Pay off mortgage immediately? Or keep plugging along?

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62nc
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Pay off mortgage immediately? Or keep plugging along?

Post by 62nc » Mon Jun 27, 2016 4:21 pm

I know this probably gets asked a ton, but just looking for advice and general poll on my specific situation. Every few months I look at stuff and think, well crap I could just pay this off and be done with it. It would increase monthly available cash by $1450, I could begin throwing more at investing, college savings for kids, home repair that needs to happen, giving to others (important to us), vacations (important to us), and so on. I would like to think I'd be one of those that would be super disciplined and completely invest the new cash flow, but if I am realistic I think it would be only partially diverted to that; it would prob be split amongst the list above.

Or - At my current payoff rate, if I keep the mortgage I can pay off at age 45 when my oldest goes to college but then that cash flow essentially will divert to college. For two kids. For a 7 year window. :|

In a "normal" month right now we typically have about $600-1200 on top that we toss into savings. So with $1450 increase in cash flow + normal overage, we'd have about $2-2.6K/mo of margin to play with.

So - do I take the large pot of cash ($115K) sitting there and put nearly all of it on the mortgage ($108K) and kill it? That would leave just $8K in savings but I could quickly build that back up to ~$20K in about 5 months for emergencies. Or hold tight to my pay-off-by-45 plan?

Basics
    Age: 39
    Marital: Married
    Household income: $150K
    Kids: two...one elementary, one middle school
    Mortgage payment: $1100
    Extra already putting towards mortgage: $375

Debts
Current mortgage: $107K
House value: around $275-295K

Liquid Assets: roughly $300-305K
    Savings (cash): $115K --- unusually high due to my decision paralysis and some bonuses
    401K: $90K ----- now contributing max of $18K/year
    Roth: $51K ----- contributing max of $5.5K/year
    Spouse Roth: $6K -----just started in early 2016. now contributing max of $5.5K/year
    Trad. IRA rollover: $12K ---- just sitting there
    Past employment spouse acct: $13K ---- just sitting there
    Child1 529: $9K ---- $1500/yr until house paid off
    Child2 529: $6K ---- $1500/yr until house paid off

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timboktoo
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by timboktoo » Mon Jun 27, 2016 6:16 pm

Well, this is a very personal decision and you're right that it gets asked a lot.

I wrote a check a few months ago for $19,000 to basically finish off my mortgage. And then my A/C unit went out and I had to buy a new unit for $5,000. That cleaned out my savings and checking. I went down to zero.

So, my advice would be to maintain a 6 month emergency fund and, assuming you are already investing what you'll need for retirement, put the remaining money to work in the way that brings you the greatest happiness.

- Tim

delamer
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by delamer » Mon Jun 27, 2016 6:26 pm

What is the interest rate on your mortgage?

Ron Ronnerson
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by Ron Ronnerson » Mon Jun 27, 2016 6:34 pm

It may be helpful to know the rate and term of the loan and whether or not you are able to get a tax deduction on any of the interest. Based on how much you have saved in retirement accounts and your age, my first impression (without knowing the terms of your mortgage) would be to keep the loan and direct some of the money toward retirement, particularly if there is tax-advantaged space available. If unavailable, I still might just invest in a taxable account rather than pay the loan faster if the rate is good. If the rate is low enough, I'd probably stop paying anything extra on the mortgage and direct that toward investing as well. It is a personal decision, of course, and depends on various factors including not only the specifics of your loan but also your feelings toward having debt.

Lou354
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by Lou354 » Mon Jun 27, 2016 6:34 pm

Another factor to consider is how reliable and steady your income is. Also whether you are a single income or double income family.

62nc
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by 62nc » Mon Jun 27, 2016 6:48 pm

Answering some of the questions here....

Loan specifics
    Original loan: $157K
    15 year, started in 2012 (4 years in), original payoff scheduled 2027
    Already been paying early, at current rate 2022 is payoff
    3.25%
    I can deduct the interest. However, there is only about $3400 interest/year projected this year that will be paid bc of loan term, amount owed, & rate.

I don't think I have any tax-advantaged space left but maybe I've missed something. I'm maxing 401k at 18K, and both my & wife's roth at $5500/year. With employer match (4%) and roths, this is about $35K in tax-advantage space.

We are single income right now, potential for small 2nd income in the next few years.

I do get the math side of the argument for keeping. But there has to be something said for the emotion/freedom side of not keeping as well right?

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Toons
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by Toons » Mon Jun 27, 2016 6:49 pm

Pay it off.
You won't have to think about it again.
Good to know you can rebuild the savings.
:happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

KlangFool
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by KlangFool » Mon Jun 27, 2016 6:59 pm

OP,

Please note that if you pay off the house, you are "House Poor". 300+K is tied to the house. You only have 305 -115 = 190K of asset elsewhere. Are you comfortable with that? That is a lot of eggs in one single basket.

KlangFool

Ron Ronnerson
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Location: Bay Area

Re: Pay off mortgage immediately? Or keep plugging along?

