DONT Payoff your Mortgage Club

[neo von retorch]

I mean yeah... right now our two mortgages combine to $787k... though by June hopefully there will be one mortgage and it'll be quickly dropping below $500k.

[bacchi]

Or, sell your highly appreciated (still mortgaged) home and buy another one for cash, which is what we did. Don't worry, we still have mortgages on our rentals ;-)

This is what we're planning. We'd like to keep a mortgage when we relocate but 1) no income; and 2) rates are too high.

The current mortgage is actually more than when I bought the place (nominally). We took out 2 HELOCs, built an ADU, and upgraded the main house wiring. It kept money in the market and we're repaying it with inflationary and capital gain dollars.

[Dicey]

Sometimes doing nothing gets pretty boring. This past few days has been unexpectedly...not boring. All civilized conversation on this topic is good conversation, right?

I've been singing the DPOYM song for a long time, and nothing makes me happier than reading something like the quote below. As this was posted in eta's journal, it is quoted with her permission.

The monthly budget is such a deeply embedded psychological game, I think, SunnyDays. It's probably why it's so tempting to pay down the mortgage, even though that makes no sense mathematically in our case. Two years ago, when we bought, we could have recast the mortgage after we sold the condo. It would have brought down our monthly payment by at least $600. But with a mortgage rate of 2.99%, that plan didn't make much sense. We experienced the pain of having too much of our money tied up in the house with the condo--we used to put $800/month extra on our mortgage every month, and we had a 20 year mortgage. So then, when we wanted to buy the townhouse, it was harder to come up with the down payment.

So we have a tighter monthly budget but we also have a huge pile of money in accessible investments. Come to think of it, we really made all the right moves. We didn't put the extra money into the mortgage, where it would be less efficient and also inaccessible, but we also didn't spend it, which is why the more conservative money folk a la Dave Ramsey encourage paying down the mortgage as a money goal--the concern is that if you don't pay down the mortgage, you'll just waste the money. Having the pile of money gives us a lot more flexibility in terms of big life adjustments. If I had to stop working, for example, we could pay the monthly mortgage payment out of our savings for years...whereas, if we had recast the mortgage, the bank would still want the (lower) monthly payment, but we wouldn't have the money to pay it. Good job, us!

But yes, we do have the psychological burden of a tighter monthly budget. This actually is probably not a bad thing. It makes me less likely to buy unnecessary stuff.

Thanks, @englishteacheralex!

[Fomerly known as something]

Sometimes doing nothing gets pretty boring. This past few days has been unexpectedly...not boring. All civilized conversation on this topic is good conversation, right?

I've been singing the DPOYM song for a long time, and nothing makes me happier than reading something like the quote below. As this was posted in eta's journal, it is quoted with her permission.

The monthly budget is such a deeply embedded psychological game, I think, SunnyDays. It's probably why it's so tempting to pay down the mortgage, even though that makes no sense mathematically in our case. Two years ago, when we bought, we could have recast the mortgage after we sold the condo. It would have brought down our monthly payment by at least $600. But with a mortgage rate of 2.99%, that plan didn't make much sense. We experienced the pain of having too much of our money tied up in the house with the condo--we used to put $800/month extra on our mortgage every month, and we had a 20 year mortgage. So then, when we wanted to buy the townhouse, it was harder to come up with the down payment.

So we have a tighter monthly budget but we also have a huge pile of money in accessible investments. Come to think of it, we really made all the right moves. We didn't put the extra money into the mortgage, where it would be less efficient and also inaccessible, but we also didn't spend it, which is why the more conservative money folk a la Dave Ramsey encourage paying down the mortgage as a money goal--the concern is that if you don't pay down the mortgage, you'll just waste the money. Having the pile of money gives us a lot more flexibility in terms of big life adjustments. If I had to stop working, for example, we could pay the monthly mortgage payment out of our savings for years...whereas, if we had recast the mortgage, the bank would still want the (lower) monthly payment, but we wouldn't have the money to pay it. Good job, us!

