Is [this] a stupid idea? - Extreme mortgage payoff

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Is [this] a stupid idea? - Extreme mortgage payoff

Postby viking112347 » Mon Feb 04, 2013 5:08 pm

I am one year into a 30 year 3.625% mortgage which has a balance of 365,000 (house valued around 520,000). I work in the defense/intel industry which is somewhat under attack with sequestration and other budget pressures. I am working under a contract that is guaranteed thru end of 2014 but who knows what will happen after that! I currently make ~150,000. My wife also works and makes ~50,000 and is in a very stable job with little risk of future layoff. We both will have defined benefit pension plans, social security, 401Ks, etc at retirement. I am 42 and could retire at 60 if I stay at current company otherwise 65. My wife can retire at 55 and she is currently 34. We are both maxing out 401K, Roth IRA, contributing to 529, etc. Current retirement assets are 350,000. My pension if I were to quit today would be 30,000 per year. Each additional year I stay employed with this company is adding 2000-2500 per year (so after this year my pension would be 32,000 at retirement age, 34,000 after the next year, etc). My wifes pension will likely end up in the 30-40K range.

What I would like to do is the following:
- Stop wife 401K contributions (she doesn't get a match)
- Stop Roth IRA contributions
- Only contribute 8% to get 50% match at my job
- Ratchet down 529 contributions to a small number

Doing the above plus allocating other money we had extra each month will allow us to send extra $4000 to mortgage each month. Plus I have about 80000 outside emergency fund I can throw at it (which would bring down to 285,000 as a starting point). Doing this would allow me to payoff my mortgage in about 4 years. I have 2 guaranteed years of work and am pretty confident our contract will get extended for at least another 2 and if not I should be able to find another contract with same company for at least 2 years. I would like to be able to take advantage of my salary to knock my mortgage out now knowing we are going to still be contributing some to retirement (and after payoff mortgage would max everything) plus we have the advantage of having 2 defined benefit pension plans.

Let er rip!
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Re: Is the a stupid idea? - Extreme mortgage payoff

Postby Grt2bOutdoors » Mon Feb 04, 2013 5:37 pm

Not the brightest idea! - You will never be able to regain the Roth space you give up. You do not have job stability, and your wife's very stable job will not be enough to carry the mortgage. What about an e-fund if you sink every penny into your home? Your scenario is not like you hold 2x or more equivalent of mortgage debt in cash. Does your wife like your idea? :oops: Unless you have a firm commitment from your employer concerning job placement and even then those can be rescinded, would not bank on the "even then I can find another job" thought.
Very risky to undertake this, especially since you have a family to think about.
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Re: Is the a stupid idea? - Extreme mortgage payoff

Postby Beantown85 » Mon Feb 04, 2013 5:39 pm

Seems risky. You won't have your mortgage paid off at the two year mark, so your monthly cash needs will be exactly the same as they are now, except you won't have the EF and retirement funds to fall back on. Not a fan.
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Re: Is the a stupid idea? - Extreme mortgage payoff

Postby crowd79 » Mon Feb 04, 2013 5:42 pm

I don't even own a house yet and pretty much know that is not a good idea. You'd be giving up all those tax benefits and deductions off of mortgage interest yearly at a reasonably low mortgage rate. Funding a tax-free Roth or tax deferred Traditional IRA (also with possible tax credits) with your yearly available space every year gives your money time to grow at rates that "should" be greater than 3.7% mortgage interest minus tax benefits. No your plan IMHO is not a good idea.
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Re: Is [this] a stupid idea? - Extreme mortgage payoff

Postby LadyGeek » Mon Feb 04, 2013 5:50 pm

Remember that defined benefit pension plans are at the risk of the company. If the company disappears, so does your pension. Also, check your company's pension rules carefully. I don't think you can even start collecting until you hit 55- 13 years from now.

Granted, your company may be around for a long time. However, you have no idea on the effects of any possible future mergers or acquisitions with another company. And then there's the possibility of moving to a different department based on sequestration / project funding issues. Want to keep your job? Move to the other side of the country...

I don't think this is a good idea.
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Re: Is [this] a stupid idea? - Extreme mortgage payoff

Postby Christine_NM » Mon Feb 04, 2013 5:50 pm

I waited to pay off mortgage until I had enough to do it from taxable money in one fell swoop. It happened to be 10 years early. No regrets, was able to rebuild taxable account fairly quickly.

Keep building the taxable account or maybe make extra mortgage payments. No point in paying large amount unless it's the final payment. Hope this helps.
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Re: Is [this] a stupid idea? - Extreme mortgage payoff

Postby FNK » Mon Feb 04, 2013 5:57 pm

Dumping ER into mortgage: extremely stupid.
Stopping 401(k) contributions in favor of mortgage: stupid.
Dialing back 401(k) contributions in favor of mortgage: less stupid.
Dialing back Roth IRA or 529 contributions in favor of mortgage: arguable.

