Re-thinking the mortgage payoff plan

Sometimes, I don’t feel like making big payments to the mortgage and I would rather throw the money into investments. I mean, my interest rate is only 2.5% and the balance is a lot less scary now that it is down in the $150,000 range from the $280,000 range when I bought two years ago. For now, I am going to continue with the plan of paying off the mortgage. There’s no rhyme or reason to my wanting to throw money in investments instead of at the mortgage, so it’s probably just fatigue from working on a medium-term goal. Or maybe it’s a desire to see my investments go up faster instead of seeing the mortgage go down faster. I think I’m more motivated by seeing numbers go up than numbers go down! (Hmmm, if that’s the case, perhaps I should track my equity instead of tracking the mortgage balance. Well, I do both in my own spreadsheets.)

Every once in a while, I calculate how much extra I would need to pay on the mortgage each month in order to pay it off exactly before the rate resets. As of today, that number is around $2,700 and I’m only throwing $1,800 each month at the mortgage. By the end of this year, the required number should turn into only $2,200, which might be possible. And by the time of my bonus at this time next year, it should be down to around $1,600 and the mortgage balance around $80,000. So the question at that point becomes “Would I rather take a year to pay off the mortgage and put nothing into investments in that time OR pay off the mortgage exactly before the rate resets and put everything else into investments in that time?”

I’m not going to let myself re-evaluate how much I’m throwing at the mortgage until I have reached a point where I am throwing more at the mortgage each month from my paychecks than I need to to pay off the mortgage before the rate resets, since I don’t want to rely on my bonuses. After all, my original goal WAS to pay off the mortgage before the rate resets. It just turned out to possibly be possible to pay it off months/years before that happened.

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  1. #1 by dan23 on May 24, 2014 - 12:04 pm

    I don’t think there is a clearly superior rationale choice. I do think this is mainly psychological (so try paying more attention to equity) and find the psychological benefit of not having a mortgage to be real – you can reach that point fairly soon if you want to.

    I tend to value the permanent elimination of expenses (in this case a mortgage) higher than an increase in discretionary income as it makes it harder for sudden income changes to be harmful (increases resiliency or at least self-perceived resiliency). I know this argument is somewhat weak, as by saving and investing an equivalent amount you should be in a similar financial position, but I know quickly depleting savings I had built up would hurt me more psychologically, then having to spend down less while having more meager savings.

    To the extent, if at all, the especially high recent market performance is making you feel as if you’re missing out (I felt this way in retrospect, as I would have significantly more money if I had invested my money rather than purchased my residence), there is no reason to think it will continue, and to the extent reversion to the mean in market performance is real, it is probably more likely to not be the case in the near-medium term.

    • #2 by Leigh on May 24, 2014 - 12:34 pm

      I don’t think so either and I think that’s why sometimes I wish was doing 50/50 to hedge the fact that neither choice is really superior. So it’s probably just medium-term goal fatigue :)

      My desire to be throwing money into investments instead of the mortgage is not related to the stock market’s gains over the last few years. It’s more related to missing the feeling of throwing money into my savings account and watching it grow. I think you’re right that I should watch the equity instead of the mortgage balance.

      The mortgage balance is now less than what I will gross this year and I’m reasonably confident that it will be under this year’s net income by the end of the year, possibly even close to my base pay. I also have more in other assets by strict dollar amount than my mortgage balance now and if I cashed out my retirement accounts, I’m now only $15,000 short of paying off the mortgage. And at some point next year, my non-retirement assets will be greater than my mortgage balance. Another point of decision will be at what point I will pay off the mortgage once my non-retirement assets will be greater than my mortgage balance. Am I willing to pay capital gains taxes? Cash out my one year’s worth of Series I Savings Bonds? Empty out my emergency fund and money set aside for a Roth IRA contribution? I’m curious to see what I end up doing.

      Mint is currently telling me my net worth is slightly over $400,000 because a transfer credited and hasn’t debited yet. Weeee!

      • #3 by dan23 on May 24, 2014 - 1:51 pm

        I read somewhere that we spend the most time agonizing over choices where it doesn’t really matter which choice we go with. I’m mostly incapable of doing this, but the suggestion is to commit to following the outcome of a coin flip and flip a coin.

        50/50 is probably the worst solution as you probably don’t get any psychological benefits that come with committing to either. It is also one that I find unsatisfying as it acknowledges that one may be better than the other and then you are half wrong no matter what.

        • #4 by Leigh on May 24, 2014 - 2:33 pm

          That’s true. I think it is mostly for a sense of liquidity since I don’t know how long I’ll stay here. The unsatisfying aspect of hitting neither goal is probably what has dissuaded me from actually swaying from my current goal of being mortgage-free.

    • #5 by Leigh on May 24, 2014 - 12:52 pm

      The other thing too is that sometimes I think it would be nice to keep a bit more money liquid. As it is, I will have to sell if I want to move since I can’t rent my place out, but if I had more funds liquid, I could choose whether I buy or sell first. Otherwise, I would probably need to wait at least a year after paying off the mortgage to be able to move and buy a new place. Or maybe I could do something fancy and remortgage this place instead of the new place to buy a new place.

