Author Topic: Mortgage Payoff Club!!  (Read 245946 times)

robtown

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Re: Mortgage Payoff Club!!
« Reply #100 on: February 05, 2014, 06:13:08 PM »
We started a year ago.   We refinanced for a 5/1 ARM at 2.25%   We will have it paid in 2018 when the 5 year expires.   My wife will quit her job a couple months later.

jrhampt

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Re: Mortgage Payoff Club!!
« Reply #101 on: February 06, 2014, 10:04:41 AM »
At $167k now, but knocking off another $23k with this month's payment.  And depending on bonus, may be able to do the same next month, which would put us under the $100k mark this summer.

FrozenBits

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Re: Mortgage Payoff Club!!
« Reply #102 on: February 06, 2014, 01:38:34 PM »
At $167k now, but knocking off another $23k with this month's payment.  And depending on bonus, may be able to do the same next month, which would put us under the $100k mark this summer.

Awesome!  That mortgage will be gone pretty fast at this rate!

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Re: Mortgage Payoff Club!!
« Reply #103 on: February 06, 2014, 08:20:23 PM »
Challenge accepted!
Not necessarily paying off the mortgage, but addressing other questions raised in this thread. I mentioned in another thread that things like the "LifeSpreadsheet" are too complex. I will accept the sub-textual challenge of creating a fully scalable, super-simple (to start), Badassity Calculator that should assist in overcoming the predictable irrationality we all experience. That being said, I do understand that there is a reason it's predictable. The emotional payoff is so variable that it almost cannot be calculated (but I'll try). I'll come back once the requirements gathering is done, and post for review. Any suggestions can be emailed to me, or just posted here. I'll make sure I check back.
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Mortgage Free Mike

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Re: Mortgage Payoff Club!!
« Reply #104 on: February 07, 2014, 09:30:24 AM »
Just read through some of these post. I paid off my $86,000 mortgage (15 year, 3.75%) in 2 years and 2 months. It was the best decision for me, despite the low interest rate. I feel great about it.

For those who say they could make more money in the markets, perhaps it's true. But the reason I was able to accomplish this goal is because I had something to look forward to.  A finish line.  I was finding new ways to save and earn more in order to reach my goal. Had I not set the goal to pay off my mortgage, I think I probably would not have found a way to save $86,000 in 2 years, which means I wouldn't have had as much money to invest. 

This journey was about being financially free.  Now I am and the possibilities are endless.  I also blog about this topic at http://www.saveonalmosteverything.com Keep me posted on your progress.

Sofa King

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Re: Mortgage Payoff Club!!
« Reply #105 on: February 10, 2014, 01:25:56 PM »

I live in a mobile home, with 6.25% interest rate for 30 years. The House won't be worth anything in 30 years, its worth is steadily declining. We probably can't refinance it, either. Had a hard enough time getting any loan at all for it.

However, things are looking up since I started being Mustachian. I'm 5 years into it, and I've still got $72,000 left to pay on the principal... but $85K more just in interest if I keep going.



That is crazy price for a mobile home. I paid LESS for a 3 bedroom 2 bath house in upstate NY that has gone up in value.  I have never heard of a trailer park home costing so much. But then again I never looked into buying one either.  If you spent this much why didn't you just purchase a regular house?

FunkyStickman

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Re: Mortgage Payoff Club!!
« Reply #106 on: February 11, 2014, 07:50:04 AM »

I live in a mobile home, with 6.25% interest rate for 30 years. The House won't be worth anything in 30 years, its worth is steadily declining. We probably can't refinance it, either. Had a hard enough time getting any loan at all for it.

However, things are looking up since I started being Mustachian. I'm 5 years into it, and I've still got $72,000 left to pay on the principal... but $85K more just in interest if I keep going.



That is crazy price for a mobile home. I paid LESS for a 3 bedroom 2 bath house in upstate NY that has gone up in value.  I have never heard of a trailer park home costing so much. But then again I never looked into buying one either.  If you spent this much why didn't you just purchase a regular house?

Actually, that includes the land, and we got it on a very large (double-sized) lot, so not all of that is the home. At the time, the housing market was wanting ridiculous prices for even small homes in rural areas... believe it or not, this was the cheapest thing we could find that wasn't trashed.
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jrhampt

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Re: Mortgage Payoff Club!!
« Reply #107 on: February 11, 2014, 08:38:02 AM »
But the reason I was able to accomplish this goal is because I had something to look forward to.  A finish line.  I was finding new ways to save and earn more in order to reach my goal. Had I not set the goal to pay off my mortgage, I think I probably would not have found a way to save $86,000 in 2 years, which means I wouldn't have had as much money to invest. 

I think this is very true.  I can accomplish a LOT when there's a time horizon of 1-2 years...it's easier to stay intensely motivated.  Sure, I can hold steady for longer time periods, but at a lower level.

secondcor521

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Re: Mortgage Payoff Club!!
« Reply #108 on: February 11, 2014, 12:57:09 PM »
OK, I think I'm addicted.

