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re: When does it make sense, mathematically, to accelerate mortgage payments?
Posted on 12/6/23 at 1:31 pm to BestBanker
Posted on 12/6/23 at 1:31 pm to BestBanker
quote:
Math and feelings are 2 different things, bro.
Not always. It is possible to assign values to feelings.
For example, how much would it be worth it to me to have less stress at work? Would I take a $50k pay cut for less stress or maybe just $5k? How much of a pay cut would I take to work 3 days per week? How much of a raise would I need make me work in in an office 5 days a week?
That similar process/mentality can be applied to the mortgage situation. Mortgage payments are some level of stress for everyone. Each person can decide if that is a big value or small value and analyze accordingly.
1
Posted on 12/6/23 at 1:33 pm to baldona
quote:
The bank having more of your money doesn't change your future payments.
It does if you want the ability to recast your current mortgage in a time of need.
Posted on 12/6/23 at 1:38 pm to Big Scrub TX
quote:
Also, I just don't see the argument for feeling better about paying it down - it LOWERS your cash on hand. That seems LESS secure to me.
How much income do you need to cover your life expenses and a mortgage?
How much income do you need to cover just life expenses with no mortgage?
Would you say the second option is less than the first? If you need less income to sustain your life, does that increase the pool size of jobs that you could take and cover your needs/wants? Is there more security in having more job options? Is there a greater potential for finding the right job if you have more to pick from?
Not saying this is for everyone but there absolutely is more security for many folks when they have less allocated income to to pay debts.
EDIT: I should also add that as a sole provider for a family of 5, knowing that my house was owned completely by me would really reduce the stress of keeping a well paying job. If I had no mortgage and I lost my job, it would be super easy to find enough income to get us by.
This post was edited on 12/6/23 at 1:40 pm
Posted on 12/6/23 at 2:09 pm to Big Scrub TX
quote:
Also, I just don't see the argument for feeling better about paying it down - it LOWERS your cash on hand. That seems LESS secure to me.
I think there’s some version of sunk-cost fallacy at play with a lot of homeowners who “missed out” on historically and absurdly low rates. Paying double on a 6% rate to simulate a 3% rate for instance.
I sort of did that by doing a 15 year fixed as rates were starting to go up. I fell prey to the psychological factor I derided above. I really wanted the first figure in my rate to be a 3. Not a huge deal because it was a small now-rental-property refi and isn’t significant one way or another. But a proper analysis would’ve resulted in a 30year at higher rate.
This post was edited on 12/6/23 at 2:41 pm
Posted on 12/6/23 at 2:23 pm to notsince98
quote:I guess. But one has to pay for housing, one way or another. In your scenario. you didn't mention the stress of retiring (or becoming disabled) with potentially far less in retirement savings due to the fact that so much present-day cash was plowed into home equity.
For example, how much would it be worth it to me to have less stress at work? Would I take a $50k pay cut for less stress or maybe just $5k? How much of a pay cut would I take to work 3 days per week? How much of a raise would I need make me work in in an office 5 days a week?
That similar process/mentality can be applied to the mortgage situation. Mortgage payments are some level of stress for everyone. Each person can decide if that is a big value or small value and analyze accordingly.
Posted on 12/6/23 at 2:25 pm to notsince98
quote:I can't imagine many people these days have on-balance-sheet mortgages from community banks and the like. It seems unlikely that Fifth Third or whoever is just going to give you a happy loan mod because your UPB happens to be lower than the amort tables had predicted.
It does if you want the ability to recast your current mortgage in a time of need.
But in any event, if it's "time of need" you're worried about, then having MORE cash is better than having MORE home equity.
Posted on 12/6/23 at 2:27 pm to Gorilla Ball
quote:
My rate is about 3% and my portfolio return is about 9.75%
there ya go. proving my points. milk that damn mortgage. pay everything else off.
Posted on 12/6/23 at 2:28 pm to notsince98
quote:In the alternate scenario, you are saving (and hopefully investing) thousands more per year that is readily on-hand in the instance of job loss.
EDIT: I should also add that as a sole provider for a family of 5, knowing that my house was owned completely by me would really reduce the stress of keeping a well paying job. If I had no mortgage and I lost my job, it would be super easy to find enough income to get us by.
I get what you are saying - I just think you are overpaying for basically the same peace of mind as carrying the mortgage and investing present cash.
ETA: if this is the kind of thing that really worries you, I would submit that perhaps you have too much house.
