Mortgage Update and a worry

Last Month (November):

Balance: $150,516.80
Years left: 14.25
P = 618.61, I = 595.80, Escrow = 591.95

Another month with another extranormally large lump sum payment.  We will not be able to do this again unless we do additional consulting or win prizes etc.  The maximum extra payment would be 3K, and that’s only before February (when we have to start saving for the unfunded summer) and assuming the stars align.

This Month (December)

Balance: $136,704.56
Years left: 12.5
P = 673.28, I = 541.12, Escrow = 591.95
One month savings (difference between predicted interest for next month vs. actual interest): $52.23 (this is on top of the savings from last month, I’m just looking at the marginal change for this month’s extra payment)

This brings me to my worry.  Am I paying down too much?  Will I end up paying down too much?

That GRS amortization spreadsheet is addicting.  It is so tempting to cut into the emergency fund– we’ll just refill it next month or the month after.  Why not drain it now?

Because we can’t be fired without a year’s notice, we keep exactly one month expenses in emergency fund during the school year and 4-5 months in the summer, give or take.  In a true emergency I have some taxable stocks that could be liquidated, but I prefer not to do that because it’s such a tax hassle and because I like letting things float in the market just on general principal.  These taxable stocks also balance my portfolio with things I can’t get in my work retirement account.

The problem with putting extra money in the mortgage pre-payment is that it’s not accessible.  It’s not like stocks which can be sold (even at a loss) or even CDs or bonds that can be broken.  In theory, a home equity loan could be gotten, but… when bad things happen sometimes you can’t get that loan precisely because bad things are happening.

What if DH leaves his job?  What if we need money for moving expenses?  What if we want to take an unpaid sabbatical?  Or unpaid leave for a second child?  These things take time to save up for.

Summer also takes time to save up for.  Currently I have no summer money coming– I’ve been taking my grants as research assistance instead because time is so valuable.  But maybe I should start getting more income instead of time.  It’s hard to say.

The worry is that I’m going to cut the emergency fund too close in order to pay down the mortgage and thus make us feel artificially poor (or have to liquidate stocks I don’t want to liquidate) and we’ll have to cut back heavily next August and September.

One of the things I like about spending less than we earn is that it provides the freedom not to worry about all of the above.  But when you start pushing on a goal that isn’t easy to reach (like paying off the mortgage, or getting to financial independence for at least one spouse), all of a sudden you have to start worrying about these things again.  And I’m not sure I like that.  Balance is really difficult and maybe I should stay inside the comfort region, or maybe I should push out of it so that the comfort region is even larger later.  It is very difficult to say.

We could cut our expenditures dramatically over the summer if we had to (without reneging on any of our fixed obligations), but that would make us unhappy.  I don’t really want to live on split peas and meatless chili again.  But we also don’t want to overspend if there’s an emergency.  Where’s the line?

Anyhow, come February we have to start saving for the unpaid summer months so the mortgage payment updates will get a lot less interesting.

How do you balance pre-payment/debt payment with the need for cash?  If you’re debt-free except mortgage, do you keep yourself feeling artificially poor on purpose?

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35 Responses to “Mortgage Update and a worry”

  1. First Gen American Says:

    I paid off my primary mortgage at the end of last year. You are right, it is truly addictive, especially when you get within reach of payoff. Toward the end, we drained almost all of our liquid savings just to have it over and done with.

    We paid our house off in 10 years and what’s amazing is that 1. time flies (so if you have a 7 year or 10 year payoff plan, it’ll get here in no time)
    2. Little bits do help. I always rounded up to the nearest $100 no matter what.

    My husband was the voice of reason and he kept a bigger buffer than I did in his checking account. I actually hate having liquid money around not working for me in some way.

    I also personally like feeling poor because it makes me budget better. I had extra in my checking account this month and I totally blew all the dough and then some on presents, booze, movie tickets, etc because I was feeling generous.

    I personally would always try to pay a little extra every month. You wouldn’t think that extra $50 makes a difference but it does.

    I really still am pinching myself that it’s done and all those times I sent an extra $1000 here, or an extra $75 there actually helped me get to my goal. Do you use your tax return for summer savings or can you put that toward the mortgage? I know for me, it’s the windfalls (bonus’s, tax returns, selling stuff, etc that put the biggest dents in the balances).

