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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: Hadilly on December 16, 2013, 05:13:27 AM

Title: Pay off an interest-only second mortgage+appreciation early or wait 28 years?
Post by: Hadilly on December 16, 2013, 05:13:27 AM
Hello my beloved mustachians,

inspired by the "accomplishments in 2013" and "goals for 2014" threads, I have been putting together my list of things to do with our money. I would love feedback on how to deal with our second mortgage.

We have a condo with about 250-450K in equity (the market has really gone up in our area). We owe about 600K and should be done with that in about 22 years at current rate of repayment.

We also have a second mortgage for 150K at 2.5% or 3%. We have to pay interest on it every month to the tune of about $500. We have to pay off the second in full about 28 years; this is non-negotiable. We also have to pay appreciation on the loan, so 11% of appreciation after we sell goes to the mortgage holder.  Any capital improvements we do in meantime count against that appreciation. 10K on a bathroom remodel would result in 10K of appreciation forgiven. Does that make sense?

If I really hustle, I think I can save about 24K a year from my job and we can pay it off in about 4-5 years. It has to be paid off in full or in big chunks so applying a bit extra every month is not an option.

I can see us staying here indefinitely, I can also see us moving but the chance of that feels low. The job situation is very stable.

The alternative is to hustle, put together the money and then invest it, pull it out 28 years from now and pay the mortgage off. That seems like the thing we should probably do, but I hate paying $500 a month in interest.

We don't really have any other debt, but we do need to save for childrens' college and I am pretty committed to stashing a nice chunk for retirement/FU money. Either way, we're definitely going into save and invest mode this year, but I am having trouble figuring out how to prioritize (or not) this mortgage.

Thoughts? Is it as simple as, go be in the market for the next few decades?

Title: Re: Would you pay off an interest-only second mortgage?
Post by: Another Reader on December 16, 2013, 05:55:48 AM
What happens if you pay off the shared appreciation second mortgage early?  Is there a prepayment penalty?  Do you owe the lender the appreciation percentage up to the payoff date?

You are NOT paying 2.5 to 3 percent.  You are paying interest and giving the lender part of your equity.  You have a co-owner of your property and I would be looking for a way to get rid of that equity partnership ASAP.
Title: Re: Would you pay off an interest-only second mortgage?
Post by: Hadilly on December 16, 2013, 06:07:43 AM
Thank you for your thoughts, Another Reader.

There is no prepayment/early payment penalty. We would owe any appreciation accrued. As I understand it, we would pay for an appraisal, get the current value of the condo, and then subtract any capital improvements from 11% appreciation, and then have our number to pay, 150K+ presumably.