Comments on: JLP’s Question of the Day – Prepaying Mortgage http://allfinancialmatters.com/2006/10/17/jlps-question-of-the-day-prepaying-mortgage/ A personal finance blog dedicated to discussing such topics as budgeting, asset allocation, 401K, IRA, cash flow, insurance, financial planning, portfolio management, and other areas in personal finance. Sat, 11 Feb 2012 20:32:19 +0000 hourly 1 http://wordpress.org/?v= By: Andy http://allfinancialmatters.com/2006/10/17/jlps-question-of-the-day-prepaying-mortgage/comment-page-1/#comment-451062 Andy Fri, 17 Dec 2010 13:46:36 +0000 http://allthingsfinancialblog.com/2006/10/17/jlps-question-of-the-day-prepaying-mortgage/#comment-451062 No one has mentioned a recast. You can pay down a lump sum, like $5000 or $10,000 toward principle, and instead of ending the mortgage early, lower the payment. This makes it easier to save up for the next paydown, etc, so you still end up finishing earlier if you want to. The thing I don't like about paying down early the traditional way is that it does nothing for improving cash flow. I can pay down early, but then lose my job, can't make the payment, and lose it all. But with each recast, I increase my liklihood of being able to keep up with the payment in hard times. No one has mentioned a recast. You can pay down a lump sum, like $5000 or $10,000 toward principle, and instead of ending the mortgage early, lower the payment. This makes it easier to save up for the next paydown, etc, so you still end up finishing earlier if you want to.

The thing I don’t like about paying down early the traditional way is that it does nothing for improving cash flow. I can pay down early, but then lose my job, can’t make the payment, and lose it all. But with each recast, I increase my liklihood of being able to keep up with the payment in hard times.

]]> By: Tony R http://allfinancialmatters.com/2006/10/17/jlps-question-of-the-day-prepaying-mortgage/comment-page-1/#comment-393481 Tony R Tue, 30 Dec 2008 04:03:11 +0000 http://allthingsfinancialblog.com/2006/10/17/jlps-question-of-the-day-prepaying-mortgage/#comment-393481 With this on-going recession and low bank interest rates, I would rather pay my house which I have rented out than put my money in risky investments. I'll finish paying the house next year (within 2 years only) and then keep as savings the $950 I receive every month from the renters. Which bank nowadays can give me $950 a month CD interest for my $142,000 (my house cost in San Antonio)? With this on-going recession and low bank interest rates, I would rather pay my house which I have rented out than put my money in risky investments. I’ll finish paying the house next year (within 2 years only) and then keep as savings the $950 I receive every month from the renters. Which bank nowadays can give me $950 a month CD interest for my $142,000 (my house cost in San Antonio)?