New balance:  $9,999.99

I do have some expenses coming up (taxes, a small driving vacation next weekend with my son).  Will keep pressing forward; hope to have it done by my 45th birthday in May.
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FunkyStickman

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Re: Mortgage Payoff Club!!
« Reply #109 on: February 11, 2014, 02:48:16 PM »
Just dropped $5K on principal... down to about $67K on principal! That cut about 4 years of interest. Going to keep plopping down per month as I can.
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Bateaux

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Re: Mortgage Payoff Club!!
« Reply #110 on: February 12, 2014, 10:58:31 AM »
It's hard to believe how good debt freedom feels.  Nothing you can buy can give this feeling.
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steveo

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Re: Mortgage Payoff Club!!
« Reply #111 on: February 12, 2014, 01:07:21 PM »
It's hard to believe how good debt freedom feels.  Nothing you can buy can give this feeling.

This is my first goal. We owe about 165k on the house at this point. The goal is to get it down to 100k this year and then pay it off within the following 2 years. Its the first step for us on our path to FI.

Still it feels so long to go.

soccerluvof4

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Re: Mortgage Payoff Club!!
« Reply #112 on: February 13, 2014, 04:16:40 AM »
Just going to say they need to be rid of the 30 year mortgage and back to 20% down. So I see both sides of the Arguement with basically getting free money. But i for one would rather pay off my mortgage which i havent had one in 20 years and have that behind me Just because as stated in the US we don't ever own our house. My fucking taxes are 9300$ and I hate it. I live in a great school system and community but I want out of this. By the time i add my water bill and other utitlites and maintenance i have a mortgage. So thats my stupidity. Its costing me 13-1400 dollars a month for a house thats paid for. 4-5 years max when 2 of my 4 kids are off to college I am cutting this at least in half . I cant move because of my biz as well so if that changed that to would make me move. Ok self inflicted face punches........last thing dont keep a mortgage for the tax credit. Dont think anyone was suggesting that but I know people that have argued that.  Do what lets you sleep at night. I have no debt and  i still only slept till 3am last night cant imagine if i did have any debt!
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Bateaux

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Re: Mortgage Payoff Club!!
« Reply #113 on: February 13, 2014, 06:23:39 AM »
Wow!!!
I can't imagine paying that much in property tax.  You are paying 10 times what I pay.  I'm sticking to the south.
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nicknageli

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Re: Mortgage Payoff Club!!
« Reply #114 on: February 13, 2014, 08:29:51 AM »
Yeah, those taxes are brutal!

jrhampt

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Re: Mortgage Payoff Club!!
« Reply #115 on: February 14, 2014, 07:41:25 AM »
Hmm, yes.  Our property taxes just got bumped up to $7200 this year.  I am not thrilled about this, and one of my top priorities in retirement will be to move to an area with lower property tax.

secondcor521

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Re: Mortgage Payoff Club!!
« Reply #116 on: February 17, 2014, 07:09:05 PM »
Yup.  I was addicted.

New balance:  -$98.71.

Overpaid a little just to take care of any residual interest.

Will have to wait until March 10th for all the scheduled payments to post and have it be official.

Surprisingly I am not debt free because I owe $133.34 to American Express at the moment and will be charging my vacation expenses this upcoming weekend in order to get 10,000 MR points.  Then I'll sock drawer that card and be debit card only.

Should be able to cash flow my tax bill in March/April time frame.
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jordanread

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Re: Mortgage Payoff Club!!
« Reply #117 on: February 24, 2014, 10:51:21 AM »
Yup.  I was addicted.

New balance:  -$98.71.
Congatulations!!!
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train_writer

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Re: Mortgage Payoff Club!!
« Reply #118 on: February 24, 2014, 12:58:30 PM »
Great to read these pay-off stories!

As one of the Dutch members of the mortgage-payoff-club, it now makes even more sense to me to throw money at the principal:
I reached the stash treshold where I have to pay the extra 1,2 % tax on savings, bonds & stocks!

This means that the market has to yield 3,9 (mortgage 3,85%) + 1,2 = 5,1 % on average to even the mortgage payment.

I immediately paid an extra 2500 euros towards the principal and lowered our monthly annuity payment to 700. I can see how this can be addictive! Immediate results = extra motivation.

I hope to be able to make 2 more 2500 euros payments this year and bring the monthly payment down to a very low level within a few years

The total mortgage is now 144k in euros, we bought 1 year ago for 151k including transaction costs. Long way to go!




cdub

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Re: Mortgage Payoff Club!!
« Reply #119 on: February 24, 2014, 02:17:52 PM »
Just going to say they need to be rid of the 30 year mortgage and back to 20% down.

A-MEN! At least to the 20% down portion. Easy money is what inflated the market.

My fucking taxes are 9300$ and I hate it. I live in a great school system and community but I want out of this. By the time i add my water bill and other utitlites and maintenance i have a mortgage. So thats my stupidity. Its costing me 13-1400 dollars a month for a house thats paid for.

I think my property taxes are round $5k or 6k. It's about $460/month. But yeah - ouch that's alot.
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Threshkin

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Re: Mortgage Payoff Club!!
« Reply #120 on: February 24, 2014, 02:22:47 PM »
It's hard to believe how good debt freedom feels.  Nothing you can buy can give this feeling.

+1 to that!  I paid off my mortgage last year even though it was a low rate, 3.75%.  The peace of mind was much more important to me.  The cash flow improvement sure helped as well!

secondcor521

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Re: Mortgage Payoff Club!!
« Reply #121 on: February 24, 2014, 02:28:22 PM »
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basd

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Re: Mortgage Payoff Club!!
« Reply #122 on: February 25, 2014, 01:39:10 AM »
The total mortgage is now 144k in euros, we bought 1 year ago for 151k including transaction costs. Long way to go!
At least you're on the right track! As I've posted before and as a fellow Dutchman, I still have to start working on ours. We've got a significantly larger mortgage amount (238.500) and a significantly higher interest rate as well (5,4%), so the urge is even bigger.

