Chipping away at the mortgage
Chipping away at the mortgage
Hi Bogleheads,
Got a ? r/t paying down the mortgage. We have a 30 yr fixed 4.125% mortgage w/ current balance approx $265,256. Mo. payments are $1,453.95 and we pay an additional $800/mo. I think our 1st loan payment was 2/1/14. We have been making the $800 extra payments since 1/1/16.
Our portfolio is 71.2/28.8, w/ 69.9/30.1 domestic/international. It is broken down as follows:
Tax-advantaged
Wife's traditional 401k - Intermediate term bond index 7.70%
My traditional 401k - Intermediate term bond index 8.60%
Wife's ROTH 457 - International Stock Index fund 1.20%
Wife's ROTH IRA - Vanguard Total bond market Idx Adm 1.00%
Vanguard Total Int Stock Idx Adm 4.80%
My ROTH IRA - Vanguard Total bond market Idx Adm 5.00%
Vanguard Health Care ETF 0.90%
Taxable
Vanguard Total Stock Idx Adm 48.90%
Vanguard Total International Stock Idx Adm 15.40%
Vanguard CA Interm term Tax exempt Adm (VCADX) 6.50%
~$1.6 m
Wife is a Calpers member and is pensioned. We max the 401k's, wife's ROTH 457, and ROTH IRAs, and still invest some in the taxable account (some dividends plus net cash). I was thinking of selling all the VCADX and using that to pay down the mortgage. If I did sell, I'd rebalance using our tax advantaged accounts. May throw off our domestic/international 70/30 mix from the initial calculations I ran, but the main thing is that I get back to our 70/30 AA. FWIW, we have $9,362 left in LT capital losses, and $7,196 left in ST capital losses.
Is the following thinking correct? VCADX yields 1.81% with a duration of 5 yrs. We are 25% fed, 9.3% CA. So, that's a rate 34.3%. Hence we are paying 2.71% on the mortgage after tax deductions. B/c that's more than the current yield on VCADX, makes sense to pay down the mortgage.
While I have thought about paying off the mortgage completely, I just don't believe/know if selling equities to do so is the wisest thing.
Got a ? r/t paying down the mortgage. We have a 30 yr fixed 4.125% mortgage w/ current balance approx $265,256. Mo. payments are $1,453.95 and we pay an additional $800/mo. I think our 1st loan payment was 2/1/14. We have been making the $800 extra payments since 1/1/16.
Our portfolio is 71.2/28.8, w/ 69.9/30.1 domestic/international. It is broken down as follows:
Tax-advantaged
Wife's traditional 401k - Intermediate term bond index 7.70%
My traditional 401k - Intermediate term bond index 8.60%
Wife's ROTH 457 - International Stock Index fund 1.20%
Wife's ROTH IRA - Vanguard Total bond market Idx Adm 1.00%
Vanguard Total Int Stock Idx Adm 4.80%
My ROTH IRA - Vanguard Total bond market Idx Adm 5.00%
Vanguard Health Care ETF 0.90%
Taxable
Vanguard Total Stock Idx Adm 48.90%
Vanguard Total International Stock Idx Adm 15.40%
Vanguard CA Interm term Tax exempt Adm (VCADX) 6.50%
~$1.6 m
Wife is a Calpers member and is pensioned. We max the 401k's, wife's ROTH 457, and ROTH IRAs, and still invest some in the taxable account (some dividends plus net cash). I was thinking of selling all the VCADX and using that to pay down the mortgage. If I did sell, I'd rebalance using our tax advantaged accounts. May throw off our domestic/international 70/30 mix from the initial calculations I ran, but the main thing is that I get back to our 70/30 AA. FWIW, we have $9,362 left in LT capital losses, and $7,196 left in ST capital losses.
Is the following thinking correct? VCADX yields 1.81% with a duration of 5 yrs. We are 25% fed, 9.3% CA. So, that's a rate 34.3%. Hence we are paying 2.71% on the mortgage after tax deductions. B/c that's more than the current yield on VCADX, makes sense to pay down the mortgage.
While I have thought about paying off the mortgage completely, I just don't believe/know if selling equities to do so is the wisest thing.
bbrock
Re: Chipping away at the mortgage
Why not refi into a 15-year with a lower interest rate instead?
Re: Chipping away at the mortgage
Because I don't think it is worth paying all of the costs to refi to a 15 yr for the amount of time I would have the loan.
If I make a $104,000 payment, and continue to make the $800 monthly payments, my mortgage would be paid off in a little more than 10 years (and that's from the beginning of the loan 2/2014).
If I make a $104,000 payment, and continue to make the $800 monthly payments, my mortgage would be paid off in a little more than 10 years (and that's from the beginning of the loan 2/2014).
bbrock
Re: Chipping away at the mortgage
I'd look at total return in addition to inccome for comparison. Especially if you rebalance after paying down mortgage I'd consider the expected performance of the overall portfolio before rebalance vs. after rebalance. IOW's If you rebalance from equity to bonds or cash due selling VCADX you have in effect sold some equities to pay down the mortgage. Hope this makes sense.bbrock wrote: Is the following thinking correct? VCADX yields 1.81% with a duration of 5 yrs. We are 25% fed, 9.3% CA. So, that's a rate 34.3%. Hence we are paying 2.71% on the mortgage after tax deductions. B/c that's more than the current yield on VCADX, makes sense to pay down the mortgage.
Just a thought.
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Re: Chipping away at the mortgage
Great job on paying off mortgage. Make sure the loan company gave you and amorization chart and you are paying only principle with the extra $800. Then you can figure out when house will be paid for and how much in interest you saved.
Re: Chipping away at the mortgage
No, because the durations don't match; paying down the mortgage has a much longer duration, as you won't get any benefit until the mortgage is gone. You could increase your bond returns by using CA Long-Term Tax-Exempt with its 2.34% yield, and even that is a shorter duration than your mortgage.bbrock wrote:Is the following thinking correct? VCADX yields 1.81% with a duration of 5 yrs. We are 25% fed, 9.3% CA. So, that's a rate 34.3%. Hence we are paying 2.71% on the mortgage after tax deductions. B/c that's more than the current yield on VCADX, makes sense to pay down the mortgage.
As a minor note, your tax rate is 32%, not 34.3%, since you can deduct state tax from federal (unless you pay AMT, but then your marginal federal rate would not be 25%).
- sunny_socal
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Re: Chipping away at the mortgage
Then get a "no-cost" refi. I've done this several time and it's been worth it every time - no money out of my pocket yet much lower rate. You're doing a good job paying off that mortgage but you're also leaving some $$ on the table.bbrock wrote:Because I don't think it is worth paying all of the costs to refi to a 15 yr for the amount of time I would have the loan.
If I make a $104,000 payment, and continue to make the $800 monthly payments, my mortgage would be paid off in a little more than 10 years (and that's from the beginning of the loan 2/2014).
Re: Chipping away at the mortgage
Thanks for all the replies/input.
Sunny_socal, I didn't think there is anything such as a true "no-cost" refi. Sure, I could get one with no point fees, but I will always have to still pay the appraisal, processing, origination, or any other baloney fees. So, there is always some fee. Nothing is free; every one wants a piece of the pie. Hence, that is why just seems smarter to pay down my current loan. Especially if I will not be keeping any new loan (e.g. if I did refi to a 15 yr) that long. For my current mortgage, we found someone through the MortgageProfessor.com, and it was a no points loan, but there was still a cost to do business/make the transaction.
Grabiner, thanks for your time/response. I thought one is supposed to compare their mortgage to that of a fixed income investment. In my case, I though the closest thing would be VCADX. If not that, then I assumed to compare against the Total Bond Market Index Adm, since I would only invest in either of those two bonds. I don't go long on bonds, following guidance of Bernstein, who actually says to keep short, if I recall correctly. So, intermediate is about as "risky" as I care to get with my FI position. But, the 7.3 yr duration of the VCLAX is not that much longer than the 5.3 yr of the VCADX.
And, I overlooked that CA state taxes are deductible on my Fed. I don't pay AMT. I use TT Deluxe. Where on my return would I find that deduction? Edit: I think I see it. 1040, Sch. A, Line 5a.
Indexonlyplease, the $800 payments are principal only. Recently, I was going through my records and I never could find an amortization schedule. I just use one of the many online amortization calculators (like one found at mortgageprofessor.com among others - https://www.mtgprofessor.com/calculator ... tor2a.html). I may not be exact with the month I started paying on my mortgage, but it is close enough to show the large amount of $ that is saved by accelerating my mortgage payoff. I don't need to be exact, just need to see that I'm saving a lot.
Sunny_socal, I didn't think there is anything such as a true "no-cost" refi. Sure, I could get one with no point fees, but I will always have to still pay the appraisal, processing, origination, or any other baloney fees. So, there is always some fee. Nothing is free; every one wants a piece of the pie. Hence, that is why just seems smarter to pay down my current loan. Especially if I will not be keeping any new loan (e.g. if I did refi to a 15 yr) that long. For my current mortgage, we found someone through the MortgageProfessor.com, and it was a no points loan, but there was still a cost to do business/make the transaction.
