggestions

Post by Texas hold em71 »

Woody999 wrote:So if I were to save the money until I get the payoff amount in something liquid what are my choices besides...

Guaranteed not to lose options:
Savings Acct
Money Market Acct
CD

Are there any options that are not guaranteed but have little risk?

Thanks! 8-)
That is about it, yes. Some people put house money or emergency fund money in an intermediate bond fund because it is low risk although not as low as the options above.
Topic Author
Woody999
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Re: Saving to payoff the house...need suggestions

Post by Woody999 »

After really sharpening my pencil I have nailed down the difference in saving it in a money market at 0.75% interest and paying off the mortgage as we go. The difference is only about $4,200 and that doesn't include tax savings of not paying as we go. Saving it at 0.75% would yield ~$1600. I don't think losing the liquidity is worth $4,200 (minus tax savings).

So now I just need to find the lowest risk way to save the money and outperform $1,600 + $4,200 = $5,800. If 0.75% equates to $1,600 in savings then I would need to get (5,800/1,600)*.75 = 2.71% interest. I hope I did this math correctly!!!

So now may question to you guys is what is the lowest risk way to get 2.71% interest over the next 2 years? The money needs to be liquid and have the ability to accept $5k monthly deposits.

Any ideas?
:beer
letsgobobby
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Re: Saving to payoff the house...need suggestions

Post by letsgobobby »

My wife and I each have a Kasasa or rewards checking account, which pays 2.25-2.5%. However it's capped at $25k balance, so $50k between the two of us, so that only goes so far.

I bonds might normally play a role here, but with inflation currently so low and with the 3 month penalty, it doesn't seem like you'll do better than a CD over two years.

But you've considered the right factors - you've determined the actual, after tax cost of the liquidity, and made a personal decision about whether the liquidity is worth the cost. Maximinizing returns is just gravy.
Dandy
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Re: Saving to payoff the house...need suggestions

Post by Dandy »

I hate debt. But such a low mortgage rate, assuming it is fixed, may look quite attractive in a few years when interest rates are not kept low by the Fed. I also assume that paying extra on the existing mortgage doesn't lower the monthly expense -- it just shortens the term.
I might consider selling the condo and using the proceeds to pay down the mortgage. I would probably split the extra monthly income between investing (vs saving) and paying extra on the mortgage. You will be well on your way to eliminating the mortgage and will have an investment pot that might be better than a low interest safe savings plan.

I am suggesting this as a possibility since you feel you can live off your spouse's income and a 20% pay cut. Also, I believe paying down several years of mortgage ahead of time may allow you to skip some future payments should things get tight. You need to check this out. If true that is like having a partial emergency fund.
Twins Fan
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Re: Saving to payoff the house...need suggestions

Post by Twins Fan »

Woody999 wrote:After really sharpening my pencil I have nailed down the difference in saving it in a money market at 0.75% interest and paying off the mortgage as we go. The difference is only about $4,200 and that doesn't include tax savings of not paying as we go. Saving it at 0.75% would yield ~$1600. I don't think losing the liquidity is worth $4,200 (minus tax savings).

So now I just need to find the lowest risk way to save the money and outperform $1,600 + $4,200 = $5,800. If 0.75% equates to $1,600 in savings then I would need to get (5,800/1,600)*.75 = 2.71% interest. I hope I did this math correctly!!!

So now may question to you guys is what is the lowest risk way to get 2.71% interest over the next 2 years? The money needs to be liquid and have the ability to accept $5k monthly deposits.

Any ideas?
:beer
How are you getting these numbers?

Messing around with the online mortgage and savings calculators... plugging your rough numbers into the mortgage calc. I linked, and using a savings calc. with a $113k starting balance (your initial + condo sale) and a $5k/month deposit at .75%... you would save about $58k interest you would not pay by paying down the mortgage (and paid off in 31 months), and make about $5k total in interest at .75% APY throwing everything in a savings account (Using a 3 year timeframe for the savings period).

I think your math may be off? :D
Topic Author
Woody999
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Re: Saving to payoff the house...need suggestions

Post by Woody999 »

I hope my math is off...in my favor of course :wink: The details get tricky but here goes...

