April Mortgage Update: and comments on a Minting Nickels post

Last month (March):

Balance: $107,953.41
Years left: 9.25
P = $781.78, I =$432.62, Escrow = 726.93

This month (April):

Balance: $106,607.65
Years left: 9.166666667
P = $781.78, I =$432.62, Escrow = 726.93

One months savings from this month’s prepayment:  ~$2.22.

The mortgage company finally realized we were overpaying escrow.  They still say we’re underpaying it but by less.  I figure this is the last time they’re going to try to readjust for almost a year so I sent them a check (~$185) and our required monthly payment will drop back down.  This change means our prepayment will go up by about $100/month starting next month.

Minting nickels had a great post in February that we wanted to link to in March but with that whole academic guest blog thing decided to swap out for a different post.

Minting Nickels asks, “How soon would you be debt free if you went all out?”  Like, if you went totes gazelle intense rice and beans, everything at the debt.

As you can see, we have about 106.6K of mortgage debt.  (It’s at a somewhat high, somewhat low interest rate of 4.75%.  Paying to refinance to a lower rate doesn’t make sense in most of the scenarios I’ve run through, so it just sits there.)

And yet, we’ve been putting away crazy amounts of money each year to retirement accounts, a 529… and we buy fancy cheeses and just generally tend not to worry about money.  We’ve come a long way from making 36K a year with rent costing 20K of that (and still managing to pay off student loans and generate an emergency fund).  God and nature willing I will never lose my ability to digest red meat again.  (Even if the thought of pancakes makes me queasy.)

So we’ve got a few scenarios (besides, of course, selling the house) that could answer Minting Nickel’s question.

The first one is, what if we threw all of our current taxable assets at the mortgage.  The stock market has been doing insanely well and we’ve regained all that we’ve lost since the recession and a little more (although getting back to a pre-recession high doesn’t make up for all those years during and after the recession when the money could have been invested elsewhere!).  Now, of course, if we liquidated all that, we’d be hit by a capital gains tax…  The resulting cash leftover would leave something like 35K left in the mortgage to repay, give or take.  Where could we find 35K?  Well, we’ve been saving up so that we can live over the summer, pay school tuition and so on.  We’ve got about 20K there… and who needs to eat or prepay school?  Maybe we could forage until the October paycheck.  Actually, there are a few months of paychecks left that might allow us to replenish some of that, even if we couldn’t be fancy (and we wouldn’t be paying 1200 towards the mortgage every month after the mortgage was paid off, just the equivalent of escrow).  That leaves 15K.  I think there’s about 2K left in the daycare reimbursement fund, some of which I have to fight with payflex about since they denied something for not having a signature even though it has a signature, which wouldn’t be so annoying if their stupid fax machine hadn’t been down for a full day of me trying to send things (anyway…).  So that’s 13K left… Well… we could dip into the remaining fund my father gave me for charitable work for education (and swear to pay it back), and the mortgage is gone.  So, basically we could get rid of the mortgage after a couple of weeks of moving money around.

But all that money is there for a reason.  My father’s money will eventually go to DC’s school and to DH’s relative’s education.  The summer money will pay for water and air conditioning (also:  food) so we don’t have to rack up credit card debt (or pass out, or get nasty letters from the HOA), DC’s tuition for next year and childcare for the new baby.  The taxable funds are there as a secondary emergency fund and as a way to diversify our available cash.  So… that’s no go.

The second route then is to move money around and cut our expenses.  We have another year or two of both of us having salaries.  We’re putting an insane amount towards retirement and will be easing up in the future.  Right now we’re putting about 45K towards retirement accounts that could be going elsewhere, 55K if you include the Roth IRAs I seem unable to not fund.  If DH keeps his current job and we stop contributing so much to retirement, then the mortgage could be paid off in 2 years without me having to cut back my fancy cheese habit.  Of course, that’s ignoring the additional childcare expenses we’ll be having… however, we will pay down about an equivalent amount on the mortgage with regular payments in two years, so that should balance out.