But yes, we do have the psychological burden of a tighter monthly budget. This actually is probably not a bad thing. It makes me less likely to buy unnecessary stuff.

Thanks, @englishteacheralex!

It makes me think about how until my expensive CA condo, I tried not to get caught in the trap of looking at my house payment as a monthly payment.  But in part because I started renting, I had thought about how much I was willing to spend on housing each month now and into the future.  When I decided to buy my Financial Advisor noted, it’s basically the same range as what you talked about for rent when you moved out to CA, amazing how that worked out right? 

With CA being a no recourse state and me itemizing because I’m single and only have a $13,xxx standard deduction it makes even more sense to have a big fat mortgage and keep my brokerage account Fat as well.  (I could pay things off tomorrow).

[footwear]

I have about $142k left on our mortgage that started at 15 years at 2.5%. We have about 11 years left.

I'm firmly a member of this group vs. the pay off your mortgage now group. However I feel like having a mortgage payment will be a major factor in *not* deciding to FIRE if/when that time comes. I know I won't like the payment hanging over my head without a paycheck!

Realistically the chances that we are comfortable and ready to FIRE before 11 years is probably slim but I'd love to be able to if things work out. Kind of kicking myself for refinancing to a 15 year and not doing a 30 year...could be investing a lot more each month. On the bright side we will have a paid off house before either of us reach 50.

[halfling]

Near-term math on not paying off your mortgage before you even sign up for it - please poke holes if you see them!

So, I'm on track to take on roughly a $400K mortgage locked for now at 6.625% . I could put down about $25K more than I plan to, to get me over the 20% down payment threshold, but I did some math and found that it will cost me about $125 per month total, between PMI and additional interest charges, adding back a flat 4% for interest income I could theoretically earn from HYSA minus income taxes. The comfort from the extra $25K cash buffer is worth the cost to me since the house needs some work.

I have no idea what the Fed is going to do this month or this decade, but I am assuming for my calculations no chance to refi any time soon, nor even to float down to a lower rate before closing. Hoping for an easy float down by May 1 but not expecting it.

[Dicey]

Near-term math on not paying off your mortgage before you even sign up for it - please poke holes if you see them!

So, I'm on track to take on roughly a $400K mortgage locked for now at 6.625% . I could put down about $25K more than I plan to, to get me over the 20% down payment threshold, but I did some math and found that it will cost me about $125 per month total, between PMI and additional interest charges, adding back a flat 4% for interest income I could theoretically earn from HYSA minus income taxes. The comfort from the extra $25K cash buffer is worth the cost to me since the house needs some work.

I have no idea what the Fed is going to do this month or this decade, but I am assuming for my calculations no chance to refi any time soon, nor even to float down to a lower rate before closing. Hoping for an easy float down by May 1 but not expecting it.

Find out what it takes to get rid of the PMI before you go that route. I only had it once, and I despised every moment of it. Why? It protects the lender, not the borrower, and it was impossible to get rid of without paying for an appraisal. In your position,  I'd put 20% down and cash flow the renovations. A zero percent credit card might be another option, as long as you don't overspend.

[nereo]

Near-term math on not paying off your mortgage before you even sign up for it - please poke holes if you see them!

So, I'm on track to take on roughly a $400K mortgage locked for now at 6.625% . I could put down about $25K more than I plan to, to get me over the 20% down payment threshold, but I did some math and found that it will cost me about $125 per month total, between PMI and additional interest charges, adding back a flat 4% for interest income I could theoretically earn from HYSA minus income taxes. The comfort from the extra $25K cash buffer is worth the cost to me since the house needs some work.

I have no idea what the Fed is going to do this month or this decade, but I am assuming for my calculations no chance to refi any time soon, nor even to float down to a lower rate before closing. Hoping for an easy float down by May 1 but not expecting it.