]]> By: SueCopening http://allfinancialmatters.com/2006/10/17/jlps-question-of-the-day-prepaying-mortgage/comment-page-1/#comment-135238 SueCopening Sat, 01 Sep 2007 04:26:11 +0000 http://allthingsfinancialblog.com/2006/10/17/jlps-question-of-the-day-prepaying-mortgage/#comment-135238 OK, so you do not have high interest credit cards and you are fully funding your Roth. Then if you want to GET RID OF YOUR MORTGAGE FAST, here is what you do. Use the equity you DO have to pay off the equity you don't have yet. Take out a HELOC and start treating it like a checking account. Deposit your income into it and pay your bills out of it. By cashflowing through it you will achieve a lower EFFECTIVE rate on it than on your mortage. HOW? Ask yourself this... if you borrow $1 from a heloc (a revolving line of credit with interest calculated on the average daily balance), how much does it cost you in interest? 10 cents if you pay it back exactly a year later, but only 2.5 cents if you pay it back in 3 months. So your EFFECTIVE interest rate is just 2.5%). Now by achieving a lower effective interest rate on your heloc, than your primary mortage, you can monitor your cash flow (there is an algorithm based software program you can buy for this) and then borrow the equivalent of your discretionary income 3 months in advance and put it into to your mortgage (making sure you will be able to pay it back quickly enough with your paychecks and cash flow to keep the effective rate low). Then when the heloc balance gets close to zero... do it again. The heloc should be used only as a TOOL to do this. You can do this as a guessing game, or use software, but this is math, not horseshoes or hand grenades. If you DO do this right you can knock a 30 year mortgage down to half the time or LESS, without changing your budget or scrimping or saving. You must be very disciplined to do this yourself, but it has been done for years with excellent results. Making these transfers as quickly as possible is key... want to know why? Go put a $5000 principle payment into your mortgage (use an extra payment calculator on the internet) with the first months payment... then do it instead 6 months later. On a $200,000 mortgage at 6% you will see that you save an EXTRA $787.94 by putting the money in 6 months earlier. But what does it cost you to borrow it from the heloc? Making monthly payments at 10% interest it costs you at most $180. but if you cashflowed through the heloc with your income you may have achieved an effective rate of as low as 1-3%. Regardless.. that is an advantage of, at LEAST, an extra $600 in interest saved over the life of your mortgage. Short term, controlled borrowing from a heloc is a simple way to accelerate a mortgage painlessly. If you do it really well you can end up with an EFFECTIVE interest rate, for BOTH your primary and heloc. of as low as 1-3%. And PLEASE do not stress over losing your tax deduction! All we do with that is give the bank $1 and get back 15-25 cents at year end (depending on our bracket). As someone here said.. that is called negative cash flow. Wouldn't you rather have the dollar? Also... a savings account strategy loses here also... as the money earned on a savings account is accrued, and TAXABLE, while the lower effective rate on a properly managed heloc is tax deductable. Do the math on that and you see that paying down the mortgage in THIS fashion (with heloc) beats trying to save chunks, even with a 5% savings account. Advance TIMING of prepayments makes a HUGE difference on an amortized loan! Got questions... call me 407-697-8869 Sue :) OK, so you do not have high interest credit cards and you are fully funding your Roth. Then if you want to GET RID OF YOUR MORTGAGE FAST, here is what you do. Use the equity you DO have to pay off the equity you don’t have yet. Take out a HELOC and start treating it like a checking account. Deposit your income into it and pay your bills out of it. By cashflowing through it you will achieve a lower EFFECTIVE rate on it than on your mortage. HOW? Ask yourself this… if you borrow $1 from a heloc (a revolving line of credit with interest calculated on the average daily balance), how much does it cost you in interest? 10 cents if you pay it back exactly a year later, but only 2.5 cents if you pay it back in 3 months. So your EFFECTIVE interest rate is just 2.5%). Now by achieving a lower effective interest rate on your heloc, than your primary mortage, you can monitor your cash flow (there is an algorithm based software program you can buy for this) and then borrow the equivalent of your discretionary income 3 months in advance and put it into to your mortgage (making sure you will be able to pay it back quickly enough with your paychecks and cash flow to keep the effective rate low). Then when the heloc balance gets close to zero… do it again. The heloc should be used only as a TOOL to do this. You can do this as a guessing game, or use software, but this is math, not horseshoes or hand grenades. If you DO do this right you can knock a 30 year mortgage down to half the time or LESS, without changing your budget or scrimping or saving. You must be very disciplined to do this yourself, but it has been done for years with excellent results. Making these transfers as quickly as possible is key… want to know why? Go put a $5000 principle payment into your mortgage (use an extra payment calculator on the internet) with the first months payment… then do it instead 6 months later. On a $200,000 mortgage at 6% you will see that you save an EXTRA $787.94 by putting the money in 6 months earlier. But what does it cost you to borrow it from the heloc? Making monthly payments at 10% interest it costs you at most $180. but if you cashflowed through the heloc with your income you may have achieved an effective rate of as low as 1-3%. Regardless.. that is an advantage of, at LEAST, an extra $600 in interest saved over the life of your mortgage. Short term, controlled borrowing from a heloc is a simple way to accelerate a mortgage painlessly. If you do it really well you can end up with an EFFECTIVE interest rate, for BOTH your primary and heloc. of as low as 1-3%. And PLEASE do not stress over losing your tax deduction! All we do with that is give the bank $1 and get back 15-25 cents at year end (depending on our bracket). As someone here said.. that is called negative cash flow. Wouldn’t you rather have the dollar? Also… a savings account strategy loses here also… as the money earned on a savings account is accrued, and TAXABLE, while the lower effective rate on a properly managed heloc is tax deductable. Do the math on that and you see that paying down the mortgage in THIS fashion (with heloc) beats trying to save chunks, even with a 5% savings account. Advance TIMING of prepayments makes a HUGE difference on an amortized loan! Got questions… call me 407-697-8869 Sue :)

