Author Topic: DONT Payoff your Mortgage Club  (Read 574577 times)

sadiesortsitout

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Re: DONT Payoff your Mortgage Club
« Reply #3050 on: January 14, 2022, 05:08:56 PM »
I'm going to just ask an ignorant question-- is it worth paying extra on the mortgage if you have PMI?

I bought a house in 2020 for $70k (heck yes Missouri prices) at 2.95% on a fixed-rate 30-year mortgage. I only put about $2000 down. How do I math it to figure out if it's worth paying extra to get PMI removed?

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #3051 on: January 14, 2022, 10:27:29 PM »
I'm going to just ask an ignorant question-- is it worth paying extra on the mortgage if you have PMI?

I bought a house in 2020 for $70k (heck yes Missouri prices) at 2.95% on a fixed-rate 30-year mortgage. I only put about $2000 down. How do I math it to figure out if it's worth paying extra to get PMI removed?
How much is the PMI? What's your total payment? FHA financing? That's such a good interest rate on so little money that you might be just fine letting it ride and investing everything else you can save into equities. PMI isn't the worst thing in the world, as long as it isn't costing you a fortune.

YttriumNitrate

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Re: DONT Payoff your Mortgage Club
« Reply #3052 on: January 15, 2022, 08:54:23 AM »
Given that this is already a pretty absurd hypothetical...... simply finding a home that was worth 10x as much in Omaha in 1958 would have been a challenge, unless it was an opulent custom home...It's Omaha - sleepy small city in the heartland with a (well) below average household income (then and now).
So you're saying that the hypothetical requires Buffett to move from Omaha to a more expensive location in 1958. Considering people do that all the time, I'm not sure how that qualifies as an absurd hypothetical.

nereo

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Re: DONT Payoff your Mortgage Club
« Reply #3053 on: January 15, 2022, 10:54:22 AM »
Given that this is already a pretty absurd hypothetical...... simply finding a home that was worth 10x as much in Omaha in 1958 would have been a challenge, unless it was an opulent custom home...It's Omaha - sleepy small city in the heartland with a (well) below average household income (then and now).
So you're saying that the hypothetical requires Buffett to move from Omaha to a more expensive location in 1958. Considering people do that all the time, I'm not sure how that qualifies as an absurd hypothetical.

Nope.
Iím saying Buffettís choice of home wasnít some miserly hovel and the real estate market in Omaha in 1958 did not have any $380k homes available. The return* he got is precisely because it fit within the local market.  If you buy (or build) a home thatís 10x nicer than nearby homes in your area, chances are you wonít make any money.  That certainly seems to be the case for Omaha.

*ROI on a home purchase of course must include more than simply the  purchase price and sale price, especially over 5+ decades.  Inflation, insurance, renovations etc. must all be considered.

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #3054 on: January 16, 2022, 11:06:31 AM »
Buffet's life should be judged as the whole package. I was very impressed by his biography The Snowball.

Bateaux

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Re: DONT Payoff your Mortgage Club
« Reply #3055 on: January 16, 2022, 12:08:33 PM »
I'm going to just ask an ignorant question-- is it worth paying extra on the mortgage if you have PMI?

I bought a house in 2020 for $70k (heck yes Missouri prices) at 2.95% on a fixed-rate 30-year mortgage. I only put about $2000 down. How do I math it to figure out if it's worth paying extra to get PMI removed?

It can't be much money on such a small loan.  I'd however try and get passed PMI.  You never know when you'd like to sell and having a bit more equity could help.

solon

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Re: DONT Payoff your Mortgage Club
« Reply #3056 on: January 16, 2022, 07:55:09 PM »
On page one of this thread, runewell has a great formula for determining the mortgage vs invest question. A great formula, usually eye-popping in most scenarios.

The question I have is about the assumption. It assumes you have a pile of money equal to your principle balance, and you are trying to decide if you should pay off the mortgage all at once, or invest it. But that's not the situation I'm in, and I think many people are with me. I don't have a big pile of cash, I have $1,000 a month from my paycheck.

Is there a formula that helps you decide what to do with an extra $1,000 a month? Is it the same as runewell's formula, just at a smaller scope?