Grabiner, thanks for your time/response. I thought one is supposed to compare their mortgage to that of a fixed income investment. In my case, I though the closest thing would be VCADX. If not that, then I assumed to compare against the Total Bond Market Index Adm, since I would only invest in either of those two bonds. I don't go long on bonds, following guidance of Bernstein, who actually says to keep short, if I recall correctly. So, intermediate is about as "risky" as I care to get with my FI position. But, the 7.3 yr duration of the VCLAX is not that much longer than the 5.3 yr of the VCADX.
And, I overlooked that CA state taxes are deductible on my Fed. I don't pay AMT. I use TT Deluxe. Where on my return would I find that deduction? Edit: I think I see it. 1040, Sch. A, Line 5a.
Indexonlyplease, the $800 payments are principal only. Recently, I was going through my records and I never could find an amortization schedule. I just use one of the many online amortization calculators (like one found at mortgageprofessor.com among others - https://www.mtgprofessor.com/calculator ... tor2a.html). I may not be exact with the month I started paying on my mortgage, but it is close enough to show the large amount of $ that is saved by accelerating my mortgage payoff. I don't need to be exact, just need to see that I'm saving a lot.
bbrock
Re: Chipping away at the mortgage
You're missing the point on the no cost refi. They'll give you all those things at no cost out of your pocket in exchange for maybe a slightly higher rate. Even that slightly higher rate will be much better than your current rate. And if you want even lower of a rate because you plan to pay down faster, then do a 7 year arm instead of a 15 or 30 year fixed.bbrock wrote:Thanks for all the replies/input.
Sunny_socal, I didn't think there is anything such as a true "no-cost" refi. Sure, I could get one with no point fees, but I will always have to still pay the appraisal, processing, origination, or any other baloney fees. So, there is always some fee. Nothing is free; every one wants a piece of the pie. Hence, that is why just seems smarter to pay down my current loan. Especially if I will not be keeping any new loan (e.g. if I did refi to a 15 yr) that long. For my current mortgage, we found someone through the MortgageProfessor.com, and it was a no points loan, but there was still a cost to do business/make the transaction.
Grabiner, thanks for your time/response. I thought one is supposed to compare their mortgage to that of a fixed income investment. In my case, I though the closest thing would be VCADX. If not that, then I assumed to compare against the Total Bond Market Index Adm, since I would only invest in either of those two bonds. I don't go long on bonds, following guidance of Bernstein, who actually says to keep short, if I recall correctly. So, intermediate is about as "risky" as I care to get with my FI position. But, the 7.3 yr duration of the VCLAX is not that much longer than the 5.3 yr of the VCADX.
And, I overlooked that CA state taxes are deductible on my Fed. I don't pay AMT. I use TT Deluxe. Where on my return would I find that deduction? Edit: I think I see it. 1040, Sch. A, Line 5a.
Indexonlyplease, the $800 payments are principal only. Recently, I was going through my records and I never could find an amortization schedule. I just use one of the many online amortization calculators (like one found at mortgageprofessor.com among others - https://www.mtgprofessor.com/calculator ... tor2a.html). I may not be exact with the month I started paying on my mortgage, but it is close enough to show the large amount of $ that is saved by accelerating my mortgage payoff. I don't need to be exact, just need to see that I'm saving a lot.
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Re: Chipping away at the mortgage
I'd also start with a 15 year no cost refi. I've done this 3 times. Total cost to me = $0.
Some had an application fee that was returned at closing but none had me pay anything by the time the closing had completed. The rate wasn't as good as a normal "paying the bank bribe money" mortgages but as long as the rate was lower than what I had, it accomplished the goal of lowering my costs.
Some had an application fee that was returned at closing but none had me pay anything by the time the closing had completed. The rate wasn't as good as a normal "paying the bank bribe money" mortgages but as long as the rate was lower than what I had, it accomplished the goal of lowering my costs.
Bogle: Smart Beta is stupid
Re: Chipping away at the mortgage
bbrock -- don't discount this advice. You might as well pay lower interest over the period of time you are paying down the mortgage. And, yes, all the fees associated with a refi can be wrapped into the interest rate. As long as the interest rate is better than what you have right now, you will come out ahead.Goal33 wrote:You're missing the point on the no cost refi. They'll give you all those things at no cost out of your pocket in exchange for maybe a slightly higher rate. Even that slightly higher rate will be much better than your current rate. And if you want even lower of a rate because you plan to pay down faster, then do a 7 year arm instead of a 15 or 30 year fixed.bbrock wrote:Thanks for all the replies/input.
Sunny_socal, I didn't think there is anything such as a true "no-cost" refi. Sure, I could get one with no point fees, but I will always have to still pay the appraisal, processing, origination, or any other baloney fees. So, there is always some fee. Nothing is free; every one wants a piece of the pie. Hence, that is why just seems smarter to pay down my current loan. Especially if I will not be keeping any new loan (e.g. if I did refi to a 15 yr) that long. For my current mortgage, we found someone through the MortgageProfessor.com, and it was a no points loan, but there was still a cost to do business/make the transaction.
Grabiner, thanks for your time/response. I thought one is supposed to compare their mortgage to that of a fixed income investment. In my case, I though the closest thing would be VCADX. If not that, then I assumed to compare against the Total Bond Market Index Adm, since I would only invest in either of those two bonds. I don't go long on bonds, following guidance of Bernstein, who actually says to keep short, if I recall correctly. So, intermediate is about as "risky" as I care to get with my FI position. But, the 7.3 yr duration of the VCLAX is not that much longer than the 5.3 yr of the VCADX.
And, I overlooked that CA state taxes are deductible on my Fed. I don't pay AMT. I use TT Deluxe. Where on my return would I find that deduction? Edit: I think I see it. 1040, Sch. A, Line 5a.
Indexonlyplease, the $800 payments are principal only. Recently, I was going through my records and I never could find an amortization schedule. I just use one of the many online amortization calculators (like one found at mortgageprofessor.com among others - https://www.mtgprofessor.com/calculator ... tor2a.html). I may not be exact with the month I started paying on my mortgage, but it is close enough to show the large amount of $ that is saved by accelerating my mortgage payoff. I don't need to be exact, just need to see that I'm saving a lot.
Re: Chipping away at the mortgage
Try your local credit union, only caveat was I needed to put $50 in their savings account and some kind of direct deposit (I did $100) every paycheck. Closing costs were $0.
Re: Chipping away at the mortgage
Don't be too quick to discredit the 15 yr refi.
Run the ammoratization schedule, there is a significant difference in how much of each payment goes to principal with a 15yr. loan.
That combined with the lower interest rate can recoup the closing costs rather quickly.
Run the ammoratization schedule, there is a significant difference in how much of each payment goes to principal with a 15yr. loan.
That combined with the lower interest rate can recoup the closing costs rather quickly.
Fools think their own way is right, but the wise listen to others.
Re: Chipping away at the mortgage
If refinancing, be sure to differentiate between "no closing costs" and "no costs paid at closing". The former is rare, the latter is easy to find but just adds those costs onto the outstanding mortgage balance. Both, however, can save you a significant amount of money over a 10 year period in many cases.
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Re: Chipping away at the mortgage
If you live in a state they serve, consider Third Federal's 10 year fixed $295 cost mortgage:
https://www.thirdfederal.com/
https://www.thirdfederal.com/
- sunny_socal
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Re: Chipping away at the mortgage
Perhaps you just haven't shopped around. If you go to a B&M Bank, they'll of course quote you for a refi and show all the traditional costs, likely several thousand.bbrock wrote:Thanks for all the replies/input.
Sunny_socal, I didn't think there is anything such as a true "no-cost" refi. Sure, I could get one with no point fees, but I will always have to still pay the appraisal, processing, origination, or any other baloney fees. So, there is always some fee. Nothing is free; every one wants a piece of the pie. Hence, that is why just seems smarter to pay down my current loan. Especially if I will not be keeping any new loan (e.g. if I did refi to a 15 yr) that long. For my current mortgage, we found someone through the MortgageProfessor.com, and it was a no points loan, but there was still a cost to do business/make the transaction.
<snip>.
But try a local mortgage broker, they tend to have close relationships with many lenders and can likely offer you a deal that beats your bank and has all the closing costs reimbursed by the lender. I've done this many, many times. (Last time from a 20-year 3.5% loan to a 15-year 2.625% loan)
- jimb_fromATL
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Re: Chipping away at the mortgage
Assuming all of the mortgage interest is fully deductible at 25% federal and 9.3% state tax totaling 34.3% the effective rate would indeed be about 4.125% x (1 - 34.3%) = 2.71% . But that's not really the equivalent rate you earn for paying down the mortgage.bbrock wrote:
30 yr fixed 4.125% mortgage w/ current balance approx $265,256.
Mo. payments are $1,453.95 and we pay an additional $800/mo. Is the following thinking correct? VCADX yields 1.81% with a duration of 5 yrs. We are 25% fed, 9.3% CA. So, that's a rate 34.3%. Hence we are paying 2.71% on the mortgage after tax deductions. B/c that's more than the current yield on VCADX, makes sense to pay down the mortgage.
While I have thought about paying off the mortgage completely, I just don't believe/know if selling equities to do so is the wisest thing.