Find out what it takes to get rid of the PMI before you go that route. I only had it once, and I despised every moment of it. Why? It protects the lender, not the borrower, and it was impossible to get rid of without paying for an appraisal. In your position,  I'd put 20% down and cash flow the renovations. A zero percent credit card might be another option, as long as you don't overspend.

Thanks Dicey - on some level I knew this, but had not thought of it so explicitly. With PMI you are paying to insure someone else’s risk.

[Askel]

Near-term math on not paying off your mortgage before you even sign up for it - please poke holes if you see them!

So, I'm on track to take on roughly a $400K mortgage locked for now at 6.625% . I could put down about $25K more than I plan to, to get me over the 20% down payment threshold, but I did some math and found that it will cost me about $125 per month total, between PMI and additional interest charges, adding back a flat 4% for interest income I could theoretically earn from HYSA minus income taxes. The comfort from the extra $25K cash buffer is worth the cost to me since the house needs some work.

I have no idea what the Fed is going to do this month or this decade, but I am assuming for my calculations no chance to refi any time soon, nor even to float down to a lower rate before closing. Hoping for an easy float down by May 1 but not expecting it.

As Dicey said, check to see what your mortgage company requires to get out of PMI.  I've had it go a couple ways (on all two mortgages I've had in my life). First eliminated PMI as soon as you hit >20% of the initial purchase price paid down.  Most recent mortgage was something like >22% of the initial purchase price when *scheduled* by the initial payment schedule. Anything sooner required a property appraisal.   But PMI was $16/month on a 3.25% loan so not really a big deal. I put down the absolute minimum down payment (3%) on my fixer upper.   But I had a couple of high dollar projects to do right away that required a bunch of cash on hand.   

[halfling]

Near-term math on not paying off your mortgage before you even sign up for it - please poke holes if you see them!

So, I'm on track to take on roughly a $400K mortgage locked for now at 6.625% . I could put down about $25K more than I plan to, to get me over the 20% down payment threshold, but I did some math and found that it will cost me about $125 per month total, between PMI and additional interest charges, adding back a flat 4% for interest income I could theoretically earn from HYSA minus income taxes. The comfort from the extra $25K cash buffer is worth the cost to me since the house needs some work.

I have no idea what the Fed is going to do this month or this decade, but I am assuming for my calculations no chance to refi any time soon, nor even to float down to a lower rate before closing. Hoping for an easy float down by May 1 but not expecting it.

Find out what it takes to get rid of the PMI before you go that route. I only had it once, and I despised every moment of it. Why? It protects the lender, not the borrower, and it was impossible to get rid of without paying for an appraisal. In your position,  I'd put 20% down and cash flow the renovations. A zero percent credit card might be another option, as long as you don't overspend.

I think it will fall off automatically, but I just asked the lender for specifics in case they will want to see a new appraisal, so thanks for the warning. It is $30/mo for the PMI, and I understand it's there to protect the lender; most of the added cost comes from just borrowing more money at a high rate. I'll have to see if I can stash enough cash before closing to be really comfortable putting more down. I'm sure I'm more scared than I ought to be of suddenly going broke! Thanks

[Dicey]

Interesting, when I had PMI, it was 1% of my loan amount. It sounds like prices have dropped sugnificantly since then.

[neo von retorch]

Interesting, when I had PMI, it was 1% of my loan amount. It sounds like prices have dropped sugnificantly since then.

1% of the (original) loan amount... per month?

That would be shocking! My PMI is $61 on a $567k mortgage (@5.95%). Which calculates out to 0.0108%. or 0.1291% annually.

On the flip side, maybe you just meant... payment? $61 on a $4000 payment is 1.53%.

[halfling]

The PMI they quoted me scaled up, the less % you put down, naturally. $30 was with 15% down. It was $60 with 10% down. I'm sure much more with only 3% down.

[catccc]

Find out what it takes to get rid of the PMI before you go that route. I only had it once, and I despised every moment of it. Why? It protects the lender, not the borrower, and it was impossible to get rid of without paying for an appraisal. In your position,  I'd put 20% down and cash flow the renovations. A zero percent credit card might be another option, as long as you don't overspend.

