Author Topic: Pay off the mortgage in 33 months  (Read 4432 times)

aperture

  • Bristles
  • ***
  • Posts: 468
  • Location: Colorado
Pay off the mortgage in 33 months
« on: January 22, 2016, 06:51:27 AM »
Yesterday, I had a Eureka moment.  I looked at what we could save over about three years until I am ready to FIRE and what the return on that would be at 4% and 7% and realized that the amount of return over so short of time was not worth the risk COMPARED to the certain return of paying off the mortgage. Here are the facts:

Principal: $220,000
Fixed Interest rate: 2.75%
Current payment each month: $2,250 of which $1,334 was principal last month, and $441 was escrow for insurance and taxes
Estimated additional principal each month to achieve our goal: $5000
Remaining $'s per month for all household expenses (after mortgage): $4,049 (I know that is a ridiculous number, but we are only 6 months into this mustachian thing and on a steep learning curve).

You probably think that paying off an interest rate of 2.75% vs. investing is sort of dumb - I bought into this point of view for the last 6 months.  BUT, there are some big upsides to paying off the mortgage for my family:
--By setting a "radical goal" that has tangible impact on our lives, I have motivated my wife to join this plan.  Prior to this, when we were scaling back spending, she was only half-heartedly on board and spending has been a bit of a weekly pillow fight for us.  Yesterday, after I proposed this idea to her, she started writing a budget to see if it was possible!
--By reducing spending to achieve this radical goal, we REDUCE SPENDING which as you all know is a double gain.
--By eliminating our mortgage, we reduce how much money we need to draw every month in retirement. 
--The money that is left over in our budget after making our massive mortgage payment each month is 100% available for our enjoyment - no more feeling like every dollar is a dollar that could be better used (within reason).
--Having the house paid off is tangible security against crisis.

What is the down side - we give up the opportunity to watch our money tumble about in the wash cycle of the stock market for the next 3 years and perhaps pull $15K to 45K in growth (or watch same amount of shrinkage) from the back pocket of our jeans.  Anyway, I am thrilled to see my wife get excited about this undertaking.  I am glad to hear your thoughts - probably something obvious I am missing, but 20 hours into hatching this plan from my eureka moment, and it looks good to me. 

Thanks, -Ap.

FrugalFan

  • Pencil Stache
  • ****
  • Posts: 910
Re: Pay off the mortgage in 33 months
« Reply #1 on: January 22, 2016, 07:38:46 AM »
I think this is a reasonable idea for all the reasons you mention, but does that still include contributing to your 401k if you have one? If not, the tax advantage of that should also counted as a loss. Our mortgage is almost exactly the same, but the payments are lower as the amortization is likely longer. I often get crazy ideas like this but then I realize I would rather have more of our net worth in liquid assets. If we were going through some rough financial times for example, I would rather have money that I could access than more equity in my house. Once the house is paid off though, there is a huge security advantage. I am leaning toward a more blended approach. I will probably increase our mortgage payments by double, once we reach the point where we can still invest 4-5 k per month on top of that.

onlykelsey

  • Handlebar Stache
  • *****
  • Posts: 2172
Re: Pay off the mortgage in 33 months
« Reply #2 on: January 22, 2016, 07:42:14 AM »
Have you considered stashing the amount you need to pay off the mortgage (and continuing making standard payments in the interim), and then paying it all off in lump sum?  If you have paid off 95% of it but then have a horrific medical emergency after both losing your jobs and can't afford the last 5%, you could use the whole thing.

I'd be inclined to start an earmarked account (savings or bonds or whatever is right for your risk tolerance) and then transfer the lump sum as soon as it's equal to the balance of the mortgage.

aperture

  • Bristles
  • ***
  • Posts: 468
  • Location: Colorado
Re: Pay off the mortgage in 33 months
« Reply #3 on: January 22, 2016, 08:29:57 AM »
Traveling biologist, thanks for your question. We are maxing 401k contributions.

Onlykelsey, I like the way you think. With interest rate of 2.75% we can afford to save the mortgage and either pay it all at once, or pay off big chunks (e.g $30K) to get some of the interest benefit on the way. In the scenario you paint, we would borrow from the 401k to pay off the last 5%, but I can definitely appreciate your point.

