March Mortgage update: And why we’ve stopped prepaying

Last month (February):
Years left: 2.083333333333
P =$1,091.24, I =$123.16, Escrow =$788.73

This month (March):
Years left: 2
P =$1,103.46, I =$110.94, Escrow =$788.73

One month’s prepayment savings: $0

After a lot of time on Craigslist and Zillow looking at apartments and houses in Paradise, and quizzing people on utilities costs, and so on, and then sitting down and doing a bare-bones BOE about income vs. outflow, I started getting titchy.

If we 1.  stop contributing to my retirement next year other than the required 6% plus match (not counting the changes I made last month to max out the 2015 403(b)), and 2. stop contributing to 529s, 3. get someone to cat-sit for the cost of utilities rather than rent our house and 4. don’t cut back our frivolous spending, then, given only our take-home pay, we can afford to spend 2K/month on housing from our cashflow.

Of course, we cannot get a 2br/1ba apartment even in an awful part of paradise for 2K/month.  And we have our heart set on someplace in walking distance to school and public transportation and a library (that allows pets and has w/d and a dishwasher).

We planned for that though.  As of this writing, we have 72K just sitting in a savings account doing nothing waiting to be turned into goods and services.  Some of that is going to need to go to get our house painted [Update:  This has happened– we’re down $4500, but the bathroom is no longer shredded].  Some of that is going to go towards moving expenses.  Some of that will go towards travel costs to find housing, and deposits and so on.  But some of that is earmarked to go towards rent.  (And some of it will go towards weekend trips to places a day’s drive away from Paradise that I’m longing to show my family!  Camping!  Bed and Breakfasts!  The beauties of nature!)

We’re aiming for rent between 3K/month and 5K/month, depending on what we end up with.  We won’t know what we end up with until closer to the time we need to go.  The market seems to be 2-8 weeks before you move in.  And some of those 3K/month apartment reviews are really scary (maintenance badly needed but never coming, paper-thin walls and floors, etc.).  Many of them aren’t, but we won’t know what’s available when we need it– right now is a slower part of the year than summer and we only have a limited window for shopping.  Wiggle room is nice to have.

And even at 5K/month, we’ll still have wiggle room given our savings.

So why stop the mortgage pre-payment (thus freeing up 6K total that we wouldn’t have had had we continued those last three paid months)?  Because our scenario above assumed that other than the 2015 403(b), we wouldn’t be contributing to any tax-advantaged accounts.  And tax-advantaged accounts are a bigger priority.

Previously when we started prepaying without maxing out our retirement savings, that was in order to manage risk.  Pre-paying the mortgage meant that we could lower our monthly fixed payments in an emergency through recasting or get some of that money back when needed by selling the house while we were still young.  Now, with the mortgage balance so low, we don’t really need to get it down much lower in order to manager risk– we could re-amortize at any time and our monthly payment wouldn’t be much more than escrow.  It makes more sense to direct our money towards use-it-or-lose it savings.

So now these tax-advantaged accounts are a greater priority than mortgage pre-payment (with which we could save at most, 2K in total interest over the remaining life of the loan, at this point).  We can pre-pay the mortgage any time, but 457s are use it or lose it.  We might be IRA eligible next year, and that’s use it or lose it.  529s aren’t use it or lose it, but contributing early helps more than contributing later.  And there’s charitable donations… we’re not paying school for DC1 next year but we’re thinking of offering a scholarship to another student while we’re gone.  We’re not sure yet.

So that’s why we’re not pre-paying the mortgage.  Because we don’t want to cut our frivolous spending because we’re really not Mustachian (though we’re also not Vanderkamdian).  Because tax-advantaged retirement savings is a bigger priority than mortgage prepayment right now.  Because we want to enjoy our year in paradise without worrying too much about money, even the unexpected expenses.  Because we think 6K more in cash savings will make me feel a little less anxious.

(This is actually the first time we haven’t done *any* prepayment… given increases in property taxes, the bill is just a little bit over 2000, so I can’t round up to 2000 and rounding up to the next 500 is just too much.  I feel really weird writing a check that isn’t a round number.  Makes me wish I’d prepaid the escrow difference when I had a chance to keep the monthly payment under 2K.)

60 Responses to “March Mortgage update: And why we’ve stopped prepaying”

  1. Holly@ClubThrifty Says:

    Maybe I missed it- where is paradise? It better be some place nice with rent prices like that!