Though maybe we don’t want to cut the entire amount contributed to retirement.  Maybe we only want to cut 30K/year from our retirement savings.  Of course, that only works for at most two years since after that DH may no longer be employed if we stay here (if we don’t stay here, then hopefully we sell the house!)  So that would be 60K over 2 years.  Stop contributing to 529 at $6000/year.  If we stopped spending so much on food, we could probably cut 6000/year from our budget (but but… I like fancy cheeses!)  We could drop some insurances to get down another $500/year.  Then we start getting into smaller cuts.  Cutting down our netflix subscription doesn’t help much, maybe $100/year.  In theory I could try to get more summer money, but that has been more difficult to come by (not to say I haven’t tried!)  I’ve also been being offered fewer little writing/editing gigs, but those occasionally come in at $500/year give or take.  We could try selling some stuff rather than sending it to goodwill or the relatives, and that might net $100 give or take (who knows, maybe more if we were smart about it).  All of these together and I think we’d probably be able to pay off the mortgage in around 3-4 years.

If we just keep doing what we’ve been doing, paying $2500/month to the mortgage (assuming the escrow doesn’t go up again, which is a silly assumption), the mortgage will be gone in 5.33 years.

So:  bottom line.  The things we could do to get rid of our mortgage debt right away seem penny wise and pound foolish.  We do think we’ll be shifting some money from retirement to mortgage next year (more on that in a future post), but not enough to really get rid of that mortgage debt in a really short time-frame.  If we don’t shift around that money, then the cuts we would have to make to our spending before DH leaves his job would be painful and would not shorten the timeframe enough to make the suffering worthwhile (or at least not worth getting rid of our taxable assets for).

How soon would you be completely debt free if you went all out?   How soon could you be completely debt free with less painful scenarios?  Are any of them worth pursuing?

p.s.  We were an editor’s pick in this week’s Carnival of Personal Finance!

35 Responses to “April Mortgage Update: and comments on a Minting Nickels post”

  1. Leigh Says:

    That’s an interesting exercise! When I was looking at how much I was willing to take on as a mortgage, one of my measures was how quickly I could pay it off if I threw ALL of my discretionary savings at it (100% of bonuses, 50% of my monthly net pay). I was trying to keep it around 7 years or so (not that I would probably end up paying it off that quickly, but just as a measure).

  2. chacha1 Says:

    Verrry interesting. Not having a mortgage, DH and I have a lot more flexibility. If we went “gazelle” it wouldn’t actually make much of a difference … because “we” would be “me” and my income is the lower of the two. DH has a severe mental block about saving, so all our debt repayment (which = saving) and e-fund comes out of my paychecks. If I cut out everything fun (including fancy cheeses) we could be 100% debt free in … 5 months. If life is worth living, we’re debt free in 10.

    Query for you. WTH is “escrow”? I thought escrow applied to the period when you are waiting for a mortgage to fund, which in my never-bought-a-house state of ignorance I thought meant after contract was finalized but before seller’s bank had received the purchase price (?) from buyer’s bank? Would really love to know more about homebuying finance. See above re: ignorance. :-)

    • Linda Says:

      Many mortgage lenders require that you have an escrow account for things like property taxes, homeowner’s insurance, and HOA fees. So every month you pay your bill to the lender it is broken out as the Grumpies have noted above: principle, interest, escrow. The total amount of these three items is your monthly mortgage bill.

      I’m lucky enough to not have to any HOA fees (a benefit of living in an old-fashioned city neighborhood) and when I secured my mortgage I said I wanted to pay my insurance myself. Unfortunately my lender will not allow me to pay my property taxes on my own; the terms of my mortgage require me to have an escrow account with them for taxes.

    • nicoleandmaggie Says:

      What she said.

      Technically “escrow” is just a general term meaning money that a third party is holding taken from party one to give to party 2 at a later date after something happens. In this case party 2 is the city gov’t and the insurance company. (In the case you’re thinking of, party 1 and party 2 are the homebuyer and seller respectively.) I think we have enough equity now that we don’t need to do the escrow through the bank, but we do it anyway because it’s convenient and we’re not losing that much money with interest rates so low.

      • chacha1 Says:

        Thanks to the three of you! Very good to know. if/when the time comes I shall seek out a lender that doesn’t require an escrow account if I *possibly* can. I trust my money management skills more than I trust a lot of banks. Or city governments, for that matter.

      • nicoleandmaggie Says:

        Legally (in some jurisdictions) you have to have a certain value-to-loan ratio before they’ll let you do the escrow yourself. The law is usually at the state level.