Jack

  • Magnum Stache
  • ******
  • Posts: 4734
  • Location: Atlanta, GA
Re: Pay off the mortgage in 33 months
« Reply #4 on: January 22, 2016, 10:18:48 AM »
You probably think that paying off an interest rate of 2.75% vs. investing is sort of dumb - I bought into this point of view for the last 6 months.  BUT, there are some big upsides to paying off the mortgage for my family:
--By setting a "radical goal" that has tangible impact on our lives, I have motivated my wife to join this plan.  Prior to this, when we were scaling back spending, she was only half-heartedly on board and spending has been a bit of a weekly pillow fight for us.  Yesterday, after I proposed this idea to her, she started writing a budget to see if it was possible!
--By reducing spending to achieve this radical goal, we REDUCE SPENDING which as you all know is a double gain.

Wow, this is the first "pay off my mortgage instead of investing" thread I can actually get behind!

aperture

  • Bristles
  • ***
  • Posts: 468
  • Location: Colorado
Re: Pay off the mortgage in 33 months
« Reply #5 on: January 22, 2016, 12:18:22 PM »
Thanks Jack - means a lot to have a senior mustache look over my shoulder. 

-Ap.

YoungRetire

  • 5 O'Clock Shadow
  • *
  • Posts: 26
Re: Pay off the mortgage in 33 months
« Reply #6 on: January 22, 2016, 12:27:55 PM »
Yesterday, I had a Eureka moment.  I looked at what we could save over about three years until I am ready to FIRE and what the return on that would be at 4% and 7% and realized that the amount of return over so short of time was not worth the risk COMPARED to the certain return of paying off the mortgage. Here are the facts:

Principal: $220,000
Fixed Interest rate: 2.75%
Current payment each month: $2,250 of which $1,334 was principal last month, and $441 was escrow for insurance and taxes
Estimated additional principal each month to achieve our goal: $5000
Remaining $'s per month for all household expenses (after mortgage): $4,049 (I know that is a ridiculous number, but we are only 6 months into this mustachian thing and on a steep learning curve).

You probably think that paying off an interest rate of 2.75% vs. investing is sort of dumb - I bought into this point of view for the last 6 months.  BUT, there are some big upsides to paying off the mortgage for my family:
--By setting a "radical goal" that has tangible impact on our lives, I have motivated my wife to join this plan.  Prior to this, when we were scaling back spending, she was only half-heartedly on board and spending has been a bit of a weekly pillow fight for us.  Yesterday, after I proposed this idea to her, she started writing a budget to see if it was possible!
--By reducing spending to achieve this radical goal, we REDUCE SPENDING which as you all know is a double gain.
--By eliminating our mortgage, we reduce how much money we need to draw every month in retirement. 
--The money that is left over in our budget after making our massive mortgage payment each month is 100% available for our enjoyment - no more feeling like every dollar is a dollar that could be better used (within reason).
--Having the house paid off is tangible security against crisis.

What is the down side - we give up the opportunity to watch our money tumble about in the wash cycle of the stock market for the next 3 years and perhaps pull $15K to 45K in growth (or watch same amount of shrinkage) from the back pocket of our jeans.  Anyway, I am thrilled to see my wife get excited about this undertaking.  I am glad to hear your thoughts - probably something obvious I am missing, but 20 hours into hatching this plan from my eureka moment, and it looks good to me. 

Thanks, -Ap.

Pay off that mortgage, I listen to Rich people and I stick my nose up their butt and ask them their secrets. I met a guy recently and asked him what was his secret to getting sooooooooo wealthy. He replied debt free. The funny part is I asked him if he knows who Dave Ramsey is ? He replied no. I was like no way, you are a Dave Ramsey and you dont even know who he is ? I laughed and asked him how big did he grow his wealth ? He replied I'm up to 100 debt free rental houses.  He started when he was about 18 buying up houses paying cash all the way 100% from the start with his 100K a year income selling insurance. He's 47 now which is pretty young. I always tell people who cares about a measly 7% to 10% investing vs. the feeling of having a house paid off. Dave Ramsey says his goal is to get you back your biggest wealth building asset and tarts your income. Right now that income is being tied up in interest. Basically what Dave is saying is that if you aren't paying interest who cares so much about rate of return on your money because your not paying interest and your cramming so much money into savings you are kicking ass ! Good luck and focus on debt free : )

JLee

  • Walrus Stache
  • *******
  • Posts: 5670
Re: Pay off the mortgage in 33 months
« Reply #7 on: January 22, 2016, 01:00:04 PM »
Congratulations on your discovery! Getting your partner in on the same goal is huge, and will likely far outweigh any potential gains you would've seen had you tried to just invest and continue the mortgage to term.

