Author Topic: Mutilating the Mortgage  (Read 5446 times)

Stephanie Stache

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Mutilating the Mortgage
« on: February 01, 2013, 10:57:55 AM »
First time on the forums, but long-time MMM reader here. Lately I've been feeling like we haven't been saving very much of our income towards retirement. My husband really feels strongly about paying down the mortgage. I was surprised looking at our finances over the past 12 months, we've put 60% of our take home income towards paying down the mortgage! Our family of 4 lived on about $25,000 (not including the mortgage) and we still felt like we were living the good life. We did this so we would have enough equity to refinance (unfortunately, we bought our home right before the housing bubble burst). It was a long, frustrating process, but we finally refinanced at the end of the year, going from a 6% interest rate to 2.8%, from a 30 year to a 15 year mortgage, yet still cutting our minimum monthly payment by $100. Of course, we still plan to pay extra, hope to pay it off in under 10 years. But we want to focus more on retirement investing, since our mortgage interest rate is so low now. Paying down the mortgage may not always be the highest return financially, but it's a great morale boost to see your debt balance take a dive!

sherr

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Re: Mutilating the Mortgage
« Reply #1 on: February 01, 2013, 11:22:53 AM »
Agree completely, congratulations on successfully knocking your mortgage down to very reasonable terms! It sounds like you guys have your lives and priorities aligned in a very reasonable and Mustachian way!

Tami1982

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Re: Mutilating the Mortgage
« Reply #2 on: February 01, 2013, 12:24:28 PM »
Way to go!  What an achievement.  Congrats!

icefr

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Re: Mutilating the Mortgage
« Reply #3 on: February 01, 2013, 03:07:40 PM »
Wow! That's awesome that you were able to *lower* the interest rate by refinancing into a 15 year loan! Congrats!

ncornilsen

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Re: Mutilating the Mortgage
« Reply #4 on: February 02, 2013, 08:28:17 AM »
Aren't 15 year notes typically lower interest rate loans?

destron

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Re: Mutilating the Mortgage
« Reply #5 on: February 02, 2013, 09:12:04 AM »
I completely agree that you should start saving money for retirement and slow down your mortgage payoff. Although it is an emotional issue having that huge debt hanging over your head, paying off your mortgage at 2.8% is not in your financial favor (over saving the money. It is better than spending the extra cash).

1. 2.8% is around inflation. Do you want to pay off the mortgage in today's dollars, or in next year's dollars that are worth 3% less?

2. There is a tax benefit to paying mortgage interest of whatever your marginal tax rate is. If you are in the 25% tax bracket and itemizing, then you save 25% off that interest. Now you are only paying around 2.1% interest.

3. By investing in the stock market, you should get between 7-10% over time. That is, at a minimum, more than twice as much as you are saving by paying off the mortgage early.

In short, over the course of the next 15 years, you would be better off putting that money into a tax preferential investment account like a Roth IRA or a 401k, or even just a standard brokerage account. You will have more money in the long run.

I'll run some numbers for you.

Assuming a $200,000 mortgage 15 year @ 2.8% your payment is 1362.01 beginning in Jan 2013.

If you have an extra $1000/month to pay it off, you will pay it off in Nov. 2020. Then invest the full amount 2362.01@7% until Dec. 2027 and you will have $259,717.

If, on the other hand, you just invest $1000/month starting now for 15 years, you will have $316,962 when your mortgage is paid off.

This doesn't even factor in the tax savings from the mortgage interest deduction.

Stephanie Stache

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Re: Mutilating the Mortgage
« Reply #6 on: February 02, 2013, 11:00:37 AM »
Aren't 15 year notes typically lower interest rate loans?

Yes, 15 year loans are lower rates than 30 year, and we thought about a 10 year, but the interest rate wasn't really much lower, so we decided to go with the 15, to keep the minimum payment lower just to be on the safe side.

Stephanie Stache

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Re: Mutilating the Mortgage
« Reply #7 on: February 02, 2013, 11:09:18 AM »
I completely agree that you should start saving money for retirement and slow down your mortgage payoff. Although it is an emotional issue having that huge debt hanging over your head, paying off your mortgage at 2.8% is not in your financial favor (over saving the money. It is better than spending the extra cash).

We just increased our 401k and Roth IRA contributions, but I would like to convince my husband that we could increase them even more. If we don't put extra towards the mortgage, I think we could max out all our retirement accounts. But, I'm not sure our income will be quite as much as last year, since my husband worked a LOT of overtime. Also, he's applied for a different job at his work, more in the direction he wants to take his career, but it would be a pay cut since it would just be salary, no option for overtime.

grantmeaname

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Re: Mutilating the Mortgage
« Reply #8 on: February 02, 2013, 11:14:43 AM »
Yes, 15 year loans are lower rates than 30 year, and we thought about a 10 year, but the interest rate wasn't really much lower, so we decided to go with the 15, to keep the minimum payment lower just to be on the safe side.
You could always go online, find out what the minimum payment for the 10 year mortgage is, and then pay that in months that you can afford to and pay the regular payment the other months. That way you could count on paying it off a bit early.