Pay down mortgage early or attempt to invest otherwise?

[Sharon in SC]

Now that our old house has sold, we're in a position to decide whether or not we want to pay down our mortgage early with additional principle each month or use what we would have otherwise put into additional principle to earn interest elsewhere. With the current economy, I honestly don't know the better route to take.

 

Paying off the mortgage early would mean all the $ is tied up in a home we plan to stay in forever (meaning the investment would not be realized 'til we sell it). To invest otherwise, could mean we are more liquid in the case of catastrophe, emergency, etc. Of course, short of catastrophe or emergency, those saved $ could ultimately still go toward paying off the mortage early.

 

BTW - the interest on our mortgage and our tithes are about the only tax deductions we can claim, fwiw. Also, we're in our mid to late 40s in case that makes a difference in the decision to take 30 years to pay off the house or 15. Again, if we made payments as if we were taking 30yrs, we'd be saving elsewhere to actually have the ability to pay it off in 15 if need be.

 

Surely we're not the only ones to face this ?. Please share your thoughts....

 

(Adding content of followup post below for benefit of those reading from this point on:

 

Because each of your responses are linked to the saving for retirement, etc I'll post a further informational response here (should have done this with the OP but didn't think to!). We have maxed our 401K contributions and have other $ invested/saved as well in the name of college, etc. Of course, with the hit savings have taken like this, who can say how much that is ultimately going to be worth in the long run! :-} Additionally, we carry a healthy life insurance, health insurance, disability ins, and long term care insurance.

 

But, to answer your questions - yes, we have the other bases covered as best we can figure. I'm talking purely about $ that will either go towards paying the mortgage down early unless we elect to do something different should it seem a better use of those funds - all in the name of covering the mortgage long term (either actually paying off early and having the $ saved elsewhere to pay off early if need be). Does this make sense? )

Edited December 6, 2008 by Sharon in SC

[Jumping In Puddles]

Before you start paying your mortgage down, save first, then continue to save AND make extra payments on your mortgage.

 

That is what I would plan to do. :)

[Renee in NC]

Do you have 6 months expenses in an Emergency Fund already?

 

Are you already saving for retirement?

[Susie in CA]

Well, we are doing both! If this is the best approach I am not sure. It makes sense to us because we pay down our mortgage quicker and we do save money for emergencies and retirement.

 

I don't agree, though, that a paid of mortgage is an investment not realized until you sell. I believe that you get it back as an investment when you no longer pay a mortgage. Now you have all that extra money!

 

They are always positives and negatives! I am in the no debt is better camp!

 

Warmly,

 

Susie

[Sharon in SC]

Because each of your responses are linked to the saving for retirement, etc I'll post a further informational response here (should have done this with the OP but didn't think to!). We have maxed our our 401K contributions and have other $ invested/saved as well in the name of college, etc. Of course, with the hit savings have taken like this, who can say how much that is ultimately going to be worth in the long run! :-} Additionally, we carry a healthy life insurance, health insurance, disability ins, and long term care insurance.

 

But, to answer your questions - yes, we have the other bases covered as best we can figure. I'm talking purely about $ that will either go towards paying the mortgage down early unless we elect to do something different should it seem a better use of those funds - all in the name of covering the mortgage long term (either actually paying off early and having the $ saved elsewhere to pay off early if need be). Does this make sense?

Edited December 6, 2008 by Sharon in SC

[C_l_e_0..Q_c]

We chose to pay down the mortgage in one big lump payment. Now we have that extra money each month to do with as we please.

We also have a nest in case of emergency.

And we can remortgage our house as needed (never had the need so far, but we can!) So it's money you can still get to without selling.

 

On the other hand, right now, is a GREAT time to invest. Every stock is dirt cheap! When we faced the same decision, the markets were really really high.

Honestly, if it were us, I would choose to invest for the next 10 years.

[Sharon in SC]

We chose to pay down the mortgage in one big lump payment. Now we have that extra money each month to do with as we please.

We also have a nest in case of emergency.

And we can remortgage our house as needed (never had the need so far, but we can!) So it's money you can still get to without selling.