    Now to finish off my mom’s mortgage and then I can really start thinking big about what to do with extra income.

    • nicoleandmaggie Says:

      We always do round up to the nearest 000… but since the refinance and increase in property taxes, that isn’t as much as it used to be.

      We don’t usually get money back for taxes– we usually have to pay extra. Or if we get money back it goes right out again as estimated payments. Last year we did get substantial money back but that was a one-time thing (and it did go the the mortgage). The daycare savings account goes to summer savings… though we won’t be getting that next year and school costs will be going up.

  2. Meg Says:

    I feel the same way…but right now, it’s not with the mortgage. It’s with our revolving debt. I feel like I cut myself too close at times (like this week!) and then we scrimp for a week or so until hubby gets paid. We try to live off of his income as much as possible, but that’s not always feasable.

    December is a month with alot of expenses for us. We are going on a trip to Florida (I won it – but will get a 1099 for it at tax time,) propane fill-ups that I dont budget for (so that I can pay more each month toward debt,) property taxes on two houses (we dont have an escrow account by choice,) and finishing up Christmas shopping.

    I use calculators all the time for our mortgage payoff, and you’re right, it’s very addicting. We hope to start paying down the mortgage by the end of next year when our last debt is done and the emergency fund is at least 3 months. If we pay $1,000 on the mortgage a month, the mortgage will be paid off in less than 5 years. That’s a pretty amazing feeling, but I want to make sure that doing that doesnt cut into our retirement fund, our fun-money, and home improvements.

    Oy. I guess I’m with you more than I thought. :-) I am getting anxious just thinking about all of this.

  3. Enough… | Single Mom Rich Mom Says:

    [...] like Grumpy Rumblings, not paying off the mortgage and making myself cash poor but choosing to feel safe with lots of cash in the bank [...]

  4. Jacq @ Single Mom Rich Mom Says:

    In hindsight, I’m VERY glad that I didn’t put all my extra cash into the mortgage and had it available to invest during the market drop of 2008-9. A 25%+ return has been a lot better than under 3%. I even cashed out of a couple of investments this month and am holding the money in a money market fund and small interest bearing account so I can take advantage of any opportunities that come up.

    I kind of did both by just increasing my payments as I made more and went in to the bank a couple of times and threw a few thousand bucks onto it just for giggles. I don’t like having all that money held up in something that’s very difficult to access.

    • nicoleandmaggie Says:

      Hm… I’m really too lazy to try to time the stock market. But Warren Buffett definitely keeps cash reserves for just such opportunities.

      I wish our mortgage return was under 3%! Even with the tax advantage it’s still closer to 4. We could refinance again in a bit and get 3.75, but it’s hard to say if we’re going to be able to pre-pay enough before then (or sell) to make the break-even point. There’s too much uncertainty in our future.

  5. Lindy Mint Says:

    I have had that thought before too – that once you pay towards your mortgage, that money is just sort of gone (even though that’s not really the case).

    I’m not often the wealth of financial wisdom, but in our case there is something to be said for a nice and cushy emergency fund. We also have to budget for unfunded summers using our short-term savings. If the summer gets really tight, it’s nice knowing that we have that extra amount in our long-term savings if we need it (though thankfully we haven’t needed it yet).

    • nicoleandmaggie Says:

      It isn’t gone, but it sure is difficult to access. Which is a good thing. But does make pre-paying a lot cutting it close.

      I don’t like not being able to order pizza in September. (We get paid in October.)

  6. Molly On Money Says:

    Paying down that interest on the principal is a good thing……
    It is a dilemma. Our emergency fund would help us out for 6 months if one of us lost our jobs. Once we had an emergency fund we wanted to start paying off our mortgage aggressively but opted to build our savings instead. Neither one of our jobs is secure and so that’s why we decided to go that route!

    • nicoleandmaggie Says:

      That makes sense. We don’t currently have a 6 month emergency fund, precisely because we could build one up after getting the year warning. We do have stocks that could be liquidated to get us through a true emergency situation, and we’re insured up the wazoo (disability, umbrella etc.).

  7. Mom of five Says:

    Well, we’re debt free except for our mortgage. We still owe about 145k over 13 years (of a 15 year mortgage). If we had the last five years to do over, we’d have lived more frugally so we’d have mortgage paid off now. Although our income is high, our mortgage is relatively low, and I do worry that our income may suffer significantly in the next few years.