]]> By: Jude http://allfinancialmatters.com/2006/10/17/jlps-question-of-the-day-prepaying-mortgage/comment-page-1/#comment-128079 Jude Fri, 10 Aug 2007 00:40:31 +0000 http://allthingsfinancialblog.com/2006/10/17/jlps-question-of-the-day-prepaying-mortgage/#comment-128079 Well, TODAY we took %170,000 out of our savings, and paid off our house! IT FEELS WONDERFUL! This lovely house is all ours. NO ONE but God can EVER take it away from us! We had a house foreclosed on us in 1995. It was the most horrible thing. There we were..broke, out in the street. Kicked to the curb. We vowed that we would come back..rise from the ashes, and never again would we go through that hell. We bought this house in 2000 for $550,000. There is a second house on the property we use as a rental, $1500 a month. No matter what happens to the economy, or to us, RIGHT HERE is where we will be. No "investment" nor stock purchase ever made us so happy. We feel secure, and very damn proud of ourselves. Sure, there will be taxes and insurance and repairs, etc., but they were there, anyway. The rental house income will cover whatever. OH, HAPPY DAY! :) :) A dream come true. OUR house: Free and Clear. Ahhhhhhhh, what a feeling! Well, TODAY we took %170,000 out of our savings, and paid off our house! IT FEELS WONDERFUL! This lovely house is all ours. NO ONE but God can EVER take it away from us!

We had a house foreclosed on us in 1995. It was the most horrible thing. There we were..broke, out in the street. Kicked to the curb.

We vowed that we would come back..rise from the ashes, and never again would we go through that hell. We bought this house in 2000 for $550,000. There is a second house on the property we use as a rental, $1500 a month.

No matter what happens to the economy, or to us, RIGHT HERE is where we will be. No “investment” nor stock purchase ever made us so happy. We feel secure, and very damn proud of ourselves. Sure, there will be taxes and insurance and repairs, etc., but they were there, anyway. The rental house income will cover whatever.

OH, HAPPY DAY! :) :) A dream come true. OUR house: Free and Clear. Ahhhhhhhh, what a feeling!

