Partial mortgage payoff, consolidation

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herennow
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Joined: Mon Mar 06, 2017 6:46 pm

Partial mortgage payoff, consolidation

Post by herennow » Mon Mar 20, 2017 12:03 pm

Looking for some help. We have the resources to pay off a 170k, 28 yr@ 4.13%. Current house seems small and we want to buy a slightly bigger house for our needs in the future, within the next year or two. We will be selling the current house if we find the bigger house. We are in the 15% income tax bracket. After doing taxes this year, it seems like the tax deduction on mortgage did not help much, and standard deduction is about the same amount.

1. The first question is, does a partial mortgage payoff make sense in this situation. We would like to have enough money to make a downpayment on the new house, but would like to also stop the bleeding on the mortgage interest that we seem to be paying month after month with no real benefit. Our resources are currently parked in a checking account (smh) earning 1%. Also, this amount is separate from investment accounts.

2.The second question is, should we consolidate our accounts. RIght now we have retirement accounts with one, taxable with another, and a separate brokerage acct. Plus 4 bank accts. We want to bring this down to four in all, but get pulled back whenever we hear of hacking like the one at yahoo.

herennow
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Joined: Mon Mar 06, 2017 6:46 pm

Re: Partial mortgage payoff, consolidation

Post by herennow » Mon Mar 20, 2017 1:19 pm

*bump*

mortfree
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Re: Partial mortgage payoff, consolidation

Post by mortfree » Mon Mar 20, 2017 1:35 pm

I am not an expert but maybe my reply will trigger more replies... even if it is just someone telling me I'm wrong :D

1. personally, if I were moving in the next year or two I would rather have the cash in my account rather than tied up in the house. If for some reason your house is slow to sell, you still have a down payment and cash in your hands to make an offer (consult an expert on whether any of that is really true).

2. Number of accounts. taxable and brokerage sound like they could be combined (?). 4 bank accounts could probably be consolidated, assuming FDIC backing isn't exceeded if you combine accounts. For comparison, I have the following separate accounts: 401k account, Roth/Taxable account, Credit Union Account, and Online Savings account.

bloom2708
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Re: Partial mortgage payoff, consolidation

Post by bloom2708 » Mon Mar 20, 2017 1:49 pm

What is your current home worth compared to what you owe? After paying for the fees of selling, that will leave you with $X.

Does $X + cash you have equal enough to put 20% down on your next house?

If you are one year away, I would just pile up cash. If you owe $170k and the home is worth $175k, then we have a different story. You would have to bring money to the table to pay for your closing costs.

Start running some numbers and look at how much you need to have down. If you have $170k cash sitting in a bank account making .1% and it is not intended to be invested, then I would consider paying down/off the current house to save 1 year worth of interest.
Last edited by bloom2708 on Tue Mar 21, 2017 10:11 am, edited 1 time in total.
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hand
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Re: Partial mortgage payoff, consolidation

Post by hand » Mon Mar 20, 2017 1:55 pm

Partial payment of existing mortgage is almost certainly a good thing. You give up receiving 1% interest, but stop paying 4% interest. Excluding tax implications (likely minimal), you realize a net 3% annual return on whatever you prepay with virtually no risk.

A couple items to consider when determining how much you prepay:

1) Make sure you keep a downpayment for the new house in cash (as you noted)
2) Any chance you'd want to overpay vs. appraised value on new house? If so, you'd likely need more cash on hand to cover the portion you can't mortgage
3) Any risk of carrying to mortgages (new and old house) concurrently? If so, you should probably keep some extra cash on hand to cover.
4) After you buy new & sell old, what is your desired debt level on the new house? Will you have extra cash sitting around from sale of old house that you'd want to use to pay down mortgage? Would it be better if you had this cash on hand in the first place and just borrowed less (e.g. lower monthly payment).
5) Is there a benefit to all / mostly cash buyers in your desired neighbourhood?

herennow
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Re: Partial mortgage payoff, consolidation

Post by herennow » Mon Mar 20, 2017 2:03 pm

Thank you for your replies.

Have a 30% equity in the house. House will sell for buying price + some, it is a pretty hot market now, but I am aware things could change in the next year. But don't anticipate paying more than what is owed.

We may split the cash reserve to partially payoff the mortgage, and keep saving the rest for dp.

Grt2bOutdoors
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Re: Partial mortgage payoff, consolidation

Post by Grt2bOutdoors » Mon Mar 20, 2017 2:07 pm

herennow wrote:Thank you for your replies.

Have a 30% equity in the house. House will sell for buying price + some, it is a pretty hot market now, but I am aware things could change in the next year. But don't anticipate paying more than what is owed.

We may split the cash reserve to partially payoff the mortgage, and keep saving the rest for dp.


What ever you prepay will reduce your liability dollar for dollar, what it will not guarantee you is the price you receive at the time of closing on sale. So, if you prepay $100K, you will save X thousands in interest expense. If you can not sell the home for some reason, what you have now, is loss of liquidity, turning cash into illiquid real estate. That is the risk.
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Epsilon Delta
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Re: Partial mortgage payoff, consolidation

Post by Epsilon Delta » Mon Mar 20, 2017 4:39 pm

Keeping cash for the new purchase only make sense if it is possible if you will be in a good enough position to finance two houses at once. For many people no matter what they do they are not going to be able to qualify for two mortgages or a bridging loan, so any purchase has to be contingent on a sale. In that case there is no advantage to holding cash v. part paying the old mortgage, and paying the old mortgage saves 3% or so in interest.

Luke Duke
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Re: Partial mortgage payoff, consolidation

Post by Luke Duke » Tue Mar 21, 2017 10:03 am

herennow wrote:Thank you for your replies.

Have a 30% equity in the house. House will sell for buying price + some, it is a pretty hot market now, but I am aware things could change in the next year. But don't anticipate paying more than what is owed.

We may split the cash reserve to partially payoff the mortgage, and keep saving the rest for dp.


This will also be true with the new house. You may have to pay more than asking/appraisal value. Keep some extra cash for closing.

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