Author Topic: A twist on the mortgage payoff debate  (Read 3273 times)

Rheagar

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A twist on the mortgage payoff debate
« on: May 20, 2015, 01:51:22 PM »
So we've all seen the debate a million times - pay off the mortgage or keep it? I am in a relatively unique scenario that IMO makes it an even more difficult decision.

I bought the house in Nov 2012 for 129k. Foolishly I only put ~3% down on an FHA loan so the mortgage started at ~126k. The plus side is my interest rate is a measly 3.125%. The mortgage is now at ~117800 and the home is valued at ~135k. I am paying PMI to the tune of 123/month. Taxes and insurance run a combine 308/month.

After maxing out my 401k and our IRAs I have been putting extra money (currently 2k/month) in a taxable account hoping to grow it to the point that I could pay off the mortgage in one big payment once it's large enough. My original goal was to pay it off in 5 years (Nov 2017) but after some raises/bonuses, etc, it looks like I could conceivably get it done ~June 2016.

The interesting/different part of the math becomes getting rid of the PMI payment. The way the law is written, you are required to pay PMI for a minimum of 5 years. However, if you pay off the entirety of the mortgage before that time you don't have to pay the PMI. So not only am I saving on the interest, I'm also saving that 123/month that I'd be paying in PMI for the 1 1/2 years before Nov 2017.

So the two options before me are:

1) Keep the mortgage and get rid of PMI in Nov 2017. Contribute 2k to the taxable account until then, then add the PMI payment to those contributions once PMI is gone.
2) Pay off the mortgage ~June 2016, then keep contributing the 2k + PMI + Principle/Interest payment to the taxable account.

If I've done my math correctly it looks like it's close to a wash. I'm assuming here that my taxable account would give me 7% ROR. Has anyone ever gone through something like this? Is my reasoning sound? I'd appreciate some more eyes on this.

boarder42

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Re: A twist on the mortgage payoff debate
« Reply #1 on: May 20, 2015, 02:07:02 PM »
your forgetting the best part - just keep the damn thing putting your money in a taxable account to grow over a 1-2 year window is not advocated by any of the "keep your mortgage" crowd.  who knows what the market will do in a 1-2 year window?  i dont. 

what i would do

REFI to a 30 year with a loan that wont include PMI and use some taxable money to pay down the loan to the point that you dont have it if youre not there yet.  then make the minimum payment and invest the rest.

Rheagar

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Re: A twist on the mortgage payoff debate
« Reply #2 on: May 20, 2015, 02:14:46 PM »
your forgetting the best part - just keep the damn thing putting your money in a taxable account to grow over a 1-2 year window is not advocated by any of the "keep your mortgage" crowd.  who knows what the market will do in a 1-2 year window?  i dont. 

what i would do

REFI to a 30 year with a loan that wont include PMI and use some taxable money to pay down the loan to the point that you dont have it if youre not there yet.  then make the minimum payment and invest the rest.

I'm not sure if refinancing would be worth it. My interest rate at 3.125% is already lower than what I'd likely get today, and after closing costs I'm not sure it would offset the cost of PMI.

charis

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Re: A twist on the mortgage payoff debate
« Reply #3 on: May 20, 2015, 02:17:51 PM »
Are you saying that all of the PMI you paid prior to paying off the mortgage would be refunded to you if you pay it off within 5 years?  If so, and you have no other tax shelters available, and you were planning to pay it off in a year anyway, I might just do that.

If not, I might refinance the loan to better rate and no PMI, if possible, and just keep investing your cash.  But I would do the math first.

Rheagar

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Re: A twist on the mortgage payoff debate
« Reply #4 on: May 20, 2015, 02:20:40 PM »
Are you saying that all of the PMI you paid prior to paying off the mortgage would be refunded to you if you pay it off within 5 years?  If so, and you have no other tax shelters available, and you were planning to pay it off in a year anyway, I might just do that.

If not, I might refinance the loan to better rate and no PMI, if possible, and just keep investing your cash.  But I would do the math first.

No, I'm just saying that if the loan is paid off in full before 5 years, I don't have to continue paying PMI.

See my comment about refinancing. I should probably look into it further and get some hard numbers, but I have dismissed it because I assumed the closing costs would make it not worth it.

charis

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Re: A twist on the mortgage payoff debate
« Reply #5 on: May 21, 2015, 05:51:09 AM »
I would definitely refinance in your shoes unless you feel strongly about paying it off.  I saw your comment, but (a) the closing cost don't have to be cancelled out by PMI savings because there are other obvious benefits to keeping the mortgage and investing your money, and (b) they might anyway - my refi closing costs were less than 2K.   I don't get the "twist" part here either.  It seems clear that you wouldn't have to pay mortgage insurance on a mortgage you  no longer have.

zolotiyeruki

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Re: A twist on the mortgage payoff debate
« Reply #6 on: May 21, 2015, 08:50:42 AM »
If I were in your situation, I'd be plowing the $2k/mo straight into the mortgage, rather than saving it up in a taxable account for a couple years.  Sure, you might lose a few percent of additional gains, but if you're going to use that money for paying off the house instead of long-term investing, just stick it straight towards the principal in the first place.