If you lose the job, you'll be able to pull out some of these contributions to keep the family afloat. You may even end up in a situation where the marginal tax+10% penalty on 401 withdrawals will be less than the marginal tax now.
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Re: Is [this] a stupid idea? - Extreme mortgage payoff

Postby Toons » Mon Feb 04, 2013 5:58 pm

Christine_NM wrote:I waited to pay off mortgage until I had enough to do it from taxable money in one fell swoop. It happened to be 10 years early. No regrets, was able to rebuild taxable account fairly quickly.

Keep building the taxable account or maybe make extra mortgage payments. No point in paying large amount unless it's the final payment. Hope this helps.


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Re: Is [this] a stupid idea? - Extreme mortgage payoff

Postby NYBoglehead » Mon Feb 04, 2013 6:03 pm

I'd continue to max out the Roths and 401ks. 200k in MFJ income puts you in the 28% bracket. If your state has an income tax too the deduction is worth it to keep contributing to the 401ks even if you don't get a match. Being in the 28% bracket also means that even without a state income tax your effective interest rate is only 2.61% (3.625% x .72).

I think it is safe to say that with even modest inflation of 2% time will gradually eat away at the amount of your check the mortgage takes up. You've got 80k in an emergency fund, which is plenty to weather the storm should your job situation be in peril in 2014.

Maybe instead keep most of the investments on auto-pilot but dial it back just a bit to throw an extra $1k or $2k/mo at the mortgage instead of going full bore on the $4k.
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Re: Is [this] a stupid idea? - Extreme mortgage payoff

Postby BuckyBadger » Mon Feb 04, 2013 6:10 pm

That seems like a really terrible idea on a number of fronts.

Job stability. Liquidity of savings. Tax advantaged space lost forever. Emergency funds. Depending on benefits that can disappear. The list goes on.

I would highly recommend against such a plan.
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Re: Is [this] a stupid idea? - Extreme mortgage payoff

Postby MoonOrb » Mon Feb 04, 2013 6:34 pm

Yes, I think this is really a poor idea for these reasons:

1. Suppose you do lose your job and you want access to money? You are very unlikely to be able to refinance your house/take out a home equity loan since you won't be working and won't have the income to repay the loan. In other words, banks give you loans based primarily on your ability to repay, not on how likely it is they think they won't get murdered on a foreclosure sale. If this happens in the near term (before full repayment) this is a disaster; if it happens in the longer term it's less of a disaster because you've substantially reduced your monthly expenses, but it's still not ideal. Once you pay down your mortgage debt, you don't have easy access to all of that money, and unless you have lots of accessible money sitting around, this is a risk that isn't worth taking on for most people (and for those people who have so much money they could afford to take on this risk, there are better things they could do with that money anyway). So you'd ironically make yourself less secure when it seems your desire is for security.

2. You will have heavily tilted your portfolio toward one asset-real estate. If something bad happens in your neighborhood or with your house, you get crushed. If real estate takes another universal dip, like the one we just went through, you get crushed, too. It's not a big drama if your house value rises and falls if it's merely a place you live in--but when you take big chunks of money and plow them into your house instead of investing them elsewhere, then you have just increased your risk significantly.

3. You miss out on all kinds of tax advantages by doing this: you reduce the benefit of your itemized deductions, so your tax bill will be somewhat higher each year; more significantly you lose out on the benefits of letting your investments grow on a tax-deferred basis.

The only alternative that I think might have some merit is considering not contributing to 529 plans, but that is mainly because of my bias that parents are not obligated to pay for their children's educations. But even if you wanted to stop the 529 plans, I would just put that money into building your emergency fund to the point where you do feel more secure.
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Re: Is [this] a stupid idea? - Extreme mortgage payoff

Postby Watty » Mon Feb 04, 2013 6:54 pm

Is [this] a stupid idea?


My take on it;

1) Using your emergency fund to pay down the mortgage --- yes dumb

2) Passing up deductible retirement contributions in your tax bracket --- yes dumb

3) Passing up Roth contributions --- not so clear --- you will have lots of money in the 401k/IRA when you retire so you could do Roth conversions then. You might even have a few years between when you stop working and when your start your pensions when you might be in lower tax bracket.


The part that I think is missing is what your total budget looks like.

You have $200K in combined income, after taxes, hefty 401k contributions, and your required mortgage payment that still leaves you a lot each year that isn't accounted for. I would think that you could come up with your target of an extra $4,000 a month in principal payments out of that without cutting back on your retirement contributions or being too strapped for money.

FYI, Google "recast your mortgage". Saving up a large chunk of money then paying off maybe 20%+ at a time has a lot a advantages if your lender will recast your mortgage.
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Re: Is [this] a stupid idea? - Extreme mortgage payoff

Postby madbrain » Mon Feb 04, 2013 7:06 pm

Christine_NM wrote:I waited to pay off mortgage until I had enough to do it from taxable money in one fell swoop. It happened to be 10 years early. No regrets, was able to rebuild taxable account fairly quickly.

Keep building the taxable account or maybe make extra mortgage payments. No point in paying large amount unless it's the final payment. Hope this helps.