JJ-

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Re: DONT Payoff your Mortgage Club
« Reply #3057 on: January 16, 2022, 08:39:00 PM »
On page one of this thread, runewell has a great formula for determining the mortgage vs invest question. A great formula, usually eye-popping in most scenarios.

The question I have is about the assumption. It assumes you have a pile of money equal to your principle balance, and you are trying to decide if you should pay off the mortgage all at once, or invest it. But that's not the situation I'm in, and I think many people are with me. I don't have a big pile of cash, I have $1,000 a month from my paycheck.

Is there a formula that helps you decide what to do with an extra $1,000 a month? Is it the same as runewell's formula, just at a smaller scope?

It's slightly different, but if you keep it simple the concept is similar.

Keeping it simple, if you have a $100k mortgage, or 10x$10k mortgages, the monthly payment for the $100k will equal the sum of the 10x$10k mortgages.

What this means is for every $ of that mortgage you can run a separate analysis. You could technically run runewells formula for each monthly extra payment you make, put in an annualized sum, or honestly run an online investment calculator interest gained result vs a pay down mortgage interest saved result. That will give you the data you're looking for rather than wiping it out all at once. You'll also want to ignore any "monthly payment reduction" l, focusing on interest only, unless you factor in a recast because the main mortgage payment will not change.

Real life variations will happen for sure. For example year 1 that $12k in the market may be flat but over 10 years avg 5%. One year of prepayment knocks time off the end of that loan and you'll see that savings in 20+ years.

The important thing to remember though is that that whole mortgage balance is the sum of a bunch of tiny chunks of money that can be assessed at the same rate (in most cases) as the parent mortgage.

sadiesortsitout

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Re: DONT Payoff your Mortgage Club
« Reply #3058 on: January 17, 2022, 01:21:51 PM »

It can't be much money on such a small loan.  I'd however try and get passed PMI.  You never know when you'd like to sell and having a bit more equity could help.

Unless I'm reading my statement breakdown wrong, it's $31 a month.

I don't plan on ever selling this house. If I did want to move, I'd rent it out before selling -- it's in a great rental market (near a large hospital and a college) and I could easily get almost twice the mortgage payment in rent. I think I may be firmly in the DPOYM club now.

Viking Thor

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Re: DONT Payoff your Mortgage Club
« Reply #3059 on: January 17, 2022, 02:44:18 PM »

It can't be much money on such a small loan.  I'd however try and get passed PMI.  You never know when you'd like to sell and having a bit more equity could help.

Unless I'm reading my statement breakdown wrong, it's $31 a month.

I don't plan on ever selling this house. If I did want to move, I'd rent it out before selling -- it's in a great rental market (near a large hospital and a college) and I could easily get almost twice the mortgage payment in rent. I think I may be firmly in the DPOYM club now.

Its probably a good deal to get rid of PMI, hard to know for sure without knowing all the details. You save on the PMI and on the mortgage interest if you pay a little extra to get the necessary loan to value to remove PMI.

Its at least worth looking up with the bank how to get rid of it which differs accordingly to your loan/bank rules. Sometimes you can get rid of it with an appraisal above a certain amount.

Once you know the rules you could do a calculation of how much you would save versus the cost and effort involved.

feelingroovy

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Re: DONT Payoff your Mortgage Club
« Reply #3060 on: January 17, 2022, 09:59:39 PM »
I'm going to just ask an ignorant question-- is it worth paying extra on the mortgage if you have PMI?

I bought a house in 2020 for $70k (heck yes Missouri prices) at 2.95% on a fixed-rate 30-year mortgage. I only put about $2000 down. How do I math it to figure out if it's worth paying extra to get PMI removed?

Do you have any idea if the house has appreciated?

We also bought a house with PMI in 2020. I was able to get the PMI removed last month with a reappraisal. It should pay off in a year.

We needed it to go up 12%. The appraisal came back 27% increase over what we paid for it. To be fair, we have already put on a new roof and did some updating of a bathroom.