    I figure that our mortgage is low enough that we will always be able to pay it even if we have to scramble with minimum wage jobs. Right now I’m just not comfortable we’ve got enough saved so building up the savings is now priority number one.

    • nicoleandmaggie Says:

      It’s always nice to have been frugal in the past. :)

      Our mortgage is low enough that we could pay it on one salary… but really our required escrow is pretty substantial. We wouldn’t be gaining *that* much money once it’s paid off. A nice amount, but we’d still have to be paying a full third of it in insurance and taxes.

  8. Linda Says:

    Seems like you’re trying to make a quality of life decision here, not a financial decision. You’re taking care of your financial responsibilities and making headway towards some goals that ensure your financial stability. So faced with this type of decision, I’d personally go for the balance that makes me happiest in the short term.

    Maybe it’s because I’ve recently been through a loss that I’m more sensitive to these things, but you never know what will happen to you or your family members tomorrow. So what if it takes you an extra year or two to pay down the mortgage? Take some time to enjoy your life while you can.

    I’m not advocating throwing caution to the winds and spending like a drunken sailor. But you should feel good about leaving enough slack in your budget and goals for those little things that make life better for you such as good food and fun times.

    I could be throwing lots of extra money at my mortgage right now, but instead I’ve decided to put that extra money in a travel fund that will allow me to take a “big” vacation every year and a few other small vacations along the way. For example, I’m hoping to spend 10 days in Spain in January and am trying to nail down final details now. I’m looking for a travel companion so I can save a bit on accommodations by sharing. Anyone want to join me? :-)

  9. Everyday Tips Says:

    I vote that you relax on the mortgage a little so you don’t have to worry about ‘life’. It is admirable that you want to be debt free, but there has to be a balance between living and being financially responsible. You obviously have the responsible part down, but you need to enjoy your life too. I would have as much saved as you feel comfortable with, invest some, and put the balance toward the mortgage.

    I owe about 145,000 on mine and it is due to be paid in about 7 years. Whereas I am so tempted to move that timeline up, I want to travel with my family too. Not to mention I never know when my house is going to need this or that!

    • nicoleandmaggie Says:

      So true about needing this and that. The gremlins have been relatively quiet for about a month.

      I’m wondering if next semester we should hire a personal assistant. DH has been taking care of an awful lot of stuff himself.

  10. frugalscholar Says:

    I had a higher rate mortgage, so the extra payments were easy to justify as rates continued their steep decline. At the end, it’s almost all principle.

    I think this is one thing where whatever you do is good. Not many things are like that!

  11. First Gen American Says:

    Just to add to what the others said, even though I am a big believer of early payoff, I still managed to take 1-2 family vacations a year. That never got cut out of our budget. There was only 1 year we didn’t go away in the last 15 and that was more a function of me being very pregnant than anything else.

  12. Physician scientist Says:

    You are crazy to pay this off early. This is the cheapest money in the last 50 years and its tax deductible. The functional interest rate on this money (after tax deduction) is probably 2.5-3%. You can put the extra money in 10 safe stocks, each yielding 2-5%, AND have access to it in case of emergency. This is a no-brainer and I think any good financial adviser would tell you to not prepay the mortgage.

    • nicoleandmaggie Says:

      Don’t worry, we have plenty of cash in stocks, even ones without a tax penalty. (And if we sold all of them I think we could completely pay down the mortgage by the end of the year, but I am happy with our current stock portfolio as it is and do not want to sell.)

      Our interest rate is 4.75%. We would have to spend more money refinancing, and we can’t right now anyway. Our functional interest rate is not 2.5-3%. It is 3.42%. Currently our savings account is 0.55%. This is money that had been sitting in savings.

      It’s about diversification. This is the real estate portion of my portfolio. It’s also a safe investment. You can read more here: http://nicoleandmaggie.wordpress.com/2010/07/31/the-pre-paying-the-mortgage-question/

      When interest rates creep up, we’ll stop pre-paying. Right now this is the best choice for us. The question is more should we stop spending and direct that money to the mortgage, and I think the answer is no. Though perhaps we should (or put that money to stocks… whatever). I don’t want to and I don’t have to… not until we have another kid or DH leaves his job.