This post was edited on 12/6/23 at 2:31 pm
Posted on 12/6/23 at 2:51 pm to Big Scrub TX
quote:
But in any event, if it's "time of need" you're worried about, then having MORE cash is better than having MORE home equity.
More cash is great for short term issues. Improving your monthly mortgage requirement is a long term help.
Posted on 12/6/23 at 2:51 pm to Big Scrub TX
quote:
In the alternate scenario, you are saving (and hopefully investing) thousands more per year that is readily on-hand in the instance of job loss.
that isn't the life of a single income household.
Posted on 12/6/23 at 3:35 pm to baldona
Great information thanks for sharing.
Posted on 12/6/23 at 3:39 pm to rpg37
The 6.5% is a certainty.
S&P might have an 8-10% year in 2024, or might be 2-3%, or might fall into bear territory. You need a DeLorean to know the right answer.
S&P might have an 8-10% year in 2024, or might be 2-3%, or might fall into bear territory. You need a DeLorean to know the right answer.
Posted on 12/6/23 at 5:01 pm to baldona
quote:
If you ever need the money for an emergency, its a hell of a lot easier to use your own money then get a bank loan.
which is why if u wanna pay it off do it in chunks using velocity banking with a big LOC or HELOC so you always have access to lots of money if it takes you awhile. instead of having it locked away with the mortgage company.
Posted on 12/6/23 at 5:55 pm to Fat Bastard
quote:
which is why if u wanna pay it off do it in chunks using velocity banking with a big LOC or HELOC so you always have access to lots of money if it takes you awhile. instead of having it locked away with the mortgage company.
Velocity banking just doesn’t make sense with HELOC rates at 7%+ and mortgage rates at sub-4%. If you can make that math work for us, I’d like to see it.
Posted on 12/6/23 at 6:08 pm to turkish
quote:
I have my payoff sum in an account making >2x my interest rate.
I’m in a similar situation and would absolutely invest every penny that would otherwise go to payments - my fear is accomplishing this before my wife thinks it’s a free for all for her to go spending crazy. The mortgage is protecting me from her
Posted on 12/6/23 at 6:40 pm to notsince98
quote:I'm not sure what this means, but it doesn't seem accurate.
More cash is great for short term issues. Improving your monthly mortgage requirement is a long term help.
Posted on 12/6/23 at 6:56 pm to lynxcat
quote:Good post.
there is no “right” answer as this is all just about opportunity cost of the marginal dollar. I am in the mathematical camp…I put no value on the “it feels so much better to own a home outright” as I’ll still be paying $3K a year in home insurance and $11K a year in property taxes (or greater into perpetuity).
With that said, 6.5% as risk free return is quite good relative to historical market returns (which is not risk adjusted). Now, 6.5% doesn’t look as good when the savings rate is 5% in money market funds but I don’t think you would regret paying down the mortgage in your situation as long as you have ample access to cash in case it is needed.
Posted on 12/7/23 at 6:07 am to rpg37
Pay as much as you can. I turned my 30 year mortgage into an 11. After payoff, I started maxing out retirement savings and how have my first million in retirement. Any leftover cash after max contributions is for hellafun vacations.
This post was edited on 12/7/23 at 6:09 am
Posted on 12/7/23 at 10:18 am to notsince98
quote:
quote:
The bank having more of your money doesn't change your future payments.
It does if you want the ability to recast your current mortgage in a time of need.
Bad assumption imo. If I need to rework my mortgage and I have paid $50,000 extra to my mortgage or I have $50,000 in cash, I'd like to see the argument from a loan officer that the smaller mortgage and more equity is ever better than cash on hand?
Furthermore, you can get a MM account paying 5%. If you pay your mortgage down you earn 0% interest on additional payments. If you put the money into a MM account you can easily get 4% right now. That will help you pay your mortgage off faster.
Cash on hand is king over paying off any loan faster IMO. You can ALWAYS pay the loan off, getting your cash back from the bank COSTS you money.
This post was edited on 12/7/23 at 10:19 am
Posted on 12/7/23 at 10:28 am to baldona
Re reading the OP, the real answer is when interest rates are the opposite of where they are currently.
1.) When to pay off - When mortgage loan interest rate is high and investment interest rate is low
2.) When not to pay off - when mortgage loan interest rate is low and investment interest rate is high.
1.) When to pay off - When mortgage loan interest rate is high and investment interest rate is low
2.) When not to pay off - when mortgage loan interest rate is low and investment interest rate is high.
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