]]> By: SHA http://allfinancialmatters.com/2006/10/17/jlps-question-of-the-day-prepaying-mortgage/comment-page-1/#comment-101133 SHA Wed, 02 May 2007 04:52:39 +0000 http://allthingsfinancialblog.com/2006/10/17/jlps-question-of-the-day-prepaying-mortgage/#comment-101133 The first assumption is that additional money is required to pay down a mortgage early. While you may choose to make an extra payment over the course of a year (which happens on a bi-weekly payment plan,) you can pay the same amount each year but switch to a twice a month payment plan to reduce the amount of mortgage interest you pay out by $15-$20K or more and shave a couple of years off the loan without spending any more money than you already are spending now. We went through 6 months of cash reserves and incurred debt following a prolonged period of unemployment after 9/11 and some unexpected health expenses in 2002. We were able to hold on until we both became employed again in 2003. In the process of negotiating reduced payments on unsecured debt, a couple of our debtors chose to instead charge off our accounts and eventually sold the debt to attorney collectors who initiated legal proceedings. During a recent debtor legal action, we became painfully aware that any money we put in our cushion fund is liquid and therefore at immediate risk of being appropriated. Without that cushion we are at risk of going back into debt at the slightest financial setback. For the next couple of years, we are getting ahead and lowering risk by maxing our 401Ks at work and making bi-weekly mortgage payments. We are limiting how much money we put into liquid cash and investment accounts until we have settled with unsecured debtors and are back on our feet. At that time we will redirect extra monies to investments that pay more than our mortgage interest costs us. Until then we are increasing the equity in our home which--unlike cash and investment accounts--can't be taken away from us so long as we are current with our mortgage payments. You can accelerate your mortgage when it makes sense to do so, and revert back to usual payments for maximized tax benefits when that makes sense. It is not necessary to make additional payments during the life of the mortgage when you can realize investment returns that exceed your mortgage interest rate, but it's hard to ignore the fact that you can get ahead just by making the same amount of house payments on a twice a month instead of once a month plan. The first assumption is that additional money is required to pay down a mortgage early. While you may choose to make an extra payment over the course of a year (which happens on a bi-weekly payment plan,) you can pay the same amount each year but switch to a twice a month payment plan to reduce the amount of mortgage interest you pay out by $15-$20K or more and shave a couple of years off the loan without spending any more money than you already are spending now.

We went through 6 months of cash reserves and incurred debt following a prolonged period of unemployment after 9/11 and some unexpected health expenses in 2002. We were able to hold on until we both became employed again in 2003.

In the process of negotiating reduced payments on unsecured debt, a couple of our debtors chose to instead charge off our accounts and eventually sold the debt to attorney collectors who initiated legal proceedings. During a recent debtor legal action, we became painfully aware that any money we put in our cushion fund is liquid and therefore at immediate risk of being appropriated. Without that cushion we are at risk of going back into debt at the slightest financial setback.

For the next couple of years, we are getting ahead and lowering risk by maxing our 401Ks at work and making bi-weekly mortgage payments. We are limiting how much money we put into liquid cash and investment accounts until we have settled with unsecured debtors and are back on our feet. At that time we will redirect extra monies to investments that pay more than our mortgage interest costs us. Until then we are increasing the equity in our home which–unlike cash and investment accounts–can’t be taken away from us so long as we are current with our mortgage payments.

You can accelerate your mortgage when it makes sense to do so, and revert back to usual payments for maximized tax benefits when that makes sense. It is not necessary to make additional payments during the life of the mortgage when you can realize investment returns that exceed your mortgage interest rate, but it’s hard to ignore the fact that you can get ahead just by making the same amount of house payments on a twice a month instead of once a month plan.

]]> By: TR http://allfinancialmatters.com/2006/10/17/jlps-question-of-the-day-prepaying-mortgage/comment-page-1/#comment-94451 TR Wed, 04 Apr 2007 14:36:52 +0000 http://allthingsfinancialblog.com/2006/10/17/jlps-question-of-the-day-prepaying-mortgage/#comment-94451 I would say prepay your mortgage. The sooner you can be debt free the better. Finanical advisors, banks, loan companies, etc. want you to keep this debt. Invest your money to make more money. Why do they say this? Because if you didn't invest they would lose out! Put money in stocks and bonds, and watch them grow. Can they guarantee that? Nope. One terrist attack, and you have nothing. No house equity and no retirement funds. You don't want to live life owing people or businesses. You want to own everything, and not have to worry about the stock market, or if your paying to much on finance charges from investors or others. Have a mortgage save money on a tax deduction. Your going to pay the same taxes no matter what! Your investments at 12% are taxed, and whenever you pull out money on your 401k your taxed (even during retirement!). My plan would be to pay off my smallest debt first, and then move to the next largest (snowball effect), until you are completely debt free. After that use CD laddering for furture savings. I would say prepay your mortgage. The sooner you can be debt free the better. Finanical advisors, banks, loan companies, etc. want you to keep this debt. Invest your money to make more money. Why do they say this? Because if you didn’t invest they would lose out! Put money in stocks and bonds, and watch them grow. Can they guarantee that? Nope. One terrist attack, and you have nothing. No house equity and no retirement funds. You don’t want to live life owing people or businesses. You want to own everything, and not have to worry about the stock market, or if your paying to much on finance charges from investors or others. Have a mortgage save money on a tax deduction. Your going to pay the same taxes no matter what! Your investments at 12% are taxed, and whenever you pull out money on your 401k your taxed (even during retirement!). My plan would be to pay off my smallest debt first, and then move to the next largest (snowball effect), until you are completely debt free. After that use CD laddering for furture savings.