I vote for this.  We put down 20% to avoid PMI and I'm glad we did.  Sometimes I do wish I had a bigger mortgage because the rate is so great, but @halfling isn't really in great rate territory.  We are also floating $45K at 0% on a half dozen credit cards right now and liking it, just make sure you have a sound exit strategy for when those promo rates expire.

[halfling]

I believe this interest rate, with ballpark around $20k in interest expenses per year for the first several years, is going to mean I'll want to itemize my taxes for the first time. So at least there's that.

[Dicey]

Interesting, when I had PMI, it was 1% of my loan amount. It sounds like prices have dropped sugnificantly since then.

1% of the (original) loan amount... per month?

That would be shocking! My PMI is $61 on a $567k mortgage (@5.95%). Which calculates out to 0.0108%. or 0.1291% annually.

On the flip side, maybe you just meant... payment? $61 on a $4000 payment is 1.53%.

To clarify, it was a hair over 1% of the monthly payment. Pissed me off every damn month. I literally couldn't get rid of it until I sold the place, four years later. At least I made a good return on it. IIRC, I was thrilled to get a 7% mortgage when I originally bought it.

[dandarc]

So, looks like we're going to be moving to a place where buy vs. rent lands on "buy" within the next 3-12 months. Not so much the price-to-rent as simple availability / selection of rentals that would work for us vs. just so much more to choose from for purchase in that place.

Anyone broker recommendations specifically to try and get an 80-20 situation on the new house? I'd like to finance 100%, then pay the 20, which is hopefully a HELOC that we'll keep open down to zero once our current house sells and we get that check for $80-100K. I was looking at it and even though coming up with a down-payment at 5 or 10% won't be an issue regardless, and we're likely to clear 30 to 50% of the new house purchase price from sale of the old house, I'd still like to maintain as much liquidity throughout this process as I reasonably can, and I definitely want a month or two overlap to complete the move as that is so much more convenient for us.

[dandarc]

Update: approved for a "non-contingent" loan with 5% down on up to $350K of house (plenty for where we are looking) from one of the big mortgage firms. "Non-contingent" means we do not have to sell Florida house first to make the deal happen. Which means we can move and get Florida house sold at our own pace.

Now to buy a house, move, sell old house, eventually refinance. And of course not pay off our mortgage early.

[Dicey]

Update: approved for a "non-contingent" loan with 5% down on up to $350K of house (plenty for where we are looking) from one of the big mortgage firms. "Non-contingent" means we do not have to sell Florida house first to make the deal happen. Which means we can move and get Florida house sold at our own pace.

Now to buy a house, move, sell old house, eventually refinance. And of course not pay off our mortgage early.

Just popping in to check on your progress, @dandarc. Where are you in the process now?

[dandarc]

Update: approved for a "non-contingent" loan with 5% down on up to $350K of house (plenty for where we are looking) from one of the big mortgage firms. "Non-contingent" means we do not have to sell Florida house first to make the deal happen. Which means we can move and get Florida house sold at our own pace.

Now to buy a house, move, sell old house, eventually refinance. And of course not pay off our mortgage early.

Just popping in to check on your progress, @dandarc. Where are you in the process now?

Close on 6/14, will be moved by 6/30 and then the agent we just hired will hit the ground hard to get our place in Florida sold. Wound up spending $263K (likely only about $5K more than our house in Florida will sell for). Still borrowing 95% - will help with the immediate cash flow until the dust settles. Getting 400 additional square feet and a pretty nice 1.5 car garage (that probably needs a new roof) and an amazing front porch. Losing carport and screen porch. And wound up with another old house - 1925 on the new one, but has been reasonably well maintained and the whole house renovated pretty much to what you'd expect in 2024. Oh - and a proper attic too. All in, you could argue we're getting 50-100% more house for this $5K + moving and transaction costs. Sort of hedging bets a bit - almost 2% up front to get "only" a 7.25% rate for 30 years.