But maybe check your neighborhood sales and Zestimate.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #3061 on: January 17, 2022, 11:56:56 PM »
I'm going to just ask an ignorant question-- is it worth paying extra on the mortgage if you have PMI?

I bought a house in 2020 for $70k (heck yes Missouri prices) at 2.95% on a fixed-rate 30-year mortgage. I only put about $2000 down. How do I math it to figure out if it's worth paying extra to get PMI removed?

Do you have any idea if the house has appreciated?

We also bought a house with PMI in 2020. I was able to get the PMI removed last month with a reappraisal. It should pay off in a year.

We needed it to go up 12%. The appraisal came back 27% increase over what we paid for it. To be fair, we have already put on a new roof and did some updating of a bathroom.

But maybe check your neighborhood sales and Zestimate.
How much did the appraisal cost?

OP, at $31/month, I'd be tempted to just let the PMI ride for a while.

feelingroovy

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Re: DONT Payoff your Mortgage Club
« Reply #3062 on: January 18, 2022, 02:33:14 PM »
Our appraisal was $495. Our PMI was a little higher so we had a 12 month payback. It's worth it if you're confident it will appraise high enough.

sadiesortsitout

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Re: DONT Payoff your Mortgage Club
« Reply #3063 on: January 18, 2022, 02:59:04 PM »

Do you have any idea if the house has appreciated?

We also bought a house with PMI in 2020. I was able to get the PMI removed last month with a reappraisal. It should pay off in a year.


I checked with the lender, but they will only use the original loan amount to calculate PMI, not the appraisal value. The idea being that an appraisal is a purely theoretical value until a valuation event (the sale) occurs. However, they were more than happy to issue me a HELOC nine months after the sale based on the appraisal value.

As to Zillow, it's interesting - the Zestimate when I bought in October 2020 was the same as the appraisal value and asking price -- $90,000. After the house sold to me for $70,000 (surprising everyone), the Zestimate dropped to $74,000 and climbed over the last year to $87,500. It's difficult to say what it would really sell for. The nearly identical houses around me have much higher Zestimates.

I plan to own this house forever, either as my home or a rental property.

couponvan

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Re: DONT Payoff your Mortgage Club
« Reply #3064 on: January 18, 2022, 03:24:36 PM »
Could you use the HELOC to pay down the original PMI balance. (Assuming the math works.) I.e if you only need $5K and itís 5%, then the interest payment of $21/month is less than the PMI cost.

sonofsven

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Re: DONT Payoff your Mortgage Club
« Reply #3065 on: January 18, 2022, 04:10:43 PM »
It might be too low a balance, but have you thought about a re fi?
Online is easy.
I got a message from Lender Fi that claimed they are closing in eight days.

NorthernIkigai

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Re: DONT Payoff your Mortgage Club
« Reply #3066 on: January 19, 2022, 04:54:33 AM »
So I've just finished reading this whole thread and found it very useful, thanks y'all! I was already familiar with the general argument in favour of keeping a mortgage, but there was a lot of nuance and detail in here that was new to me, and it's also fascinating to see how mortgages work in different places.

I guess I belong in this club, having only paid the agreed monthly payment since spring 2014. When we first took it out, it felt awful to be in debt, although the amount was less than half the value of the home we bought. I was torn between "a mortgage is almost free money, we should stretch this out" and "we need to pay off this horrible thing as soon as possible". So I figured if I can't decide between these two courses of action, just paying the agreed amount is probably the best... And as soon as the amount dropped into five figures, it didn't feel horrible at all anymore.

Mortgages here are almost always variable rate, with a specific base rate (in our case the 6 month Euribor) + an agreed margin for the bank. This means that the rate changes every 6 months, but it's not something that's up to the bank. We pay the same amount every month, and if the rate goes up, the loan takes longer to pay (and if it goes down, the loan term gets shorter). So with this setup, banks wouldn't usually lend you money for 30 years, since the loan term has to be able to expand if rates go up. I think banks also don't really consider pensioners to be able to handle mortgage payments, so they'll only give you loans that end by the theoretical (very high, nowadays) national retirement age.