That's not true. While ongoing prepayments don't improve your cashflow until the mortgage is paid off, if you are earning less on your investments than the rate on your mortgage, they definitely make sense.
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Re: Is [this] a stupid idea? - Extreme mortgage payoff

Postby Default User BR » Mon Feb 04, 2013 7:20 pm

madbrain wrote:That's not true. While ongoing prepayments don't improve your cashflow until the mortgage is paid off, if you are earning less on your investments than the rate on your mortgage, they definitely make sense.

Unless you are investing solely in individual securities or CDs, there's no way to know what you will earn on your investments. Certainly not if equities are involved as they should be at the OP's age. The mortgage rate is a very good one, and any reasonable expected return over the years should be better than that.

Given a potential for job loss, I would prize liquidity and would not pay down the mortgage. I would see no reason to avoid Roth IRA, as the contributions would be available for withdrawal in a dire emergency.


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Re: Is [this] a stupid idea? - Extreme mortgage payoff

Postby viking112347 » Tue Feb 05, 2013 12:30 am

Thanks for the comments. To clarify I have 80000 outside of an emergency fund. I wasn't planning on using my EF towards mortgage!

I am going to take a much less radical approach in paying down mortgage with goal of having it gone before 2020.
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Re: Is [this] a stupid idea? - Extreme mortgage payoff

Postby Khanmots » Tue Feb 05, 2013 1:05 am

It may be worthwhile to play with amortization calculators and see what kind of targets are obtainable with the cash flow you'd have available after maxing tax-advantaged space out. It may not be 2020 (or maybe it would?), but it could easily be 2025...

Problem with paying the mortgage off at the expense of tax-advantaged space is you now have all this cash-flow and nowhere other than taxable accounts to put it... you can't go back and grab that tax advantaged space from previous years that you passed on. This is especially important because in retirement there's a lot of ways to manipulate where you pull money from that can keep your marginal rate far lower than today... even while funding a similar (or greater) lifestyle... so you're quite likely giving up more than you think (i.e., funding with pretax dollars while in the 28% bracket then pulling them out in retirement while in a 15% bracket...)

Also, given the current stresses the defense industry is under, having lots of assets that are usable if truly needed would be good. Contributions made to a Roth can be pulled out penalty free. The penalty on withdrawing from a 401k isn't too horrible. Home equity... may not be tappable as if the job is lost you may not be able to obtain a loan with just the wifes income.
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Re: Is [this] a stupid idea? - Extreme mortgage payoff

Postby SpaceCommander » Tue Feb 05, 2013 1:27 am

I built up my investments first and only paid off my mortgage when I was free to do it all at once with plenty left over. I liked the idea of having that cushion in hand because you never know what the future might bring. Once I paid off the house, I had a smaller cushion, but I also needed less since I no longer had the debt hanging over my head. With my house paid off, I was able to once again build up my portfolio with my even bigger monthly surplus.

I don't like the idea of being cash poor while giving every spare nickel to the bank for years on end. That's just me; take it for what it's worth. Plus, as the others have noted, there are additional benefits to keeping the funds and carrying the low interest debt for a while. But if you have the means, and can do it without sacrificing other long term goals: I heartily recommend paying off your home.
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Re: Is [this] a stupid idea? - Extreme mortgage payoff

Postby SwampDonkey » Tue Feb 05, 2013 3:18 am

Do it!

It's probably not the correct answer from a pure mathematical standpoint (assuming the market gives positive returns and you have decent portion of your retirement funds in the market). I know market timing is not highly regarded on this board but what are your thoughts on where our economy is headed in the next four years? If you think there's going to be a run-up, you should probably stick with the advice of others and continue to reap the tax benefits of traditional retirement savings. If you think our economy is artificially inflated and bound for a downturn, why not save yourself the dread of watching your 4-years worth of retirement savings dwindle as the market corrects itself?

Your logic is sound and an extreme mortgage payoff will give you and your wife something huge to shoot for in the near term. By making such large payments each month, you would get the psychological pump of seeing your principal substantially drop each month. Not too many people have the means to make such a dent in their mortgage every month. Your rate of payment would be significant. On those months when you'd be second guessing yourself, all you'd have to do is look at your monthly statement and see the tangible difference your commitment to a debt-free lifestyle has made.

If you fully commit to the idea, another option would be to refi into a 5/1 ARM to save a few hundred in interest each year. Assuming your mortgage was $430k (just a guess...)
Current:
$2,431 at 30 yr 3.625%
$1,836 at 5yr (ARM) at 2.42%
Shoot, that is nearly $600/month just in interest! Combined over a four year period, that's over $25k in interest savings alone. Disclaimer: I am a SwampDonkey in real life so for the professionals out there, please correct my math if it is wrong..... In any case, if my math is anywhere near correct, the $25k in interest savings would easily offset any tax benefits from the traditional retirement savings.

I"m not a Dave Ramsey trooper but I do believe in his theories regarding the psyche of paying down debt and investing. I know it doesn't make sense from a pure numbers game but to see your mortgage drop that much, that quickly..... that will only encourage you and wife to keep going until its completely paid off.