Yesterday, I had a Eureka moment.  I looked at what we could save over about three years until I am ready to FIRE and what the return on that would be at 4% and 7% and realized that the amount of return over so short of time was not worth the risk COMPARED to the certain return of paying off the mortgage. Here are the facts:

Principal: $220,000
Fixed Interest rate: 2.75%
Current payment each month: $2,250 of which $1,334 was principal last month, and $441 was escrow for insurance and taxes
Estimated additional principal each month to achieve our goal: $5000
Remaining $'s per month for all household expenses (after mortgage): $4,049 (I know that is a ridiculous number, but we are only 6 months into this mustachian thing and on a steep learning curve).

You probably think that paying off an interest rate of 2.75% vs. investing is sort of dumb - I bought into this point of view for the last 6 months.  BUT, there are some big upsides to paying off the mortgage for my family:
--By setting a "radical goal" that has tangible impact on our lives, I have motivated my wife to join this plan.  Prior to this, when we were scaling back spending, she was only half-heartedly on board and spending has been a bit of a weekly pillow fight for us.  Yesterday, after I proposed this idea to her, she started writing a budget to see if it was possible!
--By reducing spending to achieve this radical goal, we REDUCE SPENDING which as you all know is a double gain.
--By eliminating our mortgage, we reduce how much money we need to draw every month in retirement. 
--The money that is left over in our budget after making our massive mortgage payment each month is 100% available for our enjoyment - no more feeling like every dollar is a dollar that could be better used (within reason).
--Having the house paid off is tangible security against crisis.

What is the down side - we give up the opportunity to watch our money tumble about in the wash cycle of the stock market for the next 3 years and perhaps pull $15K to 45K in growth (or watch same amount of shrinkage) from the back pocket of our jeans.  Anyway, I am thrilled to see my wife get excited about this undertaking.  I am glad to hear your thoughts - probably something obvious I am missing, but 20 hours into hatching this plan from my eureka moment, and it looks good to me. 

Thanks, -Ap.

Pay off that mortgage, I listen to Rich people and I stick my nose up their butt and ask them their secrets. I met a guy recently and asked him what was his secret to getting sooooooooo wealthy. He replied debt free. The funny part is I asked him if he knows who Dave Ramsey is ? He replied no. I was like no way, you are a Dave Ramsey and you dont even know who he is ? I laughed and asked him how big did he grow his wealth ? He replied I'm up to 100 debt free rental houses.  He started when he was about 18 buying up houses paying cash all the way 100% from the start with his 100K a year income selling insurance. He's 47 now which is pretty young. I always tell people who cares about a measly 7% to 10% investing vs. the feeling of having a house paid off. Dave Ramsey says his goal is to get you back your biggest wealth building asset and tarts your income. Right now that income is being tied up in interest. Basically what Dave is saying is that if you aren't paying interest who cares so much about rate of return on your money because your not paying interest and your cramming so much money into savings you are kicking ass ! Good luck and focus on debt free : )

If 7-10% is measly, why the strong effort to pay off mortgages at half-of-measly 3-4%?

I don't dispute the benefits of being debt-free, but discounting investment rewards as effectively meaningless isn't an accurate assessment.  Using your example of 7-10% (let's call it 8.5%), investing $50k/year for 29 years (in the case of someone earning $100k from 18 to 47) would result in an approximate balance of $6.27 million (a $4.82 million gain over the amount of money contributed).

I will admit I am driven by logic and math more so than emotion, so "the feeling" of having a paid-off house doesn't mean much to me.

PaulMaxime

  • Stubble
  • **
  • Posts: 202
  • Age: 56
  • Location: San Francisco, CA
  • Absolute power doesn't corrupt, it reveals.
Re: Pay off the mortgage in 33 months
« Reply #8 on: January 22, 2016, 07:58:14 PM »
Traveling biologist, thanks for your question. We are maxing 401k contributions.

