Last month (June):
Balance: $103,689.18
Years left: 8.833333333
P = $792.41, I =$421.99, Escrow = 621.66
This month (July):
Balance: $102,221.27
Years left: 8.666666667
P = $798.18, I =$416.22, Escrow = 621.66
One month’s savings from prepayment: $2.62
The payments you make at the beginning of the mortgage are the most productive. (Mortgages work a bit differently than credit card debt, in which all payments are equally productive in terms of interest.)
Our previous mortgage prepayments since our refinance have cut almost 70K of interest off of our 20 year mortgage. That’s 70K off from paying 80K in principal over 2 years. (This month’s prepayment, btw, saved $335.34 over the remaining life of the loan.)
Right now we’re at a point where if we paid off the mortgage tomorrow (a little over 100K) we’d only save 23K over the life of the loan. In some ways that sounds like a lot, but 100,000 could spit out a thousand or so in dividends each year for 9K over 9 years… or it could appreciate $55,000 over those 9 years assuming a rate of 5% year compounded… or both! I’m feeling a bit bullish about the future market returns right now. It is true that within 9 years we could hit another recession and stocks could lose value rather than gain.
In savings, of course, it is unlikely to amount to much since even within a 9 year time-frame we probably won’t be getting back to the interest rate highs of yesteryear… unless of course we have a lot of inflation. Of course, if we have a lot of inflation then we’re going to wish we’d held on to that 4.75% interest rate on 265K a lot longer.
23K is not nothing, but it’s not a full year salary (not anymore, thank goodness). It’s barely childcare costs for a year!
I wonder if we’ll slow down on mortgage prepayment as the gains from doing so become less worthwhile. Or, will we feel like we’re so close to the end we might as well make that final payoff?
No doubt we’ll sell and move elsewhere before then, but who knows…
Would you speed up or slow down when getting towards the end of your mortgage? Or just keep paying it at the same rate?
July 2, 2012 at 5:34 am
If you predict inflation is going to go up–and it’s hard to see it not going up from where it is right now at historical lows–and you have a fixed-rate mortgage, then the best thing to do is pay as little as possible now. Incidentally, from a political economy standpoint, this is exactly why the current entire political fiscal and central-banking monetary policy realm is focused solely on inflation and ignoring unemployment: because both those realms are dominated by banks (i.e., massive creditors).
July 2, 2012 at 5:42 am
In savings, of course, it is unlikely to amount to much since even within a 9 year time-frame we probably won’t be getting back to the interest rate highs of yesteryear… unless of course we have a lot of inflation. Of course, if we have a lot of inflation then we’re going to wish we’d held on to that 4.75% interest rate on 265K a lot longer.
We’re also going to wish we’d spent money on refinancing, but there you have it.
July 2, 2012 at 5:49 am
Yeah, the amount of money left in your mortgage isn’t really enough to move the needle. Once you get near the end, wouldn’t the convenience and attention cost of not having to make mortgage payments at all any more be worth any possible financial downside of prepayment?
July 2, 2012 at 5:51 am
Well, there’s also the irritation of having to give up our bank-package or do fancy gyrations because the bank package is free with a mortgage… http://nicoleandmaggie.wordpress.com/2012/01/02/jan-mortgage-update-and-musings-on-bank-packages/
And we’d have to think about escrow ourselves. http://nicoleandmaggie.wordpress.com/2011/11/01/november-mortgage-update-musing-on-escrow/
July 2, 2012 at 5:50 am
We paid off with a couple of years left. The savings in interest weren’t much, but there was a noticeable difference in cash flow.
July 2, 2012 at 7:28 am
For our situation:
1. Pre-tenure – just pay one extra mortgage payment a year, save extra money for Doomsday scenario.
2. After-tenure – pay it off as quickly as possible but without sacrificing lifestyle (i.e. Grumpies:cheese::Foscavista:wine).
3. After mortgage is paid off, DH will entertain the idea of buying a vacation home in country that used to promote afternoon naps.
July 2, 2012 at 11:04 am
mmm cheese
July 2, 2012 at 11:18 am
http://freethoughtblogs.com/physioprof/2012/06/30/snacke-tyme-2/
July 2, 2012 at 7:50 am
I would keep prepaying. However, I am more motivated by increasing cash flow/ lowering fixed costs than saving on interest (although that is nice, too!)
July 2, 2012 at 7:56 am
One could always take one’s investments and pay off the mortgage in the future if cash flow became an issue, or just draw down from those accounts to keep making payments. (Not the 403b stuff, but the 457 after leaving state employment or the Roth…)
July 2, 2012 at 8:06 am
Or you could cut down retirement investments in the future in order to get more cash flow (since you’ll have more in the retirement funds from saving in the past by directing that money towards retirement savings rather than mortgage)
July 2, 2012 at 8:47 am
I’m with NTF – I’m more motivated to cut the mortgage payment out of my monthly budget/cash flow than to reduce the interest that I pay on the mortgage overall.
