honeysalt
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Post by honeysalt on Jan 14, 2022 16:28:58 GMT -5
Infrequent poster who has been lurking since the MSN days.
Partner and I just bought a house for around 600k. Median home price in our city is 400k - our neighborhood median is 650k. My desired budget was 300k - partner's was 900k. We compromised in the middle and got a great place in our dream neighborhood at the end of last year. Very happy with the house and area, but experiencing a lot of anxiety about purchasing such an expensive house. First time home buyer, so buying into this market didn't help matters.
Here is the breakdown -
Monthly take home:
17k net (pretty even split between me and partner) Retirement: 450k (me)
300k (partner) Taxable: 70k (me) 90k (partner) Savings: 35K (me) 20K (partner)
Other: 400k Rental Property (partner)
Debt: 0 (me) 100K (partner - (mortgage on rental)
We put down 25% and have split all costs. Our mortgage payment is $2,300 and interest is 2.75% on a 30 year. We are both early 40's and are putting a little extra towards the monthly payment and plan on making a triple payment every January (we did this year).
Please help me with the hamster running on an endless wheel in my head. Did we buy too much house or am I letting my bag lady fears get the best of me?
At 2.75% interest, I wouldn’t pay off the mortgage one second before I had to. No extra each month. No triple payment in January. Money that you spent on additional mortgage payments is not available to cover the unexpected expenses that you are concerned about. More importantly, why would you give up 10%, 15%, or 20% investment returns to save 2.75% in mortgage interest? Although we could have paid cash for our house 15 years ago, we chose to finance part of the purchase. Our mortgage balance is about $150K at 3%. Or, about $4,500 in interest last year. Last year, our portfolio earned about 15.25%. So we got about $22,800 in gains on the $150K we didn’t tie up in the house. By putting the $150K into investment accounts we came out about $18,300 ahead for the year. That’s enough to pay for a new AC system or a new roof every year with money to spare. YM is the best! I came here thinking I'd get scolded for spending to much on my house. Instead, I'm getting scolded on pre-paying my mortgage!
Honestly, thank you. Rationally, I know you are right. Going to keep the extra monthly payment, we are essentially just rounding up in part to make the payments between us simple. I'll strongly re-consider the extra January payments.
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Tiny
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Post by Tiny on Jan 14, 2022 16:50:51 GMT -5
Emotionally, the idea of owing on a mortgage until I'm 70 makes me a little queasy. The thing is the PI part of the mortgage will most likely be a pretty inconsequential amount of money in 10 or 20 or 30 years. That and you will probably have the mortgage paid off well before then - because probably once you get down to having 60 or 36 or 24 payments left - you're gonna look at your Big Pile o' Money in savings or your checking account - and just pay the mortgage off in a lump sum. When my mortgages get down to around 10 or 15K --- I just pay the silly thing off - rather than go thru another 12 months or 24 months... my typical PI amounts are under well under 1k per month... because I don't have a Big Gross Income. So 10 or 15K is a big chunk of money - but it's been part of my EF (which has traditionally been over funded) so I'd just end the mortgage and 'rebuild' the EF for 12 or 24 months instead. At least if I missed an "EF payment" there weren't any repercussions. If it makes you feel any better I have a 30 year mortgage where I will be 85yo if I make all 360 payments. It doesn't keep me up at night. I would focus on making sure you are saving sufficiently for retirement (or early retirement) or for kids (or kids education) or for the things that are important to you. before you aggressively start paying down the mortgage. The real reason there are all those rules of thumb and advice to buy "less house" or to get as low an interest rate as possible or to put down 20% or to have a mortgage payment that fits into your 'budget' (aka not too much for your income) is so that you while you are making those 360 payments you can use your Income to build wealth - thru investing/saving. Your house isn't the "wealth". It's the ability to control the biggest fixed expense you have - and then as your income grows (and that fixed expense gets smaller in relation to your income) you can INVEST/SAVE more over a longer period of time. Owning a home tends to give you a stable place to live AND a "knowable" monthly housing expense for years and years on end. This means as your income increases - you have MORE to use to build wealth (or have a nicer life). And that tends to be true even if you make every single one of those 360 payments.