If you're jobless in two years, you'll still have paid your mortgage down to $100k which would be an easy refi that your new (greatly reduced) income could support.

Based on your current standing, you obviously have a great head on your shoulders and people like that typically aren't unemployed too long ...unless they want to be. I don't think the threat of no job should dissuade you from such an awesome goal. I think you and your wife can absolutely achieve this and when you do, you'll be grinning from ear to ear as everyone else in the world grumbles about their monthly mortgage payment and how they think they're doing well because they only have 22 years left on it.

I can't wait to read your post 48 months from now about how great it feels to have a paid off mortgage. :moneybag :moneybag :moneybag
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Re: Is [this] a stupid idea? - Extreme mortgage payoff

Postby madbrain » Tue Feb 05, 2013 6:00 am

SwampDonkey wrote:If you're jobless in two years, you'll still have paid your mortgage down to $100k which would be an easy refi that your new (greatly reduced) income could support.


Not so. Refi would be impossible without income.
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Re: Is [this] a stupid idea? - Extreme mortgage payoff

Postby madbrain » Tue Feb 05, 2013 6:19 am

SwampDonkey wrote:If you fully commit to the idea, another option would be to refi into a 5/1 ARM to save a few hundred in interest each year. Assuming your mortgage was $430k (just a guess...)
Current:
$2,431 at 30 yr 3.625%
$1,836 at 5yr (ARM) at 2.42%
Shoot, that is nearly $600/month just in interest! Combined over a four year period, that's over $25k in interest savings alone. Disclaimer: I am a SwampDonkey in real life so for the professionals out there, please correct my math if it is wrong..... In any case, if my math is anywhere near correct, the $25k in interest savings would easily offset any tax benefits from the traditional retirement savings.


Oh, and your math is not anywhere near correct.
$430k at 3.625% 30yr fixed is $1961.02/month.
$430k at 2.42% 5/1 ARM is $1681.19/month .

So, only $280/month in actual interest savings, which the OP would not only lose the tax deduction for the same amount, but also forego the tax deduction for 401K on the same amount, effectively increasing taxable monthly income by twice that, or $560/month.
If the OP is in a 25% federal tax bracket, the OP's federal taxes would go up $140/month. And that's not accounting for any state tax increase - the OP didn't mention if his state has an income tax.
If he does, the majority of the savings will go straight to the taxman. And the OP's retirement balance will not increase.
Then when you look at the increased interest risk of the ARM if the loan isn't paid off at the 5 year mark, vs the current low rates on a fixed mortgage, it makes even less sense.
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Re: Is [this] a stupid idea? - Extreme mortgage payoff

Postby NYBoglehead » Tue Feb 05, 2013 8:50 am

If you've got 80k in addition to your emergency fund you can still make accelerated payments without having to sacrifice your retirement account contributions.
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Re: Is [this] a stupid idea? - Extreme mortgage payoff

Postby Grt2bOutdoors » Tue Feb 05, 2013 9:52 am

SwampDonkey wrote:Do it!



Your logic is sound and an extreme mortgage payoff will give you and your wife something huge to shoot for in the near term. By making such large payments each month, you would get the psychological pump of seeing your principal substantially drop each month. Not too many people have the means to make such a dent in their mortgage every month. Your rate of payment would be significant. On those months when you'd be second guessing yourself, all you'd have to do is look at your monthly statement and see the tangible difference your commitment to a debt-free lifestyle has made.

If you fully commit to the idea, another option would be to refi into a 5/1 ARM to save a few hundred in interest each year. Assuming your mortgage was $430k (just a guess...)
Current:
$2,431 at 30 yr 3.625%
$1,836 at 5yr (ARM) at 2.42%
Shoot, that is nearly $600/month just in interest! Combined over a four year period, that's over $25k in interest savings alone. Disclaimer: I am a SwampDonkey in real life so for the professionals out there, please correct my math if it is wrong..... In any case, if my math is anywhere near correct, the $25k in interest savings would easily offset any tax benefits from the traditional retirement savings.


If you're jobless in two years, you'll still have paid your mortgage down to $100k which would be an easy refi that your new (greatly reduced) income could support.



Two poor pieces of advice - switching out from a known mortgage payment to an unknown at that end of 5 years. :oops: If rates move higher, now the OP is up the creek with no job and a higher payment.

No refi and no money to pay the mortgage when out of a job - not a good idea!
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Re: Is [this] a stupid idea? - Extreme mortgage payoff

Postby NateH » Tue Feb 05, 2013 11:12 am

viking112347 wrote:I am one year into a 30 year 3.625% mortgage which has a balance of 365,000 (house valued around 520,000). I work in the defense/intel industry which is somewhat under attack with sequestration and other budget pressures. I am working under a contract that is guaranteed thru end of 2014 but who knows what will happen after that!


If your career in the defence/intel industry has a modest or high likelyhood of reloaction, i wouldn't prepay anything on your 3.XX% mortgage (2.6% after itemizing for taxes).
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Re: Is [this] a stupid idea? - Extreme mortgage payoff

Postby BuckyBadger » Tue Feb 05, 2013 11:24 am

If you really want to accelerate your payments, do so ONLY after maxing out ALL your tax advantaged space. You'll never get that space back.