[Tyson]

Just a quick update.  After deciding to keep my 2.85% mortgage and just shove any extra money into investments, the strategy has paid off.

This month my investments are bigger than my mortgage.  Crazy.  It happened way faster than I thought it would.

Woot!

[NorthernIkigai]

thirty years of inflation at 9%+ would actually be really bad. You'd be well positioned with the Series I and the mortgage, but aren't the 1970s years when we saw most retirement failures in modeling?

Very good point.  I really meant that I'd like to lock in just the 9.6% rate for 30 years, not the inflation that goes with it!  I definitely do NOT want I bonds to continue to pay such high rates.  I agree that 30 years of 9% inflation would be very bad.  But for now, I bonds are the best game in town for something safe.  While they're still only paying 0% real, better than my savings account paying -9% real.

@NorthernIkigai - Definitely sounds worth it to drop your savings rate a bit to get some more space.  <800 square feet for 4 people sounds like it might be a tad tight!  Hope you're able to find something that works for you!

Thanks @Holocene! We're actually OK right now, I'm always amazed that many North Americans (even Mustachians!) seem to need so much space. But the kids are growing and it would be very nice to have at least another half bath and not just the one bathroom.

With prices for decent apartments in the size (still max 1k sq ft or so) and area we're considering starting from about 550 or 600k€, we're just patiently keeping an eye on the market and hoping for a rate rise and its effect on the market...

An update from the land of adjustable rate mortgages: A few months after I wrote this, we actually found a lovely and affordable 970 sqf apartment with everything we need. Well, we bought it, but it's not finished yet. It will be finished next summer, so we should sell our current apartment next spring some time with the caveat that we'll move out on an agreed date. We're still very happy in the current one, but that's because we know we'll be moving into a brand new one soon. If we would still be looking, we'd probably feel pretty stuck here right now.

So now we have 2 mortgages! The old one which has a current rate of 3.x% (which will go up soon again), and the new one for the new apartment (which we've only taken out partially so far) at 4.x%. Oh well, the 0.x% rates were great for the many years they lasted.

Although the cash flow looks bad at the moment, certainly with the second mortgage growing every few months, we're not worried. We'll also probably get quite a bit less for the old apartment than we had originally budgeted, since the whole market has stagnated due to the rising interest rates. But we're paying a bit less than we had originally budgeted (550--650k€) for the new apartment. And we have plenty of savings.

So we should have been selling our current (still) flat about now... We'll be doing the final inspection of the new flat this week, and can move in in about 6 weeks or so.

But now the housing market, which I described last summer as having stagnated, has simply come to a full stop. To make matters worse, the big renovation which we knew was coming at some point to the current house will start in about 6 months' time, making renting the old place out less likely and less profitable, as the flat will be unusable for a few months but we don't yet know exactly when. Maybe we'll find someone who needs to move out of their home due to a similar short-term renovation, maybe not.

Trying to sell now, when the market is a at 20+ year low in general and the upcoming renovation is scaring buyers away from this place in particular, is a fool's game. Instead, we'll be hanging on for a while waiting for the renovation to the done and the market to improve, paying more in total housing costs than what our whole monthly budget was before this moving project started. Some of it (almost half) is of course simply higher actual housing costs because we are moving to a newer, bigger place, and some are not actual costs (the principal paid on the old mortgage -- the plan was to pay this in a lump sum when we sold the place, but hey, now the lump sum will eventually be smaller).

Still, it's a crazy cash flow that will flow out for the next 12 or maybe even 18 months. I don't like it, but the market is not giving us a lot of choice and as Mustachians, we can afford if without having to worry at all.

[grantmeaname]

But now the housing market, which I described last summer as having stagnated, has simply come to a full stop.

For my curiosity, which part of the world are you in? It's been surprising to me that COVID and interest rates are basically the same stimulus applied nationally, but some markets got hot much sooner than others, and no slowing much sooner than others too -  even markets with similar cost and other characteristics.

