Author Topic: Paying additional principle when you have 2.5% interest rate  (Read 1694 times)

gardenstash

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I refinanced my house a few months ago from 3.75% to 2.5%. The biggest benefit was dropping the monthly $220 FHA PMI. But the closing costs increased my balance so I've been paying an additional $200 each month on the mortgage. I'm already pretty invested in the stock market thanks to an inheritance, so if I just let that ride until retirement age, as long as the stock market and our current way of life doesn't completely implode, and I don't have a personal disaster, I should be good for retirement. (I like working, I don't intend to retire early, I work for myself).

I just don't know what else to do with $200/month.

StarBright

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Re: Paying additional principle when you have 2.5% interest rate
« Reply #1 on: May 14, 2021, 08:23:20 AM »
We refied last summer at similar rates and also pay extra on our mortgage.

Even though the rational thing to do is invest more, I know that I will be happier and more secure with a paid off mortgage. I want to have our mortgage paid off by the time the kids go to college.

If you aren't planning on retiring early and feel that you have plenty/more than plenty in investments, then 200 towards principal is better than blowing it on frivolous stuff!

Morning Glory

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Re: Paying additional principle when you have 2.5% interest rate
« Reply #2 on: May 14, 2021, 08:32:08 AM »
You can consider a mortgage-payoff side fund in a separate investment account. Paying it off in a lump sum is much safer than making extra principal payments as you go.

Consider if you were unable to work due to an injury: The bank only cares if you make your next payment. They won't take into account any previous extra payments you made, so you are far better off owing 200k and having 100k in a side fund than you would be if you had paid the mortgage down to 100k.

JLee

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Re: Paying additional principle when you have 2.5% interest rate
« Reply #3 on: May 14, 2021, 08:46:13 AM »
2.5% of deductible interest is basically free money (inflation rate) so I would struggle to justify paying it off faster. The side fund sounds like a better ideal.

I do pay extra on my 2.5% mortgage, only because it's $1.70 to round up to the nearest even $500 which makes me irrationally happy :P

Telecaster

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Re: Paying additional principle when you have 2.5% interest rate
« Reply #4 on: May 14, 2021, 08:56:28 AM »
You can consider a mortgage-payoff side fund in a separate investment account. Paying it off in a lump sum is much safer than making extra principal payments as you go.

Consider if you were unable to work due to an injury: The bank only cares if you make your next payment. They won't take into account any previous extra payments you made, so you are far better off owing 200k and having 100k in a side fund than you would be if you had paid the mortgage down to 100k.

^ This.  Money in your house is expensive and hard to access.  Not a good place for it, most of the time. 

StarBright

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Re: Paying additional principle when you have 2.5% interest rate
« Reply #5 on: May 14, 2021, 09:08:17 AM »
You can consider a mortgage-payoff side fund in a separate investment account. Paying it off in a lump sum is much safer than making extra principal payments as you go.

Consider if you were unable to work due to an injury: The bank only cares if you make your next payment. They won't take into account any previous extra payments you made, so you are far better off owing 200k and having 100k in a side fund than you would be if you had paid the mortgage down to 100k.

^ This.  Money in your house is expensive and hard to access.  Not a good place for it, most of the time.

FWIW - I actually do think  ^ is the smarter path. I'm just one of those people that needs to see balances go down. If we didn't have enough sitting in savings to pay our house off in a worst case scenario I might feel differently though.

RWD

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Re: Paying additional principle when you have 2.5% interest rate
« Reply #6 on: May 14, 2021, 09:13:59 AM »
I just don't know what else to do with $200/month.
Investment Order.

Invest it according to the desired asset allocation in your investment policy statement.

Dicey

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Re: Paying additional principle when you have 2.5% interest rate
« Reply #7 on: May 14, 2021, 09:31:16 AM »
Feel free to come hang out over on the DPOYM thread. As for the extra buxx, jlcollinsnh will help you figure that out:

https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/

https://jlcollinsnh.com/stock-series/

Congratulations on securing a great rate. Hang on to it as long as you can. Someday, you'll really enjoy those bragging rights plus the comfort of a big, fat 'stache. Also, if you're worried about inflation, a mortgage is a terrific hedge against that. You're well on your way to winning the game.

gardenstash

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Re: Paying additional principle when you have 2.5% interest rate
« Reply #8 on: May 14, 2021, 01:04:35 PM »
I just don't know what else to do with $200/month.
Investment Order.

Invest it according to the desired asset allocation in your investment policy statement.