 

On the other hand, right now, is a GREAT time to invest. Every stock is dirt cheap! When we faced the same decision, the markets were really really high.

Honestly, if it were us, I would choose to invest for the next 10 years.

 

You make a good point about, if need be, remortgaging allowing you access to the investment. I hear you, too, about the buying low principle. I'm afraid, with $ already tied up in investments and watching those balances deteriorate with each statement, it becomes a little scary to think of making even more funding vulnerable, kwim? :tongue_smilie:

 

Thanks for the response.

[klmama]

Pay it down!!!!! If that means you only put an extra $50-100 toward the mortgage every month while you put together a 6 month emergency fund and save for retirement with the rest of the money, do it. Even that small amount will shave years - YEARS!!!! - off your mortgage. Find a mortgage calculator and see what the difference would be. Then, think of what you could do with the money now going toward the mortgage payment after your house is paid off, and smile! :D

 

Also, keep an eye on interest rates. Sooner or later they will drop, and you can refinance. Again, use a mortgage calculator to find out what rate you need to have to offset any new closing costs or refinancing charges, and shop around at reputable banks and credit unions until you find it. (Our credit union's rate has consistently been lower than the area bank rates.) We have refinanced our house twice since we bought it, but each time we have continued to make the exact same payment - the required amount, plus extra 50-100 a month. We started with a 30 year mortgage, went to a 15 year one, and now have a 10 year mortgage which we'll have paid off in two more years at the rate we are now paying. At that point we will have been in the house for 16 years total.

 

So, yes, put together at least 6 months of emergency funds, pay down your mortgage with a little extra every month, and fund your retirement. A little bit toward all of those things is good!!!!

 

Oh, and regarding your tax deductions - don't forget to deduct any charitable contributions to Goodwill or other second-hand stores. You can deduct the resale amount of anything you donate. Just itemize your list of donated items, take a look around the store to find out what things sell for, and assign prices to your list. The Goodwills in our area have brochures in the store explaining their pricing structure - yours might, too.

[Sharon in SC]

Pay it down!!!!! If that means you only put an extra $50-100 toward the mortgage every month while you put together a 6 month emergency fund and save for retirement with the rest of the money, do it. Even that small amount will shave years - YEARS!!!! - off your mortgage. Find a mortgage calculator and see what the difference would be. Then, think of what you could do with the money now going toward the mortgage payment after your house is paid off, and smile! :D

 

Also, keep an eye on interest rates. Sooner or later they will drop, and you can refinance. Again, use a mortgage calculator to find out what rate you need to have to offset any new closing costs or refinancing charges, and shop around at reputable banks and credit unions until you find it. (Our credit union's rate has consistently been lower than the area bank rates.) We have refinanced our house twice since we bought it, but each time we have continued to make the exact same payment - the required amount, plus extra 50-100 a month. We started with a 30 year mortgage, went to a 15 year one, and now have a 10 year mortgage which we'll have paid off in two more years at the rate we are now paying. At that point we will have been in the house for 16 years total.

 

So, yes, put together at least 6 months of emergency funds, pay down your mortgage with a little extra every month, and fund your retirement. A little bit toward all of those things is good!!!!

 

Oh, and regarding your tax deductions - don't forget to deduct any charitable contributions to Goodwill or other second-hand stores. You can deduct the resale amount of anything you donate. Just itemize your list of donated items, take a look around the store to find out what things sell for, and assign prices to your list. The Goodwills in our area have brochures in the store explaining their pricing structure - yours might, too.

 

Thanks for chiming in. The emergency fund is funded, retirement contributions are maxed, and insurances bases are covered. we're definitely watching the interest rates for potential to lower the interest rate (our current rate is 6.5% taken out in 2006). I do claim Goodwill contributions (usually $1/item just 'cause that's easier for me than trying to individually price things).

 

I guess I'm still wondering - I hear you and others who have mentioned the benefit of the freed $ once the mortgage is paid off. But, if I can take the additional principle $ and invest it elsewhere (leaving the $ more liquid, if you will) and still pay the mortgage off early, it seems that might be the best of both worlds. The mortgage payment is still released early but the $ to be used to do that has been sitting, rather than tied up in the mortgage, in another account possibly earning more interest than the rate of the loan???