  3. scantee Says:

    I’m in a very similar situation as the one you’ve described. The only difference is that I have a student loan that I’ve been stalling on paying off because the interest rate is so damn low. We could pay off all of our mortgage and the student loans with our retirement funds if we wanted to.

    My oldest starts public school next year and the youngest follows him two years later so in three years we’ll see our daycare costs plummet. I’ve started to think about what we’ll do with all of that extra money. I’d like to start doing some more non-retirement investing but I’m not sure where to start and don’t have much of a plan of attack. Do you do much investing outside of your retirement savings?

    • nicoleandmaggie Says:

      We have so much retirement savings availability that it seems silly to do investing outside of tax-advantaged funds when we could get a tax advantage, especially since we’re assuming we’re going to be working for decades to come.

      We do have some money in taxable accounts that we accumulated before we had jobs with retirement accounts and I keep it as a secondary emergency fund. One that we can always unDRIP if we need to. (IIRC we get about 2K of dividends/year, which is nice! Even if not as nice at tax time.)

      In terms of investing advice, the big question is what do you want these non-retirement investments for? (Emergency fund? To take on risk? As an additional income stream? For fun? Because you want to retire before age 50?) If you can give us more specifics, we’ll be happy to devote an ask the grumpies to it.

  4. Linda Says:

    I’ve thought about it, but I’m not much interested in paying off my mortgage any earlier than I’ve been targeting: 20 years. I pay extra every month to help me meet that goal.

    I need to write a blog post about my visit to the financial planner last year and the changes I made in my retirement savings, etc. based on that consultation.

  5. J Liedl Says:

    Our mortgage was up for renewal (terms are shorter here in Canada) so we got a 2.99% rate and trimmed almost six years off of the amortization. There are limits to our prepayment but we could double-up every month if we went all out and knock out quite a bit of the mortgage. However, that would leave us not only eating rice and beans pretty exclusively but also make it tough to assist Eldest with university. If she goes anywhere but here, there’s no free tuition as well as living expenses. If we could convince her to attend my U, she’d be making money between guaranteed scholarships based on her GPA as well as the tuition benefit and the extra money could come close to paying off the mortgage.

    • nicoleandmaggie Says:

      I’m still happy I didn’t attend my home U… even if they would have paid me extra to go. No worries with that here… my uni doesn’t provide any tuition benes for faculty brats, so DC has total freedom.

  6. femmefrugality Says:

    I totally agree with you. It’s never “good” to carry debt, but in some cases its wiser than to put off other investments. Like your retirements. Or having the money for your kids’ college.

  7. Cloud Says:

    I think it would depress me to do this calculation, because our mortgage is so huge. I would guess we’re on track to pay it off in about 20 years, but I wouldn’t swear to that.

    However, that is our only debt.

    We have toyed with the idea of using a bunch of our buffer to pay it down to the point where we could refinance, and we just don’t feel comfortable doing that. I figure that the best decision there is not necessarily just based on finances. If it would save us money in the long run, but make us really, really nervous in the short run, I don’t think it is worth doing.

  8. epibek Says:

    Our mortgage is brand spanking new (haven’t even moved into the house yet), and it’s a split loan, with half fixed at 6.14% for 3 years and half at variable interest rates (it’s 6.74 atm). That must sound quite high to you, but they’re pretty low rates by Australian standards. We’ve worked out how much our repayments need to be to pay it off in 10 years, and we’ll do that for as long as we can (things may change if, for example, we decide to have kids). If we had no life, ate boring food, and didn’t make extra contributions to our superannuation or save for other things, we could probably pay it off in five years. But that’s a long time to live like an ascetic. And we might get scurvy. So we’ll probably stick with the 10 year plan. Balance in all things!

    • nicoleandmaggie Says:

      I had a friend in college who got scurvy freshman year. It was diagnosed because he got thrush on his tongue. Yuck.

      Much better to keep eating fruits and veggies, even if it adds a few years to the mortgage.

  9. Karin Says:

    I think about this a lot w/r/t my student loan debt. I have a chunk of it fixed at a low rate and a slightly larger chunk floating at a low rate. Have decided to max out 401(k) and Roth and put monies aside for college and build up cash for a bigger emergency fund/down payment while paying off the floating chunk at a reasonable rate to be done in 2014. I’ll have to see what our family situation (currently no kids) or housing (currently no mortgage) looks like at that point to see if it is worth pre-paying the fixed portion. I’d rather not owe the federal government money over 25 years!