I'm currently 3 months into the assignment so I'm using 21 months to go. I also plan to fund a Roth IRA for both my wife and I for 2014 and 2015.

-The initial balance is 304K

-For paying off the mortgage as we go I used $5k in extra payments for months 1 (jan 2014) - month 19 (July 2015 2 months before end of assignment). Month 20 and 21 will use the $5k to fund the 2015 IRA ($11k). The 23k initial investment will equate to $12k put on the mortgage in month #1 (jan 2014) and the remaining $11k to buy the 2014 IRAs. I also plan to sell a 3rd car and use that $15k towards the mortgage in month 3 (March 2014). I assumed the condo would sell in month 10 grossing $80k so I factored in an $80k payment in month 10. At the end of the 2 year assignment that would leave a mortgage balance of $64,019. If things got tough, I could pull $$$ out of the Roth IRAs and come pretty close to paying it off.

-For saving along the way I figured the same amounts and timing as above but put those in a savings acct getting 0.75%. At the end of the 2 year assignment (month 21 from now) I would make the 1 time payment to the mortgage. That would leave a mortgage balance of $271,857 (mortgage payoff as of Sep 2015) - $202,000 (savings) - $1,632 (savings interest @ 0.75%) = $68,225.

-The $68,225 - 64,019 yields a difference of $4,206. After tax savings I'm thinking this difference will be more like $3,300.

Did I make a math mistake in comparing the two options?

Thanks!
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Woody999
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Re: Saving to payoff the house...need suggestions

Post by Woody999 »

Note: My comparison examples use a 2 year schedule.

The assignment could easily go longer if I choose to let it. Since I want to be with my family I'm going to cut it as short as possible. Therefore, I used 2 years to compare the numbers. After 2 years I plan to go home and pay off the remaining balance by making the normal monthly payment. If something bad happens after I return home, I could use the Roth IRAs to payoff the house resulting in a very low amount of monthly expenses.

I hope this helps explain my math. :)
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Re: Saving to payoff the house...need suggestions

Post by Twins Fan »

It looks like you're simply looking at totals and not the compounding part of it. Your mortgage is compound interest for the mortgage company... although we've argued the simple vs. compound thing on a mortgage many times. :D But, by prepaying you are taking years of compounding away from the mortgage company. That means lots of interest that you were scheduled to pay no longer needs to be paid... savings for you! You should be looking at it as... interest gained by saving vs. interest not paid by pre-paying the mortgage. That's the variable. The money you make, the money you would save, the money you would pre-pay, and the balances are what they are.

There's simply no way that a building savings account at .75% nearly breaks even with drastically reducing the principal on a 15 year loan at 2.875%. Even your effective interest rate is likely over double the .75% of the savings account.

You seem to be leaning more toward keeping the liquidity and saving up. That's fine, but make sure you look at the number correctly. If paying off your mortgage is your main goal, I say all out frontal attack it. :D
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Re: Saving to payoff the house...need suggestions

Post by Twins Fan »

Where is this assignment... out of country... tax free income?
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Aptenodytes
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Re: Saving to payoff the house...need suggestions

Post by Aptenodytes »

I don't see the merit in paying off the mortgage. If the interest rate were far higher, yes, but at that rate (the net is presumably lower, after tax subsidies), I don't get it.

If you were trying to shied liquid assets from college financial aid, it would make sense, but you don't mention that concern.

I would strongly suggest you consider investing your savings in a tax-efficient vehicle to be used to help finance your retirement, and continue to pay your very low mortgage out of current income.
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Woody999
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Re: Saving to payoff the house...need suggestions

Post by Woody999 »

Twins Fan wrote:It looks like you're simply looking at totals and not the compounding part of it. Your mortgage is compound interest for the mortgage company... although we've argued the simple vs. compound thing on a mortgage many times. :D But, by prepaying you are taking years of compounding away from the mortgage company. That means lots of interest that you were scheduled to pay no longer needs to be paid... savings for you! You should be looking at it as... interest gained by saving vs. interest not paid by pre-paying the mortgage. That's the variable. The money you make, the money you would save, the money you would pre-pay, and the balances are what they are.