[NorthernIkigai]

But now the housing market, which I described last summer as having stagnated, has simply come to a full stop.

For my curiosity, which part of the world are you in? It's been surprising to me that COVID and interest rates are basically the same stimulus applied nationally, but some markets got hot much sooner than others, and no slowing much sooner than others too -  even markets with similar cost and other characteristics.

We're in the Nordics. The housing market didn't so much overheat here as just stayed on the stove too long, we haven't had a downturn since the early 90s. I started following the construction sector for work about 4--5 years ago, and their message was basically "weird, home come we're still really busy" even through Covid and all.

Then once inflation and interest rates jumped up, people got scared and now are just wary of making any big spending decisions, especially since unemployment has gone up a little bit. And once the mood has changed, it's hard to get back to "normal", even though interest rates are coming down a little bit now. Most people have variable rate mortgages, so changing rates make a big difference for their bottom line. Banks don't even offer the kind of mortgages with a rate locked in for the entirety of the loan as they do in the US.

[Dicey]

Just a quick update.  After deciding to keep my 2.85% mortgage and just shove any extra money into investments, the strategy has paid off.

This month my investments are bigger than my mortgage.  Crazy.  It happened way faster than I thought it would.

Woot!

It seeems counterintuitive,  but that's exactly how it works. Congratulations!

[dandarc]

Update: approved for a "non-contingent" loan with 5% down on up to $350K of house (plenty for where we are looking) from one of the big mortgage firms. "Non-contingent" means we do not have to sell Florida house first to make the deal happen. Which means we can move and get Florida house sold at our own pace.

Now to buy a house, move, sell old house, eventually refinance. And of course not pay off our mortgage early.

Just popping in to check on your progress, @dandarc. Where are you in the process now?

Close on 6/14, will be moved by 6/30 and then the agent we just hired will hit the ground hard to get our place in Florida sold. Wound up spending $263K (likely only about $5K more than our house in Florida will sell for). Still borrowing 95% - will help with the immediate cash flow until the dust settles. Getting 400 additional square feet and a pretty nice 1.5 car garage (that probably needs a new roof) and an amazing front porch. Losing carport and screen porch. And wound up with another old house - 1925 on the new one, but has been reasonably well maintained and the whole house renovated pretty much to what you'd expect in 2024. Oh - and a proper attic too. All in, you could argue we're getting 50-100% more house for this $5K + moving and transaction costs. Sort of hedging bets a bit - almost 2% up front to get "only" a 7.25% rate for 30 years.

Update to the Update: Closing Disclosure came in today accompanied by what I'd characterize as a demand for acknowledgement. Couple problems: #1 was "uh, I already paid that first year of insurance". #2 was "why do you want to escrow 3 times the actual amount we'll owe for property taxes!?"

One issue was I emailed, then texted but the text seemed to be forwarded to the wrong person and he kinda doubled-down on the demand for acknowledgement. But then my loan officer called and end of the day, escrow is being waived for no cost, which had that been presented as an option today would have been my first choice. So yay!

[Fomerly known as something]

Spent last night in an argument on sub Reddit DirtyDave on what housing is in relation to wealth, which while critical of Dave Ramsey they also like a lot of what he does. 

I think the difference between us and the other club is how we see our homes.  I live in my house, I’m willing to pay x amount of my monthly budget for said housing.  My housing is a liability, yeah at some point I could sell it and use the money but generally it’s still spending and a liability.  What that housing cost is (mortgage vs rent vs taxes) really doesn’t matter.  On the other hand, my wealth comes from my investments, those are growing with additional contributions and compounding, where as my housing costs are mostly consistent, which means over the years they are shrinking in proportion to my wealth.  If I don’t have a mortgage at this point, that money isn’t going to go into investments automatically, my investments are fine at their current level, I don’t need to add more to them monthly.  My goals are going to be met on the timeline I have set.  Once my Mortgage is paid off in 2052, that money is likely to be “not that much” monthly and will maybe pay for me to get cable once again or something.