  2. First Gen American Says:

    Can you expand your definition of paradise? I can think of about a dozen places that would all be equally cool in different ways and not all of them are high cost of living. (They’re not all in North America though).

  3. nicoleandmaggie Says:

    Next person who asks/guesses where we’re going next year gets their comment deleted. If we wanted to say, we would.

    • Rented life Says:

      I’m not sure why anyone thinks you should say. Even if this wasn’t written under a pseudonym, should anyone be like “hey I’ll be living here and not in my house for the next year.”

    • becca Says:

      Paradise is obviously Fort Smith, Arkansas.
      If you were to add up 1) the maxed out 403(b) from 2015 and 2) the required 6% contribution from 2016 + normal contribution level for the non-sabatical portion of 2016, what percent of your projected income over that two year time stretch would it amount to? How would that change if you’re IRA eligible and you max out those? I hope that question makes sense.

      Also, I just now noticed on the February post that you describe your 457 as half Roth. I’m now bummed mine apparently can’t be done Roth style.

      • nicoleandmaggie Says:

        I don’t really understand the question… Are you trying to figure out what % of our income we’ll be saving for retirement? Remember that there are two of us and DH’s retirement savings options suck.

      • becca Says:

        Yes, the % of the income you’ll be saving, or rather the average %, with and without IRAs.

      • nicoleandmaggie Says:

        I forget what DH puts away for retirement each month in his 401K (it isn’t much), but my required retirement savings over our combined income while I’m on leave comes out to 4%. (Since he will be making more than I will.) It’s harder to figure out what to do with the 403b/457 because I don’t know how much we will be putting away or how to split it across the academic year/fiscal year.

        But it isn’t really that relevant either– what matters is how much we have saved for retirement already. Because we went to grad school we had undersaved. Then we were able to oversave and caught up. Since then we’re a bit more than on track, so we can afford to save less for a year if we end up doing that (which we may or may not– this is a good opportunity to turn taxable assets into tax-advantaged assets and get rid of that mutual fund that keeps spitting off capital gains that it reinvests, but we will see what happens).

      • becca Says:

        Not trying to imply it’s not enough! Most of my peers are lucky to save at all, and for a variety of reasons. I’m more trying to get a reference point for talking to people going on sabbatical- what level of financial hit it entails in your kind of situation (which seems pretty common- most academic couples I know are dual-earner and I think a lot of people go to their personal paradise with a high COL for sabbatical, if at all possible). I think I may also be trying to calibrate “what would a financially savvy person consider a bad net-worth building year, given a good reason” (also relevant for a good amount to save toward retirement in a particular year if you’re also trying to build up cash for a down payment, or perhaps before having a child with imperfect insurance).

  4. Leah Says:

    Sounds like you have planned well! In my mind, something like this is the point of being financially responsible. Money buys freedom, and you have the freedom to make this choice. I also think being able to do something like this makes the grind worthwhile, much moreso than just stashing away money for someday and denying oneself any pleasure. (side note: some prefer the simple life, and I’m not judging them for that.)

    How exciting. I’m looking forward to hearing about Paradise :-) And also exciting that two more years of standard payment = no mortgage — nice that you can achieve that goal AND go to Paradise.

    • nicoleandmaggie Says:

      It is pretty astonishing. As a little kid I never would have dreamed this kind of thing was possible. High income + fiscal responsibility + investing = a world of options. (And Fiscal responsibility + investing means a world of options for your kids… So, thank you, parents!)

      I definitely agree that being able to do this is amazing, and much more amazing than getting more frequent newer cars or taking regular fancy vacations or having permanent early retirement extreme or what have you. But different people have different preferences (and that’s a good thing– imagine what prices would be like in paradise if *everybody* wanted to live there).

      • Debbie M Says:

        Yes, this is awesome! And yes, it’s good that not everyone agrees on what paradise is. In my case, I’m grateful that so many people are willing to move to the suburbs to have bigger houses so I can still afford to live in town in my small house. (Except now my nieghborhood is getting gentrified, and people are knocking down the small houses to make bigger ones, oops.)

        Pre-paying the mortgage is SO BORING near the end (except for the last payment). The earlier pre-payments just knock off so much interest or, as I liked to think of it, they knock so many payments off the end. (My first pre-payments were cutting three months off the end of the mortgage.)

