Different ways of paying off mortgage

[DBV1985]

Hello fellow Mustachians,

I recently decided I would rather pay off a mortgage in the next 1-2 years than buy a Tesla 3. lol I am just not sure the best way to go about it. Some of the posts I have read so far include 1. apply savings towards the principal 2. invest the extra money into a vanguard index fund account until I had enough to sell and pay off the morgage. That is assuming I will have earnings by the end of it. 3. Use the extra savings towards saving account churning.

If you wanted to pay off your mortgage, how would you do it?

$47K outstanding principal balance
3.125% interest rate
$485 principal and interest
$554 total monthly payment with taxes and insurance
Condo purchased 12/2012
Maturity date 12/2027

Thanks!
J

[Catbert]

If you really plan to pay off within 1-2 years, don't put the money in the stock market.  Way too volatile in that short period of time.  It's a strategy if you want to turn a 30 year mortgage into your own version of a 15 year mortgage.

Many would debate the wisdom of paying off a 3% mortgage.  I'd be among them except that your balance is so low that having it hang around for 10 years wouldn't be beneficial.  So...I'd pay extra every month or when you get extra money.

[SwordGuy]

I'm assuming you have some savings that you could draw on to make your payments with if you lost your job or were unable to work.

If that's not true you should fix that problem first.

Assuming you have that covered, just pay extra every month and have it marked as being against the principal.  Enjoy!

[boarder42]

I'd invest it.  Then at the end I'd be so happy I invested it that I wouldn't use it to pay it off

[CindyBS]

I'm in favor of paying off a mortgage early, mostly b/c I like the feeling of being 100% debt free.

One tip I do is that we pay the mortgage on the 15th of the month - so if it is due Oct. 1st, it gets paid by Sept. 15th.  The two weeks that are the 15th - 1st are not that long for the principal payment to collect interest and each month it probably saves almost nothing, but over the life of a loan it adds up and costs nothing extra to do it. 

We are paying off our mortgage early by overpaying every month with the extra going towards principal and then a small lump sum payment at the end of the year. 

[kpd905]

I'm in favor of paying off a mortgage early, mostly b/c I like the feeling of being 100% debt free.

One tip I do is that we pay the mortgage on the 15th of the month - so if it is due Oct. 1st, it gets paid by Sept. 15th.  The two weeks that are the 15th - 1st are not that long for the principal payment to collect interest and each month it probably saves almost nothing, but over the life of a loan it adds up and costs nothing extra to do it. 

Since you are still just paying monthly, your first payment made on the 15th instead of the 1st saved you a little bit of interest, but now you are accruing a full month's interest between payments again.  So maybe $5 I would guess.

[MDM]

If you wanted to pay off your mortgage, how would you do it?

It would depend on my other assets and cash flow situation.

[DBV1985]

Okay thanks. I will put in extra towards principal every 2 weeks. I know the rate is nice but it is a very low balance. I would like to just get it over with and pay it off. No other debts, have a savings of 6 months and maxing out all other tax deferred accounts. I wanted the tesla 3 really bad and still dream of owning one one day. Maybe the Y or used X in 2 yrs. Other priorities come first though! I'm looking forward to getting my $1000 deposit back :).

J

[EarthSurfer]

DBV1985,

I am a huge fan of owning a personal residence free and clear of a mortgage, and the experience of rapidly retiring the debt transform how you think about the power of directed, short term financial goals.

If you plan to use the condo as a rental property in the next few years, you may not want to pay off or even pre-pay the mortgage. The ROI (return on investment) is typically much lower on a rental property when you have more money in it. Additionally, if you need funds out to purchase a new home, you will likely be paying a much higher rate. Current 30 yr rates are near 4% for a personal residence, and add at least 0.75% more for an "investment property." Outside of another major financial crash, it is unlikely you will see rates as low as 3.125% in the next 10 years.

A major increase in property value would negate this reason if you plan to borrow against this increased value (aka: equity) if / when you turn the condo into a rental unit. The strategy here would be to put a mortgage on the unit about a year before the rental conversion so you have access to the lower personal residence rates. (I have been told most FHA conforming mortgages have a requirement that the Owner "intends" to reside in the property for at least one year following the origination date.)

BUT... If you are going to pre-pay on the mortgage, have at least 6-12 months of expenses in reserves.  Personally, I chose not to prepay, and I paid the mortgage off in one lump sum. I worked in tech and always considered my job one corporate reorganization away from a layoff. 

Sending that wire transfer for $95,683.27 on 6/27/97 to pay off my mortgage was soooo freeing. I had about 4 months living expenses available at the time, and I figured I could raid my 401K & IRA if things got "bad."

I will save you from my rant on how the 30 year mortgage lead to lifestyle inflation in the US...

