Paying off a mortgage with an almost non-existent rate

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rashad3000
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Paying off a mortgage with an almost non-existent rate

Post by rashad3000 » Mon Dec 11, 2017 10:58 am

My wife and I currently make $145,000 a year. We have 3 children (11, 6, 5). We owe $26,100 in credit card debt at 0% until September 2018. This debt comes from a car loan we had at 3.05% that we transferred over to our credit union credit card at 0% with $0 fee for 12 months.

We currently owe $179,000 on our 15-year mortgage at 0.125% (yes, that's the actual rate- thanks NACA). It was originally $215,000 in May 2015.

We will have the credit card paid off before the 0% expires. The next goal is to quickly get $25,000 in a money-market account for an emergency fund. After that, we plan to max out our 403(b) accounts, in addition to continuing maxing out our Roth IRAs. This will lead to about $750 extra each month.

Should we just throw that $750 into our money market account? Or since we are maxing everything out, would it make sense to pay the mortgage off early? Does it ever make sense to pay off a mortgage with such a low interest rate?

Thanks in advance!

Thesaints
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Re: Paying off a mortgage with an almost non-existent rate

Post by Thesaints » Mon Dec 11, 2017 11:01 am

it doesn’t, whenever those $750 can generate an after tax profit larger than the after tax mortgage interest expense.

b42
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Re: Paying off a mortgage with an almost non-existent rate

Post by b42 » Mon Dec 11, 2017 11:04 am

With an interest rate of 0.125%, it doesn't make much sense to pay off the mortgage any faster than you have to. You may be in a situation where the best thing to do would be to start investing in your taxable accounts after the retirement accounts are maxed out.

EDIT: Just as an example, 0.125% of $179,000 is $223.75, which is an incredibly small amount of interest to pay on $179,000.

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flamesabers
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Re: Paying off a mortgage with an almost non-existent rate

Post by flamesabers » Mon Dec 11, 2017 12:11 pm

rashad3000 wrote:
Mon Dec 11, 2017 10:58 am
Should we just throw that $750 into our money market account? Or since we are maxing everything out, would it make sense to pay the mortgage off early? Does it ever make sense to pay off a mortgage with such a low interest rate?
At such a low rate, I recommend investing over paying down the mortgage. Have you considered any of these to use the extra $750 on:

*Taxable investments
*529 accounts for your children
*Savings bonds

Maverick3320
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Re: Paying off a mortgage with an almost non-existent rate

Post by Maverick3320 » Mon Dec 11, 2017 12:16 pm

How do you get a 0.125% mortgage?

cal91
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Re: Paying off a mortgage with an almost non-existent rate

Post by cal91 » Mon Dec 11, 2017 12:18 pm

Wow. I've never heard of an interest rate that low. NACA? Do you have to meet qualifications to use it?

UKFred
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Re: Paying off a mortgage with an almost non-existent rate

Post by UKFred » Mon Dec 11, 2017 12:22 pm

From a purely financial point of view, it makes no sense to pay off the mortgage because you can probably earn more (post tax) than your monthly payments. But there is another aspect to consider: How likely is it that you will diligently invest that money month-on-month? Will your expenses slowly creep up to use up all or part of those $750?

raamakoti
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Re: Paying off a mortgage with an almost non-existent rate

Post by raamakoti » Mon Dec 11, 2017 12:26 pm

Maverick3320 wrote:
Mon Dec 11, 2017 12:16 pm
How do you get a 0.125% mortgage?
NACA's mission is to provide affordable homeownership with a focus on low- to moderate-income people and communities
Targeted Members - Members whose income is less than 80% of the median income in the Metropolitan Statistical Area ("MSA") where the Member is purchasing (Click here);
B.Targeted Area - Properties in a census track where the medium income is less than 80% of the median income in the MSA (Click here)
C.Non-Targeted - Members who are not Targeted Members or purchasing in a Targeted Area, cannot purchase a property greater than the maximum Acquisition Cost for the area (Click here)

mega317
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Re: Paying off a mortgage with an almost non-existent rate

Post by mega317 » Mon Dec 11, 2017 12:36 pm

Even if you're extremely debt- and risk-averse it makes no sense to pay it off. There are plenty of FDIC insured ways to earn more.

Can you do a cash out refi at that rate?

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CyclingDuo
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Re: Paying off a mortgage with an almost non-existent rate

Post by CyclingDuo » Mon Dec 11, 2017 12:41 pm

rashad3000 wrote:
Mon Dec 11, 2017 10:58 am
My wife and I currently make $145,000 a year. We have 3 children (11, 6, 5).

Should we just throw that $750 into our money market account? Or since we are maxing everything out, would it make sense to pay the mortgage off early? Does it ever make sense to pay off a mortgage with such a low interest rate?
No, don't use it to pay off the mortgage!

See what is bolded above? 3 children ages 11, 6, 5. You didn't mention any funds established for them such as 529's or other. Do you have any accounts started for their college educations? I would establish a 529 for each one and start socking away that $750 every month in their accounts. Maybe give $4K a year to the 11 year old, and $2500 each for the younger two so you can play a bit of catch up with the 11 year old for the first couple of years.