That’s because money is fungible. For any money you have in hand, the equivalent rate of return realized for improving your net worth for paying down the mortgage is its nominal rate, same as any other debt. You’re still paying the lender the 4.125%, and you still improve your net worth at that rate in the long run by NOT paying it out as interest on the debt.
Here's an example to illustrate it, with examples of the formulas to solve for it in a spreadsheet using the math library functions described in more detail In this post about math functions .
- For a mortgage balance of $265,256 at 4.125% with your payments of $2253.95 per month for P&I the remaining time is 151.07 months (12.59 years). The total paid will be 151 x 2253.95 = $340,512 with $75,256 interest.
=NPER(4.125%/12, 2253.95, -265256) = 151.07 months.
=PMT(4.125%/12, 151, -265256) = $2253.95
If you were to apply a lump sum of $104,000 to reduce the mortgage balance as an 'investment' then the normal payment will pay it off in 82.26 months (6.85 years).
=NPER(4.125%/12, 2253.95, -161256) = 82.26 months.
As a double-check , the new balance of $161,256 with the normal payment would be reduced to
=FV(4.125%/12,82.26, 2253.95, -161256) = $0.
Solving for the rate of return
- At that same point of 82.26 months without any prepayment(s) the original mortgage would have had a balance of
=FV(4.125%/12,82, 2253.95, -265256) = $137,919.
In order for the $104,000 to grow to $137,919 to pay off the mortgage in 82.26 months and give you the same net worth, it would need to earn
=RATE(82.26, 0, 104000, -137919) * 12 = 4.125% compounded monthly
-- which is exactly the rate of the mortgage if there were no taxes on the earnings at all.
As a double-check
=FV(4.125%/12, 82.26, 0, -104000)
... shows that the $104,000 at 4.125% for 82.26 months will grow to $137,919.
If there were no taxes on the gain, that would be exactly enough to offset the extra mortgage debt and give you the same net worth. But you do pay tax on gains in most after-tax, taxable investments. In those cases, the effective rate is actually higher when compared to after-tax money invested in taxable account.
Here's more proof that the "effective rate" of the mortgage after the tax deduction is not the same as the ROI for paying down the mortgage:
If you were to invest the lump sum of $104,000 in an account that only earns the 2.71% 'effective rate' of the mortgage for 6.85 years compounded monthly it would be worth
=FV(2.71%/12,82.26, 0, -104000) = $125,205
... which is short by $12,713.47 of the amount needed to pay off or offset the mortgage balance and give you the same net worth at that time.
For a rough estimate of the gross earnings rate required in a taxable account, assuming 15% federal cap gains tax and 9.3% state tax on gains (and disregarding any dividends reinvested):
- If you need $137,919 from an investment of $104,000 you need a net gain of $33,919. With taxes of 24.3% the pre-tax gain would need to be $44,807. So the rate required for $104,000 compounded monthly for the 82 months would be
=RATE(82.26 ,0, 104000, -148806.50) * 12 = 5.238%
Double-checking:
=FV(5.238%/12,82.26, 0, -104000) = $148,807.
The gain is 148807 - 104000 = $44,807
Tax at 15% federal and .09 is 44807 x 24.3% = $10,888.
148,807 - 10,888 = $137,919
In a CD or money market account paying a total of 34.3% regular fed and state income tax on interest every year, it would need to earn in the range of 5.9%. I suspect a lot of folks who have the spare cash and want a guaranteed result with absolutely no risk might jump on the chance to buy a CD that guarantees that much for 7 years.
jimb
Last edited by jimb_fromATL on Fri Jul 21, 2017 5:35 pm, edited 2 times in total.
Re: Chipping away at the mortgage
You can still do a no-cost refinance and save some interest over those 10 years.bbrock wrote:Because I don't think it is worth paying all of the costs to refi to a 15 yr for the amount of time I would have the loan.
If I make a $104,000 payment, and continue to make the $800 monthly payments, my mortgage would be paid off in a little more than 10 years (and that's from the beginning of the loan 2/2014).
I just checked Provident.com who have one of the best rates typically and they would give you 3.5% with a ~$4000 credit that would cover the closing costs, thus saving you 0.625% over those 10 years you are paying off the mortgage.
Re: Chipping away at the mortgage
See Paying down loans versus investing on the wiki.bbrock wrote:Grabiner, thanks for your time/response. I thought one is supposed to compare their mortgage to that of a fixed income investment. In my case, I though the closest thing would be VCADX. If not that, then I assumed to compare against the Total Bond Market Index Adm, since I would only invest in either of those two bonds. I don't go long on bonds, following guidance of Bernstein, who actually says to keep short, if I recall correctly. So, intermediate is about as "risky" as I care to get with my FI position. But, the 7.3 yr duration of the VCLAX is not that much longer than the 5.3 yr of the VCADX.
A fair comparison is between bond investments of the same duration. If you sell an intermediate-term bond fund to buy a long-term bond fund, you are increasing your expected returns and also your interest-rate risk; this may be a good or bad move. If you sell an intermediate-term bond fund to make a mortgage payment with a long-term benefit, you are also increasing your interest-rate risk. Thus, even if you choose to hold intermediate-term bond funds, the correct bond fund to use for comparison is a bond fund of similar duration to the mortgage payment, as this keeps the risk comparable.
Normally, the reason to avoid long-term bonds is the risk of inflation; a bond which will be worth $10,000 in ten years has substantial risk that you don't know what that $10,000 will buy. Particularly with taxable bonds, you may not be adequately compensated for that risk. (Long-term TIPS avoid this risk and are thus a good investment for long-term needs.) But since you have a long-term fixed-dollar obligation, you can buy a bond which will be worth $10,000 in ten years, pay $10,000 in ten years against your mortgage, and not worry about inflation, since it affects both equally.
Re: Chipping away at the mortgage
Tx for the helpful feedback all. Grabiner, raladic, stevieg72, etc., I thank you for all your input. jimb thanks for that illustrative example w/ your math. I will definitely need to re-read what you wrote a couple or times to make sure I understand all the figures. I understand your point and do appreciate your post.
I'll have to look at these no cost refi mortgages more. Since time is tight, perhaps a mortgage broker could be of assistance. For those that have done a true no cost $0 refi (no closing costs or 3rd party fees) were those fees wrapped into your mortgage balance, or do you mean they were reflected in a slightly higher rate?
I did not consider the option of looking at ARM. I guess that could be an option too if I am set on getting it paid off soon.
I'll have to look at these no cost refi mortgages more. Since time is tight, perhaps a mortgage broker could be of assistance. For those that have done a true no cost $0 refi (no closing costs or 3rd party fees) were those fees wrapped into your mortgage balance, or do you mean they were reflected in a slightly higher rate?
I did not consider the option of looking at ARM. I guess that could be an option too if I am set on getting it paid off soon.
bbrock
Re: Chipping away at the mortgage
Beautiful post jimb_fromATL. Thanks.
- sunny_socal
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Re: Chipping away at the mortgage
Here's how the 'no-cost refi' has worked for me:bbrock wrote:Tx for the helpful feedback all. Grabiner, raladic, stevieg72, etc., I thank you for all your input. jimb thanks for that illustrative example w/ your math. I will definitely need to re-read what you wrote a couple or times to make sure I understand all the figures. I understand your point and do appreciate your post.
I'll have to look at these no cost refi mortgages more. Since time is tight, perhaps a mortgage broker could be of assistance. For those that have done a true no cost $0 refi (no closing costs or 3rd party fees) were those fees wrapped into your mortgage balance, or do you mean they were reflected in a slightly higher rate?
I did not consider the option of looking at ARM. I guess that could be an option too if I am set on getting it paid off soon.
- Find a trusted mortgage broker (eg. through friends & family.)
- Obtain a refi quote, took all of 15 minutes to run the numbers. (Sending in the full paperwork later took a few hours)
- There are indeed fees associated with the refi, they are all broken out in black & white. There is nothing fishy about it. All the usual fees are there.
- Mortgage balance stays exactly as before. If I say "I'd like to refi $350k of my mortgage" then it's $350k.
- Rate is very competitive. If I were to pay the fees myself, rate would be slightly less (eg. 0.125% difference)
- The MB gets a large rebate from the lender at closing. It is sufficient to cover all the costs.
- I had to pay an appraisal fee on my credit card (< $500) but this was refunded that as well when we closed
It's not a scam, it's similar to auto manufacturers providing kickbacks to their retailers. You can model the loan before calling anyone by visiting the amerisave.com or aimloan.com websites, they give you an array of refi options and clearly show the breakdown of closing costs for each option. You pick the rate and associated costs.
To the purists: Yes, there is indeed a cost and it is reflected in a slightly higher rate. Comparing the final outcome to the loan you had before is really all that matters.
- jabberwockOG
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Re: Chipping away at the mortgage
A true "no cost" mortgage, where principle balance stays the same, is obtained by taking a loan with a higher than par (prevailing market rate when loan is locked) interest rate. Investors are willing to pay a premium for above par loans and that premium is used to pay transaction costs and fees. This type of loan is typically available from a stand alone "mortgage broker" rather than a traditional bank or credit union. Most banks will not sell you this kind of loan because they tend to self finance their loans and fees are a big profit center for them. As long as the new rate obtained is lower than your current rate this type of loan can be a good deal especially for folks looking to pay loans off early.