 

Honestly, to try to think through all the possible case scenarios is mind boggling! :willy_nilly:

[Renee in NC]

I think it comes down to returns.

 

If you use the money to pay down the mortgage, then you are technically earning whatever percentage your mortgage is, ie. if your interest rate is 5.5%, then you are earning 5.5% on your money, right?

 

Can you earn more than 5.5% in some other investment?

 

I don't know if you need to worry about liquidity so much since you have other sources of emergency cash. HOWEVER, I get what you are saying about not realizing your gain until the house is sold (which you don't plan to do.) Calculate it both ways - one way where you pay the mortgage and realize your earnings (savings) and the other where you invest it, earning the same rate (be sure to calculate inflation in there somewhere.)

 

So, it comes down to risk as well - which is the riskier investment? Can you afford to lose the money? It seems half a dozen of one 6 of another, but the mortgage payoff is lower risk (in this market anyway!)

[Caroline]

We chose to pay down the mortgage. Was this the wise money thing to do? I don't know. But I do know we feel better with less debt. (Our mortgage is our only debt.) For us this plan worked. But I do understand the dilemma.

[klmama]

Thanks for chiming in. The emergency fund is funded, retirement contributions are maxed, and insurances bases are covered. we're definitely watching the interest rates for potential to lower the interest rate (our current rate is 6.5% taken out in 2006). I do claim Goodwill contributions (usually $1/item just 'cause that's easier for me than trying to individually price things).

 

I guess I'm still wondering - I hear you and others who have mentioned the benefit of the freed $ once the mortgage is paid off. But, if I can take the additional principle $ and invest it elsewhere (leaving the $ more liquid, if you will) and still pay the mortgage off early, it seems that might be the best of both worlds. The mortgage payment is still released early but the $ to be used to do that has been sitting, rather than tied up in the mortgage, in another account possibly earning more interest than the rate of the loan???

 

Honestly, to try to think through all the possible case scenarios is mind boggling! :willy_nilly:

 

It sounds like you've covered your bases and now just want to do the best with what's left. Is this the first year of your new mortgage? Right now, I still think you'll get your best return on your money by paying down the mortgage. You have to remember that 6.5% interest you are paying on your total mortgage amount may add up to a lot more money over 30 years than even higher interest you might earn on any smaller amount of money you could invest. The early on extra payments make a much bigger dent in the overall amount paid for a house. Even if you make just one additional full payment now, with smaller amounts over the rest of the year, it will make an enormous difference in the total paid. Again, work with a mortgage calculator to see how that would affect your total. You may be surprised how that big chunk paid up front will affect the total.

 

Once you've figured that out and are satisfied, go ahead and invest the rest of your surplus! You do want to have some flexibility. Dh takes care of our finances, so I may not have all the details quite right, but I do know he invests in no-load mutual funds for our mid- and long-term savings (additional retirement funds beyond 401K/IRA, car replacement, major home repairs/appliance replacement) and has recently moved our liquid reserve to some online bank recommended by Kiplinger's, as the interest rate was much higher than we were getting in money market CDs. We do have a month's worth of money in a local savings account tied to our checking for immediate access in case of emergency, but the interest there is miniscule.

 

As for Goodwill contributions, you are selling yourself short at $1 an item! That is much lower than the resale price from a second hand store, which is what you are allowed to claim. A pair of adult jeans goes for $7.99 at our local Goodwill. Pick up the brochure the next time you are in, or just walk around the store for 5 minutes to jot down the prices. The extra 15 minutes it might take you to assign prices to your itemized list could save you a significant amount on your taxes, depending on how much you donate. That said, only claim the resale amount on items that are in good enough shape to resell! They do resell poor quality items for rags, though, so it's still okay to pass those on to Goodwill. I just don't claim them on my list of items.

 

HTH!

[Wendi]

I like Dave Ramsey's baby steps. If you have an emergency fund of 3-6 months' worth of expenses (with the recession, I'd think 6 would be better!), the next step is investing 15% of your income for retirement. So that would go into mutual funds. Next is kids' college funds. After that, are you saving for vehicles, furniture, home repairs/improvements that you foresee? I'd be putting some $$ aside every month for these if needed. The rest I would put towards my mortgage.