On the plus side, we're saving quite a bit of money at the moment (although that will dip again as soon as our son goes to daycare), so I expect to be able to pay off around 10% of the total mortgage amount before the end of the year. That will be the goal for the years to come as well, hopefully making us mortgage free in 10-15 years.

Again, well done and good luck on the rest of the journey :)

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Re: Mortgage Payoff Club!!
« Reply #123 on: February 26, 2014, 10:06:40 AM »
I'm switching jobs to lower pay (boo!) but staying in my old job until my bonus (yay).  Lower pay, higher sanity, better stability, free transportation!  Even if we don't make add'l payments we're set to payoff in 4 years - but we'll kick its ass.

Current balance: 50,600-ish

soccerluvof4

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Re: Mortgage Payoff Club!!
« Reply #124 on: February 26, 2014, 10:42:29 AM »
Wow!!!
I can't imagine paying that much in property tax.  You are paying 10 times what I pay.  I'm sticking to the south.



I know its ludicrous! I so want to head South but be 4 years before i can consider it. Biz is here.
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nicknageli

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Re: Mortgage Payoff Club!!
« Reply #125 on: February 26, 2014, 01:44:41 PM »
I know its ludicrous! I so want to head South but be 4 years before i can consider it. Biz is here.

Not ludicrous at all.  You don't have to shovel sunshine! 

Strawberrykiwi75

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Re: Mortgage Payoff Club!!
« Reply #126 on: February 27, 2014, 12:57:56 AM »
I'm settling on a house tomorrow and I can't wait to pay it off. It's my first home, so I only had a 20% deposit.

212k lending (265k purchase price), I've split it into two parts: offsetting and fixed.
The offsetting is 32k, and any money in my accounts stand against the loan, reducing the interest. So say I had 20k in my accounts, I only pay interest on the 12k remaining. I'm planning on saving as hard as I can to get to about 30k in my accounts, so that I barely pay any interest at all. No principal payments on this loan for 5 years either, which means I can plow all my money at the other loan.

180k fixed for 3 years, and I'm paying it off assuming an interest rate 2.3% higher than mine. Then I'll chuck any bonuses I can at it too.

Hoping to get it all paid off in half the time or less!

lbdance

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Re: Mortgage Payoff Club!!
« Reply #127 on: March 01, 2014, 02:17:55 PM »
I'm in. (About 95k owing at present) If we stick to the banks timeline - we would have about 8-9 years left. Our current conservative plan will have it paid off somewhere mid 2016.
The stretch goal is to have it paid off before the end of next year. And if possible before Oct 2015 to give my hubby an extra birthday present :)

medinaj2160

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Re: Mortgage Payoff Club!!
« Reply #128 on: March 03, 2014, 06:05:53 PM »
We are in as well :)

Me 28 and my wife 29 purchased our first and last home June 2012.

Value of our home according to Zillow 180K. We only paid 126K since it was a foreclosure and have a 30 year mortgage at 3.75%.
 
As of today we own $64,385.

Payoff goal: March 2015

My reason for paying the house fast is peace of mind because you never know what the future will hold.

New balance: $59,980

I miss judged my tax withholdings so I am not going to be able to pay as much on my mortgage next month :/

New balance: $55,556

little by little

New Balance: $51,171

train_writer

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Re: Mortgage Payoff Club!!
« Reply #129 on: March 04, 2014, 11:39:46 AM »
we're saving quite a bit of money at the moment (although that will dip again as soon as our son goes to daycare), so I expect to be able to pay off around 10% of the total mortgage amount before the end of the year.


Paying off 10 %  per year is huge, how much does it save you on monthly payments? Also, wow, juggling daycare with saving and paying off and investing, way to go!
-we are thinking about having a kid and pondering on what timing is best, waiting a year, a few years?-

basd

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Re: Mortgage Payoff Club!!
« Reply #130 on: March 05, 2014, 01:53:39 AM »
we're saving quite a bit of money at the moment (although that will dip again as soon as our son goes to daycare), so I expect to be able to pay off around 10% of the total mortgage amount before the end of the year.


Paying off 10 %  per year is huge, how much does it save you on monthly payments? Also, wow, juggling daycare with saving and paying off and investing, way to go!
-we are thinking about having a kid and pondering on what timing is best, waiting a year, a few years?-
No idea, but I guess it will amount to a save of around 75 euros net monthly. I'm not sure whether we can reach 10% every year as we have a bit of savings lying around which would go to the mortgage this year and you can only spend them once) but I like a challenge :)

wauske

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Re: Mortgage Payoff Club!!
« Reply #131 on: March 05, 2014, 03:19:23 AM »
we're saving quite a bit of money at the moment (although that will dip again as soon as our son goes to daycare), so I expect to be able to pay off around 10% of the total mortgage amount before the end of the year.


Paying off 10 %  per year is huge, how much does it save you on monthly payments? Also, wow, juggling daycare with saving and paying off and investing, way to go!
-we are thinking about having a kid and pondering on what timing is best, waiting a year, a few years?-

If you have an annuity based mortgage you can easily calculate this via the PMT formula (you do have to know the number of months left for the remainder of the mortgage).