Thanks for that suggestion. The only thing on the list I haven't done (that I can do, because of SafeHarbor rules I can't increase my 401k contribution) is max out funding of a Traditional IRA or Roth so that's a good idea. I've not heard of a mega backdoor Roth, I'll definitely look into that too.

WHAT           
0. Establish an emergency fund to your satisfaction           
1. Contribute to your 401k up to any company match           
2. Pay off any debts with interest rates ~5% or more above the current 10-year Treasury note yield.           
3. Max Health Savings Account (HSA) if eligible.
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level           
5. Max 401k (if
    - 401k fees are lower than available in an IRA, or
    - you need the 401k deduction to be eligible for (and desire) a tIRA deduction, or
    - you earn too much for an IRA deduction and prefer traditional to Roth, then
    swap #4 and #5)           
6. Fund a mega backdoor Roth if applicable.         
7. Pay off any debts with interest rates ~3% or more above the current 10-year Treasury note yield.           
8. Invest in a taxable account and/or fund a 529 with any extra.           
           

gardenstash

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Re: Paying additional principle when you have 2.5% interest rate
« Reply #9 on: May 14, 2021, 01:04:59 PM »
You can consider a mortgage-payoff side fund in a separate investment account. Paying it off in a lump sum is much safer than making extra principal payments as you go.

Consider if you were unable to work due to an injury: The bank only cares if you make your next payment. They won't take into account any previous extra payments you made, so you are far better off owing 200k and having 100k in a side fund than you would be if you had paid the mortgage down to 100k.

That's a good suggestion, too. Thank you.

gardenstash

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Re: Paying additional principle when you have 2.5% interest rate
« Reply #10 on: May 14, 2021, 01:08:59 PM »
Feel free to come hang out over on the DPOYM thread. As for the extra buxx, jlcollinsnh will help you figure that out:

https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/

https://jlcollinsnh.com/stock-series/

Congratulations on securing a great rate. Hang on to it as long as you can. Someday, you'll really enjoy those bragging rights plus the comfort of a big, fat 'stache. Also, if you're worried about inflation, a mortgage is a terrific hedge against that. You're well on your way to winning the game.

Thanks! It was a horrendous experience with Amerisiave, but in the end I got that rate.

My Grandfather just passed away and my Mom inherited enough to pay off her house that was at 3.75%, and at first I was like, why???? NOooo!!!  But thinking about it more, for her that's a good thing because she blows through money like nobody else. I had been really worried for her ability to have money in retirement because of some paperwork concerns regarding my father's military retirement continuing for her after his passing, but luckily that got sorted and she's going to get military retirement for life so she shouldn't ever be destitute.

Dicey

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Re: Paying additional principle when you have 2.5% interest rate
« Reply #11 on: May 14, 2021, 01:41:05 PM »
Feel free to come hang out over on the DPOYM thread. As for the extra buxx, jlcollinsnh will help you figure that out:

https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/

https://jlcollinsnh.com/stock-series/

Congratulations on securing a great rate. Hang on to it as long as you can. Someday, you'll really enjoy those bragging rights plus the comfort of a big, fat 'stache. Also, if you're worried about inflation, a mortgage is a terrific hedge against that. You're well on your way to winning the game.

Thanks! It was a horrendous experience with Amerisiave, but in the end I got that rate.

My Grandfather just passed away and my Mom inherited enough to pay off her house that was at 3.75%, and at first I was like, why???? NOooo!!!  But thinking about it more, for her that's a good thing because she blows through money like nobody else. I had been really worried for her ability to have money in retirement because of some paperwork concerns regarding my father's military retirement continuing for her after his passing, but luckily that got sorted and she's going to get military retirement for life so she shouldn't ever be destitute.
There are folks for whom it makes sense not to have a mortgage, and your mom sounds like she could be one. Alas, with a spender like that, it might not be enough. You're probably always going to wonder what kind of trouble she's going to get herself into. Will she use the house as an ATM, or worse still, eventually need a Reverse Mortgage, or lose it because she can't pay her taxes? Sigh. I don't envy you. Hopefully, she will find a way to live within her means. If the military retirement includes GIHA, that's a blessing.

I am so happy for you that you've obviously found and taken another path. Go, @gardenstash!

Full disclosure: our (very expensive) primary home was bought for cash. Our rentals all have long mortgages, so, four properties, three mortgages. We did what made sense for us at the time, because we were already FI.

If you want to get to FI as fast and as effortlessly as possible, carrying a long cheap, affordable, tax-deductible mortgage whilst stuffing every possible investment vehicle chock full is the easiest and best way to get there. Plenty of discussion of this on the DPOYM thread. We don't bite.