 

Wendi

[Sara R]

This is a smart idea in normal times. It is an even smarter idea in uncertain times like these, assuming you are sure to stay in the house. You'll be saving about 6% on a totally safe investment in a time when safety is difficult to find.

 

The only other question would be about your husband's job. How secure is it? Any possibility you might be forced into a move?

[kalanamak]

I like Dave Ramsey's baby steps.

 

Next is kids' college funds. After that, are you saving for vehicles, furniture, home repairs/improvements that you foresee? I'd be putting some $$ aside every month for these if needed. The rest I would put towards my mortgage.

 

 

I've never read DR, but really he says fund the college funds before paying down mortgage? Hummm. My parents put only one child of 6 through college. The rest of us made other arrangements, and all of us went onto further degrees.

 

I did mortgage first (OH, what a nice feeling) and then college fund with estate from my folks.

Edited December 7, 2008 by kalanamak

[Kathy in MD]

Since this is the home you plan on staying in, you might try making it cheaper to run and maintain in the long run. And given that construction is down, you should be able to get good prices and service from the better home and remodeling contractors in your area.

 

A few things you might consider are:

 

Increasing your insulation

Reducing air infiltration

How old is your roof?

How old is the mechanical system?, electrical? plumbing?

Solar power, solar hot water heater or other alternatives

Replace wood exterior trim with vinyl (for when you have to hire people to climb on ladders and paint)

Replace windows with high quality windows.

Install gutter guards (avoid ladder climbing)

If you want to remodel bathrooms, install blocking for future grab bars, possibly enlarge for walkers or wheelchairs. Remember to enlarge doorways at the same time for wheelchairs.

 

If you're fine with this, then I'd pay off the mortgage ASAP

[LMA]

How about make one extra payment (= amount of your monthly amount) toward principal only each year? You will reduce your mortgage by years if you do it once a year. Here is a link that explains it.

 

http://www.mortgagecalculatorsplus.com/articles/how-can-an-additional-payment-each-year-change-your-mortgage.php

 

I would not put all my extra cash just toward the mortgage in this economy. I would make the one extra montly payment and save the extra money in CDs and other safe investments. This is what we are doing right now since our stocks are in bad shape.

[KarenNC]

Will you face any capital gains taxes on the money if you don't use it toward your current home? I have no idea, just seem to remember this being a possible issue for some folks.

[Lawana]

If you know of an investment that is totally secure and pays more than 6.5% interest I'd sure like to hear about it! Seriously, our mortgage is paid off and trying to find something secure to invest in that even keeps up with inflation is hard.

 

Lawana

[TraceyS/FL]

There is that point too.

 

I"d probably do 1/2 and 1/2 and revaluate in 6 months. Maybe build to a quick access/very liquid 6 month emergency fund given the current economy - then pay down? Gee, it's hard to say! Oh heck, just send it to me and i'll put new windows in :D (i'm joking! LOL!!!)

 

As someone with no mortgage - i can't tell you how freeing that is, but we don't need the tax deduction either. LOL!!

[Sharon in SC]

The only other question would be about your husband's job. How secure is it? Any possibility you might be forced into a move?

 

Well, it's probably about as secure as one can be in this day and time (state employed physician). Should his current position go bad, I, thankfully, would not imagine he'd have too much trouble finding a replacement job.

[Sharon in SC]

Great ideas, Kathy!

[Sharon in SC]

Will you face any capital gains taxes on the money if you don't use it toward your current home?

 

No, because we lived in it at least 2 of the last 5 years.

[Sharon in SC]

..... trying to find something secure to invest in that even keeps up with inflation is hard.

 

Lawana

 

exactly.

[Sharon in SC]

....but we don't need the tax deduction either. LOL!!