      • nicoleandmaggie Says:

        Definitely. The interest portion has seriously gone down.

  5. Leigh Says:

    I understand why you’ve stopped pre-paying, but is there a tiny irrational part of you that wants to just pay it off? You guys are going to have an amazing time in Paradise!

    • nicoleandmaggie Says:

      Actually, no, the tiny irrational part really doesn’t want to have to deal with switching our bank stuff around to avoid paying monthly fees! So in this case the rational and irrational parts agree. :)

  6. Foscavista Says:

    Madrid is paradise for me (without chaperoning students!). One of my bucket list items is to buy a flat there, especially in the Salamanca or Retiro neighborhoods.

    Yet, DH won’t let me buy any property until the home mortgage is paid off.

  7. Griffin Lamb Says:

    To what extent does running the numbers on what next year will be like impact your thinking on where you currently live? For example, we moved to NC after 10+ years in Boston (and not to Charlotte or Raleigh, so a real difference in housing and childcare, our biggest fixed costs). 10+ years was long enough for me to experience city life and for both of us to work for incredibly employers who trained us well. There are trade offs to either situation, and we are very happy with our decision.

    • nicoleandmaggie Says:

      Well, I like my job here and I can’t get a comparable job in Paradise, so as long as DH is able to work remotely, we’re not going to be moving to Paradise permanently. If he loses his job, we will re-evaluate. For us, having interesting work in a supportive environment is coming up as most important as our revealed preference.

      We actually did run the numbers about 5 years ago because every time we visit friends in Paradise who made different choices we question our decisions, but so far we’ve been staying where we are. It’s hard to put a price on a good work environment. If that changes, then I might leave tenured academia. I dunno.

  8. Griffin Lamb Says:

    My comment stems from my mulling over Cloud’s post last week on commuting and the subsequent comments. Having experienced commuting, I couldn’t agree more with Cloud’s position. I don’t buy the argument that outsourcing childcare and end-of-day duties solves the commuting problem. For example, if you have to drive and you have an awful winter you lose a tremendous amount of productivity to being stuck in the car and the sheer frustration post commute. It’s hard to recoup that time with the most ingenious outsourcing strategy.

    • nicoleandmaggie Says:

      Absolutely– that’s one of the reasons that our proposed rent costs are so high–we want to keep the commute time reasonable, and housing with reasonable commute times is more expensive. We’re lucky that we don’t have to include DH’s commute time in the calculation, only mine and the kids’. It’s another reason that on-campus childcare can be so important for productivity– having one fewer place to commute to!

  9. NoTrustFund Says:

    Sounds amazing- love that you’re not being ‘cheap’ and are prepared to have an expensive year to fully experience Paradise!

    • nicoleandmaggie Says:

      Well… to *truly* experience paradise we’re talking more like 7K/mo in rent. But even the bare minimum of a 2br apartment is pretty expensive. (And if we were doing private school, that would be 40K+! Though I suppose we could live someplace with crappier public schools and pay less rent, still, it wouldn’t be saving anywhere near 40K in rent.)

  10. bogart Says:

    I have to admit your decision to prepay in the first place has never struck me as strictly “rational” (from a cost/benefit/expected value perspective), so, you know, carry on!

  11. Rented life Says:

    Sounds like you are in for an awesome year! I’m all about saving extra even if it’s not “needed” to ease anxiety. And husband is learning if I’m less anxious I’m easier to live with :).

    Paradise for me would be being able to afford to rent a vacation place for a week.

    • nicoleandmaggie Says:

      We actually haven’t ever rented a vacation place for a week before. Either we stay with family in places that are not paradise-like at all, or we turn a work trip into a vacation trip for the part of the family that isn’t working (so the hotel is paid). And I suppose there’s weddings, but that’s usually only an overnight stay, maybe 2.

      Next year I think will be the first time we actually try to take a real vacation, if DH can stand not going back to the homestead for a year. (I have my doubts… but maybe it will be ok if enough of his family visits us, which will probably only happen if we luck into a 3br instead of a 2br.)

      • Rented life Says:

        We don’t have to go far to see my parents and we don’t see his. And we learned the hard way not to stay with most family members (plus many either can’t ccomodate us or smoke which is a no for me). Before baby we traveled and stayed places but never in one spot for more than a couple days. I’m ready to try it and I think that’s easy with the kiddo than our on the move trips we used to do.