No costs are not always a good idea. Taking a higher rate to save a few bucks on a long term 30 year loan and then taking full term to pay it off is a bad idea as the overall increased interest cost of an above par no cost loan will more than offset any initial savings.
Consumers who take the time to educate themselves on how mortgage primary and secondary market works, how rates vary and are set, how discount points work, how lock in and floating rate works, and how fees and costs are calculated and charged, etc., can save themselves an enormous amount of money over time by successfully shopping for and obtaining great loans that make sense for them (and not getting overcharged and ripped off). There are lots of wolves involved in the home loan business - don't be a sheep.
No costs are not always a good idea. Taking a higher rate to save a few bucks on a long term 30 year loan and then taking full term to pay it off is a bad idea as the overall increased interest cost of an above par no cost loan will more than offset any initial savings.
Consumers who take the time to educate themselves on how mortgage primary and secondary market works, how rates vary and are set, how discount points work, how lock in and floating rate works, and how fees and costs are calculated and charged, etc., can save themselves an enormous amount of money over time by successfully shopping for and obtaining great loans that make sense for them (and not getting overcharged and ripped off). There are lots of wolves involved in the home loan business - don't be a sheep.
- jimb_fromATL
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Re: Chipping away at the mortgage
Raladic wrote:You can still do a no-cost refinance and save some interest over those 10 years.bbrock wrote:Because I don't think it is worth paying all of the costs to refi to a 15 yr for the amount of time I would have the loan.
If I make a $104,000 payment, and continue to make the $800 monthly payments, my mortgage would be paid off in a little more than 10 years (and that's from the beginning of the loan 2/2014).
I just checked Provident.com who have one of the best rates typically and they would give you 3.5% with a ~$4000 credit that would cover the closing costs, thus saving you 0.625% over those 10 years you are paying off the mortgage.
Penfed and others are currently offering 3.125% refinancing. So a 3.5 "no cost" loan will actually cost more in the long run.bbrock wrote:Thanks for all the replies/input.
Sunny_socal, I didn't think there is anything such as a true "no-cost" refi. Sure, I could get one with no point fees, but I will always have to still pay the appraisal, processing, origination, or any other baloney fees. So, there is always some fee. Nothing is free; every one wants a piece of the pie. Hence, that is why just seems smarter to pay down my current loan.
You might find this table useful as a guide to do more research on the pros and cons of all the permutations of refinancing
Code: Select all
_____ pay up front balance rate months payment total paid interest
current mortgage $0 $265,286 4.125% 151.1 $2253.95 $340,562 $75,276
refi roll in $4000 costs $0 $269,286 3.125% 180. $1875.87 $337,657 $68,371
make higher pmt on new $0 $269,286 3.125% 143.3 $2253.95 $322,997 $53,711
no cost refi $0 $265,286 3.500% 180. $1896.48 $341,367 $76,081
higher pmt on 'no cost' loan $0 $265,286 3.500% 144.38 $2253.95 $325,435 $60,149
pay closing costs up front $4,000 $265,286 3.125% 180. $1848.01 $336,641 $71,355
higher payment on new $4,000 $265,286 3.125% 140.73 $2253.95 $321,202 $55,916
pay down existing mtg $4,000 $261,286 4.125% 148.13 $2253.95 $337,867 $76,581
What the table shows:
If you owe $265,286 at 4.125% and are paying $2253.95 per month the loan has 151 months ( 12.59 years) remaining. The total paid will be $340,562 with $75,276 interest
If you refi and roll in $4,000 closing costs then $269,286 at 3.125% for 180 months has a payment of $1875.87 per month for P&I. The total paid will be 180 x $1875.87 = $337,657 with $68,371 interest. The total is $2,906 less than the current mortgage and adds 29 months of payments.
However, if you make the higher payment of $2253.95 from the old mortgage then the balance of $269,286 at 3.125% will be paid off in 143.3 months (11.94 years). The total paid will be 143.3 x $2253.95 = $322,997 with $53,711 interest. This total is $17,565 less than the current mortgage ... and cuts 8 months of payments.
If you refi with a 'no closiing cost' loan at 3.5% then $265,286 at 3.5% for 180 months has a payment of $1896.48 per month for P&I. The total paid will be 180 x $1896.48 = $341,367 with $76,081 interest. The total is $805 more than the current mortgage and adds 29 months of payments.
However, if you make the higher payment of $2253.95 from the old mortgage then the balance of $265,286 at 3.5% will be paid off in 144.4 months (12.03 years). The total paid will be 144.38 x $2253.95 = $325,435 with $60,149 interest. This total is $15,128 less than the current mortgage ... and cuts 7 months of payments.
Notice that the 'no closing costs' loan will actually cost $2438 more and take 1.1 months longer than the lower rate refi with costs rolled in.
If you refi and pay the closing costs of $4000 up front and refinance the balance of $265,286 at 3.125% and make the old $1848.01 payment it will be paid off in 180. months. The total paid will be 4000 + (180. x 1848.01) = $336,641 with $71,355 interest. This total is $3,921 less than the current mortgage, but takes 29 longer.
However, if you make the higher payment of $2253.95 from the old mortgage then the balance of $265,286 at 3.125% will be paid off in 140.7 months (11.73 years). The total paid will be 140.73 x $2253.95 = $321,202 with $55,916 interest. This total is $19,360 less than the current mortgage ... and cuts 10 months of payments.
If you pay the same $4000 on the existing mortgage, the balance of $261,286 at 4.125% with the $2253.95 payment will be paid off in 148.1 months. The total paid will be 4000 + (148.13 x 2253.95) = $337,867 with $76,581 interest. This saves $2,695 and 3 months over the existing mortgage For the real apples to apples comparison of the same money up front and per month, paying the closing costs saves $16,665 and 7.4 months over the existing mortgage.
jimb
- jimb_fromATL
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Re: Chipping away at the mortgage
Here's another table similar to the one previously posted.
This assumes paying an extra $100K (your original $104K proposal in case of prepaying closing costs) and the same choices of rolling in the closing costs, hiding them in a higher rate, or paying them out of pocket.
This also assumes about 1.5% closing costs either paid, rolled, or hidden in the rate.
Looks like there's not much to gain if you're really going to pay it off this fast. And not sure it's worth being absolutely committed to the higher minimum payment for the 15 year loan.
[/size]
jimb
This assumes paying an extra $100K (your original $104K proposal in case of prepaying closing costs) and the same choices of rolling in the closing costs, hiding them in a higher rate, or paying them out of pocket.
This also assumes about 1.5% closing costs either paid, rolled, or hidden in the rate.
Looks like there's not much to gain if you're really going to pay it off this fast. And not sure it's worth being absolutely committed to the higher minimum payment for the 15 year loan.
Code: Select all
_____ pay up front balance rate months payment total paid interest
current mortgage $0 $165,286 4.125% 84.64 $2253.95 $190,778 $25,492
refi roll in $2500 costs $0 $167,786 3.125% 180. $1168.81 $210,386 $42,600
make higher pmt on new $0 $167,786 3.125% 82.86 $2253.95 $186,756 $18,970
no cost refi $0 $165,286 3.500% 180. $1181.60 $212,688 $47,402
higher pmt on 'no cost' loan $0 $165,286 3.500% 82.63 $2253.95 $186,242 $20,956
pay closing costs up front $2,500 $165,286 3.125% 180. $1151.40 $209,752 $44,466
higher payment on new $2,500 $165,286 3.125% 81.48 $2253.95 $186,156 $20,870
pay down existing mtg $2,500 $162,786 4.125% 83.16 $2253.95 $189,938 $27,152
jimb
Re: Chipping away at the mortgage
Yes, it's $51,110 less interest paid to the lender. And since it's never paid, it's never deducted. Thus, there is a corresponding increase in your income taxes for making this initial prepayment. Aren't you forgetting to account for these increased taxes ?jimb_fromATL wrote: The $104,000 investment has guaranteed that the loan will be paid off in 82.3 months at a total cost of 104000 + (82.26 x 2253.95) = $289,402 with $24,146 interest paid to the lender. That's $51,110 less interest paid to the lender,
- jimb_fromATL
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Re: Chipping away at the mortgage
No. You're still having to come up with that full amount of money to pay to the lender. Even when you're the one of four taxpayers who exceeds the standard deduction and gets any tax deduction for your mortgage interest -- which the OP no doubt is -- you're still paying a large net percentage of your money for the mortgage instead of having it to buy necessities, pay bills, pay down debts, or invest for retirement. Once you've eliminated the mortgage, you'll have ALL of the freed-up payments to invest for yourself. And you won't have to earn as much in the investments to come out better, because none of it is being offset by money being paid to the lender.madbrain wrote:Yes, it's $51,110 less interest paid to the lender. And since it's never paid, it's never deducted. Thus, there is a corresponding increase in your income taxes for making this initial prepayment. Aren't you forgetting to account for these increased taxes ?jimb_fromATL wrote: The $104,000 investment has guaranteed that the loan will be paid off in 82.3 months at a total cost of 104000 + (82.26 x 2253.95) = $289,402 with $24,146 interest paid to the lender. That's $51,110 less interest paid to the lender,
Plus, if you keep a big mortgage and fall on hard financial times like a cut in pay, you lose a lot of the deduction, which make the net mortgage interest a considerably bigger part of your total income, and it is a time when you can least afford it.
