October Mortgage Payment: And why it is a big one

Last month (September):

Balance: $99,268.01
Years left: 8.3333333
P = $815.61, I =$398.79, Escrow = 621.66

This month (October):

Balance: $90,282.60
Years left: 7.5
P = $821.47, I =$392.94, Escrow = 621.66

One month’s savings from prepayment:  $32.31

In the end, I ignored almost everybody’s good advice and did a big mortgage pre-payment, a little more than half of what DH is not putting into the 457 plan this year that he was putting in last year (around 8K).  We will re-evaluate where we are later.

Why?  I don’t know.  There are rational reasons and irrational reasons.

Rational:

It is a safe investment and somewhat liquid.  As we’re not planning on foreclosing, we owe this money no matter what.  We can liquidate the money either by selling the house, or paying $250 to re-amortize (more on that in a future post) the mortgage, thus freeing up cash flow.  Now, the amount we free up monthly from cash flow from this pre-payment if we reamortize isn’t that big, but it’s not that small either.

Even in the short term, it makes a pretty good return.  (Of course, we may be shooting ourselves in the foot come tax time when we deduct less interest… I didn’t calculate those implications, but we’ll deal with that later, and unexpected tax bills are a good reason to have an emergency fund.)  The main problem is that we don’t see that savings in our cash flow unless we reamortize.

Putting it in the stock market has benefits, but also more risk.  The mortgage is a sure return.

Irrational:

I worry that if I let that money sit in savings too long I’ll feel richer and just spend it instead of keeping it as a buffer.  Putting it away in a CD seems just as bad as putting it in the mortgage in terms of liquidity, but the return is more than 10x lower.

It probably wouldn’t kill us to have to practice economy once DC2 is a bit older and we’re not paying through the nose for childcare (only through one nostril!) and to feed ourselves.  DH will also have more time to think about cutting our expenses, should that be necessary.  Alternatively, DH will be bringing in more income and cutting expenses will not be necessary.

But what really got me was looking at the rate of return for the year (though it’s actually lower because I ignored taxes…oh well).  The one year return on this specific prepayment is $396.14.  That’s not chump change.  And we keep getting return from this prepayment until the mortgage ends, for a total of $3650.98 over the course of the loan, assuming no more pre-payment.  (Though we still plan to do the regular monthly pre-payments until the end of the year or until we have a reason not to.)  And yes, the later money is not worth as much as the earlier money because of inflation, but what can you do?

Finally, I like writing a check with lots of 0s.  (This is also why we’re not pre-paying even more!)

Rational again:

We should still be able to end the year with a good cash buffer, especially if the two grants I’ve been doing paperwork for materialize (they *should* but I haven’t been including them in my calculations just in case).  By my calculations, even with this pre-payment we’ll have 3 months summer money, tuition for DC1, 2 months emergency fund, and several thousand leftover.  If I get the expected summer money, then we’ll be able to fund next year’s IRAs on top of that.

If we do end up moving and need to tap into more emergency funds prior to selling the house, I will sell stocks or use DH’s 457 money.  We can also stop regular prepayments and other saving and undrip dividends with enough advance notice.  We could even tap into our home equity, as a previous commenter suggested.  (Though if we do that, I’ll feel silly.)  And, of course, we could use the money set aside for private school tuition since DC1′s schooling situation would change.

Anyway, after having spent a ton of time thinking about it, even if this isn’t the optimal decision, I think it will satisfice and we’ll be ok under most circumstances.

About these ads