[Cranky]

We just chucked extra at the principal whenever we had it (given that we also had a 12 month emergency fund and our retirement accounts were where we wanted them.)

Once we got to the point where we were paying more principal than interest, it got to be more fun and it really went fast because of that.

The last bit was a lump sum bonus that we decided to use for the house instead of a vacation. And once you have no mortgage, it's pretty easy to start saving for a new car.

[frugaliknowit]

Given that you are sure you want to pay it off and have enough cash on hand, you might make a principal payment (that you can spare) each payday till you nuke it dead:)

[boarder42]

Threads like these hurt me alot.

You're increasing your risk of life financial failure
And Increasing your time til you're FI.
 

All for a feeling.

And the biggest issue is those around here emotionally supporting the poor financial decision.

You've made the worst possible choice in this scenario. And people are supporting it.  Hiring a house cleaner and lawn mower tomorrow should be your next 2 steps.

[Gonzo]

I don't like the idea of paying down a low rate mortgage.  You'll lose the liquidity but gain no benefit in your cash flow.  Invest the money as you like, and someday write the big check.  Hopefully your chosen investments will pay some of it off for you.  I use equity index ETFs myself. 

The truth is, I could easily pay off my mortgage but chose not to because the rate is so low.  I pay 2.09% after tax, which makes it a good interest rate and good inflation hedge.  The current high valuations have me considering deleveraging, but OTOH my mortgage is essentially free money. 

[Drole]

I'd pay whatever extra amount you can each month. Simply not having a mortgage gives you so much more future flexibility.

In paying off a couple of rental properties, i've been amused as a couple of companies have rejected/returned payments if I paid off too much at once. So I stagger it now and watch online to make sure payments are applied correctly as principal. Despite filling out their own forms to apply $ to principal, i've had them apply it as future payments, more times than I can count.

[DBV1985]

Boarder42,

My original post asked "what are different ways of paying off a mortgage" and it wasn't a "would you or wouldn't you pay off your mortgage?". Of course the responses were appropriate in answering my question. This post was not intended for a discussion of "this is why you shouldn't do it and this is why you should". There are plenty of those types of posts on this forum and I have tried to read many of them in the past to understand peoples different view points on the topic. I completely respect and understand why people choose not to pay off their mortgage.

This decision is not only an emotional one but also comes from experience with the 2008 real estate crash. I do not want my family to ever go through multiple foreclosures again. This condo would stay in the family for many years and my parents will continue to live in it throughout their retirement. The $47K balance is not that large and I am comfortable with it affecting my FIRE date.

J

[Drifterrider]

I'm in favor of paying off a mortgage early, mostly b/c I like the feeling of being 100% debt free.

One tip I do is that we pay the mortgage on the 15th of the month - so if it is due Oct. 1st, it gets paid by Sept. 15th.  The two weeks that are the 15th - 1st are not that long for the principal payment to collect interest and each month it probably saves almost nothing, but over the life of a loan it adds up and costs nothing extra to do it. 

We are paying off our mortgage early by overpaying every month with the extra going towards principal and then a small lump sum payment at the end of the year.

Is your loan institution crediting your payment on the 15th or on the 1st?  If the former, yes the interest reduction will add up: if the latter, it won't.

I'm amazed at people who "sign up" (meaning pay a fee) to pay every two weeks or on some other schedule.  If the payment isn't credited upon receipt, there is no financial benefit to paying early.

[ender]

To those debating "pay off or not" keep in mind the OP's self admitted decision was "Tesla or mortgage."

[Morning Glory]

I'm in favor of paying off a mortgage early, mostly b/c I like the feeling of being 100% debt free.

One tip I do is that we pay the mortgage on the 15th of the month - so if it is due Oct. 1st, it gets paid by Sept. 15th.  The two weeks that are the 15th - 1st are not that long for the principal payment to collect interest and each month it probably saves almost nothing, but over the life of a loan it adds up and costs nothing extra to do it. 

We are paying off our mortgage early by overpaying every month with the extra going towards principal and then a small lump sum payment at the end of the year.

Is your loan institution crediting your payment on the 15th or on the 1st?  If the former, yes the interest reduction will add up: if the latter, it won't.

I'm amazed at people who "sign up" (meaning pay a fee) to pay every two weeks or on some other schedule.  If the payment isn't credited upon receipt, there is no financial benefit to paying early.

When I had a mortgage with my credit union, the payment was actually credited every two weeks, which saved a little bit of interest each time. Unfortunately their underwriters could not do rural property so I am with Wells Fargo now. I signed up for the biweekly thinking it would be the same, but no, they just hold the money until they have the full amount. So I am giving them a free loan for two weeks every month, and leaving it this way for convenience (the money would otherwise just sit in my checking account anyway). At least they don't charge a fee for this "privilege", and I end up making an extra payment every year without really noticing.