My mortgage has been reduced to 75k in the meantime, 60k at the end of the year looks doable :)
Everything I say is my personal opinion which is based on my subjective experience.

jrhampt

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Re: Mortgage Payoff Club!!
« Reply #132 on: March 06, 2014, 08:45:47 AM »
New balance: $143k

Bonuses next week!  Then we'll know how big this month's payment can be.  This time last year, we were at $203k, so we've made 60k progress over the past 12 months, and that was before we decided to really get serious about paying it off ASAP.

RNwastash

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Re: Mortgage Payoff Club!!
« Reply #133 on: March 06, 2014, 10:21:16 PM »
Count me in!! My balance is $144,000.  APR is 3.375% .  After reading so many different articles on whether to prepay or not, I have decided to bite the bullet.  My goal is to pay it off in 5 years so I can go part time.

cdub

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Re: Mortgage Payoff Club!!
« Reply #134 on: March 06, 2014, 11:09:53 PM »
New balance: $143k

Bonuses next week!  Then we'll know how big this month's payment can be.  This time last year, we were at $203k, so we've made 60k progress over the past 12 months, and that was before we decided to really get serious about paying it off ASAP.

Woah! $60k in 12 months. That's awesome. I hope to get there soon. Need to rebuild my e-fund though.
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smalliswell

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Re: Mortgage Payoff Club!!
« Reply #135 on: March 11, 2014, 11:50:53 AM »
I'm in. We have been on the Dave Ramsey path for some time, but really started to hit paying down the mortgage aggressively when I realized I wasn't a fan of my stressful job with long commute and great pay. In my head I thought I could rationalize a change if our home was paid for, and thats all the motivation we needed. I'm thankful for it now. Every single cent since August of 2013 has gone to the remaining 58K left on our house. We will pay it off on April 15th. The job has improved in the mean time, although the commute hasn't. I'm not the type to make fast career decisions either, so we will have to see what being mortgage free feels like when we get there. We are not there yet but dang we can feel what its going to be like. We have started to really think about how we will spend our days. We can hardly wait we are so excited at all the possibilities.

One strategy I've found to work is to snowball our financial goals one at a time. We only big goal at a time, thereby allowing us to get to our goal faster. We did not stop our 401K match, but we did stop funding our ROTH in Jan, and Christmas fund, and vacation fund, home update fund, and will play catch up with that after April 15th.

Here is our facebook page if you want to follow along. Its a work in progress.
https://www.facebook.com/ocsmalliswell

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Re: Mortgage Payoff Club!!
« Reply #136 on: March 11, 2014, 01:39:33 PM »
@Tomsang: I disagree with it being purely emotional. Currently we are paying down our mortgage by about 1k per month with approx. 275 in interest. If I was only saving/investing I'd have to cover an annual spending amount of 17k whereas without a mortgage I only need 12k. With every additional payment my montly fixed expenses lower slightly.
When the mortgage is payed off I have 2 advantages: my current 5k stash will last me nearly 8 months in case of an emergency (F-you I quit) whereas with my current expenses it would only last me less than 4.
Second advantage is i can devote 75% of income to saving and investing as opposed to less than 50% now.

The lack of compounding is likely negated by the lack of stash I need to build in total...

I think you are missing the math!  Do two side by side calculations.  One with the $1,000 going to pay down a 4% mortgage and one going into an investment account that averages 8% over a 30 year mortgage term.  I think you can see logically that earning 8% and foregoing paying down a 4% mortgage is going to be the better financial answer.  There has never been a time where the market has not performed greater than 4% since records have been kept.  When you talk about compounding you have to take into account that your investments are compounding.  If it all hits the fan, you don't just have the $5,000 that is in your emergency fund.  You also have all the months and returns that you have been saving vs. paying down your mortgage. 

So if in two years something hits the fan you have the 24 months at $1,000 savings plus the returns on those savings.  So you have like $29k + your $5k emergency fund.  So your numbers would be figuring out how long could you support yourself with $34k in the bank. So you would have 2 years saved up vs.  4 months that you currently have saved ($5,000 emergency fund/ $17k per year to live and make payments).  You are much safer having your assets liquid vs. having them tied up in your house in a crisis. 

If you are half way done paying off the mortgage and you can't make the next payment, you can't just call the bank and say you prepaid the past two years.  They will say you are out of contract and make the payment or face foreclosure.  If you were investing the $1,000, then you could liquidate investments to pay the mortgage and support your family until you get back on your feet.  You would have two years to get on your feet vs. a 4 month buffer with the $5k. 

Mathematically it is pretty simple to see that earning 6 to 8 percent in investments is a better call than paying down a sub 4% loan.  To take the emotion out, calculate the loss of portfolio gain by paying down the 4% mortgage.  If the market returns anything greater than 4% you are better off investing.  If you think the market is going to earn less than 4% over the next 30 years then make sure that your safe withdrawal rate is 1% or closer to your life expectancy as all the models are based on historical performance.  We have never seen a sub 4% return on investments over a 30 year period of time.  If you think that we are going to see those low returns you should also sell your house as the economy is going to be crashing and your house is going to lose significant value.  You would be better off renting when we are in a deflationary time.

In an earlier post on page one I do the side by side analysis of paying off debt or investing.  Again, mathematically if you think we are going to average over 4% you are better off investing.