The math still works out that you're financially better to not pay it off early, but if it makes you feel better go ahead and do it -- just please don't do it at the expense of your oh-so-valuable tax advantaged space.
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Re: Is [this] a stupid idea? - Extreme mortgage payoff

Postby downshiftme » Tue Feb 05, 2013 11:26 am

I like the idea of paying off a mortgage, but I sure don't like the idea of having little savings or reserves when facing a layoff. When my company looked in danger of layoffs, I did the opposite of what you are considering. I pulled all I could out of my HELOC and conserved cash in case I was facing a prolonged job search. I cannot eat or spend equity if I have no job and I'm unlikely to get any kind of loan against the equity with no employment. Luckily I found employment quickly and could pay back what I borrowed. Others from my company looked for over a year without finding new jobs. Their finances became much more desperate. I was glad I was prepared in case that happened to me.

If you really think your job is in danger, you can harness the spirit of a big mortgage payoff to build a savings or investment account in which you deposit all the extra principal payments you would be making. If you get a balance big enough to pay off the mortgage and still no layoff, then you can pay it all off. If instead you get employment problems, you have a nice big cushion of reserves to rely upon until you can get a new job.
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Re: Is [this] a stupid idea? - Extreme mortgage payoff

Postby swyck » Tue Feb 05, 2013 4:50 pm

Christine_NM wrote:I waited to pay off mortgage until I had enough to do it from taxable money in one fell swoop. It happened to be 10 years early. No regrets, was able to rebuild taxable account fairly quickly.

Keep building the taxable account or maybe make extra mortgage payments. No point in paying large amount unless it's the final payment. Hope this helps.

This ^

I'm glad I paid off early, highly recommend it, but I'm not a fan of extreme anything where savings are concerned. Just put some extra away over time, pay off a little bit more when you can, and you'll eventually get there.
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Re: Is [this] a stupid idea? - Extreme mortgage payoff

Postby 555 » Tue Feb 05, 2013 8:55 pm

Why are you contributing to Roth IRA instead of a Traditional IRA?
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Re: Is [this] a stupid idea? - Extreme mortgage payoff

Postby SwampDonkey » Wed Feb 06, 2013 9:14 pm

madbrain wrote:Oh, and your math is not anywhere near correct.
$430k at 3.625% 30yr fixed is $1961.02/month.
$430k at 2.42% 5/1 ARM is $1681.19/month .

So, only $280/month in actual interest savings, which the OP would not only lose the tax deduction for the same amount, but also forego the tax deduction for 401K on the same amount, effectively increasing taxable monthly income by twice that, or $560/month.
If the OP is in a 25% federal tax bracket, the OP's federal taxes would go up $140/month. And that's not accounting for any state tax increase - the OP didn't mention if his state has an income tax.
If he does, the majority of the savings will go straight to the taxman. And the OP's retirement balance will not increase.
Then when you look at the increased interest risk of the ARM if the loan isn't paid off at the 5 year mark, vs the current low rates on a fixed mortgage, it makes even less sense.


1. You are absolutely correct about my numbers. I was using Zillow's iphone app and didn't realize it automatically included estimated insurance and tax payments. Thanks for the correction.

2. I also agree with you that with the corrected numbers, the case for the ARM's tax savings is negligible.

Good reply. Although I still think they should use the extreme mortgage payoff plan (even without the tax argument that you were able to prove to be negligible). Being fully paid off in 5 years?!?!?!? Man, that would just feel amazing and completely change one's outlook on how much they now needed to earn to live the lifestyle they wanted to.
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Re: Is [this] a stupid idea? - Extreme mortgage payoff

Postby SwampDonkey » Wed Feb 06, 2013 9:24 pm

Grt2bOutdoors wrote:
Two poor pieces of advice - switching out from a known mortgage payment to an unknown at that end of 5 years. :oops: If rates move higher, now the OP is up the creek with no job and a higher payment.

No refi and no money to pay the mortgage when out of a job - not a good idea!
I know lots of unemployed folk who are smart and hardworking - they are still unemployed!


Why no money and why no refi?

OP said wife is making $50k/year. OP will make $30k/year if he retires now and will make even more for each year he remains on the job.

Let's assume he's able to work for several more years, they pay the mortgage down to the low $100k's and he unwillingly becomes unemployed. They will still have $80k+ of income to deal with a mortgage that is over 75% paid off. This would be an easy refi and if they were really hurting for money, they could elect a 30 fixed that would keep their monthly in the $600-800 range. ---- And this is all assuming the OP is unable to find ANY sort of employment which is highly unlikely.
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Re: Is [this] a stupid idea? - Extreme mortgage payoff

Postby Grt2bOutdoors » Thu Feb 07, 2013 2:47 pm

SwampDonkey wrote:
Grt2bOutdoors wrote:
Two poor pieces of advice - switching out from a known mortgage payment to an unknown at that end of 5 years. :oops: If rates move higher, now the OP is up the creek with no job and a higher payment.

