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Pay off mortgage sooner? - Page 2

post #16 of 31
Let me emphasize the related point of maxing out your tax advantaged accounts. Assuming you are in a high tax bracket and don't need the cash to live on in the near future (and you probably are given thoughts of mortgage payoffs) I think that you should be making ZERO investment in anything until you have maxed out every tax advantaged account available to you.

Don't forget 529 college plans. All earnings are tax free if used for college (and can be transferred to other kids). And, many states offer a state tax deduction for contributions (no fed deduction). Historically, a lot of states ran really crappy 529s but there has been reform so you can usually find an acceptable investment vehicle (vanguard index, simple CD ladders, etc). You can invest in any state's fund as a non-resident but the state tax deduction is usually only for your state of residence.
post #17 of 31
I agree with most of what's been said, but the value of liquidity shouldn't be understated. If you have plenty of cash saved (12mos+ expenses) with truly liquid availability (i.e. not in a 401(k) or other retirement account), and no other higher-cost outstanding debt, you should probably consider mortgage prepayment.

I would rate mortgage prepayment as one of the lowest financial priorities, but it is an opportunity for savings nonetheless.
post #18 of 31
Quote:
Originally Posted by mkarim View Post
Thanks. Yes those biweekly programs are just a way for banks to keep your money for free. They keep your first half-payment and only apply it when they receive the second half-payment.


Yes that's what I was thinking. I am currently maxing out both my 401K and Roth every year but I would have to reduce my contributions if I make extra mortgage payments. If I pay off my mortgage first and then max out retirement savings, it may be too late to have significant savings (I'm 40).

Well, as others have noted, it's going to depend in part on your particular financial and tax situation. But note that you're limited in the amount you can contribute to your 401K and Roth each year. Generally speaking, you don't have the opportunity to "make up" the foregone contributions in later years. However, if you end up with some extra cash (bonus, tax refund, giving up the Styleforum FS thread for Lent, etc.) you can decide to throw some extra $ at the mortgage any time you want.
post #19 of 31
Thread Starter 
Quote:
Originally Posted by deaddog View Post
Its all about taxes, liquidity and risk. If you have maxed out your tax-advantaged retirement accounts, maxed out your kid's 529 college plans, don't need the cash flow (that is you have a 12 mos of liquid assets and a reasonably secure income) and you are pretty sure that you cant make a guaranteed return of 5% plus in alternative investments, then you pay it down. IN other words, if you have a mortgage balance of $200,000 and you have a big chunk of cash just sitting in CD's or money markets, then you pay it down.

To me, the key in these high risk/low return investment climates is to carry as little debt as possible.

Plus you get the psychological benefits if you're into that kind of thing.

The balance on my primary in $153K (at 4.75%) with about $50K in equity and balance on rental is $165K (at 4.875%) also with about $50K in equity. Of course those are paper equity, given that you can't actually sell them in this market. Single, no kids, car paid off, so not much pressure on income.
post #20 of 31
Thread Starter 
Quote:
Originally Posted by lawyerdad View Post
Well, as others have noted, it's going to depend in part on your particular financial and tax situation. But note that you're limited in the amount you can contribute to your 401K and Roth each year. Generally speaking, you don't have the opportunity to "make up" the foregone contributions in later years. However, if you end up with some extra cash (bonus, tax refund, giving up the Styleforum FS thread for Lent, etc.) you can decide to throw some extra $ at the mortgage any time you want.
Yes good point. The retirement accounts have a use-it or lose-it window that one should take advantage of. Extra payments on mortgage can be done any time. That's a very important distinction! Thanks to all for valuable advice. Yes I've cut down on SF purchases too
post #21 of 31
interest rates are alot higher where i live, its hard to beat 8% in other investments, especially when you take tax into account.
post #22 of 31
$200,000 mortgage
6%
30 years
Total interest: $231,676.38
Monthly payment: $1,199.10

Adding 1/12 of a payment per month (1199.10 total per year):
Total interest: $182,564.29
Savings: $1,964.48/year

That's a 63% return on investment (it's backended due to the nature of a mortgage, but that is the return on average). You won't get a better return on anything else. The issue is risk of needing liquid assets. Dumping cash into extra payments is clearly a sound idea based on the return, but the excess equity built up with prepayment can't really help you if you need quick cash (outside of a home equity loan, which can take time). You need to determine if you were to lose your job/income if you have a stable foundation of liquid assets to support yourself, as another poster said.
post #23 of 31
unless you can get a rate of return higher than your interest rate, pay off the mortgage
post #24 of 31
if you want to make ben bernanke happy you should heloc this one and roll it over into one or more new properties hopefully using no doc ninja loans
post #25 of 31
Thread Starter 
Quote:
Originally Posted by scientific View Post
if you want to make ben bernanke happy you should heloc this one and roll it over into one or more new properties hopefully using no doc ninja loans

Thought no-doc Ninja loans were long-gone now. Are they supposed to reappear at some point? I had a heck of a time refinancing both my properties, although I am a prime borrower with an 800 FICO.
post #26 of 31
Quote:
Originally Posted by scientific View Post
if you want to make ben bernanke happy you should heloc this one and roll it over into one or more new properties hopefully using no doc ninja loans

Do it and I promise you I'm taking your loans and repacking the crap outta them. CDO market is comin' back, I tells ya.
post #27 of 31
Quote:
Originally Posted by mkarim View Post
Thanks. Yes those biweekly programs are just a way for banks to keep your money for free. They keep your first half-payment and only apply it when they receive the second half-payment.

I thought it was better to pay the biweekly thing - you get an extra monthly payment in every year that way - if you pay monthly, you have 12 payments, but if you pay biweekly, you have 26 payments, so 13 monthly payments - is the $1k or whatever the biweekly payment so much interest that the bank holds for 2 weeks?
post #28 of 31
Thread Starter 
Quote:
Originally Posted by whusurdadi View Post
I thought it was better to pay the biweekly thing - you get an extra monthly payment in every year that way - if you pay monthly, you have 12 payments, but if you pay biweekly, you have 26 payments, so 13 monthly payments - is the $1k or whatever the biweekly payment so much interest that the bank holds for 2 weeks?

Yes it is better to make the equivalent of 13 monthly payments instead of 12 a year. But (apparently) the manner in which you do it makes a difference. In biweekly, the bank holds on to every other payment so onle every other payment is applied towards principal. A much better way is to make one month's worth of extra payment upfront once a year and then keep making regular payments every month. That wwy your lump-sum extra payment will immediately be applied to principal, thus reducing it all at once. The amortization schedule will be recalculated and more of your subsequent payments will also go to principal (lower principal balance means less interest charges which means more towards principal). That's probably why banks encourage the biweekly thing: it gives them free money whereas the one-extra-payment-a-year option only benefits you, not them.

In short, one lump-sum monthly payment is immediate, upfront shot to principal, whereas biweekly pays down the principal much slower.
post #29 of 31
Use extra cash to pay down the principal on the mortgage, with the goal of paying it off in 15 years or less, and set up a home-equity line of credit (HELOC), just in case you need access to the cash later.
post #30 of 31
Thread Starter 
Quote:
Originally Posted by OakCliff View Post
Use extra cash to pay down the principal on the mortgage, with the goal of paying it off in 15 years or less, and set up a home-equity line of credit (HELOC), just in case you need access to the cash later.
I was leaning towards that too. I already have a HELOC with a high limit ($45K) and a great rate (prime minus 1%). I have a balance on that. First goal would be to pay off that balance so I can have access to more money if needed. Then I can make extra payments on principal and still have the HELOC (with zero balance) to fall back on if needed. Thanks.
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