Hello Tomsang,

If my situation stays the same it is better for my to pay off the mortgage ASAP over investing first.  Why?  Well, with being a bit over median income and planning on having kids in the near future, getting rid of the mortgage allows both full contributions for both my spouse and I toward our retirement funds.  This would drop our taxable income considerably and allow us to claim the EIC credit.  Doing a side by side analysis using your 4% difference, investing my planned $4,800 annual extra mortgage payments to investing, waiting to invest until after the mortgage is paid off generates ~$9,500 in more gains over the 17 year comparison.  If either of us happen to get a promotion some time before the mortgage is paid off then we can adjust accordingly and max out our 401(k) then.  But without considering taxes and their potential benefits, you cannot just blindly say a 4% mortgage should never be paid off early.  If someone were earning six figures I would agree since they cannot obtain the EIC.  But for the Median family, I would say pay off the mortgage and THEN max out the 401k.

tomsang

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Re: Mortgage Payoff Club!!
« Reply #137 on: March 11, 2014, 02:55:42 PM »
If my situation stays the same it is better for my to pay off the mortgage ASAP over investing first.  Why?  Well, with being a bit over median income and planning on having kids in the near future, getting rid of the mortgage allows both full contributions for both my spouse and I toward our retirement funds.  This would drop our taxable income considerably and allow us to claim the EIC credit.  Doing a side by side analysis using your 4% difference, investing my planned $4,800 annual extra mortgage payments to investing, waiting to invest until after the mortgage is paid off generates ~$9,500 in more gains over the 17 year comparison.  If either of us happen to get a promotion some time before the mortgage is paid off then we can adjust accordingly and max out our 401(k) then.  But without considering taxes and their potential benefits, you cannot just blindly say a 4% mortgage should never be paid off early.  If someone were earning six figures I would agree since they cannot obtain the EIC.  But for the Median family, I would say pay off the mortgage and THEN max out the 401k.

Can you provide your math?  I think I am missing something. 

In your scenario I don't see you touching your investment accounts to fund your 401k, but you can liquidate your investments at any time to pay-off your mortgage or to fund your 401k contributions.  So you don't have to lock into making monthly extra payments to provide you with the opportunity to get the EIC in the future.  If you conduct appropriate tax planning when you need the funds you can cash out your investments that have minimal gains as well.  So if you want to fully fund your 401k so that you can get the EIC then you can still do this by funding your 401k with your after tax investments.

Let me know what I am missing.

Kipp

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Re: Mortgage Payoff Club!!
« Reply #138 on: March 11, 2014, 03:38:57 PM »
Hello Tomsang,

I think there is a slight misunderstanding, I currently do not have investment accounts outside my ROTH and 401k. 

If you are referring to investing my planned 4800 into a taxable account instead of directly to the mortgage and then just pay it off when the paths cross, I can see how that is the best scenario in theory.  However, there are no guarantees in investment returns and with a time frame of less than 10 years I don't feel completely comfortable doing this strategy.

Attached is my spreadsheet showing my math.  In my scenario you can see the 4800 being invested for the first 9 years and then it stops there.  Why?  Because I would be investing that same amount when the home is paid off.  Likewise regarding the investing when the home is paid off, I have an extra $9,439 through no principal and interest payments and the available EIC based on current income and tax laws.  To compute the gains I subtract out the ending balance of each investment of $4,800 while subtracting out only $6,439 with the mortgage since the $3,000 from EIC is all free money.  This comes to the difference between the two options of almost $10,000 as you will see on the spreadsheet.

Again this isn't any option for all mustachians, but those with median incomes whom can take advantage of the EIC.

tomsang

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Re: Mortgage Payoff Club!!
« Reply #139 on: March 11, 2014, 09:28:42 PM »
@Kipp

If you are not comfortable investing then I think that paying off your mortgage is a way to get a 4% return.  I was still having difficulties understanding your spreadsheet, but a few things stood out.

1) You are using a 4% investment return. The stock market has averaged 8%+ over longer periods of time.

2) After 10 years you are increasing your investment amounts, yet you are not accounting for the principal paydown on the mortgage. That would most likely drop the benefit significantly. You should do side by side asset/liability based calc.

3). You are not doing any harvesting of gains or losses  to minimize income to eliminate any EIC discounts. You should be able to minimize taxable income to claim the EIC in most years.

4) You are not taking any tax benefits for having a mortgage, which may be warranted based on charitable giving, taxes and mortgage interest.

5) You have not placed any value of having liquidity to purchase assets at a discount or the flexibility to get yourself out of trouble with liquid investments.

You are also banking on doing this to structure your income to get the EIC in 10 years. Your income and the rules around the EIC may change significantly in 10 years. As you may have heard a certain portion of the population do not like the idea of giving the less fortunate money. Tax laws will most likely be revamped in the next decade. In any case if you felt comfortable to invest you could liquidate your investments to pay off our mortgage and still get the EIC.

The government was trying to stimulate the economy. They purposely created an environment where interest rates were depressed. We have never seen rates this low. If you can't beat a 3.5-4.5% interest rate over the next 20+ years, then your Safe Withdrawal Rate would be around 1% or your actuarial life as all the models have the markets earning in excess of 4%, with the average being 8%+



Kipp

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Re: Mortgage Payoff Club!!
« Reply #140 on: March 12, 2014, 08:40:33 AM »
@Kipp

If you are not comfortable investing then I think that paying off your mortgage is a way to get a 4% return.  I was still having difficulties understanding your spreadsheet, but a few things stood out.