No refi and no money to pay the mortgage when out of a job - not a good idea!
I know lots of unemployed folk who are smart and hardworking - they are still unemployed!


Why no money and why no refi?

OP said wife is making $50k/year. OP will make $30k/year if he retires now and will make even more for each year he remains on the job.

Let's assume he's able to work for several more years, they pay the mortgage down to the low $100k's and he unwillingly becomes unemployed. They will still have $80k+ of income to deal with a mortgage that is over 75% paid off. This would be an easy refi and if they were really hurting for money, they could elect a 30 fixed that would keep their monthly in the $600-800 range. ---- And this is all assuming the OP is unable to find ANY sort of employment which is highly unlikely.


No. Read carefully, OP stated if he retires/stops working today his accrued pension benefit equals $30K in today's dollars. That means at normal age of distribution (whatever his plan says 60 if he works there,otherwise age 65 if he left today) the plan will begin paying him that money - the OP is currently 42 years old.

The Bank will not give a mortgage to unemployed person, and even if the wife was working her income alone is not sufficient to support the new mortgage. She brings home 25% of current gross income, OP brings home 75% - this will be a non-starter the second the mortgage underwriter sees the Debt to Income. Now you have all that sunk money and a cash flow problem. It would be better for OP to save up the money and pay down in a lumpsum fashion - that will provide liquidity, peace of mind and optionality to do it or stay pat.
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Re: Is [this] a stupid idea? - Extreme mortgage payoff

Postby madbrain » Thu Feb 07, 2013 7:56 pm

SwampDonkey wrote:Although I still think they should use the extreme mortgage payoff plan (even without the tax argument that you were able to prove to be negligible). Being fully paid off in 5 years?!?!?!? Man, that would just feel amazing and completely change one's outlook on how much they now needed to earn to live the lifestyle they wanted to.


And why do you think that would be ?
There are two sides of that coin - the extreme mortgage payoff comes at a steep cost - one, in the form of taxes, and second, in the form of reduced income-producing assets for retirement, such as stocks and bonds.
Personally, I have about $450k of debt (almost all mortgage, rest is a 1.9% auto loan) and $850k of investments, half of them in taxable and the other half in 401k and Roth IRA. I could pay the debt in its entirety any time I wish by selling some investments. But I don't do that. It would not make me feel any better. Quite the contrary. I think it would be a stupid thing to do. As long as I'm working, I get a large benefit from the interest tax deduction. The mortgage rate is 3.375% fixed, but after tax deductions it is only 2.29%. That is very close to the rate of inflation. And I expect my investments to return more than inflation over the life of the mortgage.

I will also submit that even though the mortgage payment might be the OP's single biggest individual expense, it is still unlikely to be the majority of their spending. The OP and his wife have a combined income of $200k per year which is about $16600 per month. Put in that context, getting rid of a sub-$2000/month mortgage payment is very unlikely to be a life changing event as you state.
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Re: Is [this] a stupid idea? - Extreme mortgage payoff

Postby MNwildcat » Thu Feb 07, 2013 8:21 pm

This has been an very interesting topic. I must be in the minority, I too have been aggressively paying down my mortgage. I have a 2.75% 5/1 ARM that I am 13 months into and it is our only debt. I just turned 36 and have been paying an extra $30K towards the principle the last two January's. I will have it paid off on my 40th birthday. I max out my 401k (currently $340K in value), will have a defined contribution pension plan from my employer, my wife's teacher retirement account, plus put in $300/month toward 529 plans (three children, oldest will be in college in 10 years).

The reasons I have been paying aggressively are the following:
1. I have been relocated for work within the same company on average every 3-4 years. In the event that we transfer again, I never want to be underwater in the home that I am leaving. I guess this thinking has led me to believe that if I have no mortgage, then I never have to worry about this plus I will feel confident that housing values will/should correlate with my exisiting home and the future home. At this point, I have 50% equity in our current home.
2. Emotionally, I hate having a mortgage. I would rather live as frugually as what my wife will allow, pay off all debt as soon as possible. Once it is paid off, I would use these former payments as principle for investing. I understand the benefits of low mortgage rates, but it is still a debt that will never go away. Money markets and investments can go up or down but I would always have a debt to pay while I have a mortgage.

Ultimately, I am sure I am not making the absolute best financial decisions, but I feel very comfortable with my current plan and the risks associated.

Great input by everyone.

Thanks,
Robb
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Re: Is [this] a stupid idea? - Extreme mortgage payoff

Postby Default User BR » Fri Feb 08, 2013 2:21 pm

MNwildcat wrote:This has been an very interesting topic. I must be in the minority, I too have been aggressively paying down my mortgage. I have a 2.75% 5/1 ARM that I am 13 months into and it is our only debt. I just turned 36 and have been paying an extra $30K towards the principle the last two January's. I will have it paid off on my 40th birthday. I max out my 401k (currently $340K in value), will have a defined contribution pension plan from my employer, my wife's teacher retirement account, plus put in $300/month toward 529 plans (three children, oldest will be in college in 10 years).