Onlykelsey, I like the way you think. With interest rate of 2.75% we can afford to save the mortgage and either pay it all at once, or pay off big chunks (e.g $30K) to get some of the interest benefit on the way. In the scenario you paint, we would borrow from the 401k to pay off the last 5%, but I can definitely appreciate your point.

If you both lose your jobs you won't be able to borrow against the 401K. I'd also argue that borrowing against the 401K while you are working is a bad idea because if you do lose your job, you have to pay the balance back rather quickly or pay taxes at your marginal rate + 10% penalties on top of that,


onlykelsey

  • Handlebar Stache
  • *****
  • Posts: 2172
Re: Pay off the mortgage in 33 months
« Reply #9 on: January 22, 2016, 08:08:37 PM »
If you both lose your jobs you won't be able to borrow against the 401K.

I was going to point that out, as well.  Maybe pay down the mortgage to 50%, and once it gets there, just start saving those extra principal payments and making minimums so you can pay off in a chunk.

aperture

  • Bristles
  • ***
  • Posts: 468
  • Location: Colorado
Re: Pay off the mortgage in 33 months
« Reply #10 on: January 23, 2016, 05:09:56 AM »
If you both lose your jobs you won't be able to borrow against the 401K.

I was going to point that out, as well.  Maybe pay down the mortgage to 50%, and once it gets there, just start saving those extra principal payments and making minimums so you can pay off in a chunk.

Thanks, I was not aware that we would not be able to borrow from 401K if we were both unemployed.  With these considerations, our new plan is to save the money in CDs (laddered as possible to mature in ~3 years).  When we have $60K in CDs (2 year cushion of minimum payments), we will stop saving and start putting the $5K/month towards the loan.  Presently, we already have a cash reserve for emergencies. It is possible that some emergency could arise such that we raid it all, lose our jobs and then lose the house, but that is what umbrella policies, rehab, and lithium are for, LOL. 

Thanks again for looking and commenting.  You help me to make this plan more robust.  -Ap

faramund

  • Bristles
  • ***
  • Posts: 331
Re: Pay off the mortgage in 33 months
« Reply #11 on: January 23, 2016, 05:47:25 AM »
I'm usually an invest, don't payoff guy. But if your wife is enthused about it - then it seems like an excellent plan - all the best.

Dicey

  • Senior Mustachian
  • ********
  • Posts: 11105
  • Age: 61
  • Location: NorCal
Re: Pay off the mortgage in 33 months
« Reply #12 on: January 30, 2016, 02:30:08 AM »
Have you considered stashing the amount you need to pay off the mortgage (and continuing making standard payments in the interim), and then paying it all off in lump sum?  If you have paid off 95% of it but then have a horrific medical emergency after both losing your jobs and can't afford the last 5%, you could use the whole thing.

I'd be inclined to start an earmarked account (savings or bonds or whatever is right for your risk tolerance) and then transfer the lump sum as soon as it's equal to the balance of the mortgage.
I'm not an early payoff fan. I'm a build a bit ball  o' money fan. Compound interest is free money and I'm all about that. I think onlykelsey's advice rocks!

aperture

  • Bristles
  • ***
  • Posts: 468
  • Location: Colorado
Re: Pay off the mortgage in 33 months
« Reply #13 on: January 30, 2016, 09:27:48 AM »
Thanks for all the input.  I want to update you all. In the last week since first discussing this with my DW, she has established a budget for our spending, (including items that were previously non-negotiable), agreed to weigh the possibility of ending the (ridiculous) private ice skating lessons for my 11 year old daughter (at least temporarily) and has volunteered to work an extra day per week at her job while a co-worker is on maternity leave! 

This is not about invest vs. payoff mortgage.  This is about finding a large enough lever to move our family to the next level of frugality common sense in resource utilization. 

As mentioned above, we will save $60K in the next year and purchase CDs then, then start paying off the mortgage at $5000/month.  Of course, I am also considering the possibility of not paying off the mortgage and seeing where else we could put the savings (purchase another house as a rental?), but between now and that future decision, I have a motivated DW and our household is moving towards leaner times.