Post by Ron Ronnerson » Mon Jun 27, 2016 7:07 pm

62nc wrote:I do get the math side of the argument for keeping. But there has to be something said for the emotion/freedom side of not keeping as well right?


Right. That's why the answer is personal. Everyone is different. Based on what you've stated, if I was in your situation, I'd keep the mortgage but possibly look at refinancing as rates have been coming down. Instead of directing it toward the mortgage, I'd invest a portion of the money I had in savings and keep the rest as an emergency fund.

delamer
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by delamer » Mon Jun 27, 2016 7:10 pm

You didn't address how secure your income is, which is an important factor.

If the only savings you have earmarked for college are the two 529 accounts (plus the annual savings into those), that is pretty low give n your kids' ages. Did you mean that you have 7 years until your oldest starts college? I guess you might be able to pay for an instate school out if current income if your mortgage us paid off by then.

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darkhorse346
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by darkhorse346 » Mon Jun 27, 2016 7:12 pm

Toons wrote:Pay it off.
You won't have to think about it again.
Good to know you can rebuild the savings.
:happy


I second Toons, with a slight modification. Build up enough savings so that after you write the big check, you've still got enough cash to handle A/Cs going out, major car repairs, etc.

Pay it off...well done! :beer

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celia
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by celia » Mon Jun 27, 2016 7:20 pm

62nc wrote:Answering some of the questions here....

Original loan: $157K
15 year, started in 2012 (4 years in), original payoff scheduled 2027 <--this is a fast payoff to begin with
Already been paying early, at current rate 2022 is payoff <-- and you are already bringing it down faster
I do get the math side of the argument for keeping. But there has to be something said for the emotion/freedom side of not keeping as well right?

I think you are already enjoying the emotional/freedom side of being free of that loan. But mortgages are GOOD LOANS to have. By overdoing it, you are depriving yourself of other investing opportunities that come along. I assume you know how compounding works. Put the available cash that is burning a hole in your pocket into an investment(s) that matches your risk tolerance and just let that compounding grow. That will likely grow faster than the value of your house (if you should think of the house as an investment).
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

Dave55
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Location: Colorado

Re: Pay off mortgage immediately? Or keep plugging along?

Post by Dave55 » Mon Jun 27, 2016 7:22 pm

Being debt free is very liberating. Pay it off.

Dave

10YearPlan
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by 10YearPlan » Mon Jun 27, 2016 7:35 pm

Normally I am a bit more torn on this. 9 out of 10 times the math says keep the mortgage but I totally get why the person would want to pay it off and can easily be swayed. But in your case, I think it is clear that keeping the mortgage, at least for now, is the right move. For one, you are already chipping away at it rather aggressively, so an early payoff is in sight regardless. But mostly because I would not want all my eggs in that basket, which will definitely be the case if you pay it off now. In your shoes, I would throw the extra money at college savings and taxable investments for retirement and revisit in another 2-3 years.
62nc wrote:I know this probably gets asked a ton, but just looking for advice and general poll on my specific situation. Every few months I look at stuff and think, well crap I could just pay this off and be done with it. It would increase monthly available cash by $1450, I could begin throwing more at investing, college savings for kids, home repair that needs to happen, giving to others (important to us), vacations (important to us), and so on. I would like to think I'd be one of those that would be super disciplined and completely invest the new cash flow, but if I am realistic I think it would be only partially diverted to that; it would prob be split amongst the list above.

Or - At my current payoff rate, if I keep the mortgage I can pay off at age 45 when my oldest goes to college but then that cash flow essentially will divert to college. For two kids. For a 7 year window. :|

In a "normal" month right now we typically have about $600-1200 on top that we toss into savings. So with $1450 increase in cash flow + normal overage, we'd have about $2-2.6K/mo of margin to play with.

So - do I take the large pot of cash ($115K) sitting there and put nearly all of it on the mortgage ($108K) and kill it? That would leave just $8K in savings but I could quickly build that back up to ~$20K in about 5 months for emergencies. Or hold tight to my pay-off-by-45 plan?

Basics
    Age: 39
    Marital: Married
    Household income: $150K
    Kids: two...one elementary, one middle school
    Mortgage payment: $1100
    Extra already putting towards mortgage: $375

Debts
Current mortgage: $107K
House value: around $275-295K

Liquid Assets: roughly $300-305K
    Savings (cash): $115K --- unusually high due to my decision paralysis and some bonuses
    401K: $90K ----- now contributing max of $18K/year
    Roth: $51K ----- contributing max of $5.5K/year
    Spouse Roth: $6K -----just started in early 2016. now contributing max of $5.5K/year
    Trad. IRA rollover: $12K ---- just sitting there
    Past employment spouse acct: $13K ---- just sitting there
    Child1 529: $9K ---- $1500/yr until house paid off
    Child2 529: $6K ---- $1500/yr until house paid off

62nc
Posts: 17
Joined: Mon Jun 27, 2016 3:34 pm

Re: Pay off mortgage immediately? Or keep plugging along?