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Tiny
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Post by Tiny on Jan 14, 2022 17:02:00 GMT -5
If it makes the OP feel better and if after all retirement accounts are filled and all the other things wanted are saved for - just pay one extra payment per year (divide your current payment by 12 and add that to your monthly payment). and BAM! instant Feel Good every month. You are prepaying your mortgage and cutting a year or two off your mortgage. I'm guessing one extra payment per year isn't going to mess up your spending plan/budget.
another reason to NOT aggressively pay down a mortgage - is you loose the use of that money... it's locked up in your house. You can't sell a window or some siding or the back deck if you need money - even for a short term expense. To use the equity in your house - you have to take a loan (or line of credit) and odds are you will pay MORE to use this money than you were paying for the use of money for the original mortgage.) In general it's better to have money you don't have to borrow available.
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honeysalt
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Post by honeysalt on Jan 14, 2022 17:02:28 GMT -5
Emotionally, the idea of owing on a mortgage until I'm 70 makes me a little queasy. The thing is the PI part of the mortgage will most likely be a pretty inconsequential amount of money in 10 or 20 or 30 years. That and you will probably have the mortgage paid off well before then - because probably once you get down to having 60 or 36 or 24 payments left - you're gonna look at your Big Pile o' Money in savings or your checking account - and just pay the mortgage off in a lump sum. When my mortgages get down to around 10 or 15K --- I just pay the silly thing off - rather than go thru another 12 months or 24 months... my typical PI amounts are under well under 1k per month... because I don't have a Big Gross Income. So 10 or 15K is a big chunk of money - but it's been part of my EF (which has traditionally been over funded) so I'd just end the mortgage and 'rebuild' the EF for 12 or 24 months instead. At least if I missed an "EF payment" there weren't any repercussions. If it makes you feel any better I have a 30 year mortgage where I will be 85yo if I make all 360 payments. It doesn't keep me up at night. I would focus on making sure you are saving sufficiently for retirement (or early retirement) or for kids (or kids education) or for the things that are important to you. before you aggressively start paying down the mortgage. The real reason there are all those rules of thumb and advice to buy "less house" or to get as low an interest rate as possible or to put down 20% or to have a mortgage payment that fits into your 'budget' (aka not too much for your income) is so that you while you are making those 360 payments you can use your Income to build wealth - thru investing/saving. Your house isn't the "wealth". It's the ability to control the biggest fixed expense you have - and then as your income grows (and that fixed expense gets smaller in relation to your income) you can INVEST/SAVE more over a longer period of time. Owning a home tends to give you a stable place to live AND a "knowable" monthly housing expense for years and years on end. This means as your income increases - you have MORE to use to build wealth (or have a nicer life). And that tends to be true even if you make every single one of those 360 payments. This is huge. Looked up the cost of rent at my old place - I would have to pay 25% more in rent to move back there. Guess I'll stay here, listen to YM and make my payments as they come
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tskeeter
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Post by tskeeter on Jan 14, 2022 21:17:36 GMT -5
At 2.75% interest, I wouldn’t pay off the mortgage one second before I had to. No extra each month. No triple payment in January. Money that you spent on additional mortgage payments is not available to cover the unexpected expenses that you are concerned about. More importantly, why would you give up 10%, 15%, or 20% investment returns to save 2.75% in mortgage interest? Although we could have paid cash for our house 15 years ago, we chose to finance part of the purchase. Our mortgage balance is about $150K at 3%. Or, about $4,500 in interest last year. Last year, our portfolio earned about 15.25%. So we got about $22,800 in gains on the $150K we didn’t tie up in the house. By putting the $150K into investment accounts we came out about $18,300 ahead for the year. That’s enough to pay for a new AC system or a new roof every year with money to spare. YM is the best! I came here thinking I'd get scolded for spending to much on my house. Instead, I'm getting scolded on pre-paying my mortgage!
Honestly, thank you. Rationally, I know you are right. Going to keep the extra monthly payment, we are essentially just rounding up in part to make the payments between us simple. I'll strongly re-consider the extra January payments.
Don’t consider yourself scolded. Consider yourself encouraged to do something different. That said, you need to do what will let you sleep at night. If paying off the mortgage ASAP is going to let you sleep at night, go for it. In 2019 my Dad paid off the mortgage he had on the house he bought in 2018. He just couldn’t stand making a PITI payment that was over $2K every month. I doubt that he’d ever made a mortgage payment over about $500 in his life. $2K was more than he could deal with.
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honeysalt
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Post by honeysalt on Jan 14, 2022 22:44:17 GMT -5
YM is the best! I came here thinking I'd get scolded for spending to much on my house. Instead, I'm getting scolded on pre-paying my mortgage!
