July Mortgage update and playing with numbers (or: another post on why we don’t just pay it off)

Last month (June):
Balance: $52,393.37
Years left: 4
P =$995.17, I =$219.23, Escrow =788.73

This month (July):
Balance: $49,389.48
Years left: 3.75
P =$1,007.01, I =$207.39, Escrow =788.73

One month’s prepayment savings: $7.90

Some fun tiny milestones this month. We’re under 50K in our mortgage balance. We’re over $1,000 in the amount of our regular payment that goes to principal. Next month we’ll be under $200 in the amount of monthly payment that goes to interest. That’s pretty cheap rent! (Our utility bills are far higher than that, at least in the summer.  And I guess technically the escrow part is also rent, making it a bit more expensive.)

At this point there’s two warring feelings going on. On the one hand, wow, we could just pay that sucker off. It is totally manageable at this point. If we applied our extra money sitting in savings (waiting far too patiently to be turned into bathroom linoleum, to fix the damage the kittens did to the master bath, and to finally do *something* about the kitchen) and our emergency fund and our summer money it would be gone. And we’d still even have DC1’s school tuition left.  (We’d have to re-save up for all those various funds, cutting spending under DH’s income, but it’s not like we’ve been in a hurry to fix things because man we’re lazy.)

On the other hand, the way that mortgages work, paying a huge chunk of money down now doesn’t save anywhere near as much money as paying the same chunk early in the mortgage. If we paid off our mortgage tomorrow we would save about $4,372.91 (possibly a little less because we’d have to pay a day or two of interest before the transaction went completely through) assuming the alternative is to stop pre-payments entirely and let the mortgage take its course. $4,372.91 just isn’t a whole lot of money over a 3.75 year period. If we continue pre-paying the $1,996.87 that we’re pre-paying each month, we’ll only pay an additional $1,473.20 in interest over the course of the mortgage, meaning that by paying it off tomorrow instead of as we’ve been doing it, we would only save $1,473.20 (and we’ll be done in 1.25 years). That’s even less savings!

Having the money and the option of stopping pre-payments allows us a lot of freedom. If DH’s company goes under, or I want to take a sabbatical, we could do that more easily by just stopping pre-payments. Paying off the mortgage entirely would free up less than 2K/month because >1/3 of our regular payment goes to escrow. It would stop the pre-payments too, but we wouldn’t have that pre-payment money anymore anyway because it would have gone to the mortgage. (We wouldn’t have our emergency fund either, for that matter, and we’d have to cut way back on spending.) Stopping pre-payments while still having the money we were using to pre-pay in the bank saves a full almost 2K/month.  That’s kind of fuzzy math there, but liquidity is what’s important in those measurements.  Not paying off the mortgage provides more liquidity in the case of an emergency or other desired expenditure.

And we’re willing to pay $1.5K – $4.5K over the course of almost four years for that freedom.  In fact, it’s tempting to stop the prepayments entirely and just wait out the 3.75 years… but if we did that I’d feel even more guilty about the extra money building up savings (the next risk-free option) earning next to no interest.  Keeping on with the current course doesn’t require any thinking and slowly depletes the extra amount in savings rather than increasing it thus forcing me to figure out where else to put the money while it waits for us to call home repair people to take it.

When you get/got close enough to the end of your mortgage that you could see it, would/did you pay it all off or drag it out?

33 Responses to “July Mortgage update and playing with numbers (or: another post on why we don’t just pay it off)”

  1. Debbie M Says:

    I paid it off because my mortgage holder had evil policies and I wanted to give them as little of my money as I could. However, it was also sad having to slowly re-build my savings afterwards.

    Once I paid it off, my account disappeared from the internet immediately. I did not get to see what day they received payment let alone how much principal they thought I had left. This is from a company that leave old credit card accounts online forever (until you call and ask them to be removed). At least they didn’t keep doing the automatic withdrawals like I suspected they would.

    When you do pay it off, they’ll probably want you to get an official pay off notice. I don’t know what happens if you just pay it off without getting that notice. If the amount they tell you sounds too low, I’d pay the amount I though should be left by that date and hope they send back any extra because their pre-pay estimate says all over it that if they are wrong and you don’t pay enough, they will charge you a bunch of interest and fees.

    For now, it’s good just knowing that you could pay it off at any time. Congratulations!

  2. Leah Says:

    I love hearing your reasoning. I think that’s sound.