Furthermore, no matter what your tax deduction may be, the mortgage that costs the least before taxes also costs the least after the tax deduction.
Plus the OP was not asking whether they should gamble with their house in the pot as collateral in the hope that they might earn more interest in the market than they're paying on the mortgage -- provided everything goes well. They're looking at pros and cons about relatively low-risk funds like bonds versus absolutely guaranteed return with no risk to the principal for paying off the mortgage faster.
jimb
Re: Chipping away at the mortgage
Large is all relative - personally my P+I minimum payment is about 11% of gross - so I don't think it's all that large.jimb_fromATL wrote: No. You're still having to come up with that full amount of money to pay to the lender. Even when you're the one of four taxpayers who exceeds the standard deduction and gets any tax deduction for your mortgage interest -- which the OP no doubt is -- you're still paying a large net percentage of your money for the mortgage instead of having it to buy necessities, pay bills, pay down debts, or invest for retirement.
The post I quoted from you made the assumption the taxpayer was deducting all interest at the beginning - but then seemed to forget to account for it in part of the computations.
I certainly agree with that, but to make an apples-to-apples comparison, you need to make comparisons with identical amount of cashflow, over the same duration.Once you've eliminated the mortgage, you'll have ALL of the freed-up payments to invest for yourself. And you won't have to earn as much in the investments to come out better, because none of it is being offset by money being paid to the lender.
That is true, but I don't think it was part of the assumptions of the post I quoted.Plus, if you keep a big mortgage and fall on hard financial times like a cut in pay, you lose a lot of the deduction, which make the net mortgage interest a considerably bigger part of your total income, and it is a time when you can least afford it.
And there is of course a flip side to it - if you didn't sink the large prepayment upfront, the comparative alternative would be to put it into an investment earning the same after-rate rate as the mortgage.
Your liquidity will always be better if you didn't sink in the prepayment, so if you fall on hard times, you have that reserve to tap in one case, and not in the other.
But I think all that is besides the point here - my main interest in the comparison is the net worth total over the same period, using the same amount of cashflow If you are earning the exact same after-tax rate on your risk-free investment at the mortgage, it seems to me that the net worth total would be identical between making a prepayment on one hand, or investing on the other hand, over the same duration. The only difference would be reduced liquidity in the case of prepayment.
True, but your net investment return may also increase if you are in a lower tax bracket as a result, if you saved/invested instead of prepaid.Furthermore, no matter what your tax deduction may be, the mortgage that costs the least before taxes also costs the least after the tax deduction.
Re: Chipping away at the mortgage
And I have verified this to be the case with my own calculations - the only thing that I find different is the compounding difference between mortgages and savings account rates as quoted. Mortgage interest is calculated monthly and doesn't compound.madbrain wrote:But I think all that is besides the point here - my main interest in the comparison is the net worth total over the same period, using the same amount of cashflow If you are earning the exact same after-tax rate on your risk-free investment at the mortgage, it seems to me that the net worth total would be identical between making a prepayment on one hand, or investing on the other hand, over the same duration. The only difference would be reduced liquidity in the case of prepayment.
Savings rates are paid monthly but interest compounds. So the savings/investment APY you need to earn to match your mortgage interest rate is (1+(APR/12))^12 .
- jimb_fromATL
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Re: Chipping away at the mortgage
That's a large percentage of your mortgage interest money that is still going to your lender despite your tax deduction. Not of all of your money. If it were a large percentage of all of your money, you probably would not be able to -- and should not -- be paying extra on the mortgage -- or have a mortgage that big.madbrain wrote:Large is all relative - personally my P+I minimum payment is about 11% of gross - so I don't think it's all that large.jimb_fromATL wrote: No. You're still having to come up with that full amount of money to pay to the lender. Even when you're the one of four taxpayers who exceeds the standard deduction and gets any tax deduction for your mortgage interest -- which the OP no doubt is -- you're still paying a large net percentage of your money for the mortgage instead of having it to buy necessities, pay bills, pay down debts, or invest for retirement.
The post I quoted from you made the assumption the taxpayer was deducting all interest at the beginning - but then seemed to forget to account for it in part of the computations.
I've been discussing the pros and cons and helping folks with the math for paying down debts versus investments for decades ... and I've never known of a single soul who actually kept a constant cash flow by reinvesting all their money once they paid off a debt. But at least it's an option. Making mortgage payments is not optional with most mortgage lenders.I certainly agree with that, but to make an apples-to-apples comparison, you need to make comparisons with identical amount of cashflow, over the same duration.Once you've eliminated the mortgage, you'll have ALL of the freed-up payments to invest for yourself. And you won't have to earn as much in the investments to come out better, because none of it is being offset by money being paid to the lender.
Except that even at today's low mortgage rates, you're not likely to find a savings or investment that is absolutely guaranteed by the function of the math, instead of speculation that you might do as well.That is true, but I don't think it was part of the assumptions of the post I quoted.Plus, if you keep a big mortgage and fall on hard financial times like a cut in pay, you lose a lot of the deduction, which make the net mortgage interest a considerably bigger part of your total income, and it is a time when you can least afford it.
And there is of course a flip side to it - if you didn't sink the large prepayment upfront, the comparative alternative would be to put it into an investment earning the same after-rate rate as the mortgage.
I've always cautioned folks that they need to max pretty much ever possible tax-advantaged investment, pay off most debts, and have at least 6 months to a year of living expenses before they pay anything extra on a mortgage.Your liquidity will always be better if you didn't sink in the prepayment, so if you fall on hard times, you have that reserve to tap in one case, and not in the other.
I don't know of any way paying mortgage interest to a lender improves your cash flow or net worth ... no matter how much of it might be tax deductible.But I think all that is besides the point here - my main interest in the comparison is the net worth total over the same period, using the same amount of cashflow If you are earning the exact same after-tax rate on your risk-free investment at the mortgage, it seems to me that the net worth total would be identical between making a prepayment on one hand, or investing on the other hand, over the same duration. The only difference would be reduced liquidity in the case of prepayment.
For most folks who can afford to choose whether to pay extra on a mortgage or to invest more in taxable accounts after maxing their tax-advantaged retirement plans, paying off most other debts, and building an adequate emergency fund, the cap gains tax rate is probably substantially lower than the amount they get to deduct on a mortgage. So losing the mortgage deduction is likely to cost more than they gain from a lower cap gains tax bracket. Besides, if they've lost so much income that their cap gains tax bracket is lower --or non existent -- chances are they cannot afford to be investing as much.True, but your net investment return may also increase if you are in a lower tax bracket as a result, if you saved/invested instead of prepaid.Furthermore, no matter what your tax deduction may be, the mortgage that costs the least before taxes also costs the least after the tax deduction.
jimb
Re: Chipping away at the mortgage
Agree.jimb_fromATL wrote: That's a large percentage of your mortgage interest money that is still going to your lender despite your tax deduction. Not of all of your money. If it were a large percentage of all of your money, you probably would not be able to -- and should not -- be paying extra on the mortgage -- or have a mortgage that big.
And for those who paid off their mortgages, do you know that they invested 100% of their new found cash flow ?I've been discussing the pros and cons and helping folks with the math for paying down debts versus investments for decades ... and I've never known of a single soul who actually kept a constant cash flow by reinvesting all their money once they paid off a debt. But at least it's an option. Making mortgage payments is not optional with most mortgage lenders.
I think it clearly depends on your life circumstances, needs and discipline, and we just can't put those into spreadsheets, so mathematical comparisons is what we have to go with, ie. "everything else being the same", as much as possible. This goes for many economic questions - everything else is rarely the same, there may be unintended consequences to some actions.
No, we aren't at that point yet, but getting there.Except that even at today's low mortgage rates, you're not likely to find a savings or investment that is absolutely guaranteed by the function of the math, instead of speculation that you might do as well.
Yes, but even that is much too risky for some situations - I consider 6 months to 1 year expenses to be very insufficient liquidity.I've always cautioned folks that they need to max pretty much ever possible tax-advantaged investment, pay off most debts, and have at least 6 months to a year of living expenses before they pay anything extra on a mortgage.
And I never said it did - all I was saying is comparing net worth annually for the prepayment + minimum mortgage payment vs investment + minimum mortgage payment. And I have concluded net worth at the end of each year will be the same if the rate on mortgage and investment is the same. And that is true regardless of taxes. The only difference is liquidity - one will have no mortgage eventually, and limited liquidity, the other will have a larger investment balance and mortgage balance. But the net worth between these 2 investors will be exactly the same every year along the way .I don't know of any way paying mortgage interest to a lender improves your cash flow or net worth ... no matter how much of it might be tax deductible.
I wasn't even talking about capital gains - I was assuming taxable bond interest, which would usually be taxed at the same rate as your mortgage interest is deductible. But again, the assumption from the beginning of your post was that one is a taxpayer who always itemizes and benefits from deducting the interest. If you change that variable, it changes all the calculations, of course.