Post by 62nc » Mon Jun 27, 2016 10:20 pm

The income is steady and secure, no fluctuation other than upward for 10 years.

delamer wrote:You didn't address how secure your income is, which is an important factor.

If the only savings you have earmarked for college are the two 529 accounts (plus the annual savings into those), that is pretty low give n your kids' ages. Did you mean that you have 7 years until your oldest starts college? I guess you might be able to pay for an instate school out if current income if your mortgage us paid off by then.

62nc
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Joined: Mon Jun 27, 2016 3:34 pm

Re: Pay off mortgage immediately? Or keep plugging along?

Post by 62nc » Mon Jun 27, 2016 10:35 pm

So I don't quite get the all eggs in one basket fears - two things....

1) won't this (in the near term) be the case no matter when I pay my house off? The ratio of home equity to investments for me I don't see drastically changing until 5+ years from now. It's roughly $190 vs $300 right now (equity vs liquid). I would just simply swap the numbers, $300 vs $190 (equity vs liquid). And that ratio would come back even after 3 years with 401k+roth+roth alone ($105k), and that doesn't include the extra taxable that I'd have made available to invest. What ratio would be considered good to those thinking it is an all-eggs-in-one-basket problem?

2) In 2008 my area took about a 10% hit in real estate (eyeballing from zillow). Stock market corrections are much more volatile. Heck, with Brexit, we may lose 10% by the end of the week. The house basket is a single basket but it feels pretty safe. If I put all my eggs in the other basket (stocks), that feels like a shakier basket swaying from side to side with every election, referendum, or world issue.

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Watty
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by Watty » Mon Jun 27, 2016 10:43 pm

I am very pro "pay off the house" and I recently paid mine off but you would be too short on cash if you pay it off now. You are doing great right now but you need to watch out for "Murphys law" hitting when you are short of cash.

An alternative would be to contact your lender and see if they will "recast your mortgage" (google this) if you make a large payment. They are not required to do this but many will and only charge a couple of hundred dollars in processing fees.

If they will then you could could pay off half the mortgage and that would also cut your required mortgage payment in half. (or whatever percent you want) You could then pay of the rest in a couple of years if it makes sense then.

Your comments about being able to spend more on things like vacations and home repairs if you pay off the mortgage doesn't hold water since you can pay for those out of your cash savings.

SRenaeP
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by SRenaeP » Tue Jun 28, 2016 6:46 am

I would put all cash minus six months expenses into the mortgage. Consider refi'ing into a 10 year mortgage as well to lower your interest rate. Third Federal is at 2.5% right now.

-Steph

10YearPlan
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by 10YearPlan » Tue Jun 28, 2016 7:02 am

62nc wrote:So I don't quite get the all eggs in one basket fears - two things....

1) won't this (in the near term) be the case no matter when I pay my house off? The ratio of home equity to investments for me I don't see drastically changing until 5+ years from now. It's roughly $190 vs $300 right now (equity vs liquid). I would just simply swap the numbers, $300 vs $190 (equity vs liquid). And that ratio would come back even after 3 years with 401k+roth+roth alone ($105k), and that doesn't include the extra taxable that I'd have made available to invest. What ratio would be considered good to those thinking it is an all-eggs-in-one-basket problem?

2) In 2008 my area took about a 10% hit in real estate (eyeballing from zillow). Stock market corrections are much more volatile. Heck, with Brexit, we may lose 10% by the end of the week. The house basket is a single basket but it feels pretty safe. If I put all my eggs in the other basket (stocks), that feels like a shakier basket swaying from side to side with every election, referendum, or world issue.


I would not be comfortable with $8k in liquid non-retirement savings, two kids, and two college educations looming. Regardless of what the markets are doing. I'd throw all the extra money at building up my non-retirement assets, including 529s for a few more years before revisiting.

tampaite
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by tampaite » Tue Jun 28, 2016 7:02 am

62nc wrote:So - do I take the large pot of cash ($115K) sitting there and put nearly all of it on the mortgage ($108K) and kill it? That would leave just $8K in savings but I could quickly build that back up to ~$20K in about 5 months for emergencies.


My vote to kill it esp. since you have decision paralysis. Owning your home debt-free sooner is better.

In 5 months, you'll thank yourself once you have a house paid off and with ~20K in savings.

Chadnudj
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by Chadnudj » Tue Jun 28, 2016 7:21 am

62nc wrote:Answering some of the questions here....

Loan specifics
    Original loan: $157K
    15 year, started in 2012 (4 years in), original payoff scheduled 2027
    Already been paying early, at current rate 2022 is payoff
    3.25%
    I can deduct the interest. However, there is only about $3400 interest/year projected this year that will be paid bc of loan term, amount owed, & rate.

I don't think I have any tax-advantaged space left but maybe I've missed something. I'm maxing 401k at 18K, and both my & wife's roth at $5500/year. With employer match (4%) and roths, this is about $35K in tax-advantage space.

We are single income right now, potential for small 2nd income in the next few years.