1) You are using a 4% investment return. The stock market has averaged 8%+ over longer periods of time.

2) After 10 years you are increasing your investment amounts, yet you are not accounting for the principal paydown on the mortgage. That would most likely drop the benefit significantly. You should do side by side asset/liability based calc.

3). You are not doing any harvesting of gains or losses  to minimize income to eliminate any EIC discounts. You should be able to minimize taxable income to claim the EIC in most years.

4) You are not taking any tax benefits for having a mortgage, which may be warranted based on charitable giving, taxes and mortgage interest.

5) You have not placed any value of having liquidity to purchase assets at a discount or the flexibility to get yourself out of trouble with liquid investments.

You are also banking on doing this to structure your income to get the EIC in 10 years. Your income and the rules around the EIC may change significantly in 10 years. As you may have heard a certain portion of the population do not like the idea of giving the less fortunate money. Tax laws will most likely be revamped in the next decade. In any case if you felt comfortable to invest you could liquidate your investments to pay off our mortgage and still get the EIC.

The government was trying to stimulate the economy. They purposely created an environment where interest rates were depressed. We have never seen rates this low. If you can't beat a 3.5-4.5% interest rate over the next 20+ years, then your Safe Withdrawal Rate would be around 1% or your actuarial life as all the models have the markets earning in excess of 4%, with the average being 8%+

@ Tomsang

It's not that I am uncomfortable investing, I am still investing a little over 10% of my gross income during this entire time, what I am unsure of is that the time frame is less than 10 years.  To my knowledge the S&P 500 hasn't lost money in a 10 year time frame, but it has in less than 10 years.

1.)  The difference is 4% investment return (the amount earning more than the mortgage interest)

2.) After 10 years I am still accounting for the principal and interest pay down, which is why that money is shown with the the difference of 4% in gains (8% over the 4% return on the mortgage).

3.) If you look at how EIC works, it takes the higher of your AGI or earned income, harvesting losses really won't have any effect unless if I can get my earned income lower (which is possible by putting more in my 401k, and I can put enough in my 401k once I have less debt obligations).

4.) I might get 2-3 years of this benefit, and it is very minimal.  As the standard deduction rises this would go away on its own very shortly without making any additional payments.  I suspect I will be between $600-1000 this year over the standard, so without paying extra towards the mortgage, as interest decreases and the standard increases, I am looking at maybe 2 years to claim this deduction - then the following years I have to claim the refunds of state and local as income.  So this could be a benefit of $135 the first year then maybe $45 the next.  If it makes you feel better I can add that into the calculation, but I don't think $180 is going to drastically change the outcome.

5.) Liquidity is nice... but a 401(K) isn't exactly liquid either.  Besides, dropping expenses decreases the need for liquidity.  What assets do you see as a discount with the current P/E ratios?  It's not like I have $0 going into the market, so I am still dollar cost averaging.  If the market tanks, then I can look into investing that $4,800 in the market and then paying off once it is crosses the paths, but at market highs I am going for the guaranteed return.

If my income changes significantly I will adjust then, and consider it a win.  But I need to plan based on what is known.  If tax rules change it could change how everything works, 401k's, ROTH's, etc.  But one thing that is actually being pushed for is an expansion of the EIC by economists, and it was even in a republican's tax change proposal!  So it may change, but everything could change with a large tax reform, so why would the risk be greater looking to claim the EIC then putting the money in a tax advantaged account?  I guess I have another advantage since I work for a government and it gives me the opportunity to invest in a 403(b) as well as a 401(K).  This would allow me to defer additional an income increase of up to $17,500 (based on current contribution limits), allowing for more flexibility to claim to EIC if my income does increase.

tomsang

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Re: Mortgage Payoff Club!!
« Reply #141 on: March 12, 2014, 05:57:08 PM »
Kipp - I put together this worksheet to try to put down my logic.  Check it out and let me know your thoughts.

Tom

MrCash

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Re: Mortgage Payoff Club!!
« Reply #142 on: March 12, 2014, 06:04:28 PM »
I would like to join the mortgage payoff club!  My plan is to buy our first house in cash and then work towards FI.  So I won't technically have a mortgage, but hopefully this doesn't disqualify me from the club!  Let's do this!
Our Cash House - Our No-Mortgage Journey Toward Financial Independence

Kipp

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Re: Mortgage Payoff Club!!
« Reply #143 on: March 13, 2014, 05:54:37 AM »
Kipp - I put together this worksheet to try to put down my logic.  Check it out and let me know your thoughts.

Tom

Tom - your calculations are correct.  The one thing I do not see considered is all of the free cash flow to invest once the mortgage is paid off (the principal and interest portion).  I will have to play around with it to add this comparison and also add another spot where I can additionally invest the EIC amount to see the difference over the comparable 30 year period and get back with you.

Kipp

tomsang

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Re: Mortgage Payoff Club!!
« Reply #144 on: March 13, 2014, 08:05:46 AM »
Kipp - I put together this worksheet to try to put down my logic.  Check it out and let me know your thoughts.

Tom

Tom - your calculations are correct.  The one thing I do not see considered is all of the free cash flow to invest once the mortgage is paid off (the principal and interest portion).  I will have to play around with it to add this comparison and also add another spot where I can additionally invest the EIC amount to see the difference over the comparable 30 year period and get back with you.