When we first took out the loan, the base rate was just above 0.4% and the bank's margin 1%. Since then, the base rate has dropped somewhere below -0.5%, and we've twice renegotiated the margin, first to 0.65% and then to 0.45% (I think the first of this was free and the second cost a few hundred euros). Since contracts currently include a clause that the bank will not pay the customer any interest, we now pay that 0.45% ... while smiling and thinking of this MMM club. Our original contract didn't include that clause, and I've heard that some customers have actually been in situations where the bank pays them to keep their mortgage! Meanwhile, the projected end date of the mortgage has moved from spring 2028 to summer 2027 because of the lower base rate and those renegotiations.

So it's possible to follow the DPOYM philosophy, even if you can't have a 30-year fixed loan. A combination of a much larger down payment and muuuch better rates does the trick just as well.

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #3067 on: January 19, 2022, 08:02:04 AM »
We are glad to have you join us, @NorthernIkigai !

When I was reading those early posts, the peculiar American access to a long term at a fixed interest rate was a major foundational requirement of the DPYM club. That doesn't mean it's unwise to float a large mortgage balance. It just means you're bearing more risk per currency unit of debt than someone with a lengthy fixed term would be.

In my own case, I was paying toward an Adjustable rate mortgage from 2013-2020. During the initial five year "teaser" period (when my rate was fixed at 3.0%), I paid ahead slightly so as to ensure that any rate resets would limit the monthly payment to what our household could manage. The first reset took us up the maximum, but we were able to swing the payments with no difficulty, and the second annual reset--this was after the yield curve inversion--actually reduced the rates.

Retire-Canada

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Re: DONT Payoff your Mortgage Club
« Reply #3068 on: January 19, 2022, 08:18:27 AM »
We are in the DPOYMC here in Canada with adjustable rate mortgages. The way the mortgage/housing market is structured the Government cannot allow rates to sky rocket suddenly as that would lead to so many defaults they economy would crater. So while rates are not static I don't feel particularly vulnerable with this type of mortgage. The low starting rate of each 5 year term means that we can take quite a few rate increases before we would have been better off on a 5 year fixed term mortgage.

If the SHTF these mortgages have generous repayment terms so we could pay it off quickly if the math did make sense at some point.

In the meantime we'll enjoy our 1.45% mortgage rate and keep borrowing while letting that ~$500K stay invested.

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #3069 on: January 19, 2022, 08:58:13 AM »
Because of investment gains, I now have a taxable investment account with a balance more than 15% in excess of our mortgage balance on our primary resident.

Of course, those investments could have a year in which they decline by 35%. It's happened recently...

trc4897

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Re: DONT Payoff your Mortgage Club
« Reply #3070 on: January 19, 2022, 09:34:03 AM »
So I used to be on the pay off the mortgage early mindset (before reading this thread). I have about $11k in extra payments applied to the mortgage since 2017. Has anyone ever done a recast? Chase offers this for free and it should lower my monthly payment by $100 or so. I don't see a downside in doing this.

Some info on my mortgage: 3.5%, $89k remaining balance ($140k purchase price in 2017)

JJ-

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Re: DONT Payoff your Mortgage Club
« Reply #3071 on: January 19, 2022, 09:59:32 AM »
So I used to be on the pay off the mortgage early mindset (before reading this thread). I have about $11k in extra payments applied to the mortgage since 2017. Has anyone ever done a recast? Chase offers this for free and it should lower my monthly payment by $100 or so. I don't see a downside in doing this.

Some info on my mortgage: 3.5%, $89k remaining balance ($140k purchase price in 2017)

No experience in doing it, but I'd do it if it's genuinely free and invest that $100 accordingly.

Telecaster

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Re: DONT Payoff your Mortgage Club
« Reply #3072 on: January 19, 2022, 01:04:24 PM »
So I used to be on the pay off the mortgage early mindset (before reading this thread). I have about $11k in extra payments applied to the mortgage since 2017. Has anyone ever done a recast? Chase offers this for free and it should lower my monthly payment by $100 or so. I don't see a downside in doing this.

Some info on my mortgage: 3.5%, $89k remaining balance ($140k purchase price in 2017)

Totally makes sense to recast in your situation.