Author Topic: Fund husband's sabbatical by paying off the house?  (Read 4760 times)

ambimammular

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Fund husband's sabbatical by paying off the house?
« on: May 28, 2014, 03:43:48 PM »
First off, I'm so grateful for any criticism to our plan.  We're early into this so it's still possible to game change.

Ok. My husband is a professor, and every seven years he gets a sabbatical to work on research and whatever else. His college gives him two options: 1) take one semester off and receive half of his regular salary; or 2) take the full academic year off and receive 1/2 salary. We were fortunate that for his first sabbatical (which just started), he received a grant to take the entire year at full salary, but we're looking toward the one 7 years from now. Basically, we want for him to take the full-year-at-half-salary option even if he doesn't get a grant.

Because we don't have enough liquid income to invest and have the earnings make up the other half of his salary in seven years, we were planning to pay off the house in 5 years, freeing up the $937 per month in current mortgage payments. In order to pull that off, we need to pay $500/month extra on the mortgage, though I toss in more when I can't resist.

Paying off the house early would give us 16 months to pocket that cash (nearly $16k), plus the sabbatical year of pocketing those payments. That $16k of savings, plus his 1/2 salary (we're estimating his full salary to be a minimum of $70k by that time), would give us about $51k that year to meet our annual expenses. This is more than enough to meet our $27k annual non-mortgage expenses (this includes maxing out my Roth, but not his).

Two flaws in our plan: 1) our mortgage interest rate is a mere 3.25%, so our dollars could be working much harder for us for 7 years in the stock market. 2) Not maxing out husband's Roth while we may be able to get a saver's credit (we squeaked under last year!) kinda hurts my saving sensibilities. Plus, I'm lamenting the 7 years of growth he'll be missing by diverting that money to the house.  Arrgh! I want it all!

To give you a more rounded view, I'm a stay-at-home-mom for two more years, then my eventual income can go wherever needed. We'll be in this house 20 years or longer.  Our retirement projections are cooking along nicely.

I think that's all you need. I can add numbers if required. 

I'm just curious if we're going about this in the right way. If we didn't pay off the house early we wouldn't have that extra $16k of savings and our expenses in that year would include our mortgage payment and therefore would be $38.3k. So, clearly paying off the house early works, but is there something else we could do with that $500-$600/month that would be wiser than paying off the house?

Alternatively, I could put my Roth money toward the house too and shave another year and 4 months off the mortgage, but, but...not my Roth!

After a while I feel like these numbers are just swimming around and around.  Straighten me out, folks!


Cassie

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Re: Fund husband's sabbatical by paying off the house?
« Reply #1 on: May 28, 2014, 03:52:09 PM »
No matter what I would continue to contribute to your Roth.  People on this forum will argue either way about paying off the house.

Eric

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Re: Fund husband's sabbatical by paying off the house?
« Reply #2 on: May 28, 2014, 03:59:37 PM »
If you'll receive $35k for the sabbatical year, and your expenses would be $38k including the mortgage, that only leaves you $3k short.  Seems like that should be a pretty easy amount to come up with considering that you have 7 years notice.  :)


Eric

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Re: Fund husband's sabbatical by paying off the house?
« Reply #3 on: May 28, 2014, 04:01:15 PM »
This thread has some of the most comprehensive Mortgage vs Investing debate

http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/
« Last Edit: May 28, 2014, 04:06:03 PM by Eric »

rmendpara

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Re: Fund husband's sabbatical by paying off the house?
« Reply #4 on: May 28, 2014, 04:02:27 PM »
First off, I'm so grateful for any criticism to our plan.  We're early into this so it's still possible to game change.

Ok. My husband is a professor, and every seven years he gets a sabbatical to work on research and whatever else. His college gives him two options: 1) take one semester off and receive half of his regular salary; or 2) take the full academic year off and receive 1/2 salary. We were fortunate that for his first sabbatical (which just started), he received a grant to take the entire year at full salary, but we're looking toward the one 7 years from now. Basically, we want for him to take the full-year-at-half-salary option even if he doesn't get a grant.

Because we don't have enough liquid income to invest and have the earnings make up the other half of his salary in seven years, we were planning to pay off the house in 5 years, freeing up the $937 per month in current mortgage payments. In order to pull that off, we need to pay $500/month extra on the mortgage, though I toss in more when I can't resist.

Paying off the house early would give us 16 months to pocket that cash (nearly $16k), plus the sabbatical year of pocketing those payments. That $16k of savings, plus his 1/2 salary (we're estimating his full salary to be a minimum of $70k by that time), would give us about $51k that year to meet our annual expenses. This is more than enough to meet our $27k annual non-mortgage expenses (this includes maxing out my Roth, but not his).

Two flaws in our plan: 1) our mortgage interest rate is a mere 3.25%, so our dollars could be working much harder for us for 7 years in the stock market. 2) Not maxing out husband's Roth while we may be able to get a saver's credit (we squeaked under last year!) kinda hurts my saving sensibilities. Plus, I'm lamenting the 7 years of growth he'll be missing by diverting that money to the house.  Arrgh! I want it all!

To give you a more rounded view, I'm a stay-at-home-mom for two more years, then my eventual income can go wherever needed. We'll be in this house 20 years or longer.  Our retirement projections are cooking along nicely.

I think that's all you need. I can add numbers if required. 