There's simply no way that a building savings account at .75% nearly breaks even with drastically reducing the principal on a 15 year loan at 2.875%. Even your effective interest rate is likely over double the .75% of the savings account.

You seem to be leaning more toward keeping the liquidity and saving up. That's fine, but make sure you look at the number correctly. If paying off your mortgage is your main goal, I say all out frontal attack it. :D
I think you are talking about saving the money long term thus paying the mortgage over the 15 years versus paying it off early. I'm talking about paying it off early 2 different ways. One is putting the money on the mortgage as I go which results in a balance of $64,019 at the end of the 2 year assignment. The other is to save up the money then put the savings on the mortgage at the end of the 2 year assignment resulting in a balance of $68,225. Both ways accomplish saving tens of thousands in interest compared to paying it off over the 15 years. The difference in my two options is $3,300 as they will both save the compound interest over the normal 15 year payoff.

What am I missing here?
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Woody999
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Re: Saving to payoff the house...need suggestions

Post by Woody999 »

Twins Fan wrote:There's simply no way that a building savings account at .75% nearly breaks even with drastically reducing the principal on a 15 year loan at 2.875%. Even your effective interest rate is likely over double the .75% of the savings account.
This is correct but I'm looking at a 21 month period not 180 months.
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Re: Saving to payoff the house...need suggestions

Post by Twins Fan »

I was talking a 3 year timeframe, and thinking interest saved vs. interest gained... but, as an absolute for the 3 years. I gotcha now, yes, you would still save a bunch of interest by paying off the mortgage at year 3... or 2, and gain a little interest while saving. My bad.
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Woody999
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Re: Saving to payoff the house...need suggestions

Post by Woody999 »

Aptenodytes wrote:I don't see the merit in paying off the mortgage. If the interest rate were far higher, yes, but at that rate (the net is presumably lower, after tax subsidies), I don't get it.

If you were trying to shied liquid assets from college financial aid, it would make sense, but you don't mention that concern.

I would strongly suggest you consider investing your savings in a tax-efficient vehicle to be used to help finance your retirement, and continue to pay your very low mortgage out of current income.
Mathematically, you are correct. In my field the job market has eroded where I live and is unstable. I would like to reduce monthly expenses. Once the house is paid off I will have $2,400 per month to dump into more retirement savings.

Oh and my job is not out of the US so I still pay Uncle Sam :)
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Re: Saving to payoff the house...need suggestions

Post by Twins Fan »

Woody999 wrote:
Aptenodytes wrote:Oh and my job is not out of the US so I still pay Uncle Sam :)
Oh, dang it!! :D Could have got you a totally tax free return by paying down the mortgage.
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Woody999
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Re: Saving to payoff the house...need suggestions

Post by Woody999 »

Hahahaha...I wish!

Any ideas on how to get around 2.5-3.0% with some but minimal risk?

Thanks for your help! :sharebeer
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Re: Saving to payoff the house...need suggestions

Post by Twins Fan »

Now days... not really. Take what you can get in the savings/CD area is about it.
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Re: Saving to payoff the house...need suggestions

Post by Grt2bOutdoors »

Woody999 wrote:
Grt2bOutdoors wrote:
Woody999 wrote:
Twins Fan wrote:Throw it all at the mortgage as soon as possible and keep throwing money at it as it comes!!

I don't see any point in "saving" to pay off debt. :confused I doubt anything "safe" out there right now beats your mortgage interest rate by enough to make it worthwhile to save up to pay off the mortgage. Now if savings accounts were giving 5% interest, that might be a different story. But, that's not the case now days.

Lowering the principal as much as possible SAVES you interest that you would have paid.
Thanks for the reply!

The reason I'm leaning toward saving the money until the end of the assignment instead of paying on the loan as we go is if the assignment ends early. Lets say the assignment ends in 4 months. If I pay as I go I will have paid ~$45k on the loan but of course the payment would be the same. When this assignment is over my job security will go down. My wife and I currently have emergency funds (2 Roth IRAs currently worth ~$24k). We could have added the $45k to the emergency funds instead of paying a small percentage on the mortgage.