Have you ever looked at the calculators that show the effect of not investing in your younger years? How the compounding works for you that way? How much it takes to catch up starting later?

MNwildcat wrote:1. I have been relocated for work within the same company on average every 3-4 years. In the event that we transfer again, I never want to be underwater in the home that I am leaving. I guess this thinking has led me to believe that if I have no mortgage, then I never have to worry about this plus I will feel confident that housing values will/should correlate with my exisiting home and the future home. At this point, I have 50% equity in our current home.

But you don't have to be pre-paid. Just sell the house for what you can. If that's less than the mortgage amount you bring some cash to the table.

MNwildcat wrote:2. Emotionally, I hate having a mortgage. I would rather live as frugually as what my wife will allow, pay off all debt as soon as possible. Once it is paid off, I would use these former payments as principle for investing. I understand the benefits of low mortgage rates, but it is still a debt that will never go away. Money markets and investments can go up or down but I would always have a debt to pay while I have a mortgage.

Your emotions are what they are. Again, by doing this you get a late start on investing and probably end up with a lot less at retirement. Is that frugal?[/quote]


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Re: Is [this] a stupid idea? - Extreme mortgage payoff

Postby 325e » Fri Feb 08, 2013 5:23 pm

Default User BR wrote:
MNwildcat wrote:This has been an very interesting topic. I must be in the minority, I too have been aggressively paying down my mortgage. I have a 2.75% 5/1 ARM that I am 13 months into and it is our only debt. I just turned 36 and have been paying an extra $30K towards the principle the last two January's. I will have it paid off on my 40th birthday. I max out my 401k (currently $340K in value), will have a defined contribution pension plan from my employer, my wife's teacher retirement account, plus put in $300/month toward 529 plans (three children, oldest will be in college in 10 years).

Have you ever looked at the calculators that show the effect of not investing in your younger years? How the compounding works for you that way? How much it takes to catch up starting later?

MNwildcat wrote:1. I have been relocated for work within the same company on average every 3-4 years. In the event that we transfer again, I never want to be underwater in the home that I am leaving. I guess this thinking has led me to believe that if I have no mortgage, then I never have to worry about this plus I will feel confident that housing values will/should correlate with my exisiting home and the future home. At this point, I have 50% equity in our current home.

But you don't have to be pre-paid. Just sell the house for what you can. If that's less than the mortgage amount you bring some cash to the table.

MNwildcat wrote:2. Emotionally, I hate having a mortgage. I would rather live as frugually as what my wife will allow, pay off all debt as soon as possible. Once it is paid off, I would use these former payments as principle for investing. I understand the benefits of low mortgage rates, but it is still a debt that will never go away. Money markets and investments can go up or down but I would always have a debt to pay while I have a mortgage.

Your emotions are what they are. Again, by doing this you get a late start on investing and probably end up with a lot less at retirement. Is that frugal?



Brian[/quote]

Yes, but you see that MNwildcat is investing, right? He maxes out 401k, has $340k in there, has a pension, retirement account, and 529. It is not an either - or, so much as that he is saving a lot of money, investing a lot, and putting some more towards the mortgage.
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Re: Is [this] a stupid idea? - Extreme mortgage payoff

Postby madbrain » Sat Feb 09, 2013 2:05 am

325e wrote:Yes, but you see that MNwildcat is investing, right? He maxes out 401k, has $340k in there, has a pension, retirement account, and 529. It is not an either - or, so much as that he is saving a lot of money, investing a lot, and putting some more towards the mortgage.


Indeed, and that is quite different from the op's suggestion to stop all retirement contributions in favor of prepaying the mortgage.
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Re: Is [this] a stupid idea? - Extreme mortgage payoff

Postby steve r » Sat Feb 09, 2013 11:15 am

I would not recommend it ... BUT IF YOU ARE INCLINED TO DO SO ...

refinance (see AIMLOAN or AMERSIAVE ... each will give you exact closing cost estimates ), you will probably get a lower rate .... keep cost low and payoff everything you can at the close ... you will lock in lower payments at that time .... then rebuild your emergency fund ... quickly at first (reduce SOME retirement contributions) ... less quickly if you gain certainty on employment extension (that is more for retirement).

Also, I would bring down your 529 contributions ... if you are working when kids are in school, you can afford it ... if you are not ... you cannot afford a high priced college without financial aid (which will partially be reduced because of the 529).
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Re: Is [this] a stupid idea? - Extreme mortgage payoff

Postby MNwildcat » Sat Feb 09, 2013 1:55 pm

True that I am still saving while paying down, I front load the first have of the year with a much higher 401K contribution percentage. The remaining money pays the monthly bills. My wife's income goes into savings. After 7-8 months, I have maxed out my 401K and what is left goes into savings for the remainder of the year. At the end of the year, we evaulate how much from savings we want to put towards the principal of the home loan.