Thanks again for all the great advice.  Now, if someone could please help me learn to meal plan, purchase groceries and cook - that is my present obsession (as well as learning all I can about purchasing foreclosures - have to be ready for this bear market to get ugly).  Best wishes - Ap.   

couponvan

  • Walrus Stache
  • *******
  • Posts: 6240
  • Location: VA
    • My journal
Re: Pay off the mortgage in 33 months
« Reply #14 on: January 30, 2016, 09:56:55 AM »
Now, if someone could please help me learn to meal plan, purchase groceries and cook - that is my present obsession

I have used this person's menu planner off and on for years-someone shared it with me before....I love that you can add your own meals and customize the planner if you find good ones.  Whichever day your store's weekly add comes out is the day you should menu plan for the next week....plan meals around meats on super sale, and stocking up on any "loss leader" staples you will REALLY eat in 12 weeks. Think butter/cheese/flour/canned goods/etc.

http://www.vertex42.com/Files/download2/themed.php?file=weekly-meal-planner.xlsx

I have a 2.625% $2K mortgage payment on our main home which we do not intend to FIRE in.  I like how your wife will get more on board to reduce spending with that plan.  I wonder if that would work for my DH.  One + for paying off the mortgage early is colleges don't count assets in your primary residence for financial aid.

Happy menu planning.

aperture

  • Bristles
  • ***
  • Posts: 468
  • Location: Colorado
Re: Pay off the mortgage in 33 months
« Reply #15 on: January 31, 2016, 07:44:20 PM »
Now, if someone could please help me learn to meal plan, purchase groceries and cook - that is my present obsession

I have used this person's menu planner off and on for years-someone shared it with me before....I love that you can add your own meals and customize the planner if you find good ones.  Whichever day your store's weekly add comes out is the day you should menu plan for the next week....plan meals around meats on super sale, and stocking up on any "loss leader" staples you will REALLY eat in 12 weeks. Think butter/cheese/flour/canned goods/etc.

http://www.vertex42.com/Files/download2/themed.php?file=weekly-meal-planner.xlsx

Thanks so much couponvan.  I will work to incorporate this into my evolving workflows.  Best wishes, ap.

couponvan

  • Walrus Stache
  • *******
  • Posts: 6240
  • Location: VA
    • My journal
Re: Pay off the mortgage in 33 months
« Reply #16 on: February 01, 2016, 09:15:47 AM »
Now, if someone could please help me learn to meal plan, purchase groceries and cook - that is my present obsession

I have used this person's menu planner off and on for years-someone shared it with me before....I love that you can add your own meals and customize the planner if you find good ones.  Whichever day your store's weekly add comes out is the day you should menu plan for the next week....plan meals around meats on super sale, and stocking up on any "loss leader" staples you will REALLY eat in 12 weeks. Think butter/cheese/flour/canned goods/etc.

http://www.vertex42.com/Files/download2/themed.php?file=weekly-meal-planner.xlsx

Thanks so much couponvan.  I will work to incorporate this into my evolving workflows.  Best wishes, ap.

Hope it helps - look to the "drop down" spreadsheet - you can add your favorite meals.  I print the planner with the grocery list and take that to the store with me.  I also separate the menu planner grocery list into the 3 stores I shop at - Costco, Meijer, and local produce store. Good luck menu planning and knocking off that mortgage.  We're hoping to knock out our FIRE house mortgage by the end of 2016.

BlueHouse

  • Magnum Stache
  • ******
  • Posts: 3213
  • Location: WDC
Re: Pay off the mortgage in 33 months
« Reply #17 on: February 02, 2016, 09:11:44 AM »
I love this!  Love that that two of you are so aggressively pursuing a common goal.  I play around with my numbers all the time and I know it's possible for me to pay my house off in 8 years, but that would really require a lot of sacrifice, and probably missed opportunities with investing in funds.  So I am taking a 50% approach.  For me, it provides more flexibility and still accomplishes my goals within a reasonable period of time.  I also think that when I near a point of a smallish remaining balance on my mortgage loan, I'll probably stop paying early.  Once I feel that I could pay it all off without making too big a dent in my retirement portfolio, I may not feel the anxiety or the desire to pay it early.  Who knows...still a long way off.  (but not as long as if I had done nothing).