I wonder how much paying as we save would save us. I'm not sure it would be substantial. If it is and we could pay the mortgage down to ~$50k sooner then that means I could come home sooner. That would be nice.
Every 10K thrown at the mortgage will save you $287.50 or $23.96 per month in interest expense before tax. That means if you prepaid 1/12 of $10K into the mortgage each month ($833.33), your interest expense would decline by $2.00 per month. Let's assume your income tax rate is 28%, your after-tax savings would be $207 annually. If you invested $10K in a conservative investment, you would likely earn more than 2.875% per annum in return.

I'm interested. What type investment would do this? Is it fairly conservative/safe? $207 annually sure isnt much. Thanks for your help!
Unfortunately - that safe investment does not exist. Conservative - yes, but the word safe can be such a tricky widget. What do I mean? Well, if you stuck $10K in the Vanguard Intermediate Tax-Exempt fund which yields 2.38%, you would have to earn 3.31% in a similar taxable equivalent fund - that beats the rate you are paying today on the mortgage, however you will be subject to NAV fluctuation and would have to reinvest the dividends for the full duration in order to receive the yield. https://personal.vanguard.com/us/funds/ ... 28#results

A more adventuresome alternative might involve the use of equities - 20% equities/80% intermediate tax exempt and could return more than 3.31% but not without the risk of principal fluctuation that could include a decline in principal of 20% and you wouldn't know exactly when the value might return.

These are just examples, I don't use or recommend equities for a mortgage pre-payment account, nor do I recommend rushing to pay it off if it would noticeably increase stress (financially or emotionally) at home to do so - the lender is perfectly willing to let you pay it off over time or when you have the means to do so in entirety, so long as you continue to make the minimum payments. In other words, don't put so much pressure on yourself. Liquidity offers value too, even though you can't necessarily see it in dollars and cents.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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Re: Saving to payoff the house...need suggestions

Post by Grt2bOutdoors »

Woody999 wrote:
I think you are talking about saving the money long term thus paying the mortgage over the 15 years versus paying it off early. I'm talking about paying it off early 2 different ways. One is putting the money on the mortgage as I go which results in a balance of $64,019 at the end of the 2 year assignment. The other is to save up the money then put the savings on the mortgage at the end of the 2 year assignment resulting in a balance of $68,225. Both ways accomplish saving tens of thousands in interest compared to paying it off over the 15 years. The difference in my two options is $3,300 as they will both save the compound interest over the normal 15 year payoff.

What am I missing here?
$3,300 or $2,000 after-tax over the course of 2 years is a small tax to pay for the price of keeping your liquidity intact. I vote for paying it over time so long as you do not sacrifice liquidity. Remember, lenders have no problem foreclosing if your mortgage is $1 or $64,019 or $68,225 - keeping assets liquid has its costs, but at the end of the day being able to keep a roof over your head for an extended period of time is worth so much more.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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Re: Saving to payoff the house...need suggestions

Post by abuss368 »

Here is my initial thoughts when often seeing a paying down debt question:

A Balance Sheet has two side: 1) Assets and 2) Liabilities & Equity

Why not try to build both sides of the Balance Sheet at the same time by saving/investing and also the paying down of debt.

Sell the condo and apply to the mortgage on your home. That makes sense.

I have never believed in "saving" to pay down debt. Why not pay it down as you go and start to reduce the outstanding balance from which interest is calculated?

You could take the $5,000 per month and apply $x to the savings/investments and $x to additional debt payments. Your personal Balance Sheet will be in so much better shape. Perhaps $2,500 to each. After one year your investments will have increased (ignoring market fluctuations) $30,000 and compounding going forward and debt decrease by $30,000 for an overall net worth increase of $60,000.

I would not cash in and liquidate Roth IRA space (which you will never get back) or any investments to pay off debt. The investments in the Roth IRA should generate returns in excess of your after tax interest rate on the mortgage.

Best.
John C. Bogle: “Simplicity is the master key to financial success."
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