I do get the math side of the argument for keeping. But there has to be something said for the emotion/freedom side of not keeping as well right?


You mention the 2 529s for your children, but $1500 a year is probably not "maxing this space out" which may help depending on your state income taxes. Before paying off the house I'd consider beefing up the 529 contributions, since you are 7 years out from college.

Also, I don't think this is quite as easy as just looking at the mortgage loan interest rate. There's also the financial aid aspect for when your kids go to school -- will not having a mortgage affect the financial aid formulas for your kids, causing you to pay more for their education than you would have been required to if you did not have a mortgage? I'm not entirely conversant in that area, so it's something you should probably discuss with someone experienced in how financial aid works at colleges (or just do some online research, or ask the Bogleheads here). 7 years away from kids being in college is certainly close enough to make this a factor in your planning.

mmcmonster
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by mmcmonster » Tue Jun 28, 2016 7:32 am

Dave55 wrote:Being debt free is very liberating. Pay it off.

Dave


Agree 100%. I have the sleep of the just, knowing that the house is paid off. My mortgage interest rate was 3.5%, so I considered paying it off like a guaranteed 3.5% return on my money.

If your income stream really is secure (if so, congratulations!), 6 months emergency money in cash isn't really needed. If there's an emergency that can be covered by your credit cards, that will cover you until you can pay off your cards.

I keep less than one month worth of income in my cash account and invest everything else. And with little monthly bills, the investment account balance has been tilting up the last couple years. :D

Texanbybirth
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by Texanbybirth » Tue Jun 28, 2016 8:02 am

darkhorse346 wrote:
Toons wrote:Pay it off.
You won't have to think about it again.
Good to know you can rebuild the savings.
:happy


I second Toons, with a slight modification. Build up enough savings so that after you write the big check, you've still got enough cash to handle A/Cs going out, major car repairs, etc.

Pay it off...well done! :beer


+1

sounds like you can easily pay it off this year, if not immediately, given the caveat to keep an emergency savings buffer.

Congrats! :beer

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Solair of Astora
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by Solair of Astora » Tue Jun 28, 2016 8:13 am

Watty wrote:I am very pro "pay off the house" and I recently paid mine off but you would be too short on cash if you pay it off now. You are doing great right now but you need to watch out for "Murphys law" hitting when you are short of cash.

An alternative would be to contact your lender and see if they will "recast your mortgage" (google this) if you make a large payment. They are not required to do this but many will and only charge a couple of hundred dollars in processing fees.

If they will then you could could pay off half the mortgage and that would also cut your required mortgage payment in half. (or whatever percent you want) You could then pay of the rest in a couple of years if it makes sense then.

Your comments about being able to spend more on things like vacations and home repairs if you pay off the mortgage doesn't hold water since you can pay for those out of your cash savings.



I agree with the above highlighted. Do a little of both by paying down and lowering your payment. Heck, even if they won't recast the mortgage and you were forced to re-financed you would still have a quick payback on the saved interest.

If I were you I'd put 55k on the mortgage, 10k on the home repairs you said you needed to do (no idea what needs to be done), and keep the remaining ~40k in savings as your emergency fund.

If you refinance to a 10yr mortgage @ 52k and continue to put the $375 extra on it you're looking at about
- cutting the payment about $600 a month
- still paying it off at about age 44-45
- still having a flush emergency fund
- still being able to pay it off at any time if you don't like the mortgage
- still having the flexibility to cut the $375 extra payment out in case you have something you wanted/needed to divert that money to.
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KlangFool
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by KlangFool » Tue Jun 28, 2016 8:34 am

62nc wrote:So I don't quite get the all eggs in one basket fears - two things....

1) won't this (in the near term) be the case no matter when I pay my house off? The ratio of home equity to investments for me I don't see drastically changing until 5+ years from now. It's roughly $190 vs $300 right now (equity vs liquid). I would just simply swap the numbers, $300 vs $190 (equity vs liquid). And that ratio would come back even after 3 years with 401k+roth+roth alone ($105k), and that doesn't include the extra taxable that I'd have made available to invest. What ratio would be considered good to those thinking it is an all-eggs-in-one-basket problem?

2) In 2008 my area took about a 10% hit in real estate (eyeballing from zillow). Stock market corrections are much more volatile. Heck, with Brexit, we may lose 10% by the end of the week. The house basket is a single basket but it feels pretty safe. If I put all my eggs in the other basket (stocks), that feels like a shakier basket swaying from side to side with every election, referendum, or world issue.


62nc,

House is illiquid. You have to sale the WHOLE HOUSE or take a home equity loan in order to get the money out. If you need 10K, you can sell some of the stock to get it. But, how do you get 10K out of the house?

1) You are 39 years old. In many professions, after 40, age discrimination causes job security to disappear.

