The pre-paying the mortgage question

Yes, yes I am.

No, I’m not pre-paying at the expense of other diversified savings.

Currently our rate is 5.5% (yay Wells Fargo no cost refinance).  We do itemize.

If we buckled under, we could pre-pay it in 4 years. But we have decided not to go that route.

Why?

Mainly for diversification. We want a fully-funded retirement. We want 529 plans. We want to make sure that we’re putting money in the stock market on a regular basis in order to get average returns. We like the tax advantages of retirement and 529 plans. We don’t want to put all of our money in one place– a single house in a single real estate market. Of course, we’re not fully funding our tax advantaged retirement savings (yet) either… Mainly because we don’t have an extra 76K to fill out those accounts, but partly because we’re using some of that to pre-pay the mortgage. (It is SO weird going from only being able to put retirement money in Roth accounts to having way too many options.)

So we’re doing some of each. Somewhere between 15 and 20% to retirement, some to a 529, and some to prepay the mortgage. Right now we’re on a 12 year repayment plan instead of the 29 that would have been remaining in our 30 year refinance if we’d just paid the minimum.

We also have an irrational reason for pre-paying the mortgage even before I’d thought about the issues. Our mortgage is something like XX37.10. I hate writing checks for anything other than a round number. I like writing a check with one or two number(s) followed by a lot of zeroes.

Addendum… we may be doing another no-cost refinance.  4.75%.  CRAZY.  That makes the prepaying decision even more difficult.  What do you think?  Do you pre-pay and why or why not?

Addendum #2:  Savvy Working Gal mentioned the tax benefits.  I was curious to see what the effective interest rate actually is.  Luckily there is a calculator for anything on the internets.  You may also need to know your marginal tax rate based on your income.  With the 5.5% our effective interest rate after taxes (assuming DH keeps his job) is 3.960%.  If we get the refinance, that becomes 3.420%.  Those are pretty low.  Still, with easy-to-obtain savings rates hovering around 0.40% (and inflation hovering around 0%), I think pre-paying will be a good use of extra cash until things turn around.  We can re-evaluate then.

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10 Responses to “The pre-paying the mortgage question”

  1. Savvy Working Gal Says:

    We don’t prepay our mortgage, but our reasons are unique. My sister-in-law is a partial owner of our home which is lake property formerly owned by my husband’s uncle. To keep the transaction less complicated for all parties we decided not to prepay. Instead we refinanced with a ten year low interest mortgage. As of August 1st we only have 3 years to go.

    I heard this same question on Clark Howard’s program this week. He recommended not prepaying if you have a low interest mortgage. In this situation, he feels you are better off saving the extra money. He realizes interest rates on savings accounts are currently low, but will go up again in the future. And don’t forget mortgage interest is tax deductible. He did say if your mortgage is keeping you up at night or if you are close to retirement pay it off.

  2. Florence Says:

    I am a pre-payer. I just can’t stand paying interest. We paid our final house payment last February. Now our housing expense is property taxes, homeowners insurance, homeowners association, and the never ending maintenance & repairs. One of these days, I’m going to sell the lot of it, buy an RV, and hit the road. LOL.

  3. nicoleandmaggie Says:

    Florence– Congrats!

    It is funny how there are all those housing expenses even after you’ve paid down all of the mortgage. Some people who fund their mortgage at the expense of other retirement savings tend to forget that. Plus those expenses are the ones that go up with inflation.
    Still, there’s a big difference in monthly expenses!

    Depressing… I just calculated what my monthly bill would be with only the non-mortgage housing expenses and I could rent an efficiency apartment for that amount. Luckily we don’t have to live in an efficiency. For the cost of the mortgage payment I could rent two or three apartments in town…

  4. Sandy L Says:

    I’ve always rounded our mortgage up to the nearest $100 too. It does actually make a difference over time.

    We also pre-tax contributions to retirement. That’s a given as I really don’t want to pay any more taxes than I have to.

    I added you to my rss feed. I look forward to reading your articles.

  5. nicoleandmaggie Says:

    Wow! Very flattering. Thanks for adding us!

    We’ll have to keep revisiting the mortgage question from time to time. :)

  6. Carnival of Personal Finance #269: THE DIVA$ EDITION | Miss Thrifty Says:

    […] from Nicole and Maggie: Grumpy Rumblings presents The pre-paying the mortgage question, noting that even if you are overpaying your mortgage, it isn’t a good idea to neglect […]

  7. investfourmore Says:

    Some may call me ultra aggressive, I consider my strategy completely safe. I am able to make over 20% cash on cash return by buying rental properties. They doesn’t even consider appreciation, tax savings or equity pay down. I don’t pay a dime more than I have too on my mortgage or car loans. I use that extra money to invest in more real estate.
    Some advantages over paying off my home are instant cash flow(I don’t have to have my home totally paid off to realize actual cash flow), higher returns and tax benefits as far as depreciation.
    Some say they want security in not having a house payment, but I have much more cash flow coming in every month after only two and a half years of investing. Plus I would much rather sell a rental if I need the cash then have to sell my personal residence.

  8. Ask the grumpies: Next stage financial advice | Grumpy rumblings of the (formerly!) untenured Says:

    […] isn’t low enough to make it obvious that you shouldn’t pre-pay the mortgage, but it’s not high enough to make it obvious that you should.  So there’s […]


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