    • Everyday Tips Says:

      I disagree a little on this one. I depends on where you are at in the mortgage term. For instance, at the beginning of our mortgage, we paid about 75 percent in interest, very little in principal, to the tune of about 14,000/year. The tax deduction is not worth tossing all that money out the window to me. If you can pay down that mortgage to a point where interest is negligible, that is optimal in my opinion.

      • nicoleandmaggie Says:

        I think it really is easiest to see how this works with an amortization spreadsheet. It’s pretty powerful. You can directly compare rates of return over time based on when you make early payments. Problem: it can be addicting.

      • Everyday Tips Says:

        That amortization spreadsheet can absolute drive you to pay down that mortgage, that is for sure.

  13. Alexicographer Says:

    Our effective mortgage rate is around 3%, and while it’s true we can’t make that much at the moment in cash equivalents … I absolutely cannot imagine wanting to pay a loan that cheap ahead of time. You write, “When interest rates creep up, we’ll stop pre-paying.” Well, OK. But when interest rates creep up, we’ll have cash sitting around to start earning interest immediately … (if interest rates never go up … hahaha … then we’ll just take the lump sum and pay the whole thing off (or as close as we can get) when the value of the interest deduction goes to zero for us).

    I’m pretty much with physician scientist on this one, but as frugalscholar notes, either approach is probably decent.

    • nicoleandmaggie Says:

      Like I said, it is about diversification. I would rather do this than invest in REITs. I would rather put this money in a safe investment than in my savings account or a CD or bonds (though we do have some money in bonds).

      We have a LOT of money in stocks. We are not JUST prepaying the mortgage.

      • Alexicographer Says:

        Sure, but that’s not the point of my comment … the point of my comment was I’d rather be sitting on a pot of cash (= diversification, safe investment — same thing you’ve got) earning lousy interest now because I expect interest rates to go up a bunch in the future and I know my mortgage won’t (it’s fixed, and cheap, as I surmise is yours).

        You’d rather prepay and earn more now even if doing so ends up costing you in the future (if interest rates rise). Which, fair enough, but that’s what your strategy achieves relative to mine … not relative to all alternative strategies, just this one (save cash versus prepay).

        Though upon reflection you were actually asking about spending less to prepay more, and there I have to say it depends. We haven’t cut back/out on plenty that we could because, basically, of the sort of thing everyday tips said above — would rather have money to spend on fun stuff (hobbies, trips) now than save (more) for later — but without knowing you I really don’t feel I can tell you what you “should” do in this regard.

      • nicoleandmaggie Says:

        There will be extra cash in the future to put in cds and savings and bonds. Heck, we could even cash out stocks. Interest rates have been pretty low for a long time now and I think they’ll continue low for a while. My mortgage is cheap for a mortgage but it’s a pretty good rate for a CD even when CDs were hot stuff. I don’t think safe investments will beat my effective mortgage rate (see previous comment… something like 3.42) in a short enough time to make saving so that I can invest in other safe investments in the future worthwhile.

        It is still early enough in the refinance that the prepayment gains are quite substantial.

        Plus there’s no guarantee the mortgage deduction will be so generous going forward…

      • Alexicographer Says:

        Fair enough.

  14. Kevin@InvestItWisely Says:

    Right now we swing between 3-6 months expenses. I wonder about the mortgage. Our approach will probably be to pay it off double-speed, but not necessarily because of the interest. At 3% or less, the interest isn’t huge, and the point that if rates rise, so would returns does make sense. It would be more about getting out of the rat race. Without a mortgage to pay for, you depend on your job that much less.

  15. Squirrelers Says:

    Interesting….for me, it’s first about emergency fund/cash reserves, then debt elimination. Now, I can’t stand debt and would normally rather do away with a loan first, and then focus on other things. However, I put a true emergency fund first.

    To pick up on some of the other discussion here, I would personally pay off debt as soon as possible regardless of how low the interest rate is. Debt is debt, and there’s the sleep well at night factor. I can see how it would be addicting to pay off aggressively.

  16. A Lesson About Adsense - And Also Some Of My Favorite Reads | Everyday Tips and Thoughts... Says:

    [...] Grumpy Rumblings of the Untenured try to balance paying down the mortgage and keeping enough money around for other pursuits/emergency savings. It is a fine line, as it is very attractive to try and get rid of that mortgage debt.  But you also have to live! [...]

  17. 2010 in review by Wordpress « Grumpy rumblings of the untenured Says:

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