Author Topic: Home mortgage accelerated payoff  (Read 5984 times)

follicular

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Home mortgage accelerated payoff
« on: June 08, 2012, 06:32:04 AM »
This is a recurring topic and I am sorry to belabor the issue but my wife and I are likely closer to real retirement age than most posters hence there may be new light that can be shed on this matter relevant to my age group.

My wife and I have accumulated a total of about $320000 in our retirement accounts--spread among mutual funds in ira's, 401k, and annuities. We are both fulltime employed and hope to work as long as needed. Our retirement horizon is about 5-6 years but our current home mortgage extends for exactly 7 more years. The mortgage (P&I) +property taxes represent about 1/3 of our total after-tax take home pay and we have total credit card installment debt amounting to another 20% of take home pay. We both work at stable, high-paying jobs (me a consultant and my wife a director of a social work agency) but I can easily envision these jobs not lasting for more than another 2-3 years, what with ageism, volatile market employment conditions, and other factors affecting job security.

Question: does it make more sense to take some of our retirement funds to pay down maybe 50% of the mortgage balance at one shot and pay the remainder of the mortgage at the current schedule--this would result in a full mortgage payoff in about 4 years or to keep status quo and if our jobs disappear for whatever reason, consider mortgage payoff at that point in order to reduce the monthly expense burden at a time when little income will be forthcoming?

stashette

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Re: Home mortgage accelerated payoff
« Reply #1 on: June 08, 2012, 07:05:41 AM »
You mention credit card debt, which I would tackle before accelerating payments on your home. 
You don't post your age, but will you be penalized for early withdrawal of your retirement accounts?  If so, I would avoid using them to pay off your mortgage.
If you were to be forced into retirement 2-3 years from now, would you have enough to live off of even without the mortgage?  If not you may have to get another job anyway.  Other options also include downsizing and moving to a lower cost area after retirement, at which point a prepaid mortgage doesn't do too much.

follicular

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Re: Home mortgage accelerated payoff
« Reply #2 on: June 08, 2012, 07:38:36 AM »
Thanks for the reply...we are both 60..I agree that paying off credit card debt asap is the prime directive, and we are doing so to the greatest extent possible, but remain concerned that if forced to forego most of our current income our current mortgage payment which represents our single largest monthly expense will be too much to bear; after all, the monthly mortgage payment is fixed--no wiggle room here--while a credit card can be paid at the monthly minimum if money is tight.
I clearly don't want to touch retirement funds, tho I could do so now without penalty, until our late 60's, at the earliest and don't want to 'raid' social security until around 67 which I hear for a wage-earning couple is considered to be the optimum age.

grantmeaname

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Re: Home mortgage accelerated payoff
« Reply #3 on: June 08, 2012, 07:45:19 AM »
I love the username! There's all sorts of mustache puns popping up around here!

Keep in mind that if you take money from mutual funds earning something like 7-8% a year and use it to pay 3-4% mortgage debt, you're giving up half of your return, not to mention any of the tax implications. MMM refers to his money as little employees. In the long run, that money is doing more work to pay your mortgage where it is.

How much do you owe on your mortgage, and how much equity do you have in your house? How much do you make a month? What are your other monthly expenses? Are there other ways you can tackle your credit card debt (and then later your mortgage) that don't require raiding your retirement accounts?

Bank

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Re: Home mortgage accelerated payoff
« Reply #4 on: June 08, 2012, 11:11:15 AM »
Given the stage you are at in your mortgage (assuming a 30 year amortization schedule), I estimate that around 75% of your mortgage payments are going to principal.  That will increase rapidly as you get closer to the full payoff date, likely to around 85% in three years.

Given the tax advantages of the retirement account, and the fact that you are paying relatively little in interest, I don't think it makes sense to shorten your payment cycle with a lump sum withdrawal and pay down -- Grant already did a good job discussing the disadvantages of this in more detail.  If the worst happens and one or both of you lose your jobs before you begin to collect social security, you can cover your mortgage payments by taking withdrawals from your retirement accounts at that time. 

I wouldn't throw your retirement planning off because you're concerned about something that might not happen, particularly when you have the resources to deal with it if it did.

Edit:  It's likely not a 30 year amortization schedule given recent decreases in rates, but I don't think the split between principal and interest should change much based on a shorter term.
« Last Edit: June 08, 2012, 11:15:52 AM by Bank(rupt$y) »

follicular

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Re: Home mortgage accelerated payoff
« Reply #5 on: June 08, 2012, 12:13:25 PM »
thanks for posting...I took out a 10 mortgage at 4 7/8% 3 years ago. About 2/3 of the monthly payment (=$2100) is going to principal and about $900 to interest. I can add a few more $$ per month to further pay off principal but that won't dramatically shorten the payoff time horizon I am looking for.
Your point is well taken concerning waiting until such time as I really need to pay down this mortgage in order to reduce monthly expenses. I just recently got to thinking about this whole issue when I realized that for the last 12 months I have actually seen a net decrease in the value of my retirement accounts---I might as well pay off mortgage and save money rather than watch my meager retirement holdings wither on the vine.

Bank

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Re: Home mortgage accelerated payoff
« Reply #6 on: June 08, 2012, 12:20:52 PM »
thanks for posting...