Both of our careers are very stable and the thought of having my home paid for at the age of 40 with 20 more years of 401k contributions and approximately 40K-45K of yearly investing purchasing power would mean we would be saving approximately 50% X 20 years of our income for a fourth or fifth leg to our retirement portfolio when I am 60 with NO DEBT would be awesome.

I hope I didn't hijack the OP's topic, but wanted to put my two cents in as well. Thanks for everyone's comments!!

Robb
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Re: Is [this] a stupid idea? - Extreme mortgage payoff

Postby viking112347 » Tue Feb 19, 2013 8:17 pm

After giving it some thought I have decided to continue to max out all tax-deferred space (401K,ROTH).

However, still wanting to accelerate the payoff of my mortgage which of the options below would be preferred:

1) Kickstart mortgage payoff with initial 40,000 principal payment (leaving ~50,000 for emergency fund) and then just systematically pay extra principal payments every month. I think I could realistically pay an additional 2500-3000 per month. This would payoff the mortgage end of 2019 (assuming extra 2750/month)

2) Fund a Vanguard Total Stock Market fund with the 40,000 kickstart and then systematically invest the 2500-3000 each month until at some point in the future the account balance >= mortgage balance. This approach would ensure liquidity if needed for some catastrophic reason and would 'likely but surely but not guaranteed' earn more than my mortgage rate over a number the next 6-7 years.

I am sure neither of these options would be considered ideal but would still appreciate any input!

Thanks
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Re: Is [this] a stupid idea? - Extreme mortgage payoff

Postby epilnk » Tue Feb 19, 2013 8:54 pm

viking112347 wrote:After giving it some thought I have decided to continue to max out all tax-deferred space (401K,ROTH).

However, still wanting to accelerate the payoff of my mortgage which of the options below would be preferred:

1) Kickstart mortgage payoff with initial 40,000 principal payment (leaving ~50,000 for emergency fund) and then just systematically pay extra principal payments every month. I think I could realistically pay an additional 2500-3000 per month. This would payoff the mortgage end of 2019 (assuming extra 2750/month)

2) Fund a Vanguard Total Stock Market fund with the 40,000 kickstart and then systematically invest the 2500-3000 each month until at some point in the future the account balance >= mortgage balance. This approach would ensure liquidity if needed for some catastrophic reason and would 'likely but surely but not guaranteed' earn more than my mortgage rate over a number the next 6-7 years.

I am sure neither of these options would be considered ideal but would still appreciate any input!

Thanks

Why not do both? There really isn't any need to commit all of your resources to one or the other. Paying down your mortgage is a risk free return of (tax adjusted) 3.625% and a predictable payoff date - this is good. Putting surplus funds into TSM gives you liquidity, a level of risk you can easily afford to take, and an earlier payoff date if investments return above (tax adjusted) 3.625% - this is also quite good. So either option is fine but you can also split the difference, or do first one then the other, or vary it depending on the month's cashflow. I highly value liquidity myself and contributed more to the taxable portfolio, but I also put an additional amount toward the mortgage most months until we reached the point where it made sense to just retire the whole thing.

SwampDonkey wrote:Being fully paid off in 5 years?!?!?!? Man, that would just feel amazing and completely change one's outlook on how much they now needed to earn to live the lifestyle they wanted to.

I've heard many people say things like this. I'm sure it does feel amazing to people who have this as a major goal. But we did not feel anything when we paid ours off. Nothing really changed.
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Re: Is [this] a stupid idea? - Extreme mortgage payoff

Postby Grt2bOutdoors » Tue Feb 19, 2013 10:27 pm

viking112347 wrote:After giving it some thought I have decided to continue to max out all tax-deferred space (401K,ROTH).

However, still wanting to accelerate the payoff of my mortgage which of the options below would be preferred:

1) Kickstart mortgage payoff with initial 40,000 principal payment (leaving ~50,000 for emergency fund) and then just systematically pay extra principal payments every month. I think I could realistically pay an additional 2500-3000 per month. This would payoff the mortgage end of 2019 (assuming extra 2750/month)

2) Fund a Vanguard Total Stock Market fund with the 40,000 kickstart and then systematically invest the 2500-3000 each month until at some point in the future the account balance >= mortgage balance. This approach would ensure liquidity if needed for some catastrophic reason and would 'likely but surely but not guaranteed' earn more than my mortgage rate over a number the next 6-7 years.

I am sure neither of these options would be considered ideal but would still appreciate any input!

Thanks


Option 1 with a slight modification: Open a Intermediate Tax Exempt or Long Term Tax Exempt fund - save your $40K (kickstart) until 2015 when you have more clarity on the state of your employment. Make extra principal payments into your tax-exempt fund, pay down mortgage in 2019.
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Re: Is [this] a stupid idea? - Extreme mortgage payoff

Postby JamesSFO » Tue Feb 19, 2013 11:03 pm

I do feel like some of this is trying to sort out debt snowball (pay smallest credit card BALANCES first to get the wins of paying off some) vs. pay highest interest rate first. The math does not tell the whole story, there are different behavioral aspects to each.

Same thing here, I think the OP's revised plan options are both more reasonable sides of the same coin.
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