Whoo, boy. We definitely NEED the tax deduction! :tongue_smilie:

[Vida Winter]

Sharon,

 

I've been trying to figure this one out myself. Your house payment is fixed rate, I assume. If so, your payment will not change. But if the government starts printing money to fix their problems, inflation will result. So the cost of ordinary things - food, just about everything will rapidly increase. Make sure you have a long term non-perishable food supply. You can use that no matter what happens. Also, if you have any big purchases that could be bought now, you may be in a position now to afford them better than later. For instance we just bought a generator. We live in a remote area and power outages are sometimes a problem in the winter, so it was always our plan to get one - we just did it now instead of later.

 

Dana

[TraceyS/FL]

LOL, i can relate - the "perk" of being poor right now... not needing it. I remember when i DID need it though! And then some...... :tongue_smilie:

 

I think i'm not jealous of being in your shoes right now. I'm not sure what direction we'd go if we were as well covered as you - i'd probably decide while on vacation somewhere though! LOL!

 

I guess just trying to figure out the best ROI and long/short term tax implications. I could need some adult beverages while pondering it! :tongue_smilie:

[Peek a Boo]

if you are set as far as all the other bases go, then I'd split the difference:

 

25% to mortgage

25% to increase emergency fund [immediate access to funds]

25% to investment

25% to remodeling -even if the only remodeling it needs is cosmetic dream-land stuff ;)

 

happy spending!

[Sharon in SC]

Sharon,

 

But if the government starts printing money to fix their problems, inflation will result. So the cost of ordinary things - food, just about everything will rapidly increase.

 

I think you've been listening on conversations we've had with friends, lately. :tongue_smilie: One friend, in particular, made this very point. If things are going to cost more in the future, it may be wiser to use available resources to, rather than buy down the mortgage, purchase things we KNOW we'll need in the future 'cause they're theoretically cheaper to buy now than they will be in the future.

[Amy loves Bud]

For us it was pay the mortgage. We were in the same boat as you it sounds like - no other debt, emergency money, retirement, etc. all where they needed to be. Paying the mortgage put us in the situation that if terrible things happen, we won't have to add the terrible thing (which it would be for us) of selling and moving.

 

And don't let the tax deduction sway you. If you pay $1000 each month in interest and are in a 25% tax bracket, then you still pay $750 per month that you wouldn't have to pay if you owned the house. I'd rather keep my $750 and pay bit more tax.

 

This is also our "forever home". And we see the return on our investment every single month we don't make a mortgage payment and that money gets invested elsewhere. We don't have to wait till we're in the retirement home to sell and get the advantage - we're getting it now.

 

Yes, the possibility exists for bigger returns on other investments. But as we've all seen recently, the other possibility exists, too. Security in today's economy is very valuable and can be difficult to come by. We opted for security over potentially higher gains. We're good with that trade off.

[Sharon in SC]

We opted for security over potentially higher gains. We're good with that trade off.

 

That's definitely something to chew on.....thanks for posting!

[Rosy]

I would consider buying a rental home/duplex if you can. This is such a great time to invest in real estate, and while stocks are cheap right now, we really don't know how much worse they're going to get before they get better, which businesses are going to go under, etc. If I wanted to put money toward my kids' educations, I'd rather buy a rental and sell it when it was time for college than put it in the stock market at this point. Just my humble opinion. :)

[Peek a Boo]

I would consider buying a rental home/duplex if you can. This is such a great time to invest in real estate, and while stocks are cheap right now, we really don't know how much worse they're going to get before they get better, which businesses are going to go under, etc. If I wanted to put money toward my kids' educations, I'd rather buy a rental and sell it when it was time for college than put it in the stock market at this point. Just my humble opinion. :)

 

 

we're actually considering something like this .......

[lynn]

I think it is not a good idea to just pay down your mortgage in a lump sumfor if something happened and you could not make your mortgage payment you'd loose that lump some if for some reason you had to foreclose. From what I understand you save and then whenhave enoughyou pay off the mortgage amount.

[MgoBlue]

We pay additional on our mortgage every month because we're both close to 50 and have a 30 yr mortgage. Yikes...that's scary. With every extra payment, we're cutting months off the other end of our mortgage. I don't see how that can hurt us. We have a lot of equity so even if we had to sell this house at a substantial loss from what we paid...we'd still be ahead. I hate the thought of having to sell...but we're dependent on General Motors and times are scary!