    At this point, I really just want you to get that bathroom fixed!

    • nicoleandmaggie Says:

      DH promises he’s going to call his dad (the former carpenter) tonight for recommendations on how to find someone to fix the bathroom. Then presumably he’ll contact the real estate agent friend in town we talk to whenever we need recommendations for someone to do something.

      I emailed the city to get an energy audit on the house set-up. :)

  3. Leigh Says:

    Weeee over $1,000 of your payment went to principal! My payment is just above $1,000, so I won’t get there until my balance is about $13,108.80.

    I still think it’s pretty cool that you _can_ pay it off any time, even if you choose not to. I don’t know what I will do when I could pay off my mortgage with liquid savings – I’ve mostly decided that I will figure out what to do once I get there at this point. Part of me thinks I would just pay it off and part of me thinks I would ride it out.

    • nicoleandmaggie Says:

      Well, the rest of the summer (until October) would be pretty tight if we did pay it off. DH is getting a little bit excited about getting deferred maintenance done.

      • Leigh Says:

        I replaced all my flood lights with LEDs over the weekend and won’t have to buy light bulbs again for twenty years. I can’t really picture life in twenty years, which is really amusing. Deferred maintenance is fun :)

      • nicoleandmaggie Says:

        It’s weird now, whenever we *do* have to replace a light bulb that means we have to actually go out and buy one. We no longer keep a box of them in the cupboard!

  4. Comradde PhysioProffe Says:

    Since you’re young, wouldn’t it make (and have made starting from day 1) the most sense to pay off the mortgage as slowly as possible, and invest the differential in riskier, but higher yield, instruments? In other words, the correct comparison isn’t money sitting in your home equity to money sitting in a savings or checking account, but to money invested in a mutual fund or other vehicle.

    • nicoleandmaggie Says:

      You mean ETF or index fund (mutual funds return less than the market on average once you factor in fees). And no, we’ve had this conversation before. The part you’re still missing is risk-adjustment and diversification.

      This is part of our “safe” investing in lieu of bonds or the saving account, and it’s a pretty high rate of return for a “safe” investment these days (if it were 2% we would be paying the minimum, but it isn’t).

      Don’t worry, we have *plenty* in stocks. But you shouldn’t put everything in stocks.

      Also we’re not as young as we were the first time you made that comment.

  5. J Liedl Says:

    We were close seven years ago and could have paid it all off but we realized the house wasn’t going to work for us in the long term. (Autistic Youngest will be living with us a long time and if we’re in the home long term, we wanted a big enough house that she could have more breathing room.) So we took on an extra 100k in mortgage debt to get the house we needed and are studiously paying that down along with Eldest’s university bills. The savings for the kitchen and bathroom remodel pile up more modestly as we target most of our other savings for structural repairs and maintenance (new windows, replaced the HVAC the other year, new roof a few years earlier). We can live with the ugly eighties cabinets everywhere if it means that the house is that much closer to being paid off. Of course, Canadian mortgages have much different tax implications than those in the US, so there aren’t the same incentives for us in mortgage interest as there are south of the border.

    • nicoleandmaggie Says:

      We just replaced the HVAC, and my sister is having to replace hers. It’s crazy how much maintenance there is. After we get this energy audit, we might get new windows– DH’s parents have been telling us ours are a problem since we bought the house. It’s amazing how much there is that one can spend on. Heck, we might even replace the vertical blinds one of these years.

      • J Liedl Says:

        We got rid of the last vertical blinds when the old plastic shattered on some pieces two years ago. However, we still have one set of vintage mini-blinds that are staying until that window’s replaced. (We’re doing a few windows each year because paying for them all at once would drain my house-related savings down to zero and I can’t countenance that.) New windows can make an enormous difference on the energy bills from what we’re seeing so far.

      • nicoleandmaggie Says:

        I have a hard time paying for windows if they’re not, you know, broken. But I am a fan of paying now for savings later, and with global warming, it’s not like our a/c needs are going to go down. We have planted a bunch of crepe myrtle to shade the sunny side of the house since we moved in though.

      • Rosa Says:

        New windows HALVED our heat bill (we don’t have AC, we live in a cold climate.). It’s pretty awesome. First we halved it by replacing the 50 year old boiler, then we halved it again with the windows.

        Also, they really are a lot easier to wash. The salesman was all ‘but people never really wash them’ – i do!