For most folks who can afford to choose whether to pay extra on a mortgage or to invest more in taxable accounts after maxing their tax-advantaged retirement plans, paying off most other debts, and building an adequate emergency fund, the cap gains tax rate is probably substantially lower than the amount they get to deduct on a mortgage. So losing the mortgage deduction is likely to cost more than they gain from a lower cap gains tax bracket. Besides, if they've lost so much income that their cap gains tax bracket is lower --or non existent -- chances are they cannot afford to be investing as much.
Re: Chipping away at the mortgage
jimb, I can't say thank you enough for that analysis of the different mortgage options. I definitely appreciate that you have shown the figures in the different scenarios. Thank you.
After maxing out all retirement accounts, having sufficient ER, I believe that given the low savings rates and not being able to match the guaranteed return from pre-paying the mortgage w/ a lump sum payment, then additional monthly amounts on top of the minimum, to be the preferred choice. There is no where I can match a 4.125% return that I am paying on this mortgage.
After maxing out all retirement accounts, having sufficient ER, I believe that given the low savings rates and not being able to match the guaranteed return from pre-paying the mortgage w/ a lump sum payment, then additional monthly amounts on top of the minimum, to be the preferred choice. There is no where I can match a 4.125% return that I am paying on this mortgage.
bbrock
Re: Chipping away at the mortgage
After reviewing your figures more jimb, it appears the different best case scenarios involving making a lump sum $100k payment and continuing to pay the same rate vs. no-cost vs. roll-in the costs vs. paying them upfront, that the difference in interest paid is ~$25.5k, ~$19k, ~$19k, or ~$21k, respectively. That's not as significant as I had thought. Still though, it is money saved. Will have to think about what to do.
Last edited by bbrock on Fri Jul 28, 2017 2:55 pm, edited 2 times in total.
bbrock
- jimb_fromATL
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Re: Chipping away at the mortgage
It's a tough call.bbrock wrote:After reviewing your figures more jimb, it looks like in the different best case scenarios involving making a lump sum $100k payment and continuing to pay the same rate vs. no-cost vs. roll-in the costs vs. paying them upfront, that the difference in interest paid is ~$25.5k, ~$19k, ~$19k, or ~$21k. That's not as significance as I had thought. Still though, it is money saved. Will have to think about what to do.
If you pay the closing costs out of pocket, you'll avoid paying the interest on that amount for the remaining life of the loan.
If you pay the $100 +/- to reduce the mortgage balance and then refi, you'll avoid paying compound interest on the $100K for the remaining life of the mortgage too.
If you keep the $100K invested elsewhere, it would need to give you a guaranteed rate that is equivalent to the mortgage rate plus taxes that you would pay on the earnings. That makes the ROI for paying down the mortgage better than you can get in virtually any other investment for after-tax money in taxable accounts, that is also absolutely guaranteed -- instead of speculation that you might do better in the market.
But while the end result and return is guaranteed for paying off the mortgage faster, you do have the $100K tied up in the equivalent of a bond or CD that you cannot easily touch until the end of its term. That's not liquidity at all.
And if you refi for a shorter term with a higher minimum payment you lose the option to drop back to a lower payment if times get really tough financially at some point in the future. I've known people who got into serious trouble when they had a job loss or cut in pay -- where being able to drop back to a few hundred bucks lower mortgage payment would have made a huge difference.
...And I've known people who had to postpone retirement, or even lost their homes because they kept big mortgages so they could invest more in the market. Then when their investments tanked at the same time they lost their job or suffered a cut in pay in the crashes of 2002/3 and 2008, they could not afford the mortgage payments, and didn't have enough left in their depleted investment accounts to survive. If they had paid off their mortgages, they could have paid the T&I alone on their reduced income.
On the other hand, some folks who have paid down their mortgages a lot, and if they have merely lower paying jobs instead of NO job, can probably get a new mortgage on their reduced income because they owe less and have a more favorable loan-to-value ratio on the property and an acceptable debt-to-income ratio to qualify.
So ... along with deciding how much money it might save, if you do choose to cash out the $100K, be sure you have plenty of backup cash to get you through a long dry spell if things go to heck financially before you actually have the mortgage completely paid off.
jimb
- jimb_fromATL
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Re: Chipping away at the mortgage
For paying down a mortgage with spare money as an investment, and disregarding taxes, you get exactly the same improvement in net worth -- the same rate-of-return-- for paying down the loan as you get for earning the money in another investment. And yes, it is a lot less liquid when it's tied up in the home equity. But the end result ROI is absolutely guaranteed with no risk to the principal.madbrain wrote:And I have verified this to be the case with my own calculations - the only thing that I find different is the compounding difference between mortgages and savings account rates as quoted. Mortgage interest is calculated monthly and doesn't compound.madbrain wrote:But I think all that is besides the point here - my main interest in the comparison is the net worth total over the same period, using the same amount of cashflow If you are earning the exact same after-tax rate on your risk-free investment at the mortgage, it seems to me that the net worth total would be identical between making a prepayment on one hand, or investing on the other hand, over the same duration. The only difference would be reduced liquidity in the case of prepayment.
Savings rates are paid monthly but interest compounds. So the savings/investment APY you need to earn to match your mortgage interest rate is (1+(APR/12))^12 .
As for the difference in the rate, that's mostly academic.
Using that formula for a 3% loan, (1+(0.03/12))^12 -1 returns 3.042%
But -- disregarding taxes -- that doesn't mean you have to earn a higher rate to pay off a a debt. It's just the difference between calculating interest with annual or monthly compounding.
Mortgages are annuities with rates and payments calculated with interest based on monthly payments with interest recalculated (compounded) on the unpaid balance monthly, So when comparing monthly compounding for paying a debt to investing the same money elsewhere, you need to use the same number of periods per year for both calculations to have meaningful results.
For example:
- Using the financial functions to choose and use the correct math formulas for us, then:
If you invest 10,000 for 12 months compounded monthly and let the FV() function do all the steps for us, it will be worth
=FV(3.0%/12, 12, 0, -10000 ) = $10304.16.
If you invest a lump sum of $10,000 for 12 months at 3.% compounded annually it will be worth
=FV(, 1., 0, -10000) = $10,300.00
Solving for the annual rate needed to get the compound interest result
=RATE(1, 0, 10000, -10304.16) returns 3.042%
But solving for the rate compounded monthly, you divide the rate by 12 and multiply the result by 12. So solving for the rate compounded monthly
=RATE(12/12 , 0, 10000, .00) * 12 = 3.0%
Let's look at a mortgage:
- Suppose you have a mortgage balance of $250,000 at 4.% with a payment of $1319.59 and 25.0 years (300 months) remaining.
If you pay it down by $100,000 then the $150,000 balance will be paid off in 143.12 months.
-LOG(1- 150000/1319.59 * 0.04000/12) / LOG(1+0.04000/12) = 143.119
Or letting NPER() do the math, =NPER(0.04/12, 1319.59, -150000) … does the math for us and returns 143.119
The original mortgage would still have a balance of $161,005.96 at that time.
100000 *(1+0.04000/12) ^ 143.12 = $161,005.96
Or using FV() to do the math for us =FV(4.% /12,143.119, 0, -100000 ) returns $161,005.96
The formula for rate with interest compounded monthly is
((FutureValue/StartValue)^(1/months)-1)*months
=((161005.96/100000)^(1/143.1194)-1)*12 returns 4.00%
=RATE(143.11936, 0, 100000, -161005.96) * 12 does the math for us and returns 4.00%
(I've spent days --maybe weeks-- in a previous life writing software algorithms in several programming languages to do that -- way back before there were such things as libraries of standard math and financial functions ... or PCs, spreadsheets, or the internet. I still marvel at how quick and easy it is to solve for incredibly complex and repetitive solutions in these new-fangled spreadsheets.)
HERE is a discussion of newton's method, and the formulas involved.
In spreadsheets, the financial library functions automatically choose the correct math formulas for the parameters you define in the function call. That alone makes it a lot less prone to error than trying to memorize all the formulas yourself.
... And for common solutions we look for in investments and debts, the most useful are the RATE() function, along with IRR() and XIRR() and others. They are the way to go -- since they pick the correct formula and always do the zillions of tedious iterative calculations in the right order ... and always get the equivalent of all the parentheses in the right order.
jimb
Re: Chipping away at the mortgage
What I didn't catch was the OPs age. I tend to think paying off low rate mortgages at early age is not a priority. Paying them off 50+ may make sense if everything else is taken care.
I was in similar situation 5+ years ago and was paying off a little bit of my 4+-% 30 year mortgage. Eventually I decided to refi to a 3.0% 30 year instead. Rate for 15 year is now around 3.25.
Unlike some others I'm not in huge rush to pay off low rate mortgages. I think there is value in extra liquidity.
In terms of refi fees they are rolled into the balance. You can pay more fees and get lower rates or less fees for slightly higher rates. It's just a financial calculation and depends on how long you think you will have the House. I'm going to guess a no fee refi for 15 years would be around 3.5 to 3.75. Not sure it is worth it for that marginal improvement vs low 4s . If you can get rate down to 3.0 then it may be.
I was in similar situation 5+ years ago and was paying off a little bit of my 4+-% 30 year mortgage. Eventually I decided to refi to a 3.0% 30 year instead. Rate for 15 year is now around 3.25.