Are you sure that credit card debt doesn’t work the same way? If your interest rate is 25% and your balance is $50,000 one month and $40,000 the next, you’re going to pay less interest the second month since it’s being calculated on a lower balance, no? The whole reason that mortgage payments are more productive at the beginning is because the balance is higher, so you’re paying more in interest and as you get the balance down, you’re paying less in interest anyway, so it isn’t as productive to pre-pay.
Sure you’d only save 23K in interest over the next 9 years and that 100K would generate some pretty dividends, but how much would paying the mortgage off free up in cash flow? 1K per month? That would mean that you would need 12K per year less in dividends to be able to live off of the dividends.
I’m not sure what I’ll do near the end of the mortgage. I have a feeling I’ll throw some of my cash reserves at it (the part over $10K) near the end when there’s that much left. Maybe I would stop making taxable investments for the last few months to make it disappear faster. We’ll see in a few years!
July 2, 2012 at 9:27 am
Dang it, I had a long reply to this but it got eaten.
But yes, I am sure there is a difference between fixed rate mortgage amortization interest and credit card interest, though that may not be the case with an ARM like you have, I don’t know. This is something that gets leading scholars on debt repayment (not me) frustrated when people in the audience at conferences don’t understand the difference, so I’ve heard it explained several times. But if you take an amortization schedule and a credit card repayment schedule, the effect of the same size prepayment on the same size debt should be different because the credit card has constant interest and the fixed rate mortgage is amortized. (Also note that there are rules about min payments with CC that make it difficult to compound.)
This cash flow thing is a red herring. Money is fungible. It’s not like the money you’re not putting towards your mortgage is disappearing (unless you just spend it), you can take it and its earnings back to the mortgage if you want to get fixed expenses down later, depending on where you put it. A real difference is a safe investment (repayment if you never plan to default) vs higher risk potentially higher return (stock market).
July 2, 2012 at 11:06 am
I think I left the comment in the wrong place (since your today’s post is so related!)… but what convinced me that amortization is different than CC is looking at how the one-month prepayment savings changes early vs. late for a mortgage, but it doesn’t with a credit card. (If you try this, use a big pre-payment amount or it will look the same because of rounding.)
July 3, 2012 at 8:47 am
Oops for related posts!
I don’t think that the mortgage amortization interest is all that different from ARM amortization interest? My mortgage is still amortized over 30 years, but the rate is only fixed for 5 years.
July 2, 2012 at 9:10 am
Seems like logic suggests holding on to the low interest rate mortgage, and emotion pushes for getting rid of it. (Assuming interest rates will go up at some point within the 9 remaining years.) Neither is a hugely bad choice (compared to, say, putting it up your nose in the form of cocaine), but the longer you can go with logic, the better, probably.
July 2, 2012 at 5:27 pm
Haha, yes.
July 2, 2012 at 9:11 am
As you know, I’ve been mystified (given prevailing conditions and likely future trends) that you’ve been trying to pay off ahead, though I admit that given the small amounts (of money and time) that you describe, it may make sense, at least in the sense of being a wash. Personally I’d be more inclined to mortgage the whole thing (i.e. 80% equity) at current 30-year fixed rates, sit back, and wait for inflation to make you look like a genius, but that’s me — and of course it assumes you’re planning to stay put for decades, which I think is not the case, so there’s that.
July 2, 2012 at 9:18 am
Well, our mortgage rate is ok, but it isn’t fantastic… 4.75%. If we’d locked into one of the current rates, the lower % would be far more attractive. The up-front costs for getting a lower rate are too high right now to make it worthwhile (and we’re really not sure how long we’re going to stay here). It’s all about diversification. :)
July 2, 2012 at 9:56 am
Yeah, at 4.75 and uncertain duration (if refi), I’d probably just pay it off … I mean, work toward that.
July 2, 2012 at 10:40 am
I’m kind of in the “pay it off as fast as possible” camp. Just because once you own your house, you really have a lot more options than while the bank owns it.
We have never owned, by the way, so that is a statement from a position of pure ignorance. :-) Our *intention* is to purchase a retirement property and have it completely paid off before we stop working (in L.A.) and move into it (not in L.A.). Mostly because without a rent or mortgage payment, our monthly income needs plummet.
We are obviously hoping that interest rates stay down for the next couple of years so that we can find our property, negotiate the purchase, and lock in a 15-yr FRM while the market is still moribund, as it is in our target area.
July 2, 2012 at 10:43 am
Hm… what kind of more options?
Again, I think it depends on where else you have money… if you have no retirement savings, it’s pretty risky putting all your money in one piece of real estate in one market. (If you can’t pay your property taxes, you could lose your entire equity if the bank can’t refinance for you!) But if you’re fully funded for retirement, then prepayment is as good an investment strategy as many others. It’s important to look at the entire package.
July 2, 2012 at 1:50 pm
Maybe “options” is just my ignorance talking! But I meant cash-flow options, rather than anything else. That is, when you have a mortgage, all your cash does not belong to you. And you really do not have a choice to *not* pay that note.
