Paying off all debt except mortgage | TigerDroppings.com

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TDsngumbo
LSU Fan
Member since Oct 2011
5138 posts

Paying off all debt except mortgage


I'm thinking of paying off student loan and car debt in 2013. By January 2014 the only debt I'll have is my mortgage which is two years old.
Since I bought my house two years ago, my interest rate is 4.875% which was the lowest at the time. The wife and I don't have the money to purchase another appraisal and pay closing costs towards a refinance right now so refinancing is out of the question, I believe.

If I do this then by January of 2014, we'll have nearly $2,000 each month after all of our expenses.
Is it smarter to save and invest that $2,000 each month or put that toward our mortgage?

I believe I can get more than 4.875% in the market each year on my new investments so logically speaking, it would make sense to continue to pay the minimum on the mortgage.

What do you all think?







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MoreOrLes
LSU Fan
Member since Nov 2008
16631 posts

re: Paying off all debt except mortgage


quote:

I believe I can get more than 4.875% in the market each year on my new investments so logically speaking



If so there is your answer.

If they ever take away mortgage interest deduction it might be a different story.






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Vols&Shaft83
Tennessee Fan
Member since Dec 2012
12367 posts

re: Paying off all debt except mortgage


It's a great question, congrats on getting all this debt paid off.

In my opinion, I would do a combination of both. Always pay on mortgage principal, because you have no idea what the market will do, and having a paid for house would be the best financial security you could have. But invest a portion of the additional cashflow, just because you can beat 4.875% with your eyes closed (or at least I can).






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Vols&Shaft83
Tennessee Fan
Member since Dec 2012
12367 posts

re: Paying off all debt except mortgage


quote:

If they ever take away mortgage interest deduction it might be a different story.



Have less interest to pay equals more income which is better than a tax deduction for mortgage interest.






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saderade
New Orleans Saints Fan
America's City
Member since Jul 2005
21035 posts

re: Paying off all debt except mortgage


Save up enough money for a reappraisal especially with the rates so low right now. Paying off that debt with help your credit rating.





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guttata
LSU Fan
prairieville
Member since Feb 2006
20022 posts
 Online 

re: Paying off all debt except mortgage


Sounds like you need to worry about an emergency fund.





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LSUwag
LSU Fan
St Augustine Beach
Member since Jan 2007
6440 posts

re: Paying off all debt except mortgage


quote:

I would do a combination of both. Always pay on mortgage principal, because you have no idea what the market will do, and having a paid for house would be the best financial security you could have. But invest a portion of the additional cashflow, just because you can beat 4.875% with your eyes closed (or at least I can).


I agree with this.

Seven years ago, my wife and I did this and it was life altering. We will have our home paid for in less that half of the 30 year mortgage and we have quite a lot of money invested in our respective 401K and other investments. We will be set for retirement by the time we are about 52 years old. I have no intention of retiring at that age but, we could if we needed to so so.

We considered refinancing the mortgage but the savings in interest were offset by closing costs so we just pay a lot extra each month.






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foshizzle
LSU Fan
Washington DC metro
Member since Mar 2008
29833 posts

re: Paying off all debt except mortgage


You can get the refi now, most lenders will roll the appraisal and other closing costs into the new loan amount. Do this ASAP, current 30 year rates are so low that once you take the tax break into account it is basically the same as the rate of inflation. That means there is no reason to pay early.

Although 15 year rates are even lower, this is actually worse financially than the 30 year b/c your ROI on the higher payment is negative net of inflation and taxes. Get the 30, roll as much of the cost into the new loan as you can and plan to make minimum payments for the full 30 years.






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756
LSU Fan
Member since Sep 2004
9539 posts

re: Paying off all debt except mortgage


save up one years worth of income in a somewhat conservative liquid investment

Then pay down mortage






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LSUtigerME
LSU Fan
Walker, LA
Member since Oct 2012
566 posts

re: Paying off all debt except mortgage


quote:

Sounds like you need to worry about an emergency fund.

Depending on your other details, this.

If you don't have $1-5k to throw at a refinance (which will improve monthly cash flow), you may need to reconsider your overall strategy. I refinanced my house for $1200 out of pocket, and per calculations "caught up" with the principal on my old mortgage in 11 months.

Paying off your debt is great, but it may not need to be your first priority.






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TDsngumbo
LSU Fan
Member since Oct 2011
5138 posts

re: Paying off all debt except mortgage


quote:

quote: Sounds like you need to worry about an emergency fund.


We have an emergency fund equal to 6 months of income right now. I just don't want to use that for the appraisal or closing costs. I'd rather have it in case of the loss of one of our jobs or some medical emergency, etc..



This post was edited on 1/13 at 2:25 pm


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foshizzle
LSU Fan
Washington DC metro
Member since Mar 2008
29833 posts

re: Paying off all debt except mortgage


quote:

I just don't want to use that for the appraisal or closing costs


Like I said, just roll that into the refi. No need to use any of it.