2) You have 2 kids going to college in 7 years. You only have 9K in each kid's 529. You only have 190K worth of asset now. Conservatively, we are looking at 30K per kid per year. So, it is about 240K of college expenses. So, are you going to take a student loan to cover your children's college expenses? Student loan's interest rate is much higher than mortgage interest. Regardless of whether you pay off the mortgage or not, you are looking at 240K worth of expenses coming in 7 years.

<< Heck, with Brexit, we may lose 10% by the end of the week. The house basket is a single basket but it feels pretty safe. If I put all my eggs in the other basket (stocks), that feels like a shakier basket swaying from side to side with every election, referendum, or world issue.>>

3) So? It could go back up again. And, if you need 10K, you sell 10K worth of stock and take the 1K loss. Compare this to THE HOUSE. If you need to sell THE HOUSE and THE HOUSE is down 10%, you lose 30K. Which is WORSE? 1K loss or 30K loss?

4) House in my area had not recovered from 2004/2005 level even with the recent gain of 10% to 20%. Please note that housing price could stay down for a very long time. In this case, it had been 11 to 12 years.

<<2) In 2008 my area took about a 10% hit in real estate (eyeballing from zillow).>>

5) Had it recovered? How does the price compare to the 2004/2005 level? Is it still down after 11/12 years?

KlangFool

Ryanlion8506
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by Ryanlion8506 » Tue Jun 28, 2016 9:24 am

Well, I completely understand all sides stated here. At the end of the day you have to do what puts you at peace and lowers stress in life, which might extend life. No one ever talks about that my friend. Sounds like this is weighing heavy, so listen to your gut. Math is great, but either way you are in sound financial shape regardless of what anyone here says. I agree completely with those who said get the 6 month savings emergency cushion and then kill it! Maybe since you have a secure income, a 3 month cushion would be fine and build to 6 after paying off house. As far as college, I was raised in a family where it was understood you work and help with that. Nothing at all wrong with community college first year and then transfer to any University you choose.

To the person who said loans, not his responsibility to take those out, I strongly disagree there. Save what you can in 529 and then cash flow what you can, I guarantee both kids make it!

You have a great plan, congrats on the results of hard work and perseverance.

62nc
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by 62nc » Tue Jun 28, 2016 9:25 am

KlangFool, thanks. Answers below...

House is illiquid. You have to sale the WHOLE HOUSE or take a home equity loan in order to get the money out. If you need 10K, you can sell some of the stock to get it. But, how do you get 10K out of the house?
----I would probably have a HELOC sitting there and take a 10K draw if an emergency arose and was still rebuilding cash pile.

1) You are 39 years old. In many professions, after 40, age discrimination causes job security to disappear.
----Unfortunate, but fair point. In my particular situation I feel secure but understand what you're saying.

2) You have 2 kids going to college in 7 years. You only have 9K in each kid's 529. You only have 190K worth of asset now. Conservatively, we are looking at 30K per kid per year. So, it is about 240K of college expenses. So, are you going to take a student loan to cover your children's college expenses? Student loan's interest rate is much higher than mortgage interest. Regardless of whether you pay off the mortgage or not, you are looking at 240K worth of expenses coming in 7 years.
----Right - the absence of a mortgage payment was what I had planned on fueling this when the time came. I can shed the mortgage now and throw more at college. Or shed the mortgage later and divert the former mortgage $ to college.


<<2) In 2008 my area took about a 10% hit in real estate (eyeballing from zillow).>>

5) Had it recovered? How does the price compare to the 2004/2005 level? Is it still down after 11/12 years?
----Looks like recovered around 2012 (again just eyeballing). I happened to get in a good deal when I purchased in 2007 I got the house for 215K, zillow says 290K now.

Dulocracy
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by Dulocracy » Tue Jun 28, 2016 9:35 am

Ok, so you have $115,000 sitting in cash wasting away... inflation whittling away your asset. We need to fix that.

First, subtract your emergency fund. You stated $20,000, so I will use that.

This leaves you with $95,000. It would be better to throw that in the mortgage than let it sit in cash. It would be better still (with your time horizon) to put it in stocks (especially since the market is down.... yes, I know, market timing, blah blah blah... Stocks are CHEAP right now.) It would be prudent to maintain your asset allocation, however.

Let us presume your asset allocation is age in fixed income. You are 39 years old. Your mortgage is a loan to you. Pay down your mortgage with 39% of that cash and keep plugging away. Put the 61% of cash into stock funds (60 US/ 40 Intl split.... or whatever split you have chosen).

So:
Keep $20,000 in emergency funds.
Put $37,050 into your mortgage.
Put $57,950 into stocks.

Important afternote: because you are using part of your fixed income allocation to pay down the mortgage, it is important to recapture that money by paying your monthly mortgage amount into fixed income when the mortgage is paid off until you are back into balance.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

KlangFool
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by KlangFool » Tue Jun 28, 2016 9:40 am

62nc wrote:KlangFool, thanks. Answers below...

House is illiquid. You have to sale the WHOLE HOUSE or take a home equity loan in order to get the money out. If you need 10K, you can sell some of the stock to get it. But, how do you get 10K out of the house?
----I would probably have a HELOC sitting there and take a 10K draw if an emergency arose and was still rebuilding cash pile.