]]> By: financial zen » Blog Archive » Pin this up on your wall. http://allfinancialmatters.com/2006/10/17/jlps-question-of-the-day-prepaying-mortgage/comment-page-1/#comment-90697 financial zen » Blog Archive » Pin this up on your wall. Sat, 24 Mar 2007 07:54:00 +0000 http://allthingsfinancialblog.com/2006/10/17/jlps-question-of-the-day-prepaying-mortgage/#comment-90697 [...] 7. Pay ahead on your mortgage. I’ve seen this contested. Pay more because you can afford to (and you own your house faster), or take that extra money and invest it. JLP at All Financial Matters has covered this. I’m no expert, but the feeling of paying off a property would give me that overwhelming relaxation of getting that monkey of your back (I can see why some people hesitate - it’s all a matter of income and how much you buy your house for - I’m looking in the $160k range, some people talk of $300k+ for something that I’m living in now!) [...] [...] 7. Pay ahead on your mortgage. I’ve seen this contested. Pay more because you can afford to (and you own your house faster), or take that extra money and invest it. JLP at All Financial Matters has covered this. I’m no expert, but the feeling of paying off a property would give me that overwhelming relaxation of getting that monkey of your back (I can see why some people hesitate – it’s all a matter of income and how much you buy your house for – I’m looking in the $160k range, some people talk of $300k+ for something that I’m living in now!) [...]

]]> By: David Scubadiver http://allfinancialmatters.com/2006/10/17/jlps-question-of-the-day-prepaying-mortgage/comment-page-1/#comment-87831 David Scubadiver Thu, 15 Mar 2007 21:34:47 +0000 http://allthingsfinancialblog.com/2006/10/17/jlps-question-of-the-day-prepaying-mortgage/#comment-87831 "Nobody ever got rich paying off a mortgage" I could prepay $1,000 a month on my mortgage at 5.5% Or I could sock away $1,000 a month and invest it in various mutual funds or whatever. After many years, assuming my investments are somewhere near 5.5%, I will have a huge pile of cash which I can easily spend for expenses, including retirement expenses. Heck, I could use it to pay my monthly mortgage while reserving the bulk of it for an emergency or keeping it invested. The question for me is, would I rather have a HUGE pile of cash and small mortgage debt (after all I have been paying it down a little each month for so many years), or a tiny pile of cash and no mortgage at all? The answer for me is simple. Give me the cash because I can buy stuff with it without having to take out a home equity loan, etc. Even if I wind up with less on a net worth basis, I have easier access to the cash if the money is invested in something liquid rather than my house -- and if I do well investing, I will be on the positive net, and if I want the warm fuzzy feeling I can simply pay off the entire mortgage once my investment balance equals my mortgage balance. “Nobody ever got rich paying off a mortgage”

I could prepay $1,000 a month on my mortgage at 5.5%
Or I could sock away $1,000 a month and invest it in various mutual funds or whatever.