Kipp

@Kipp. In the scenario where you would have paid off your mortgage you can liquidate your investments, pay the taxes, pay off the mortgage and still have money left over.

You can also go to the math tab, find the month that your loan would have been paid off, then go over to the investment column on the yield and you can see that the investment yield plus the additional contribution is greater than the contribution plus the extra amount of the mortgage payment. If the investment yield is greater than the loan yield the benefit will continue to grow throughout the loan term.  So the answer remains the same of which is better, yet the dollar benefit is off by the difference between the mortgage interest rate and the investment yield after the loan is paid off.

For a work around you can figure out what month this occurs and change the formula for all the remaining months to grab the investment yield vs. the loan rate in the paid off loan scenario.  I will try to work on an If/than formula so you don't have to change the formula every time you change the amount.

Thanks,

Tom

Kipp

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Re: Mortgage Payoff Club!!
« Reply #145 on: March 14, 2014, 12:35:43 PM »
Kipp - I put together this worksheet to try to put down my logic.  Check it out and let me know your thoughts.

Tom

Tom - your calculations are correct.  The one thing I do not see considered is all of the free cash flow to invest once the mortgage is paid off (the principal and interest portion).  I will have to play around with it to add this comparison and also add another spot where I can additionally invest the EIC amount to see the difference over the comparable 30 year period and get back with you.

Kipp

@Kipp. In the scenario where you would have paid off your mortgage you can liquidate your investments, pay the taxes, pay off the mortgage and still have money left over.

You can also go to the math tab, find the month that your loan would have been paid off, then go over to the investment column on the yield and you can see that the investment yield plus the additional contribution is greater than the contribution plus the extra amount of the mortgage payment. If the investment yield is greater than the loan yield the benefit will continue to grow throughout the loan term.  So the answer remains the same of which is better, yet the dollar benefit is off by the difference between the mortgage interest rate and the investment yield after the loan is paid off.

For a work around you can figure out what month this occurs and change the formula for all the remaining months to grab the investment yield vs. the loan rate in the paid off loan scenario.  I will try to work on an If/than formula so you don't have to change the formula every time you change the amount.

Thanks,

Tom

Yea I was thinking I would need to create an If / than for under the scenario of paying off the mortgage.  Doing this you would do something like balance less than equal to zero add the principal and interest portion to investments plus X.  X indicating a different cell in which I could add an additional investment (such as EIC).  That is my thoughts for adding this to the spreadsheet.

Previously I did say I agree with you that investing then paying off mortgage with invested dollars works best in theory, it is the time frame for the return that makes me wonder if that is best.  If the S&P 500 were to drop 20% from it's high it would be a no brainer for me to invest then pay off with invested dollars.  I guess it is my preference in avoiding stock valuation fluctuation risk and yours in avoiding liquidity risk.  Either way there is risk.  I suppose a hybrid plan would be the best way to offset those two risks (say 50% invest 50% mortgage).

train_writer

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Re: Mortgage Payoff Club!!
« Reply #146 on: March 15, 2014, 02:52:10 PM »
Interesting discussion in the last posts, Kipp and Tomsang. You made me rethink my strategy.

What I haven't seen in the calculations is recasting the mortgage with every extra payment towards the principal. Recasting = a 30-year mortgage is still a 30-year mortgage but the minimum monthly payment is recalculated.

I personally own a 30 year mortgage that is recasted automatically with every extra payment. After reading your discussion, I might stop paying down the mortgage once the monthly minimum payment feels more comfortable. Which would be -in my current estimations- around 600 euros or the equivalent of where I could no longer find a rental appartment in my region.

I see this recasting as building in extra resilience in case of unemployment; illness; other unforeseen hazards; or sudden urge for more travelling-less working.

Example
Mortgage: 200.000 dollars, 30 years, 4 %.
Fixed monthly payment for 30 years: 955 dollars
Extra payment of 10.000 in the first year, recasted: 907
Extra payment of 10.000 in the second year, recasted : 856

If the person in the example feels comfortable with around 850, he can stop paying extra towards the mortgage. If however, the comfortable level lies around 700, he should continue.

Edit: my automatic recasting is without any additional costs. I just realised this might not be the case in the US, depending on the policy of your lender.
« Last Edit: March 15, 2014, 03:03:23 PM by train_writer »

Cassie

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Re: Mortgage Payoff Club!!
« Reply #147 on: March 15, 2014, 03:11:12 PM »
You guys are all doing awesome!!! Our home is paid for and it really is a wonderful feeling plus our taxes are low-Nevada.  There has been a lot of discussion on other threads about saving versus paying off mortgage & many say the math points that direction but paying off your home is a guaranteed savings plan with no risk. 

dabears847

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Re: Mortgage Payoff Club!!
« Reply #148 on: March 16, 2014, 10:26:30 AM »
It just doesn't seem right, since paying off my mortgage early saves me over $200,000 in interest.
According to Washington Post, Capital Gains Tax will increase from 15% to possibly 25%. Not pleasant news to us investors.[/color]

Paying off your mortgage may "Save You $200,000 in mortgage interest", but the bigger issue is how much does it costs you in "Portfolio Gain".

If you have a $600,000 mortgage and pay it off over 30 years at 3.5% mortgage rate, then you will pay approximately $370,000 in interest over the 30 years.  If you choose to make an additional $1,500 per month mortgage payment, then you will cut the 30 year mortgage down to 188 month mortgage and you will pay approximately $178,000 in interest.