Honestly, thank you. Rationally, I know you are right. Going to keep the extra monthly payment, we are essentially just rounding up in part to make the payments between us simple. I'll strongly re-consider the extra January payments.
Don’t consider yourself scolded. Consider yourself encouraged to do something different. That said, you need to do what will let you sleep at night. If paying off the mortgage ASAP is going to let you sleep at night, go for it. In 2019 my Dad paid off the mortgage he had on the house he bought in 2018. He just couldn’t stand making a PITI payment that was over $2K every month. I doubt that he’d ever made a mortgage payment over about $500 in his life. $2K was more than he could deal with. Kidding about the scolding. Absolutely came here to benefit from different perspectives. Told my partner about this thread. He was thrilled. Not only because he is "right" about the extra payments, but also because he is happy that I am relieved after you all put things in perspective. He has heard me talk about this board and knows that how much I respect the collective financial intelligence here.
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giramomma
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Post by giramomma on Jan 16, 2022 10:02:16 GMT -5
I also don't think you bought too much house. But I also wonder if you don't have enough for retirement. We could pay off our mortgage at 46. Yet, We don't. We'd only gain a $400 cash flow a month, and money makes more in the stock market. So, rather than pay off your mortgage early, I would put that extra money in the market. Personally, I would do some projecting. At 25 I was going to work until I died.
At 35, I decided I'd retire are 60 and then work just enough to cover health insurance (2K per month until I get to medicare age). At 45, I got health thing, and now, if I have to, I want to be able to completely retire at 54-56 if my lifespan is going to end up being shorter than reasonably expected. Long story even longer: a paid off mortgage will not allow me to retire early. Money in the market will.
A paid off house doesn't give me any options. Money in the market does. I like more options, than less. Particularly in crisis situations. Illiquid assets don't give me more options. Liquid ones do.
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honeysalt
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Post by honeysalt on Jan 16, 2022 17:08:42 GMT -5
I also don't think you bought too much house.
But I also wonder if you don't have enough for retirement. We could pay off our mortgage at 46. Yet, We don't. We'd only gain a $400 cash flow a month, and money makes more in the stock market. So, rather than pay off your mortgage early, I would put that extra money in the market. Personally, I would do some projecting. At 25 I was going to work until I died.
At 35, I decided I'd retire are 60 and then work just enough to cover health insurance (2K per month until I get to medicare age). At 45, I got health thing, and now, if I have to, I want to be able to completely retire at 54-56 if my lifespan is going to end up being shorter than reasonably expected. Long story even longer: a paid off mortgage will not allow me to retire early. Money in the market will.
A paid off house doesn't give me any options. Money in the market does. I like more options, than less. Particularly in crisis situations. Illiquid assets don't give me more options. Liquid ones do.
We agree and are each setting aside 40% of our net for retirement and investing. We each set aside another 10% for short term savings.
While we have both been investors/savers for a long time, we have only had this income for a short time. We have both had a number of career/income jumps in the past 5 years. However, I get what you (and others) are saying). Financial freedom is the goal and a more likely path to get there is investing rather than pre-paying the mortgage.
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jerseygirl
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Post by jerseygirl on Jan 16, 2022 17:21:43 GMT -5
honeysalt since you’re saving so much be careful to not put in a lot into 401k , you’ll need to take around 4%/year in RMDs . If your income is too high in retirement you’ll be caught by IRMAA. A surcharge on Medicare that can be really a lot eg, extra $340 month or more Suggest to look into Roth or if your company offers a 401k Roth
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Regis
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Posts: 1,414
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Post by Regis on Jan 17, 2022 7:58:05 GMT -5
Infrequent poster who has been lurking since the MSN days.
Partner and I just bought a house for around 600k. Median home price in our city is 400k - our neighborhood median is 650k. My desired budget was 300k - partner's was 900k. We compromised in the middle and got a great place in our dream neighborhood at the end of last year. Very happy with the house and area, but experiencing a lot of anxiety about purchasing such an expensive house. First time home buyer, so buying into this market didn't help matters.
Here is the breakdown -
Monthly take home:
17k net (pretty even split between me and partner) Retirement: 450k (me)
300k (partner) Taxable: 70k (me) 90k (partner) Savings: 35K (me) 20K (partner)
Other: 400k Rental Property (partner)
Debt: 0 (me) 100K (partner - (mortgage on rental)
We put down 25% and have split all costs. Our mortgage payment is $2,300 and interest is 2.75% on a 30 year. We are both early 40's and are putting a little extra towards the monthly payment and plan on making a triple payment every January (we did this year).