....

I just recently got to thinking about this whole issue when I realized that for the last 12 months I have actually seen a net decrease in the value of my retirement accounts---I might as well pay off mortgage and save money rather than watch my meager retirement holdings wither on the vine.

You're welcome.  As for this last point, I try to throw more money in the market when I see values going down.  I wouldn't sell and lock in losses.  Who knows where we'll be next week or even next year in the market, but in the long-run your market returns are likely going to beat the that mortgage rate. 

Speaking of which, you might really want to consider refinancing if that's an option for you.  You should be able to pick up a full point or two.  I just got closed on 30 year loan for a full point less than what you're paying.  And rates are even lower today.

ShavinItForLater

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Re: Home mortgage accelerated payoff
« Reply #7 on: June 08, 2012, 01:22:18 PM »
As suggested I might look into a refi if that's feasible for you.  You could even look at doing it with no closing costs (paying a slightly higher interest rate) which is what we normally do, although we do it primarily because DW and I are never ready to commit to how long we will stay in the house.

I think if I were in your shoes I would not pay it off early--if you need to tap retirement savings to pay it you can always do so when the crisis happens.  The money is there whenever you need it.  You could even look at a refi over a longer time period, like 15 years which has great rates right now, and just make extra principal payments to pay it off over the planned 7 years.  That way your required minimum is lower if you ever had the career crisis you're worried about. 

That might also make you more comfortable about paying off the credit cards earlier, and if I were in your shoes, since you have no withdrawal penalties I would look at dipping into retirement savings to pay that off.  I have to imagine that interest rate is at or above what you'd be making with investments, it's not tax-deductible, and it's a guaranteed return.  Barring bankruptcy, you owe the money and have to pay it eventually, so paying it off faster will eliminate a ton of interest, and let you use more of your income to replace and grow retirement savings from that point forward.  I'd also be cutting my lifestyle to the bone until that credit card debt is gone.

All that said, I don't think there's anything seriously wrong with paying off your house early, I certainly wish ours was paid off, and our interest rate is less than 4%.  The risk is what's worrying you, and what makes me wish ours was paid off--we could lose our house if something really bad happens, and it would feel really great to not have that worry, and to have the resulting flexibility in career/retirement choices.  We don't have any credit card debt though, our mortgage is our only debt.  If we did have credit card debt I'd be doing every possible thing I could think of to get rid of that ASAP.

follicular

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Re: Home mortgage accelerated payoff
« Reply #8 on: June 08, 2012, 03:06:35 PM »
much appreciation to all who responded...your collective insights are really helpful.

To further the discussion of refi, I am wondering if there is such an animal as 5 year amortizing mortgage; as you all probably know those 5/1 arms are really mortgages amortized over a standard 30 years with their attendant high interest that you then must roll over every 5 or so years. I am looking for a true 5 year amortization loan which mortgage banks don't sell. They don't do less than 10 years based on what I have found.
With a 5 year AMT I could pay off my $210k balance to the tune of about $3800/month with an assumed interest rate of 3%--$800 more per month for me but 2 years faster...about a $26k overall savings.

Bank

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Re: Home mortgage accelerated payoff
« Reply #9 on: June 08, 2012, 03:39:48 PM »
I've never heard of a 5 year loan (not that they're not out there).  But what's stopping you from taking out another 10 year and then paying it off on a 5 year payment plan?  Right now you'd probably get that 3% you're targeting, as 15 year rates are in that ballpark.

arebelspy

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Re: Home mortgage accelerated payoff
« Reply #10 on: June 08, 2012, 07:13:17 PM »
I've never heard of a 5 year loan (not that they're not out there).  But what's stopping you from taking out another 10 year and then paying it off on a 5 year payment plan?  Right now you'd probably get that 3% you're targeting, as 15 year rates are in that ballpark.

Penfed has a 1.99% 5-year mortgage right now.

That's likely cheaper than you'd get on a 10-year one and prepaying early.

Honestly, if I was anti-debt I'd be getting that.  As it is, I'm on 30-years and wishing I was on 40s.
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Re: Home mortgage accelerated payoff
« Reply #11 on: June 20, 2012, 06:35:32 PM »
I think what you are doing is exceptionally risky because of the amount of the required monthly payment.  If one of you were to lose their job before the mortgage is paid off, how would you keep up with your mortgage payments?  You would likely end up taking withdrawals from your meager savings or the person laid off would have to apply for social security before full retirement age.   Once one of the jobs is lost, you probably would not be able to refinance to gain flexibility.  Having only $320,000 put away does not mix with a $210,000 mortgage!

Are you planning on living in this property after you retire?  If so, in your shoes, I would consider refinancing into a 15 year mortgage at around 3 percent or a hair more.  I might even consider a 30 year at 3.5 to 3.625 percent if my payments could be made on one income.  I would focus on getting rid of all other debt (you mention credit cards only) and maximizing my retirement contributions and other savings so I would be better prepared to weather any storm.  Once I had paid off all other debt and I was comfortable that between social security, any pension, and withdrawals from taxable and tax deferred/tax free savings and investments, my expenses, including the mortgage, were covered, then I would consider accelerating the mortgage pay-off.

I favor being debt free, but not in this case, because of the risks.