So by making an additional $1,500 payment per month, you "save" $192,000 in interest.  Close to your $200,000 savings that you mentioned.

So how does $1,500 per month going to your mortgage cost your portfolio over time?

That depends on what return you have over a 188 month/close to 15.5 year time frame.

Starting with 0, your portfolio would grow to the following at the following yields:

11% = $746,000     
10% = $677,000
 9% = $615,000
 8% = $560,000
 7% = $510,000
 6% = $466,000
 5% = $427,000
 4% = $391,000
3.5% = $367,000

In 188 months your mortgage would be 0 if you made extra payments of $1,500  per month or it would be $367,000 if you paid $0 extra. 

188 payments of $1,500 = $282,000 of capital

So the taxes would be calculated based on the return - $282,000.  IE 11% = $746,000-$282,000 = $464,000 gain.  25% of the gain = 25% of $464,000 = $116,000 of taxes if you cashed them all in at once.  You would probably manage taxes better.  $746,000 - $116,000 = $630,000.  Subtract off the mortgage that you still have of $367,000 and you have a benefit of $263,000.

After your tax rate of 25%, the results would be as follows:

11% = $263,000
10% = $211,000
 9% = $165,000
 8% = $124,000
 7% = $86,000
 6% = $53,000
 5% = $24,000
 4% = $-3,250
3.5% = -21,250

This is calculated at a very high capital gain rate of 25%, and not managing any taxes.  Just cashing out in 188 months, and many other assumptions that don't make sense.  The biggest one is all the current tax benefits that you get by itemizing your taxes and claiming your home mortgage deduction. 

Using the current 15% tax rate would result in:

11% = $309,000
10% = $251,000
 9% =$198,000
 8%  = $151,000
 7% = $109,000
 6% = $71,000
 5% = $38,000
 4% = $7,650
3.5% = $12,750 

Again with managing your realization of the gains you should be able to bring down taxes even further and again this does not take into the benefits of having the home mortgage deduction on your tax return while you are still paying high tax rates while you are working.

So over a period of 30 years, if you can get anything above 4% you are better off keeping your 3.5% mortgage as long as possible.

I am confident that I can get above 4%, if I can't then I would probably be earning a 0% return after inflation.  If we have that then our Safe Withdrawal Rate would be close to 1% which would cause significant issues to everyone.  A 30 year fixed rate mortgage is a great hedge against inflation.  The Government is giving those who take it free money to jumpstart the economy.  Those who pay it down faster than required are foregoing the government's gift to homeowners.   

I crunch these numbers all the time and I came to the value of piece of mind that paying off my house would provide a greater return should my wife or I lose our jobs.

1. I've built massive excel charts and equations evaluating the cash flow of the before cash and after cash. One thing I found is the opportunity of cash flow after the mortgage is paid off, that has to be calculated as well for the return comparison. ie. the second half of the mortgage or 15years of no mortgage payments invested and the benefit of compounding.

2. I could pay off my rentals and take the tax savings which is marginally better than paying off my house. However, I would lose the comfort of something unexpected happening to our cash flow. Maybe we have another downturn in the real estate market so I'm waiting to pay those off last.

3. I look at paying down my house as a form of bond buying as part of my investing strategy.


tomsang

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Re: Mortgage Payoff Club!!
« Reply #149 on: March 16, 2014, 11:00:51 AM »
I crunch these numbers all the time and I came to the value of piece of mind that paying off my house would provide a greater return should my wife or I lose our jobs.

1. I've built massive excel charts and equations evaluating the cash flow of the before cash and after cash. One thing I found is the opportunity of cash flow after the mortgage is paid off, that has to be calculated as well for the return comparison. ie. the second half of the mortgage or 15years of no mortgage payments invested and the benefit of compounding.

2. I could pay off my rentals and take the tax savings which is marginally better than paying off my house. However, I would lose the comfort of something unexpected happening to our cash flow. Maybe we have another downturn in the real estate market so I'm waiting to pay those off last.

3. I look at paying down my house as a form of bond buying as part of my investing strategy.

Are not taking into account that the investments kick off yield that can be tapped?  Your cashflow will be significantly better off if investments yield greater than your mortgage rate.  If you don't have a paid off mortgage, then prepaying your mortgage puts you in a significantly riskier situation if you or your wife lose your jobs.  Have investments provides a huge emergency fund vs. having your money locked up in your house.  If you prepay your mortgage by $50k, then you have an emergency where you don't have the money to pay the monthly payment the bank will not say do not worry about your payment as you prepaid $50k.  They will say make your payment by x date or we will begin foreclosure.  If you have excess dollars in investments you can liquidate your investments, payoff your bills, payoff your mortgage, etc. until you get back on your feet.

It is clear that many forget to include the investment side of the income to offset the mortgage side of the expense. If you look at in this way the peace of mind should/would be greater than having a partially or fully paid off mortgage as you in effect have a huge emergency fund earning longterm market rates.  Check out my Excel spreadsheet to see the impact on your finances based on various assumptions.

This is a very personal choice and there are no terrible decisions, but I want to point out to you and everyone else the math behind the decision.  Most don't see or don't count the investment side of things.  If they have good reasons for that, then I think it would be great to share those with the board.

If you are comfortable I would like to see your Excel file to see your assumptions and calculations.