Oh, and congratulations on your persistence. We looked into refinancing the rentals last year and it was such a pain in the ass and so chock full of fees that we finally gave up, but we are still being hounded by mortgage lenders. They will not go the fuck away. Best of all was the representative from my Credit Union, of all places, who wanted us to put a mortgage on the primary in order to pay off the rentals. Why the fuck would we do that? So you can earn a commission for booking a loan that makes no fiscal sense for the borrower? It's a mad world out there. Hang onto that mortgage, it's something to be proud of.

gardenstash

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Re: Paying additional principle when you have 2.5% interest rate
« Reply #12 on: May 14, 2021, 02:30:27 PM »
Feel free to come hang out over on the DPOYM thread. As for the extra buxx, jlcollinsnh will help you figure that out:

https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/

https://jlcollinsnh.com/stock-series/

Congratulations on securing a great rate. Hang on to it as long as you can. Someday, you'll really enjoy those bragging rights plus the comfort of a big, fat 'stache. Also, if you're worried about inflation, a mortgage is a terrific hedge against that. You're well on your way to winning the game.

Thanks! It was a horrendous experience with Amerisiave, but in the end I got that rate.

My Grandfather just passed away and my Mom inherited enough to pay off her house that was at 3.75%, and at first I was like, why???? NOooo!!!  But thinking about it more, for her that's a good thing because she blows through money like nobody else. I had been really worried for her ability to have money in retirement because of some paperwork concerns regarding my father's military retirement continuing for her after his passing, but luckily that got sorted and she's going to get military retirement for life so she shouldn't ever be destitute.
There are folks for whom it makes sense not to have a mortgage, and your mom sounds like she could be one. Alas, with a spender like that, it might not be enough. You're probably always going to wonder what kind of trouble she's going to get herself into. Will she use the house as an ATM, or worse still, eventually need a Reverse Mortgage, or lose it because she can't pay her taxes? Sigh. I don't envy you. Hopefully, she will find a way to live within her means. If the military retirement includes GIHA, that's a blessing.

I am so happy for you that you've obviously found and taken another path. Go, @gardenstash!

Full disclosure: our (very expensive) primary home was bought for cash. Our rentals all have long mortgages, so, four properties, three mortgages. We did what made sense for us at the time, because we were already FI.

If you want to get to FI as fast and as effortlessly as possible, carrying a long cheap, affordable, tax-deductible mortgage whilst stuffing every possible investment vehicle chock full is the easiest and best way to get there. Plenty of discussion of this on the DPOYM thread. We don't bite.

Oh, and congratulations on your persistence. We looked into refinancing the rentals last year and it was such a pain in the ass and so chock full of fees that we finally gave up, but we are still being hounded by mortgage lenders. They will not go the fuck away. Best of all was the representative from my Credit Union, of all places, who wanted us to put a mortgage on the primary in order to pay off the rentals. Why the fuck would we do that? So you can earn a commission for booking a loan that makes no fiscal sense for the borrower? It's a mad world out there. Hang onto that mortgage, it's something to be proud of.

Thanks, I've got the DPOYM thread open and I'm trying to get my bearings there, it's so long!

I bet they've been successful talking others into financing that way to pay off rentals. Makes no sense, but I always assume they wouldn't ask unless they've been successful before.

My business partner and I were pleasantly surprised how easy it was to refinance the business property mortgage with a different lender, and that saved us $250/month in interest. We were expecting it to be next to impossible considering how much revenue we lost in 2020 from Government shut downs. It was significant. They also told us they'll give us as many mortgages as our businesses' cashflow can support so that was nice to hear. I'm pretty certain I'm going to end up inheriting one more rental property at least so I've got my main house, a good rental property, a terrible rental condo I'm trying to sell this summer that was a giant mistake made in 2006, my commercial building and I'm building a short-term beach rental. So I feel kind of heavy on real estate. But there doesn't really seem to be anything else other than the stock market, unless I want to do crypto/gold/silver which I do not want to do. Or invest in a business which I'm already doing. It's a nice problem to have but I always feel like I'm missing an angle.

Dicey

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Re: Paying additional principle when you have 2.5% interest rate
« Reply #13 on: May 14, 2021, 02:58:21 PM »
Oh, shit! You got that rate on an investment property? Thai is badass! You're no RE newbie! Do whatever you want, lol! I will say that being fairly Real Estate heavy with solid mortgages is a pretty great way to face down an inflationary period, as so many are predicting. Sounds like you're doing great.