If we are successful in finding a property we can pay off in 15 years in our target price range, all the money that *was* going to mortgage is suddenly free. (And for the range we are looking in, we should actually be able to pay it off in 8 years.) We’ll have the choices of continuing to work in L.A., and really sock away serious green, or of moving to the new property and re-starting our businesses in the new location (where we will not need nearly the monthly money we need here given that our rent is $2400) or me working and DH retiring, or DH continuing to work and me becoming a Domestic Goddess.
:-)
July 2, 2012 at 1:56 pm
But the cash doesn’t go away– if you put it in a CD it will still be there, if you put it in the stock market, it may earn something (or it may lose value). You can always take that money and pay the mortgage in one fell swoop later.
It’s only if you would spend the money rather than investing it that it isn’t there anymore, that you’re really getting a cash-flow benefit from having the mortgage paid off.
Not saying that paying off the mortgage isn’t a good investment choice, but in terms of this cash-flow benefit, it’s misleading. If the cash is being saved/invested, you still have it. (And it’s just a matter of comparing interest rates and risk.) If you have a mortgage of 100K and you have 100K or more in stocks, then you could, at any point in time sell the stocks and pay off the mortgage. If you stop contributing to your 401K to pay off the mortgage, you’re losing long-term benefits from compounding and tax-advantage, and you’re not going to make that up by contributing later to the 401K without increasing your contributions to more than what you were paying on your mortgage.
July 2, 2012 at 2:42 pm
For us, 401(k) and other savings are completely separate from home-buying decisions. We won’t be raiding retirement funds to pay the mortgage. We live on one income (his) and save/invest the other (mine).
We’re looking at a 15-yr mortgage with monthly required payments less than $1000/mo. If I didn’t accelerate, I would still have over $1000/mo to save/invest elsewhere. However, if I do accelerate it can be paid off in 8 years. That’s too short a time to make investing elsewhere likely to beat the rate of “return” from accelerating the mortgage. Stocks MIGHT beat it, but we certainly couldn’t count on it.
To me, it just makes more sense for us to accelerate paying off the property, because not until the property is paid off does moving to it become a rational step. I’m sure emotion counts for a lot here, but you know, I’m 46 so this is not a hypothetical scenario. :-)
July 2, 2012 at 2:47 pm
Once tax advantaged retirement saving is out of the picture, it’s more of a wash and just comes down to risk and diversification choices.
July 2, 2012 at 11:46 am
If I had the money, I’d pay it off now. It might not be a full-year’s salary, but it’s $23k….and that’s nothing to scoff at. Of course, if there’s other things that need more fully funded, maybe the cash would best be spent there instead.
July 2, 2012 at 11:48 am
Yeah, it’s tough to decide when you don’t have quite enough money to hit *all* of the good savings goals, but you have more than you need to hit the minimum goals. Retirement vs. mortgage etc.
July 2, 2012 at 12:50 pm
I paid extra the first two years because the amount I was paying off each month cut off an additional 3 months from the end of the mortgage. (I was paying an extra $100/month, and my principal was only around $30/month of my $600/month payment.) Fun!
Then I refinanced from a 30-year loan over 8% to a 15-year loan at 6.625%. My minimum payments went up very slightly, but I decided to invest the extra money I had. (Not the greatest timing–as you’ve read a million times, the market ended up basically flat over that period.)
Then when interest rates kept plummeting and plummeting, I would calculate how much I could save by refinancing, but with only 2-3 years left, the closing costs would eat most of it. This made me antsy, so I paid extra at the end, too, basically by diverting some of my other savings. I’m still paying myself back for that money, so it doesn’t feel as exciting at it should (until next May), but it does feel AWESOME not to be giving that evil lender any more interest. Also, not paying 6.625% (actually 5.63125% after the tax break) makes me more money than earning 0.8%, so I think I’m coming out ahead anyway. And I didn’t have a bunch of emergency expenditures pop up when I couldn’t afford them, so it’s working out fine.
I don’t mind saving for my own property taxes (plus I now have the flexibility to pay at the end of one year sometimes and the beginning of the next year sometimes if that will help maximize deductions). My insurance company insisted on switching from annual payments to monthly payments when it was my turn to start paying, so that was kind of like getting a little bonus (because I had a year’s worth of payments saved up).
July 2, 2012 at 5:41 pm
It is so hard to predict the future, even (especially?) with investments. But it sounds like you’re doing well with what you did. Usually I try to hit the average rather than trying to hit it big by taking risks or to play it really safe by only doing safe investments, at least for the long-term. Little from column A, little from column B.
July 2, 2012 at 3:59 pm
I have just one single obsessive, almost psychopathic thought path on mortgages (if one MUST have a mortgage):
pay…it…off…NOW… Or as close to NOW as you can get.
July 2, 2012 at 5:42 pm
I think we could do that but it would completely wipe out our emergency funds. And we’d still have to pay property taxes and insurance.