Unlike some others I'm not in huge rush to pay off low rate mortgages. I think there is value in extra liquidity.
In terms of refi fees they are rolled into the balance. You can pay more fees and get lower rates or less fees for slightly higher rates. It's just a financial calculation and depends on how long you think you will have the House. I'm going to guess a no fee refi for 15 years would be around 3.5 to 3.75. Not sure it is worth it for that marginal improvement vs low 4s . If you can get rate down to 3.0 then it may be.
- jabberwockOG
- Posts: 3087
- Joined: Thu May 28, 2015 7:23 am
Re: Chipping away at the mortgage
Very few things in life can beat the wonderful, secure feeling of owning your own home and property absolutely free and clear - sweep away the naive and overly optimistic rationalizations about cost of money, debt leverage, opportunity cost, and other finance-babble, and it is just that simple.
- jimb_fromATL
- Posts: 2278
- Joined: Sun Nov 10, 2013 11:00 am
- Location: Atlanta area & Piedmont Triad NC and Interstate 85 in between.
Re: Chipping away at the mortgage
I can vouch for that from from real-life experience plus the benefit of 20/20 hindsight.jabberwockOG wrote:Very few things in life can beat the wonderful, secure feeling of owning your own home and property absolutely free and clear - sweep away the naive and overly optimistic rationalizations about cost of money, debt leverage, opportunity cost, and other finance-babble, and it is just that simple.
It is true that you might be able to earn more in the stock market. But it is also true there might be a market crash that takes you 5 to 10 years or more to recover from the loss. Meanwhile, you have a big mortgage payment.
I've known a number of folks who gambled with their home equity that they might earn more in the market -- and lost the bet. Some had to postpone retirement, some had to go back to work, and some who lost both their investment and their jobs had big mortgage payments they could no longer afford, and not enough money in their crashed investment accounts to pay off the mortgage -- and thus lost their homes.
Once you have a paid-for home, you don't need as much in liquid assets for emergencies, since the taxes and insurance and maintenance alone are much less than a typical mortgage payment.
Just having a paid for home is like owning a bond fund or annuity that guarantees a payout of the former mortgage payment at the former mortgage rate plus tax with interest compounded monthly on the remaining balance for the remaining life of the original amortization schedule.
You can cut back on your hours, or work at a job you like more even though it may pay less. Or you can invest more aggressively in the stock market. It’s a lot less stressful riding out the market’s ups and downs when you’ve already guaranteed a long-term rate of return equivalent to the mortgage payment.
Or you can afford to invest in more stable value funds with less return and less worry, because you don’t really need the money as much … when you don’t have any debt.
Or you might be able to do what I did 25+ years ago (at age 45) and drop out of the rat-race a lot earlier than most people.
No more many-hours-long rush-hour traffic jams where all the other drivers except me and thee are idiots;
No more red-eye flights and 90 hour weeks to meet deadlines when other peoples' lack of planning becomes your emergency;
and no more staff meetings with managers who were no doubt the role models for the Dilbert comic strip.
jimb
Re: Chipping away at the mortgage
Sorry about the delay in responding. Thanks for all the recent posts and feedback.
Jimb, thanks for all thorough analysis that I couldn't even begin to duplicate. It's greatly appreciated.
I also enjoy the feeling of being debt free. That is why I/we prioritized paying off all of my wife's student loans, even when the only ones left were very low interest rate loans. I wanted them done/gone. I like to free up that monthly cash flow. And, with our mortgage as our only debt now, I intend to do the same. Yes, liquidity is important, and I understand the recent posts about that, but with an emergency reserve set aside (probably more on the 6 mo. side; could be more though), all retirement accounts maxed out, and our large taxable portfolio, I believe we can take the "risk/educated decision" to expedite the mortgage payoff. While we would lose the liquidity of the ~$100k tax-exempt bonds in our portfolio if used to pay towards our mortgage, in a worst case scenario, we can sell some from our stock portfolio if needed in an emergency. At one time, people had suggested to consider my entire taxable portfolio as my emergency reserve. I never have considered it our emergency reserve and have still set aside some in a savings account for that purpose, but worst case scenario I guess it could be looked at it needed. Therefore, that enables us to prioritize the mortgage payoff in an intention to free up that monthly cash flow. I like the guarantee return it would bring by paying down/off the mortgage. From jimb's thorough analysis, I would have to earn a much higher interest rate to have that same guaranteed return on that ~$100k.
Undecided though if going through the process to refi is worth it right now w/ refi rates not being as low as they used to be.
Jimb, thanks for all thorough analysis that I couldn't even begin to duplicate. It's greatly appreciated.
I also enjoy the feeling of being debt free. That is why I/we prioritized paying off all of my wife's student loans, even when the only ones left were very low interest rate loans. I wanted them done/gone. I like to free up that monthly cash flow. And, with our mortgage as our only debt now, I intend to do the same. Yes, liquidity is important, and I understand the recent posts about that, but with an emergency reserve set aside (probably more on the 6 mo. side; could be more though), all retirement accounts maxed out, and our large taxable portfolio, I believe we can take the "risk/educated decision" to expedite the mortgage payoff. While we would lose the liquidity of the ~$100k tax-exempt bonds in our portfolio if used to pay towards our mortgage, in a worst case scenario, we can sell some from our stock portfolio if needed in an emergency. At one time, people had suggested to consider my entire taxable portfolio as my emergency reserve. I never have considered it our emergency reserve and have still set aside some in a savings account for that purpose, but worst case scenario I guess it could be looked at it needed. Therefore, that enables us to prioritize the mortgage payoff in an intention to free up that monthly cash flow. I like the guarantee return it would bring by paying down/off the mortgage. From jimb's thorough analysis, I would have to earn a much higher interest rate to have that same guaranteed return on that ~$100k.
Undecided though if going through the process to refi is worth it right now w/ refi rates not being as low as they used to be.
bbrock
Re: Chipping away at the mortgage
Following up on my thread.
After much analysis, forecasting/projecting, I have determined it is not in my best interest to withdraw the $100k +/- and use to pay down our mortgage. I'm going to keep it in our VCADX. Besides already having the emergency reserves set aside, it will serve as a further reserve. While the large advanced pay down would help shorten the life of my current mortgage, it will not help as drastically as I had thought if we continue making monthly principal payments and refi as well.
Regarding a refi, I have been in contact w/ a MB. He has some competitive rates/offerings. While I originally thought about going to a 15 yr fixed, I too have reconsidered d/t the increased payment we would be locked into. We are at $1453.95 now on our 30 yr 4.125 fixed and paying an extra $800/mo to prinicpal (have been doing that since 1/1/16). The 15 yr fixed would be 3.125%, guaranteed no costs at closing/zero/0, w/ a payment of $1839.05. That's a little less than a $400 increase vs. our current mortgage. Seems doable since we are actually paying $2253.95 but w/ many potential changed over the next 5-6 years such as our kids transitions from preschool to kindergarten/primary school, possibly needing pre & post school care, etc., it seems risky to commit to the increased mortgage of $1839.
Thus, as a middle ground, I asked the MB to quote me a 20 yr fixed. That rate would be 3.5% fixed, guaranteed no costs, w/ a payment of $1531.09. Committing to that increase of $77/mo. seems doable/fine. And, doing it this way we still get a lower rate, and can continue to make extra principal payments as we are. If we can continue the extra $800 payments/mo. as we are that would be great, but I have thought if we can't do that, or have to scale back, perhaps 1-2 x per yr we may be able to make a $4k payment to principal. We'd draw that $4k from our taxable dividends, which would just be the dividends from one qtr.
Thoughts/opinions?
After much analysis, forecasting/projecting, I have determined it is not in my best interest to withdraw the $100k +/- and use to pay down our mortgage. I'm going to keep it in our VCADX. Besides already having the emergency reserves set aside, it will serve as a further reserve. While the large advanced pay down would help shorten the life of my current mortgage, it will not help as drastically as I had thought if we continue making monthly principal payments and refi as well.
Regarding a refi, I have been in contact w/ a MB. He has some competitive rates/offerings. While I originally thought about going to a 15 yr fixed, I too have reconsidered d/t the increased payment we would be locked into. We are at $1453.95 now on our 30 yr 4.125 fixed and paying an extra $800/mo to prinicpal (have been doing that since 1/1/16). The 15 yr fixed would be 3.125%, guaranteed no costs at closing/zero/0, w/ a payment of $1839.05. That's a little less than a $400 increase vs. our current mortgage. Seems doable since we are actually paying $2253.95 but w/ many potential changed over the next 5-6 years such as our kids transitions from preschool to kindergarten/primary school, possibly needing pre & post school care, etc., it seems risky to commit to the increased mortgage of $1839.
Thus, as a middle ground, I asked the MB to quote me a 20 yr fixed. That rate would be 3.5% fixed, guaranteed no costs, w/ a payment of $1531.09. Committing to that increase of $77/mo. seems doable/fine. And, doing it this way we still get a lower rate, and can continue to make extra principal payments as we are. If we can continue the extra $800 payments/mo. as we are that would be great, but I have thought if we can't do that, or have to scale back, perhaps 1-2 x per yr we may be able to make a $4k payment to principal. We'd draw that $4k from our taxable dividends, which would just be the dividends from one qtr.