  2. #6 by nicoleandmaggie on May 24, 2014 - 12:39 pm

    I get you! Our mortgage post this next month is on a related topic, though not quite the same.

    • #7 by Leigh on May 26, 2014 - 8:37 am

      Curious to read it! Your mortgage posts always remind me of my thought processes.

  3. #8 by NoTrustFund on May 26, 2014 - 2:16 am

    Putting extra money at the mortgage is especially hard when the markets have been doing so well!

    I’m motivated by having lower monthly fixed costs and the freedom that provides- I think you are too. If not, there’s a strong arguement for keeping more money invested- especially with a rate so low!

    • #9 by Leigh on May 26, 2014 - 8:49 am

      I am somewhat motivated by having lower monthly fixed costs, but I can’t really see my base pay lowered for the next 2-3 years without leaving my city and then I would sell my condo, which means that I don’t have reason to worry about my mortgage becoming unaffordable since I have about $2,000+ of spare cash flow each month from my paycheck. And if I did find it unaffordable, I could always recast it. Today’s balance would recast the required payment to $635/month.

      I am, however, really motivated by having no mortgage at all. I’m also motivated by having no mortgage by the time I get married or consider having kids. I think I would be motivated more by having lower fixed costs if the mortgage payoff seemed a bit closer or felt like more of a stretch to pay. But compared to paying rent around here, my mortgage payment is pretty darn cheap. It would be pretty sweet though if it was gone – my boyfriend and I calculated our total required shared costs if my mortgage was gone to only be $600/month. That certainly makes our high paying jobs seem not that necessary!

    • #10 by Leigh on May 28, 2014 - 7:39 am

      On the other hand, I’m already pretty much golden for retirement past age 60 (well, assuming I continue to contribute the maximum to my 401(k) for the next two years) and just need to fund cash flow for the next 35 years. I really like the idea of having a fully paid off home. If my boyfriend and I did decide (hypothetically) that we want to buy a different place, I could probably save up my half of a 20% down payment in a year and then once I sell this place, pay off my half of the new mortgage. I miss the days of throwing all of my extra money in a savings account and watching it grow! Watching the mortgage go down is a bit different.

  4. #11 by JC @ Passive-Income-Pursuit on May 27, 2014 - 2:22 pm

    As life has changed it’s made me question some of my previous beliefs. Namely to pay off the mortgage first rather than invest like I’ve been doing. I think we’re still realistically 4-5 years out from FI so the real effects of extra $ towards the mortgage won’t make that big of an impact. Now if it would lower my monthly payment then I’d be all for it but since the payment stays the same whether I pay extra now or not I’m still leaning more towards investing my excess capital.

    • #12 by nicoleandmaggie on May 27, 2014 - 3:20 pm

      You can reamortize if you’ve been pre-paying and that will lower your monthly payments.

      • #13 by JC @ Passive-Income-Pursuit on May 27, 2014 - 3:26 pm

        There’s been no pre-payment yet because I didn’t really feel the need but I’m lacking investment ideas and my life situation has changed so there’s been a bit of thought creeping into my mind to swap to mortgage payoff in order to reduce our fixed monthly payments quicker. By re-amortize do you mean refinance or can you just re-amortize the loan at the rate that you have? I’d never heard of re-amortizing in that sense so that could make sense. Our payment isn’t cumbersome at all but that could be an option if we decide to pre-pay on the mortgage.

        • #14 by nicoleandmaggie on May 27, 2014 - 3:43 pm

          Also called “recasting” — for a small fee (usually a couple hundred dollars), you can draw out your payments to your original number of payments, cutting down the size of each payment (if you’ve pre-paid). It makes mortgage pre-payment a lot less risky– you don’t have that all-or-nothing thing going if you prepay (where you don’t realize any benefits until it’s gone). In an emergency you can lower your monthly payment using the amount you’ve prepaid. It’s less expensive than refinancing and, unlike refinancing, you can generally do it even if you lose income or get a lower credit score etc.

          http://nicoleandmaggie.wordpress.com/2012/11/05/november-mortgage-update-under-100k-and-playing-with-amortization/

        • #15 by Leigh on May 27, 2014 - 7:28 pm

          Recasting would cut my payment down to $700/month or so I think right now. My credit union actually lets you recast for free, but my current lender charges you $200. I would only recast in a cash flow crunch since it doesn’t save interest, just reduces cash flow. It helps with peace of mind a bit when you’re throwing large chunks at the mortgage.

  5. #16 by John Pham on May 31, 2014 - 10:39 pm

    I also had to rethink my mortgage plan just recently. I was adding extra principal on both my rental and personal properties, but had a change of heart. I decided since my interest rate is low (3.5% for Personal & 4.5% for Rental), I can invest my money in the stock market and can probably get a better return. The personal property I own, I actually bought it for my mother since she wanted it. I don’t intend on staying in the house, but I am currently working oversea and still have not seen the house yet and I have bought it almost 2 years ago. So I did not want to tie up all my money in the personal property.

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