After many years, assuming my investments are somewhere near 5.5%, I will have a huge pile of cash which I can easily spend for expenses, including retirement expenses. Heck, I could use it to pay my monthly mortgage while reserving the bulk of it for an emergency or keeping it invested.

The question for me is, would I rather have a HUGE pile of cash and small mortgage debt (after all I have been paying it down a little each month for so many years), or a tiny pile of cash and no mortgage at all? The answer for me is simple. Give me the cash because I can buy stuff with it without having to take out a home equity loan, etc. Even if I wind up with less on a net worth basis, I have easier access to the cash if the money is invested in something liquid rather than my house — and if I do well investing, I will be on the positive net, and if I want the warm fuzzy feeling I can simply pay off the entire mortgage once my investment balance equals my mortgage balance.

]]> By: Ryan http://allfinancialmatters.com/2006/10/17/jlps-question-of-the-day-prepaying-mortgage/comment-page-1/#comment-75511 Ryan Tue, 13 Feb 2007 05:12:39 +0000 http://allthingsfinancialblog.com/2006/10/17/jlps-question-of-the-day-prepaying-mortgage/#comment-75511 As a society we have been taught that all debt is bad. I feel that this is at least in part due to Depression-era thinking. In 1930 most mortgages were 5 year notes. As you could imagine no family was able to pay off their mortgage in 5 years. Keeping the family home was thus entirely dependent on being able to refinance! Well in the event of a liquidity crunch like the Great Depression refinancing was impossible. The following lesson was learned: Even if you pay all your mortgage payments the bank can still take back your house. This simply isn't the case anymore. Mortgagors have far more protection than in the past. My basic point is that I think there are some ideas ingrained in many of us that are outdated and cloud are ability to think about mortgage debt in an analytical way. I have so much more to say on the topic but I don't want to hog the message board! As a society we have been taught that all debt is bad. I feel that this is at least in part due to Depression-era thinking. In 1930 most mortgages were 5 year notes. As you could imagine no family was able to pay off their mortgage in 5 years. Keeping the family home was thus entirely dependent on being able to refinance! Well in the event of a liquidity crunch like the Great Depression refinancing was impossible. The following lesson was learned: Even if you pay all your mortgage payments the bank can still take back your house. This simply isn’t the case anymore. Mortgagors have far more protection than in the past.

My basic point is that I think there are some ideas ingrained in many of us that are outdated and cloud are ability to think about mortgage debt in an analytical way.

I have so much more to say on the topic but I don’t want to hog the message board!

]]> By: Ed http://allfinancialmatters.com/2006/10/17/jlps-question-of-the-day-prepaying-mortgage/comment-page-1/#comment-75233 Ed Mon, 12 Feb 2007 13:38:52 +0000 http://allthingsfinancialblog.com/2006/10/17/jlps-question-of-the-day-prepaying-mortgage/#comment-75233 billyw (#30): you are correct that you should retain your mortgage if you could get a guaranteed higher rate of return compared to your mortgage interest rate. The main problem I see is this.... i know couples who've decided to just pay their monthly mortgage payments and promised to themselves to invest the available funds they have (only because of the idea that they can get a much higer rate of return in the stock market), is that they do not maintain the course in investing, as they promised. These couples were tempted to spend their money in frivolous things and, sadly, lost their focus in investing (which is very easy to do, in my opinion). As a result, they have nothing to show for. billyw (#30): you are correct that you should retain your mortgage if you could get a guaranteed higher rate of return compared to your mortgage interest rate. The main problem I see is this…. i know couples who’ve decided to just pay their monthly mortgage payments and promised to themselves to invest the available funds they have (only because of the idea that they can get a much higer rate of return in the stock market), is that they do not maintain the course in investing, as they promised. These couples were tempted to spend their money in frivolous things and, sadly, lost their focus in investing (which is very easy to do, in my opinion). As a result, they have nothing to show for.

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