Thoughts/opinions?
bbrock
-
- Posts: 2140
- Joined: Fri Aug 18, 2017 8:46 pm
Re: Chipping away at the mortgage
How far are you from retirement and how large is your taxable investment account?
Personally, I would be very tempted to pull the strings required to eliminate the mortgage debt now and put the P&I payment+800 into my taxable investment account for the next 15 years. This can allow a slightly more aggressive AA since you would have a negative bond worth your house payments each month or that much lower living expenses necessary. The increased equities in a tilted AA "should" also improve your ror on your nest egg to help assist with offsetting the hit to your taxable.
It just seems with your level of assets, it would not skew your NW very much to real estate. I am not a fan of lump summing a part of your mortgage and would keep that money invested if you decided not to pay off the house and continue with a no-cost 15yr and paying down aggressively.
Personally, I would be very tempted to pull the strings required to eliminate the mortgage debt now and put the P&I payment+800 into my taxable investment account for the next 15 years. This can allow a slightly more aggressive AA since you would have a negative bond worth your house payments each month or that much lower living expenses necessary. The increased equities in a tilted AA "should" also improve your ror on your nest egg to help assist with offsetting the hit to your taxable.
It just seems with your level of assets, it would not skew your NW very much to real estate. I am not a fan of lump summing a part of your mortgage and would keep that money invested if you decided not to pay off the house and continue with a no-cost 15yr and paying down aggressively.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.
Re: Chipping away at the mortgage
Thanks for the reply.
Yes, I have thought about paying off the mortgage completely, but ultimately that does not get much thought. Prior to the purchase, we had actually even considered an all cash purchase, but obviously declined that route. I don't feel as comfortable using our taxable to pay off the mortgage and skewing the AA. Yes I could rebuild it with what I'll save on P&I (~1454) +800 extra, but to me it just rather makes sense to pay it down aggressively and keep our portfolio in tact.
23-25 yrs from retirement
$1.12m taxable
Yes, I have thought about paying off the mortgage completely, but ultimately that does not get much thought. Prior to the purchase, we had actually even considered an all cash purchase, but obviously declined that route. I don't feel as comfortable using our taxable to pay off the mortgage and skewing the AA. Yes I could rebuild it with what I'll save on P&I (~1454) +800 extra, but to me it just rather makes sense to pay it down aggressively and keep our portfolio in tact.
23-25 yrs from retirement
$1.12m taxable
bbrock
Re: Chipping away at the mortgage
25 years from retirement! Don't sweat it. As long as you go into retirement with no mortgage you've hit a homerun. Looks like you will have your home paid off 5-10 years before you retire. You have a great asset base now which will surely grow larger and your wife will have a nice pension. I would go with the 20 year and pay a bit more towards it when you are able.
For the ashes of his fathers, And the temples of his gods. |
Pensions= 2X yearly expenses. Portfolio= 40X yearly expenses.
Re: Chipping away at the mortgage
I had a similar dilemma a year ago except that the extra money I had was in a savings account and not invested.
I ended up refinancing from a 30 year 4.125 mortgage to a 15 year 2.875. i also reduced the principal balance substantially so that the monthly mortgage payment is actually less than it was.
Recently I was considering paying off the mortgage with new money but decided to instead invest in a conservative 50/50 (there's another thread out there with the details) portfolio. My monthly interest on my mortgage is about $550. Paying off the mortgage now would only save me $6k or so a year and wouldn't significantly increase my cash flow. (Don't forget the interest deduction as well)
I was throwing $400 extra a month at the mortgage before the refinance and continue to do so. Should be totally paid off within 10 years at this pace.
Don't get my wrong; I'd love to be rid of it, but it just doesn't pay. Having the liquidity while it is still earning the equivalent of the mortgage cost or better is a win-win. (There is always the risk of a market downturn of course; I'm not discounting that. Dumping the money into the mortgage would lock it up until I sell, so I consider this money tied up for that amount of time in the market if necessary)
The trick is to find the best balance for your own situation. My own situation took me months of questioning , thinking, overthinking, and many posts before I settled on this plan of action.
If I may give you some advice- do the no cost refi for whatever term necessary to keep the payments the same or less , as long as you end up reducing your interest rate and the term (and don't increase your principal balance at all or by much). As many on this forum are fond of saying- you can have your cake and eat it too.
I ended up refinancing from a 30 year 4.125 mortgage to a 15 year 2.875. i also reduced the principal balance substantially so that the monthly mortgage payment is actually less than it was.
Recently I was considering paying off the mortgage with new money but decided to instead invest in a conservative 50/50 (there's another thread out there with the details) portfolio. My monthly interest on my mortgage is about $550. Paying off the mortgage now would only save me $6k or so a year and wouldn't significantly increase my cash flow. (Don't forget the interest deduction as well)
I was throwing $400 extra a month at the mortgage before the refinance and continue to do so. Should be totally paid off within 10 years at this pace.
Don't get my wrong; I'd love to be rid of it, but it just doesn't pay. Having the liquidity while it is still earning the equivalent of the mortgage cost or better is a win-win. (There is always the risk of a market downturn of course; I'm not discounting that. Dumping the money into the mortgage would lock it up until I sell, so I consider this money tied up for that amount of time in the market if necessary)
The trick is to find the best balance for your own situation. My own situation took me months of questioning , thinking, overthinking, and many posts before I settled on this plan of action.
If I may give you some advice- do the no cost refi for whatever term necessary to keep the payments the same or less , as long as you end up reducing your interest rate and the term (and don't increase your principal balance at all or by much). As many on this forum are fond of saying- you can have your cake and eat it too.
Re: Chipping away at the mortgage
In a CD or money market account paying a total of 34.3% regular fed and state income tax on interest every year, it would need to earn in the range of 5.9%. I suspect a lot of folks who have the spare cash and want a guaranteed result with absolutely no risk might jump on the chance to buy a CD that guarantees that much for 7 years.
beautiful math, jimb. I learned something today.
beautiful math, jimb. I learned something today.
- unclescrooge
- Posts: 6265
- Joined: Thu Jun 07, 2012 7:00 pm
Re: Chipping away at the mortgage
I'm my previous house, I did a no cost refinance 4 times in 2.5 years.bbrock wrote: ↑Sat Jul 22, 2017 1:23 am
I'll have to look at these no cost refi mortgages more. Since time is tight, perhaps a mortgage broker could be of assistance. For those that have done a true no cost $0 refi (no closing costs or 3rd party fees) were those fees wrapped into your mortgage balance, or do you mean they were reflected in a slightly higher rate?
I did not consider the option of looking at ARM. I guess that could be an option too if I am set on getting it paid off soon.
I started with 3.75% on a 7/1 adjustable, and ended with 2.5%. The bank waived all fees, except appraisal.
Jumbo loans are more likely to get favourable rates than conforming loans.
If you're going to prepay, you should get an adjustable rate. They typically have the lowest rates.
Once my remodel is done, I'm going to refinance. My rate is currently locked in at 2.75%, no cost except appraisal.
Re: Chipping away at the mortgage
Thanks for all of the responses/input.
I decided to go with a 20 year fixed 3.5%. P&I will be $1522.39, which is not significantly different than our current $1454. The 15 year was at 3.125% fixed with a payment of $1850 if I recall. Both are true no cost through this mortgage broker I'm working with.
The 20 will cost me a little more, but I'm willing to pay that given if there was an emergency and one of us had to stop working, etc. Going to continue making extra $800 principal payments for as long as possible.
I decided to go with a 20 year fixed 3.5%. P&I will be $1522.39, which is not significantly different than our current $1454. The 15 year was at 3.125% fixed with a payment of $1850 if I recall. Both are true no cost through this mortgage broker I'm working with.
The 20 will cost me a little more, but I'm willing to pay that given if there was an emergency and one of us had to stop working, etc. Going to continue making extra $800 principal payments for as long as possible.
bbrock
- sunny_socal
- Posts: 2732
- Joined: Tue Mar 24, 2015 4:22 pm
Re: Chipping away at the mortgage
Great news! Thanks for the updatebbrock wrote: ↑Wed Aug 23, 2017 9:51 pm Thanks for all of the responses/input.
I decided to go with a 20 year fixed 3.5%. P&I will be $1522.39, which is not significantly different than our current $1454. The 15 year was at 3.125% fixed with a payment of $1850 if I recall. Both are true no cost through this mortgage broker I'm working with.
The 20 will cost me a little more, but I'm willing to pay that given if there was an emergency and one of us had to stop working, etc. Going to continue making extra $800 principal payments for as long as possible.
Re: Chipping away at the mortgage
So my final input here is that my refi ended up costing me a whole $0.65. Ouch. And that was simply b/c I don't have a brick & mortar bank (I used Ally) and didn't want to pay for $20 for a wire. And, I wouldn't be able to have Ally mail me/escrow comp. a banker's/cashier's check in the timeframe I needed. Long story short, that $0.65 was for a money order. I think I could live w/ it though.
Tx again y'all for your help with this matter!
Tx again y'all for your help with this matter!
bbrock