[Dicey]

When people often fail to realize is as long as there are taxes, utilities and maintenance, there is no such thing as owning a house "free and clear".

My vote is to bolster the stash when ever possible. In a shockingly small amount of time, you will find yourself with enough money to pay the mortgage off in one lump sum. Don't be surprised if you find you just don't want to.

<<Dicey waves to boarder42.>>

[Peanutty]

Our stash is worth a few multiples of our house, but we have also decided to aggressively attack our mortgage and don't regret it one bit. Partly because my DH refuses to FIRE with any debt on the books. Not completely rational in this interest rate era, but that's his perspective and I'm comfortable with the approach because I like the emotional feeling of having no mortgage.

Different strokes for different folks.

We personally have approached paying down our mortgage by utilizing all the "accelerated payment" options that our provider offered. We increased payment frequency to weekly, made double up weekly payments whenever feasible, and utilized the "up to 10% lump sum payment per year" option a few times. Our term is up in a few months and we are going to pay out the balance at that time.

We may take out a home line of credit at a later date and use the funds for cash-flow generating investments in other areas (i.e. rental property, stock market, other). But that is more for tax purposes in Canada to keep the loan expressly for the purpose of investing - you can't write off the interest on your mortgage or your home-related debt. You *can* write off the interest on loans for investment purposes.

[boarder42]

To those debating "pay off or not" keep in mind the OP's self admitted decision was "Tesla or mortgage."

He left the door open with how to payoff invest and payoff or payoff overtime.  Paying off over time being the riskiest financial move he could make in the scenario.

[Beach_Stache]

If you have 6 months worth of expenses saved in Cash/Savings and are already maxing out 401k & Roth IRA then I would just make extra payments each month towards the principal.  That's what I've been doing and will essentially be turning my 30 year 3.75% mortgage into a 15 year mortgage.  We could have done a 15 year but the first few years would have been difficult and a 30 year gives us the flexibility if we need to cut back on extra payments.  We've been maxing out or 401k's (me forever) and my wife for the last few years as well as my Roth IRA (again been maxing out forever - hope to start maxing out my wife's forever from this year forward), and I've been treating my extra payments towards mortgage like a diversified account.  Everyone says max out 401k (or whatever tax deferred), have the 3-6 months emergency fund, Roth IRA (if you can) and then extra towards the  mortgage.  Sounds like that's exactly what you are doing, keep up the good work!

[boarder42]

If you have 6 months worth of expenses saved in Cash/Savings and are already maxing out 401k & Roth IRA then I would just make extra payments each month towards the principal.  That's what I've been doing and will essentially be turning my 30 year 3.75% mortgage into a 15 year mortgage.  We could have done a 15 year but the first few years would have been difficult and a 30 year gives us the flexibility if we need to cut back on extra payments.  We've been maxing out or 401k's (me forever) and my wife for the last few years as well as my Roth IRA (again been maxing out forever - hope to start maxing out my wife's forever from this year forward), and I've been treating my extra payments towards mortgage like a diversified account. Everyone says max out 401k (or whatever tax deferred), have the 3-6 months emergency fund, Roth IRA (if you can) and then extra towards the  mortgage.  Sounds like that's exactly what you are doing, keep up the good work!

NO EVERYONE DOESNT SAY THIS

extra to taxable account instead of mortgage decreases risk of total financial failure, increases speed to FIRE, and increases overall safety in FIRE.  NOT paying down a 3.75% fixed mortgage is the equivalent of drying your clothes, cleaning your house, mowing your own lawn and biking to work combined*.  and guess what it takes no life effort to make the decision to just put the money into vanguard vs the mortgage.

* depending on mortgage size the results of how many of those it is equivalent to may vary.

also 3-6 months E fund is overrated once you've got a sizeable taxable account built there is no need for it. so keeping that money on the sidelines to pay down a house further decreases optimization of your little green soldiers.

[Hargrove]

Despite his indignation, boarder is right that this isn't the best financial choice. He made his case already, but I think it's worth something that, on this forum, if someone believes a poster put up two bad options, they'll say so.

That said, the asterisk in all boarder's statements is "over a long horizon." I'm guessing the guy buying a Tesla OR paying off his mortgage is not likely overburdened with a high risk of life financial failure. What i have no clue about is how much anxiety this causes you.

A guy with a phobia of snakes may be "financially stupid" not to grab a harmless snake for a $500 dare, but I'm not going to give him a hard time about it. If you can't sleep at night because your mortgage isn't paid, while paying it early isn't the best option, I could see why you would do it. border's point is that your odds of gain from saving instead are better than your odds of a perfect-storm proving early-payoff the better option.