Paula

[Mrs. Readsalot]

We asked ourselves the same question 8 years ago. Fast forward 8 years and I can tell you we will be paying off our house this month, and wow does it feel good. We have only lived in the home for 8 years and it was new when we purchased it. Now interestingly if we had invested that money during the last eight year we would have taken a huge decrease at several times, especially recently. I can't tell you how glad we are we made the decision to invest in our home. Also pull out you loan pay back schedule and you will notice the more you pay early the bigger your realized benefit. Early on in a home loan most of your payment is going for interest. At time we would send in extra and discover we had eliminated 10 payments. I know not everyone thinks this is financially wise, but as for us we are happy campers!!!

[Mommyof4ks]

I too would split the money up; the 'don't put all your eggs in one basket' mentality. We focused on paying down our mortgage a few years ago after maxing out our other options or so we thought, and then our son was diagnosed with a life threatening illness. Even with wonderful ins. it was a stretch to make ends meet that first year of his treatment (we are no longer paying extra and using that to pay medical bills). We had planned for job loss and college, but the thought of something like this never occurred to us. What I am saying is pay extra on the house, but be sure to invest some money in other things so you can get to it just in case (stocks are dirt cheap right now and the rich are out on a spending spree lol).

 

Take a vacation too! Life is too short to save everything; trust me this is a lesson we learned the scary way! If you are as secure financially as you can be then enjoy the fruits of your labor!

[Audrey]

This is absolutely a no-brainer for me. Pay down the mortgage. Get rid of that burden.

 

As someone who has worked very hard to do just that, I can tell you that there is no more FREEING feeling than knowing that your home is YOUR home! You will never have to worry about having a place to live. While others are frantic about the economy and being able to hang on to home they can no longer afford, you can sleep easy at night knowing your family won't ever be out on the proverbial street, and that you have an unburdened asset!

 

We paid off the farm a little over a year ago and have not ever regretted the hard work it took to get to this. It is a peace of mind that I cannot express adequately in words. I just know that if I had to do it all over again, I would without hesitation.

[cillakat]

Do you have 6 months expenses in an Emergency Fund already?

 

Are you already saving for retirement?

 

 

2nd.

 

1)1,000 in emergency fund (totally liquid/available)

2)no consumer debt (none!....all pd off)

3)then work on getting emergency fund up to the level of 3-6 mos of expenses....3 mos if you're both working in *very* stable jobs....6 mos if only one of you is employed (or if either are self employed)...liquid/available funds. I like some of the high yield checking accounts that are around 6% right now.

 

 

 

if that's *all* done then

4) 15% of gross in investments

 

if you're on track with that then

 

5)college savings (529's)

 

if you're on track with that, then

 

6)work toward paying mortgage off faster

 

Can you tell I'm a fan of Dave Ramsey? His plans and ideas....not so much his personality and discussion style:)

 

I'd also be socking cash away for next car puchase (ie plan on purchasing with cash.....have money for house/car repairs budgeted....ie they aren't 'emergencies' and don't constitute reasons to use emergency fund once you're in step 3.

 

:)

K

[rafiki]

.

[TwinMominTX]

What great suggestions. I am seeing this with both my in-laws and my parents. The homes themselves aren't what is costing them so much, it is the upkeep and maintenance that is eating away at savings.

[Colleen]

Pay off the mortgage.

[Liz CA]

Pay off the mortgage.

 

Absolutely! This will give you an instant "pay raise" which you then can invest profitably.

[Tap]

We changed this year from always paying extra on our mortgage to putting it in a interest bearing savings account. Our mortgage is 4.75% and our savings is 3% or more. We loose 1.75% doing this but for the difference of about $200 per year, we would rather have the extra available to us right now. We have put some in a higher yielding 6mth and 12mth CD. So the loss is really less than the $200. We have decided that once the economy settles down we can just switch the money over to the mortgage later, but we can't switch it back out from our mortgage if we need it now.

 

 

This may not be the best method for everyone, but for us it helps us stay sane by knowing the money is set aside, but still is accessible in emergency.