      • Debbie M Says:

        You’re reminding me about my grandparents who used to have a guest bedroom but turned it into an office and craft workshop and started paying for hotels for their guests instead. In your case, if you don’t luck into a 3br, you could also volunteer to put up visitors in local hotels. It’s definitely cheaper than a third bedroom (usually).

      • nicoleandmaggie Says:

        I don’t think they’d accept though. My dad is likely to visit and stay at a hostel, and DH’s parents might combine it with their anniversary but insist on paying the hotel themselves.

        I am thinking though of renting out a cabin for Christmas and having my family meet there instead of at my sister’s place like usual. We’d probably pay for that.

  12. Bardiac Says:

    I’m amused at the Paradise thing. Every time I see you write it, I imagine a different Paradise: London, New York, Madrid, San Francisco, Taiwan, Monaco, Sydney. Just from what you’ve said, it’s not likely to be certain places, but I enjoy imagining what Paradise is, and how my imaginings change.

  13. OMDG Says:

    How much mortgage debt would you consider “risky,” out of curiosity? Obviously this will vary depending on the real estate market, job security, etc. But was wondering whether you had a general gestalt about this.

    • nicoleandmaggie Says:

      I don’t think there’s an actual number– it depends on how much you have in savings, your income, and your income prospects in the event of a job loss (and the probability of a job loss… also willingness and ability of family to help).

      For us it’s kind of hard (or rather, easier than for non-academics) because the tenure-track is up-or-out, and if you’re up, then they can’t kick you out, which mitigates risk considerably. So there’s no risk until certain inflection points (reviews, tenure) which are highly risky, then much less risk (you may want to leave your job but you don’t *have* to). Non-academic job markets are very different.

  14. seattlegirluw Says:

    Well, I’m panicky (though perhaps I’d be less so if I had that amount in savings) so I’d pay it off out of savings. But it sounds like you’ve gone through the logic and found what works for you. Which, in the end, is all that matters.

    I hope you enjoy Paradise, despite those rental prices.

  15. Comradde PhysioProffe Says:

    Good luck finding something suitable! Just one financial question: Am I missing something, or wouldn’t it have been better all along to have been maximizing your allowable contributions to tax-advantaged vehicles at the expense of prepaying the mortgage? This is especially so in light of the mortgage interest tax deduction, correct?

    • nicoleandmaggie Says:

      CPP, we have explained this to you SO MANY TIMES that there’s no point in trying to explain it to you again because you’re just not going to listen or remember. (My 8 year old does this sometimes too– asks us the same question multiple times because ze didn’t listen to the answer the first or second time. DH usually yells, I usually just say that the answer was yes the first 3 times but since ze has asked a fourth, the answer is now no!) I would dig up the link to the first or second time we explained this to you except that’s too much effort. But I encourage you to look for them yourself! The “mortgage” tag is a good place to start.

      p.s. It’s still about diversification of risk.

  16. Linda Says:

    It feels good to have all your planning falling into place, doesn’t it? :-)

    I had a friend here over the weekend and while we were driving up the valley one day I kept smiling and thinking about how lucky I feel to live in such a beautiful place.

    • nicoleandmaggie Says:

      I’m still a little terrified! But once we have housing figured out… whenever that happens…

      • Leah Says:

        Granted, I had no family at the time, but I once drove into a town for my summer job (starting the next day) and didn’t yet have an apartment. I had appointments, looked at a few places, and picked one. Super nerve-wracking. That is one of the issues with rentals. You can either pay through the nose (as in, even more through the nose than you will) or have to wait until the last second, essentially, to get a place.

        In short: I feel you, and I agree that you’ll feel better when housing is settled. Here’s to hoping you find a gem at a decentish price!

      • nicoleandmaggie Says:

        We did that with grad school and it was definitely nerve wracking. We also ended up with a 100 sq foot apartment (no, I am not missing a zero– we had to turn the futon into a couch to use the computer desk) that cost $1200/mo. But in a great location…

      • Linda Says:

        *fingers crossed* the rental housing situation is reasonable when you’re ready to move.

      • Leah Says:

        I can’t even imagine the locations where you’ve lived. 100 sq ft for $1200/month. OMG. I have a hard time paying more than $600 a month for housing . . . even when I went to school in Ann Arbor, I found ways to avoid the more exorbitant of rent gouging.

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