1) You are 39 years old. In many professions, after 40, age discrimination causes job security to disappear.
----Unfortunate, but fair point. In my particular situation I feel secure but understand what you're saying.

2) You have 2 kids going to college in 7 years. You only have 9K in each kid's 529. You only have 190K worth of asset now. Conservatively, we are looking at 30K per kid per year. So, it is about 240K of college expenses. So, are you going to take a student loan to cover your children's college expenses? Student loan's interest rate is much higher than mortgage interest. Regardless of whether you pay off the mortgage or not, you are looking at 240K worth of expenses coming in 7 years.
----Right - the absence of a mortgage payment was what I had planned on fueling this when the time came. I can shed the mortgage now and throw more at college. Or shed the mortgage later and divert the former mortgage $ to college.


<<2) In 2008 my area took about a 10% hit in real estate (eyeballing from zillow).>>

5) Had it recovered? How does the price compare to the 2004/2005 level? Is it still down after 11/12 years?
----Looks like recovered around 2012 (again just eyeballing). I happened to get in a good deal when I purchased in 2007 I got the house for 215K, zillow says 290K now.


62nc,

1) You do know that bank can cancel you HELOC at any time. Especially when you lose your job. They cannot do that to you for your mortgage.

2) You are assuming that you have continuous employment for the next 7 to 12 years. You are operating with ZERO BUFFER. What will happen to your finance if you are unemployed for 1 year? In some area, the rule of thumb is it took 1 month to find a new job for every 10K of annual salary? If that rule applies to you, it will take 15 months to find a new job.

3) I was unemployed a few times. It took me about a year to find a new job.

<<I happened to get in a good deal when I purchased in 2007 I got the house for 215K, zillow says 290K now.>.

4) Counting on being LUCKY all the time is not a good strategy.

KlangFool

servusdei
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by servusdei » Tue Jun 28, 2016 9:48 am

Keep your mortgage!! 3.25% is a very low rate on your mortgage. I would kill to be able to borrow money at that rate to invest. Make only minimum payment for your mortgage and put any excess cash flows into the stock market, such as a low fee index fund like VTSAX. You have way too much cash relative to your net worth and liquidity needs. Keep about three months worth of expenses as an emergency fund and invest the rest.

Another side benefit of keeping the mortgage is that it helps your credit score. If you pay it off, and it happens to be one of your older accounts, you will get a hit to your credit score.

Again, the key point is that if the interest rate on your debt is lower than what you can earn investing (and 3.5% definitely falls squarely into this situation), you want to keep the debt and borrow more if you can. If the rate on your mortgage were 10% instead, I would not hesitate to advise paying it off as soon as possible. As is, you will do yourself a huge disservice paying it off too soon.

BigSaver
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by BigSaver » Tue Jun 28, 2016 9:49 am

At 3.25%? Keep it.

cusetownusa
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by cusetownusa » Tue Jun 28, 2016 10:12 am

KlangFool wrote:OP,

Please note that if you pay off the house, you are "House Poor". 300+K is tied to the house. You only have 305 -115 = 190K of asset elsewhere. Are you comfortable with that? That is a lot of eggs in one single basket.

KlangFool


What do you consider a good house to total asset ratio? This is something I have been thinking about lately also as I am in a similar situation. Bought a brand new house 4 years ago for $345,000 and have about $250,000 with only about $500,000 in invested assets (most of which in tax advantage accounts). Does this make me house poor? Sometimes I wonder if I should or if its worth it to move to a lower priced home.

KlangFool
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by KlangFool » Tue Jun 28, 2016 10:51 am

cusetownusa wrote:
KlangFool wrote:OP,

Please note that if you pay off the house, you are "House Poor". 300+K is tied to the house. You only have 305 -115 = 190K of asset elsewhere. Are you comfortable with that? That is a lot of eggs in one single basket.

KlangFool


What do you consider a good house to total asset ratio? This is something I have been thinking about lately also as I am in a similar situation. Bought a brand new house 4 years ago for $345,000 and have about $250,000 with only about $500,000 in invested assets (most of which in tax advantage accounts). Does this make me house poor? Sometimes I wonder if I should or if its worth it to move to a lower priced home.


cusetownusa,

1/2 to 1/3. So, I would not buy a 345K house unless I have 790K to 1.035 million elsewhere. Please note that I have ZERO job security. Over the past 10+ years, all my employers have annual or quarterly lay off ranging from 5% to 10%.

KlangFool

cusetownusa
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by cusetownusa » Tue Jun 28, 2016 10:58 am

KlangFool wrote:
cusetownusa wrote:
KlangFool wrote:OP,

Please note that if you pay off the house, you are "House Poor". 300+K is tied to the house. You only have 305 -115 = 190K of asset elsewhere. Are you comfortable with that? That is a lot of eggs in one single basket.