    • nicoleandmaggie Says:

      We knocked off DH’s student loan (and did eat a lot of rice and beans and potatoes) in a very short amount of time (considering our tiny income), but they were unsubsidized with an insanely high interest rate. My parents paid off my subsidized low interest loans for me (that they’d really taken out because the rates were so low they could leverage that money for other purposes and come out ahead) after graduation.

      When the interest rates are low it can make sense to put other priorities first!

  10. Foscavista Says:

    DH and I have the mortgage as shared debt; DH has (small) student loan and car loans debts. We are paying one extra mortgage payment a year to reduce the 30-year loan to ~25 years. I might have to pay the mortgage faster to convince DH to purchase a vacation home in another country.

    • nicoleandmaggie Says:

      If you went insane, how quickly could you pay off that debt?

      • Foscavista Says:

        If we overlook paying taxes and penalties for liquidating the retirement accounts, and I was still receiving a paycheck, I could pay off the mortgage in one swoop, and DH could do the same with the student loans and car loan. We would be, however, losing our security blanket.

      • nicoleandmaggie Says:

        Ick, liquidating retirement accounts is never a good idea! Unless you’re, you know, retired and about to die or something.

      • Foscavista Says:

        I’m interpreting the “something” scenario as when unicorns are on sale.

      • nicoleandmaggie Says:

        I dunno, I understand that unicorns are a pain to keep. And their poo is toxic.

        I guess the healing power of the horn might be worth something, but only if the market isn’t already flooded with unicorns.

      • Foscavista Says:

        The toxic poo was probably the leading reason why the unicorn pair was not invited to the arc.

      • nicoleandmaggie Says:

        Well, you can’t have holes in the boat. It starts taking on water if you do that.

  11. Lindy Mint Says:

    It’s a fun exercise, isn’t it? Well, I don’t know if FUN is the correct word…

    Thanks for the link and the extended discussion!

  12. Leah Says:

    We have no mortgage debt nor even renting expense (housing comes with husband’s job), but we both do have student loans, sadly. I managed to get two degrees without loans but had to take out loans to get my teaching license. I chose to do that rather than exhaust my savings. If I threw my entire savings at my loan, I would almost exactly equal out — everything I have is exactly what I owe. I think my husband doesn’t quite have enough to pay off his loans (we’re still combining accounts and a little unsure).

    We don’t worry about money at all right now. I don’t owe yet on my loan, as I’m not out of school yet. We’re hoping I get a job next year, and then we’ll be able to push everything I make, essentially, toward taking care of the loans. If that plan works out, we’ll be done in a year without any lifestyle changes.

    Our intention, tho, is to track what we’re spending (we haven’t bothered to do that yet) and see if we can limit ourselves in a few areas to increase what we are putting toward his loans. He has almost cut his loan in half since he met me, and he is on track to pay it off much earlier than asked for. In my mind, though, I want to get these done ASAP. I see loans as yet another thing that hangs over our head before potential freedom.

  13. NoTrustFund Says:

    I think your ‘penny wise pound foolish’ comment is a key one here. I am so conservative, that I would never want to use all of our liquid savings to put towards our mortgage debt, which is currently our only debt. Right now we could pay off the mortgage on our starter house and be debt-free, but I know that we will be moving to a bigger house in the near future so we are saving this money for our down payment. Once we move I will likely split all non-retirement, non- 529 plan savings, if there is any, between our taxable account and mortgage prepayment.

    I’m sure you’ve already considered this, and perhaps mortgages work a little differently in your neck of the woods, but here you are able to roll all mortgage fees up into the mortgage rate. You end up with a higher rate, but it makes the refinancing decision really easy. The 10 year rate with fees might be 3 1/8% but without fees it would be 3 3/8% or 3 1/2%. Just something to think about since rates really are just unbelievably low right now!

    • nicoleandmaggie Says:

      None of the scenarios I run make it worthwhile to refinance if we stick on our current payment plan. I forget what the break-even point was exactly, but it was right around 5 years give or take.

  14. Carnival of Personal Finance #356 | The Money Drain Says:

    […] from Nicole and Maggie: Grumpy Rumblings presents April Mortgage Update and comments on a Minting Nickels Post, and gives an alternative exercise viewpoint in paying off debt […]

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