Unless you are maxing your Roth you may want to consider moving 4-5 months of your emergency money to the Roth. That way you get tax-free earnings. Of course, you can get money out of the Roth anytime without penalty.






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Fat Bastard
New Orleans Saints Fan
Paradise
Member since Mar 2009
15642 posts

re: Paying off all debt except mortgage


quote:

We have an emergency fund equal to 6 months of income right now


not good enough. you need 12 months. in some form or fashion.






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ATL TGR
LSU Fan
Houston
Member since Apr 2008
2878 posts

re: Paying off all debt except mortgage


quote:

you need 12 months. in some form or fashion.


I feel it's fully dependant on the industry you work in. We have a 3 to 4 month fund and are comfortable with it. If I couldn't get a job in that timeframe then cash no longer matters...






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XanderCrews
LSU Fan
Member since Mar 2009
292 posts

re: Paying off all debt except mortgage


I have been struggling with this lately and wanted to ask someone else about it.

Why wouldnt you just keep the money set aside in some sort of interest bearing account or even under your bed as opposed to paying off principal. You can always drop the cash down on the principle when you feel ready. Instead of tying it up in a mortgage.

Assuming you are good with your finances of course.






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Zilla
LSU Fan
Friendswood, TX
Member since Jul 2005
9911 posts

re: Paying off all debt except mortgage


quote:

You can get the refi now, most lenders will roll the appraisal and other closing costs into the new loan amount. Do this ASAP, current 30 year rates are so low that once you take the tax break into account it is basically the same as the rate of inflation. That means there is no reason to pay early.

Although 15 year rates are even lower, this is actually worse financially than the 30 year b/c your ROI on the higher payment is negative net of inflation and taxes. Get the 30, roll as much of the cost into the new loan as you can and plan to make minimum payments for the full 30 years.


this is the correct answer






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ItNeverRains
LSU Fan
Franklin, TN
Member since Oct 2007
6207 posts
 Online 

re: Paying off all debt except mortgage


quote:

You can get the refi now, most lenders will roll the appraisal and other closing costs into the new loan amount. Do this ASAP, current 30 year rates are so low that once you take the tax break into account it is basically the same as the rate of inflation. That means there is no reason to pay early. Although 15 year rates are even lower, this is actually worse financially than the 30 year b/c your ROI on the higher payment is negative net of inflation and taxes. Get the 30, roll as much of the cost into the new loan as you can and plan to make minimum payments for the full 30 years.


Thanks Fo saving me keystrokes






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Hammond Tiger Fan
Arizona State Fan
Hammond
Member since Oct 2007
12223 posts

re: Paying off all debt except mortgage


quote:

You can get the refi now, most lenders will roll the appraisal and other closing costs into the new loan amount. Do this ASAP, current 30 year rates are so low that once you take the tax break into account it is basically the same as the rate of inflation. That means there is no reason to pay early. Although 15 year rates are even lower, this is actually worse financially than the 30 year b/c your ROI on the higher payment is negative net of inflation and taxes. Get the 30, roll as much of the cost into the new loan as you can and plan to make minimum payments for the full 30 years


I want to also say that this is great advice. I'm somewhat in the same position as the OP and I've concluded to do just this and max out my wife and I ROTH IRAs. We have an emergency fund set up of approximately 8 months of living expenses but I plan to move some of that money into our ROTHs as well over time. If there are any extra funds at the end of the year, I may make an additional payment towards my mortgage principal.

With our interest rate fixed at 3.5% for a 30 year mortgage, I feel like it's better to invest the extra money versus paying off our 30 year mortgage in 15 years.

I'm hoping that I am doing the right thing. I'll now in about 15 - 20 years



This post was edited on 1/14 at 10:19 am


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foshizzle
LSU Fan
Washington DC metro
Member since Mar 2008
29833 posts

re: Paying off all debt except mortgage


quote:

I'm hoping that I am doing the right thing.


Thanks. If it helps, I ran through several scenarios in Excel while doing the math on my own refi (3.25% for 30 years ) and my conclusion was that the only way this could be a bad idea is if the return on investment is essentially zero after taxes and inflation for the next 20 years or so.

Now, that could happen (hi Japan!) but even if it does this is still not a terrible play, the downside isn't large. If rates go up much at all over the next 20 years then you will wish you were mortgaged to your eyeballs at today's rates.






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Vols&Shaft83
Tennessee Fan
Member since Dec 2012
12367 posts

re: Paying off all debt except mortgage


I still think it's a better idea to plow extra money into principal as opposed to making minimum monthly payments, think about what you could do if you didn't have any mortgage payments....

Like I said earlier, combine investing extra money with extra principal payments and you eliminate a shite load of risks.






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