I'm just curious if we're going about this in the right way. If we didn't pay off the house early we wouldn't have that extra $16k of savings and our expenses in that year would include our mortgage payment and therefore would be $38.3k. So, clearly paying off the house early works, but is there something else we could do with that $500-$600/month that would be wiser than paying off the house?

Alternatively, I could put my Roth money toward the house too and shave another year and 4 months off the mortgage, but, but...not my Roth!

After a while I feel like these numbers are just swimming around and around.  Straighten me out, folks!

The math suggests you only pay the minimum toward your mortgage, and divert all excess cash flow to investments (you can decide whether to put it in a Roth, traditional IRA, brokerage, whatever).

However, some people value simplicity and would feel intrinsic happiness from getting rid of a mortgage. Is this you? I would suggest continue maxing out Roth accounts, and then put all extra cash outside of living expenses/emergency savings into the mortgage. Once paid off, you have a lot of extra cash flow to invest/live/do whatever.

ambimammular

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Re: Fund husband's sabbatical by paying off the house?
« Reply #5 on: May 28, 2014, 04:51:29 PM »
This thread has some of the most comprehensive Mortgage vs Investing debate

http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/

Ooo... thanks.  I will get right on that!

ambimammular

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Re: Fund husband's sabbatical by paying off the house?
« Reply #6 on: May 28, 2014, 05:28:22 PM »
If you'll receive $35k for the sabbatical year, and your expenses would be $38k including the mortgage, that only leaves you $3k short.  Seems like that should be a pretty easy amount to come up with considering that you have 7 years notice.  :)

35k is gross.  Net would be 29.75k.  But point taken.
And expenses would bump up to 43.5k if we're maxing both Roths (rather than putting his toward the house.
« Last Edit: May 28, 2014, 06:18:17 PM by ambimammular »

Cpa Cat

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Re: Fund husband's sabbatical by paying off the house?
« Reply #7 on: May 28, 2014, 06:16:22 PM »
If it were me and I had that choice interest rate, I would spend the next two years scraping every penny into investments. Then when you go back to work, divert your income to the house and his excess income to investments.

In 7 years, evaluate the payoff amount on the house (assuming there is one and your income over 5 years isn't enough to pay it off) and decide whether the time is right to cash in some investments to pay it off.

ambimammular

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Re: Fund husband's sabbatical by paying off the house?
« Reply #8 on: May 28, 2014, 07:38:57 PM »
If it were me and I had that choice interest rate, I would spend the next two years scraping every penny into investments. Then when you go back to work, divert your income to the house and his excess income to investments.

In 7 years, evaluate the payoff amount on the house (assuming there is one and your income over 5 years isn't enough to pay it off) and decide whether the time is right to cash in some investments to pay it off.

I like it.  I'm such a saver that it hadn't occurred to me to sell investments.

Sparkie

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Re: Fund husband's sabbatical by paying off the house?
« Reply #9 on: May 29, 2014, 01:21:50 AM »
Personally, I'd pay off the house. Although the rate is low, it is the same as a guaranteed no risk return on your money. The 7% potential return from investments is not guaranteed and given the recent run up in prices, a correction is potentially due. Since the S&P500 has only recently got higher than it was in 2000, the only real return over the past 14years has been from dividends, which probably isn't far off your mortgage rate.


Eric

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Re: Fund husband's sabbatical by paying off the house?
« Reply #10 on: May 29, 2014, 10:19:26 AM »
Since the S&P500 has only recently got higher than it was in 2000, the only real return over the past 14years has been from dividends, which probably isn't far off your mortgage rate.

That's not really how it works though.  Unless you dumped all of your money in at the top in 2000, and never invested anything else besides dividends, your real return would be much higher.  Most people invest regularly, so they dollar cost average into the market and have made quite a bit of money between 2000 and now, because much of that money went in at lower prices than the previous high in 2000.

Cassie

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Re: Fund husband's sabbatical by paying off the house?
« Reply #11 on: May 29, 2014, 02:32:51 PM »
WE chose to pay off our house and we have never regretted it. Do what feels best to you.

bacchi

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Re: Fund husband's sabbatical by paying off the house?
« Reply #12 on: May 29, 2014, 02:52:28 PM »
Personally, I'd pay off the house. Although the rate is low, it is the same as a guaranteed no risk return on your money.

The 30 year yield is above the mortgage rate. The 20 year yield is almost equal to the mortgage rate. Get a "no-risk" return AND still have liquidity.

http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield


ambimammular

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Re: Fund husband's sabbatical by paying off the house?
« Reply #13 on: May 30, 2014, 12:41:15 PM »
Personally, I'd pay off the house. Although the rate is low, it is the same as a guaranteed no risk return on your money.

The 30 year yield is above the mortgage rate. The 20 year yield is almost equal to the mortgage rate. Get a "no-risk" return AND still have liquidity.

http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

I see the extra payments as a substitute for bonds. Stabilizing, no-risk, to balance out everything else that we have in equities. Even at 34 and 37 it's hard for me to get excited about bonds. We're too young for that, and too old for all equities. I don't worry about liquidity much, as we aren't going to tap anything for a long time.

This sucks. I thought we had a plan all hammered out. There was something great about straight out subtraction off the mortgage every month, like clockwork. But Cpa Cat's ideas make so much sense. Only the actual numbers are just wishy washier depending on what the market is like in 7 years.