As for the DPOYM thread, you don't have to read the whole darn thing, it's huge. Maybe skim the last ten or so pages.

Fun fact: It was started in 2017 by boarder42, but he lost patience with some virulent and persistent naysayers and lost his shit a couple times, so he got his badass self banned. Happily, he has very recently gotten himself un-banned, with the caveat that he leave that thread for others to do the heavy lifting. He has now reached FI and RE is on the horizon, so he should have some good stories to tell.

iluvzbeach

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Re: Paying additional principle when you have 2.5% interest rate
« Reply #14 on: May 14, 2021, 05:54:17 PM »
I had no idea boarder42 was back! Glad to hear, even though I didnít care for all of his DPOYM comments.

Dicey

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Re: Paying additional principle when you have 2.5% interest rate
« Reply #15 on: May 14, 2021, 08:50:22 PM »
I had no idea boarder42 was back! Glad to hear, even though I didnít care for all of his DPOYM comments.
I get that.

Background from Dicey's personal point of view: b42 and others, including Dicey, were participating in the Mortgage Payoff thread when it got started, trying to present multiple options. People got pissed, so I suggested b42 start another thread, which he promptly did. Almost immediately thereafter, the mods asked certain people to stop participating in the MP thread, which we did. It seems there was no tolerance for any other options, it was to be a celebration/encouragement thread only.

Unfortunately, some of the MP crowd felt it wasn't enough that we'd started a different thread and walked away. A few vocal people hopped on and started being critical of the DPOYM concept, and b42 specifically. b42 stood his ground, but eventually got tired of the critics. He exploded a couple of times, and the rest is history...

What I tend to hear again and again in the oldster crowd (which is definitely where I fit in, not b42), is that people are house poor and regret focusing too much on Killing the Mortgage at the expense of other saving/investing. Typically, by then it's too damn late, because the opportunity for compound interest to do the heavy lifting fades with each passing year. My postition has always been learn the facts first, then make the best decision possible. Don't just glom on to a fucking Dave Ramsey sound bite and hope for the best.

Full disclosure: only three of the four homes we own have mortgages. We are FI, and I've been RE since 2012. And for God's sake, if you live somewhere where mortgages aren't fixed or tax deductible, please look the other way. I have no advice for you.

As for b42, I doubt he'll be participating in his old thread, but he still has plenty of wisdom to share. He is one smart mustachian dude and I'm sure there's plenty we can learn from him.

Oh, and at one point, someone, probably long gone by now, accused us of being the same person, which I thought was hilarious. I only aspire to have his clarity and wisdom.

Finally, one might ask why I defend b42. It's not that often in life you find people willing to help others that they don't now and probably never will know. b42 is one of those rare souls. He was so determined to help people learn the facts that his passion became his undoing. I'm glad he's back. I thank the moderators for allowing it to happen and b42 for being willing to try again.

@gardenstash, if this is TMI for your thread, please ping me and I'll move it.

monarda

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Re: Paying additional principle when you have 2.5% interest rate
« Reply #16 on: May 14, 2021, 10:09:30 PM »
Curious, is your loan 30 years, 20, or 15 year term?

We had a 3% 12 year loan and refinanced it last year to a 2.75% 15 year loan. For the same cost, we could have refinanced to a 12 year loan, same 2.75% interest rate, just different term and lower monthly payments. The loan officer talked me into the 15 year term, but suggested that if I wanted, I could sometimes make the higher 12-year-term payments, but this way I had a choice. Being over 60 now, I didn't want to still have mortgages to pay when I was 75, so we'll probably knock a couple of years off with occasional extra payments between now and then. So I would argue, in months when you need the cash, don't put it towards the extra principal, but sometimes, do. I must say it feels good to have the lower payment.

Morning Glory

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Re: Paying additional principle when you have 2.5% interest rate
« Reply #17 on: May 14, 2021, 10:14:59 PM »
There are times when it's better to pay off the mortgage, for example when dealing with fafsa, rmd's, or aca subsidy cliffs. Most of the time it's better to just keep paying the payments if the interest is that low. If you are going to pay it early, the lump sum method is still the safest.

ChpBstrd

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Re: Paying additional principle when you have 2.5% interest rate
« Reply #18 on: May 18, 2021, 07:49:44 AM »
I hold several REIT preferred shares which yield over 6%. I was thinking about buying more using cheap margin from Interactive Brokers. Just something to keep in mind as you consider paying off a 2.5% loan that isnít callable.