If not that, just sock the $750 per month away in the family fund as things are going to come up with the kids over the years where you need some money.

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djpeteski
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Re: Paying off a mortgage with an almost non-existent rate

Post by djpeteski » Mon Dec 11, 2017 12:53 pm

I am a debt free guy, and would support investing rather than paying off this mortgage at that rate. If you are extremely conservative you could stick the money in an online savings account and make about 1.05% on your money. Add some CDs and that rate can increase a little.

I would go for a very conservative AA model and invest rather than pay off. I'd probably do like 30% in cash (CDs and savings), 30% bonds, 40% stocks.

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Pajamas
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Re: Paying off a mortgage with an almost non-existent rate

Post by Pajamas » Mon Dec 11, 2017 1:00 pm

rashad3000 wrote:
Mon Dec 11, 2017 10:58 am
Does it ever make sense to pay off a mortgage with such a low interest rate?
It wouldn't make sense currently because you can earn significantly more interest without taking significant risk, say in a savings account, money market fund, or CD. You could always use money in those investments to pay off the mortgage whenever you wanted.

I like not having a mortgage, but I would borrow as much as I could at that rate anyway.

Maverick3320
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Re: Paying off a mortgage with an almost non-existent rate

Post by Maverick3320 » Mon Dec 11, 2017 1:14 pm

raamakoti wrote:
Mon Dec 11, 2017 12:26 pm
Maverick3320 wrote:
Mon Dec 11, 2017 12:16 pm
How do you get a 0.125% mortgage?
NACA's mission is to provide affordable homeownership with a focus on low- to moderate-income people and communities
Targeted Members - Members whose income is less than 80% of the median income in the Metropolitan Statistical Area ("MSA") where the Member is purchasing (Click here);
B.Targeted Area - Properties in a census track where the medium income is less than 80% of the median income in the MSA (Click here)
C.Non-Targeted - Members who are not Targeted Members or purchasing in a Targeted Area, cannot purchase a property greater than the maximum Acquisition Cost for the area (Click here)
Interesting. Manhattan's median family income is 66,000 per year, so I guess I'm wondering where in the country 145,000 per year is less than 80% of the median.

hudson
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Re: Paying off a mortgage with an almost non-existent rate

Post by hudson » Mon Dec 11, 2017 1:33 pm

rashad3000 wrote:
Mon Dec 11, 2017 10:58 am
My wife and I currently make $145,000 a year. We have 3 children (11, 6, 5). We owe $26,100 in credit card debt at 0% until September 2018. This debt comes from a car loan we had at 3.05% that we transferred over to our credit union credit card at 0% with $0 fee for 12 months.

We currently owe $179,000 on our 15-year mortgage at 0.125% (yes, that's the actual rate- thanks NACA). It was originally $215,000 in May 2015.

We will have the credit card paid off before the 0% expires. The next goal is to quickly get $25,000 in a money-market account for an emergency fund. After that, we plan to max out our 403(b) accounts, in addition to continuing maxing out our Roth IRAs. This will lead to about $750 extra each month.

Should we just throw that $750 into our money market account? Or since we are maxing everything out, would it make sense to pay the mortgage off early? Does it ever make sense to pay off a mortgage with such a low interest rate?

Thanks in advance!
I think that it's a big plus that you are going to clear your car loan/credit card debt in less than a year.
It's another big plus that your mortgage balance has dropped 36K.
Consider paying down your mortgage and clearing all debt. Being debt free is good.

Roger Babson recommends....
http://www.newenglandhistoricalsociety. ... ofdebt.jpg

http://www.thedacrons.com/eric/dogtown/ ... cester.php

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Watty
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Re: Paying off a mortgage with an almost non-existent rate

Post by Watty » Mon Dec 11, 2017 1:51 pm

rashad3000 wrote:
Mon Dec 11, 2017 10:58 am
Or since we are maxing everything out, would it make sense to pay the mortgage off early? Does it ever make sense to pay off a mortgage with such a low interest rate?
I am a huge fan of having a paid off house but at that rate I would be very reluctant to pay it off early since you could just put the money into some ultra safe investment and be able to get a higher rate.

I can think two special situations though that might tip the balance more towards paying it off. They are;

1) You don't have the discipline to save the money and will just spend the money and have lifestyle creep.

2) Your kids college expenses will start in about seven years. Having seven years worth of savings in a taxable account could reduce the financial aid that they will get but as I recall home equity and retirement accounts don't count against the financial aid calculations. If this is a factor then I would still save the money for now but in five or six years you could make a large prepayment on the home loan to reduce your taxable accounts.

It would also be good to double check details of that loan to make sure that it does not also have any unfavorable terms.

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Tamarind
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Re: Paying off a mortgage with an almost non-existent rate

Post by Tamarind » Mon Dec 11, 2017 1:59 pm

Don't pay off the mortgage. At that rate, your emergency fund will provide better return. I'm not sure from your post but it looks like you don't have one right now or it's not as large as you want? I would definitely accelerate that with any extra money.

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