        The one negative for the super energy efficient ones is they don’t let in enough light for houseplants.

  6. chacha1 Says:

    Right at the moment I’m strongly in favor of big slush funds, aka liquidity. :-) Given how solid the rest of your financial picture is at the moment, I too would be getting excited about some of that deferred maintenance. Fix it! Enjoy it!

    • nicoleandmaggie Says:

      OMG, do you know how much flooring there is out there? It’s too bad that DH and I both hate this kind of stuff with a violent passion.

      This site: http://www.houselogic.com/home-advice/bathrooms/smart-options-bathroom-flooring/ says, Get sheet vinyl for children’s bathrooms! But then Consumer reports is all, Off-gassing! You are poisoning your children! http://www.consumerreports.org/cro/news/2014/05/kitchen-floors-that-stand-up-to-foot-traffic/index.htm

      • chacha1 Says:

        I’d go with Linoleum (R). It’s made of natural materials and is, I believe, allergen-free as well as free of off-gassing. Super easy to clean, supposedly easy to install, comes in infinite colors, and will last a lifetime if well maintained. It is not super-cheap.

        Sheet vinyl is super-cheap and, in my opinion, that is why it is considered a “smart” option for a high-traffic area … because you can replace it for not much money when it gets shredded, which it will.

        When decorating show people talk about “linoleum” they are often referring to vinyl tile, which is NOT the same thing. It is an annoyance, akin to pronouncing “chaise longue” as Chase Lounge. :-)

      • Rosa Says:

        we are going with natural linoleum. There’s a nearly commercial grade version one of our local installers will do. I wanted for-real commercial grade rubber flooring but nobody will do that for small projects.

  7. NoTrustFund Says:

    So close! We finally just paid ours off and it feels great, even though the market just keeps going up. The reality is that we had some cash on hand and I just couldn’t justify earning nothing on the cash while paying mortgage interest.

    I don’t think there’s a right or wrong decision on what to do in this case- it comes down to whatever feels right to you.

  8. Holly@ClubThrifty Says:

    I see why you’ve chosen not to pay it off for the time being. It sounds like you don’t have a lot of time left on it anyway. We prepay ours as well, but not quite as aggressively as we did at our old house. I just don’t have the enthusiasm about it that I once did.

  9. Rosa Says:

    We’re still 7 years out I think, but I’m kind of worried that when it *is* paid off, we will forget to pay the bills that are currently escrowed. We are really bad about paying bills on time if they’re not automated and you can’t automate your property taxes in our county. Maybe in 7 years we’ll be able to.

    • nicoleandmaggie Says:

      maybe you could set up a sub-savings account to take money out regularly… the actual payment we get a bill for even though we’re escrowed

      • Rosa Says:

        the money will be there, if things were so tight there wasn’t enough for the property taxes even with no mortgage, we’d sell and downsize. I actually plan to sell & downsize anyway. Possibly even before it’s all the way paid off.

        It’s the actually remembering to do it I worry about. Every six months is a weird schedule for a bill.

      • nicoleandmaggie Says:

        Many people don’t have a problem with not having the money, but with not having the money at hand somewhere accessible.

        Ours is once a year!

        Can you put it in your calendar/day planner?

      • Jenny Says:

        Could you do a bill pay though your bank? I just bought a condo and don’t escrow and plan on setting up automatic payments w/my bank when I get my notice in Feb.

  10. Kellen Says:

    I’m about 3 years away from just having 20% down on the mortgage, so that I can stop paying PMI. After that, I think I might just stop making prepayments and put the extra into stocks instead, since the interest rate is 3.75%. But it would depend on what interest rates are like in 3 years time, of course.

  11. Marcia (123 blog) Says:

    Ah, I would just pay it off.

    In fact, I’m a bit odd in that when any debt amount becomes “small”, I almost can’t stand it and I rush to pay it off. We’ve done this with a couple of prior houses, this house and both cars. The story with this house was fun – the plan was to pay off within 8 years, but after 5 years, I was getting antsy and so I set a “Mondo Beyondo” goal to pay it off that year. I remember my boss at the time asking me about my goals for the year and I told him. He said, “wow, that sounds great” and I said, “well, of course, that’ll largely depend on my BONUS!!!!” HAHAHA! Seriously, I thought we could do it if I got a really good one. Turns out a couple of other fun things happened, we had the money and paid off that bond.

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