KlangFool


What do you consider a good house to total asset ratio? This is something I have been thinking about lately also as I am in a similar situation. Bought a brand new house 4 years ago for $345,000 and have about $250,000 with only about $500,000 in invested assets (most of which in tax advantage accounts). Does this make me house poor? Sometimes I wonder if I should or if its worth it to move to a lower priced home.


cusetownusa,

1/2 to 1/3. So, I would not buy a 345K house unless I have 790K to 1.035 million elsewhere. Please note that I have ZERO job security. Over the past 10+ years, all my employers have annual or quarterly lay off ranging from 5% to 10%.

KlangFool



Thanks...unfortunately I didn't find this site until right after I bought my house, otherwise, I would probably have bought a much older cheaper house. :oops:

I have thought about moving to a much older house that would cost about half as much but not sure if it would be worth it at this point.

KlangFool
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by KlangFool » Tue Jun 28, 2016 11:54 am

cusetownusa wrote:

Thanks...unfortunately I didn't find this site until right after I bought my house, otherwise, I would probably have bought a much older cheaper house. :oops:

I have thought about moving to a much older house that would cost about half as much but not sure if it would be worth it at this point.


cusetownusa,

Please note that I have another rule in term of housing too. I only buy when it is cheaper than renting. Rent around here is $2,200 to $2,300. My mortgage payment plus property tax is $1,800. I consider housing as an expense.

I am biased against buying a house. I only buy a house when it is a very good deal in term of housing expense. I always assume that I will lose money by buying a house. It is just a question of how much.

KlangFool

orca91
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by orca91 » Tue Jun 28, 2016 12:48 pm

I haven't read all the posts, so my apologies if I repeat anything.

You say you have home repairs that need to be done.... and you're sitting on over $100k in cash why??? Fix the things that need fixing first.

Then it seems you want to, or are paying down the mortgage aggressively. I'm one that thinks that's a good move. So, keep doing that. I say, don't leave yourself at $8k or any uncomfortable amount, but after repairs and leaving out whatever a comfortable EF is for you throw the rest at the mortgage. That will lower the balance quite a bit and with continued aggressive pay down you will have it paid off in no time.

62nc
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by 62nc » Tue Jun 28, 2016 1:38 pm

orca91 wrote:I haven't read all the posts, so my apologies if I repeat anything.

You say you have home repairs that need to be done.... and you're sitting on over $100k in cash why??? Fix the things that need fixing first.

Then it seems you want to, or are paying down the mortgage aggressively. I'm one that thinks that's a good move. So, keep doing that. I say, don't leave yourself at $8k or any uncomfortable amount, but after repairs and leaving out whatever a comfortable EF is for you throw the rest at the mortgage. That will lower the balance quite a bit and with continued aggressive pay down you will have it paid off in no time.


Haha - because I'm indecisive!!

62nc
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by 62nc » Tue Jun 28, 2016 1:45 pm

Maybe I should put all these answers in a blender and get a mix. I like Dulocracy's approach.

$115k cash pile
-$20K for EF
-$30-$45K house repair (kitchen needs work, plus other things)
-$50-65K to investments....maybe $10K each to kids college to boost those, then the other $30-45K to taxable. Vanguard?

Then stay on my path to already-early-payoff, with $375 extra going to house monthly.

Ryanlion8506
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by Ryanlion8506 » Tue Jun 28, 2016 2:15 pm

62nc wrote:Maybe I should put all these answers in a blender and get a mix. I like Dulocracy's approach.

$115k cash pile
-$20K for EF
-$30-$45K house repair (kitchen needs work, plus other things)
-$50-65K to investments....maybe $10K each to kids college to boost those, then the other $30-45K to taxable. Vanguard?

Then stay on my path to already-early-payoff, with $375 extra going to house monthly.


Is kitchen more cosmetic or must do?

Just think....
-20k EF
-House paid in full, you owe no one anything other than taxes after EF.
-You are now completely free to get house repairs as needed cash, not credit.
- You now decide how much of pie you slice for college funds, investments, vacation fund.
- Auto fund so you never have to finance.

Regardless what you do, you have set yourself and family up for great success, again...congrats. :sharebeer

joelly
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by joelly » Tue Jun 28, 2016 2:16 pm

Think of the worst possible scenario that could have happened after you clean up your $115K savings to pay off the mortgage, IF you think you and your family can weather it THEN pay it off. IF not, then devise a new plan.

:beer Congrats either way! I think you have paid off your mortgage by having that kind of savings in the bank. :sharebeer

Dulocracy
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Location: Atlanta, GA

Re: Pay off mortgage immediately? Or keep plugging along?

Post by Dulocracy » Tue Jun 28, 2016 2:16 pm

62nc wrote:Maybe I should put all these answers in a blender and get a mix. I like Dulocracy's approach.

$115k cash pile
-$20K for EF
-$30-$45K house repair (kitchen needs work, plus other things)
-$50-65K to investments....maybe $10K each to kids college to boost those, then the other $30-45K to taxable. Vanguard?

Then stay on my path to already-early-payoff, with $375 extra going to house monthly.


That sounds reasonable, but of course I would say so. :sharebeer

I would comment that 30-45k in house REPAIR is not what we were talking about as far as paying down your mortgage. That is a lot of money to spend. (You would be spending, not investing).
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

NoVa Lurker
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by NoVa Lurker » Tue Jun 28, 2016 2:18 pm

62nc wrote:Maybe I should put all these answers in a blender and get a mix. I like Dulocracy's approach.

$115k cash pile
-$20K for EF
-$30-$45K house repair (kitchen needs work, plus other things)
-$50-65K to investments....maybe $10K each to kids college to boost those, then the other $30-45K to taxable. Vanguard?

Then stay on my path to already-early-payoff, with $375 extra going to house monthly.


I was just going to recommend something similar, except with the balance going to mortgage pay-down instead of taxable.

So it would be: $115k cash pile
-$20K for EF
-$35K to house repair (don't go crazy.... might be better to use more of this to pay down the mortgage)
-$20K to boost 529s
-$40K to mortgage pay-down

That's not as satisfying as just paying off the mortgage, but I think it's a more sensible approach.

Regardless of exactly what you do, it seems like you're on a good financial track, so I would try not to spend too much time on it. There's never a "perfect" option, but leaving yourself with too little liquidity seems to be the only significant risky option.

CoAndy
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by CoAndy » Tue Jun 28, 2016 3:50 pm

I second what Nova Lurker recommended.

62nc
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by 62nc » Wed Jun 29, 2016 9:22 am

So as I'm looking into it, something I'm not understanding ..... if I do choose to apply a lump sum, say $20K-40K to mortgage, what is the difference between simply applying that to the principal, versus recasting? Which saves me over the long run? Why would I do one over the other? I know recasting technically obligates me to pay less per month, but I'm not necessarily looking to pay less per month. I would probably still be putting 1100 (P&I) + "typical" extra ($375/mo) towards housing, no matter the loan terms. I'm looking to pay off sooner within reasonable bounds while balancing the other needs (college for kids, investing, home repair, "extras" such as vacations).

Dottie57
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by Dottie57 » Wed Jun 29, 2016 9:43 am

Pay the mortgage off. It is very liberating to own your house and a job loss won't force you to sell.

User avatar
HomerJ
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by HomerJ » Wed Jun 29, 2016 10:13 am

62nc wrote:Savings (cash): $115K --- unusually high due to my decision paralysis and some bonuses


Throw 50k into the house. Wait another year, then decide if you want to pay it off completely.

KlangFool
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by KlangFool » Wed Jun 29, 2016 10:21 am

Dottie57 wrote:Pay the mortgage off. It is very liberating to own your house and a job loss won't force you to sell.


Dottie57,

Really? OP has only 5K of Emergency Fund if he does that. With annual income of 150K, he would be selling something from retirement accounts in a few months. After one to two years of unemployment, he will be selling the house.

KlangFool

SRenaeP
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by SRenaeP » Wed Jun 29, 2016 11:58 am

62nc wrote:So as I'm looking into it, something I'm not understanding ..... if I do choose to apply a lump sum, say $20K-40K to mortgage, what is the difference between simply applying that to the principal, versus recasting? Which saves me over the long run? Why would I do one over the other? I know recasting technically obligates me to pay less per month, but I'm not necessarily looking to pay less per month. I would probably still be putting 1100 (P&I) + "typical" extra ($375/mo) towards housing, no matter the loan terms. I'm looking to pay off sooner within reasonable bounds while balancing the other needs (college for kids, investing, home repair, "extras" such as vacations).


It gives you flexibility. If something (job loss, unexpected expenses, etc.) occurs, your efund will last longer if you have a lower required payment each month.

-Steph

joebh
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Re: Pay off mortgage immediately? Or keep plugging along?

Post by joebh » Wed Jun 29, 2016 12:29 pm

Dottie57 wrote:Pay the mortgage off. It is very liberating to own your house and a job loss won't force you to sell.


Hmm.

Remember that you do in fact "own your house" even if you have a mortgage.

And if you had $115k in the bank and lost your job, you could still make quite a few mortgage payments at $1100 each, in the event of a job loss.
If you had paid off the home, leaving only $8k, you might struggle a bit, even if you did feel liberated.

Dulocracy
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Location: Atlanta, GA

Re: Pay off mortgage immediately? Or keep plugging along?

Post by Dulocracy » Wed Jun 29, 2016 12:41 pm

KlangFool wrote:
Dottie57 wrote:Pay the mortgage off. It is very liberating to own your house and a job loss won't force you to sell.


Dottie57,

Really? OP has only 5K of Emergency Fund if he does that. With annual income of 150K, he would be selling something from retirement accounts in a few months. After one to two years of unemployment, he will be selling the house.

KlangFool


I completely agree with you, KlangFool, and I suspect this is an example of someone not actually reading the situation and simply posting his/her opinion, which unfortunately happens more frequently in the common discussions that tend to be more emotional like paying off the mortgage.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

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