Please help me with the hamster running on an endless wheel in my head. Did we buy too much house or am I letting my bag lady fears get the best of me?
At 2.75% interest, I wouldn’t pay off the mortgage one second before I had to. No extra each month. No triple payment in January. Money that you spent on additional mortgage payments is not available to cover the unexpected expenses that you are concerned about. More importantly, why would you give up 10%, 15%, or 20% investment returns to save 2.75% in mortgage interest? Although we could have paid cash for our house 15 years ago, we chose to finance part of the purchase. Our mortgage balance is about $150K at 3%. Or, about $4,500 in interest last year. Last year, our portfolio earned about 15.25%. So we got about $22,800 in gains on the $150K we didn’t tie up in the house. By putting the $150K into investment accounts we came out about $18,300 ahead for the year. That’s enough to pay for a new AC system or a new roof every year with money to spare. Great analysis, Phil. Wait...you're not Phil?
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Post by minnesotapaintlady on Jan 17, 2022 8:55:51 GMT -5
honeysalt since you’re saving so much be careful to not put in a lot into 401k , you’ll need to take around 4%/year in RMDs . If your income is too high in retirement you’ll be caught by IRMAA. A surcharge on Medicare that can be really a lot eg, extra $340 month or more Suggest to look into Roth or if your company offers a 401k Roth At their income even maxing 401K is not going to be much as a percentage of income and is probably a large tax break.
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giramomma
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Post by giramomma on Jan 17, 2022 11:03:28 GMT -5
I also don't think you bought too much house.
But I also wonder if you don't have enough for retirement. We could pay off our mortgage at 46. Yet, We don't. We'd only gain a $400 cash flow a month, and money makes more in the stock market. So, rather than pay off your mortgage early, I would put that extra money in the market. Personally, I would do some projecting. At 25 I was going to work until I died.
At 35, I decided I'd retire are 60 and then work just enough to cover health insurance (2K per month until I get to medicare age). At 45, I got health thing, and now, if I have to, I want to be able to completely retire at 54-56 if my lifespan is going to end up being shorter than reasonably expected. Long story even longer: a paid off mortgage will not allow me to retire early. Money in the market will.
A paid off house doesn't give me any options. Money in the market does. I like more options, than less. Particularly in crisis situations. Illiquid assets don't give me more options. Liquid ones do.
We agree and are each setting aside 40% of our net for retirement and investing. We each set aside another 10% for short term savings.
While we have both been investors/savers for a long time, we have only had this income for a short time. We have both had a number of career/income jumps in the past 5 years. However, I get what you (and others) are saying). Financial freedom is the goal and a more likely path to get there is investing rather than pre-paying the mortgage.
Again, I think this is where you have to do some calculations. Our situation is strange...small mortgage and high health care premiums. Therefore I go by 25X expenses. I actually expect we'll be spending more than we currently are now when we are first retired. We don't have a 2K bill in our current monthly budget. Our mortgage is $400 a month, so we just can't say "Oh, we'll just spend our mortgage money on health insurance premiums). We also have pensions. Which complicates things. And actually, I can convert some of my sick leave to pay for health insurance premiums. But, I don't know how many years that will cover. I'm still a decade out from retiring.
If we go by 25x expenses, we need 1.6 million for retirement. That's planning on 65K of year expenses. We're just about at a million at 46, and our pensions should replace most of the income we have. So. I'm feeling pretty good about where we are.
You might very well have the opposite. If you make 4x what we do, but you save 50%, you very well could be on track or even ahead if you do 25X expenses. So. I will amend my answer and say if you do your retirement calculations and find yourself ahead and can't think of anything else to do with the money, then, yes, I would pay down the mortgage while we are still in a pandemic.
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countrygirl2
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Post by countrygirl2 on Jan 17, 2022 12:23:20 GMT -5
Son had to end up buying a house for $650,000 in the Olympia, Washington area. It's ok, but they want to do a lot to it. He owned his other house outright, we helped so paid $250k down. He still owes at least $300k. We gifted $30k to help, think he put $25k and kept out $5k.
He has other money saved back for a garage, but with the rain they had up there, his crawl space flooded so going to have to do something with that. It ruined his ductwork, but he was going to replace it anyway and was happy he had not already done it. He has a place to drain it too, so he is happy about that.
It's just he working, I think he makes about $150k now?? He got a 25% raise to go there and a merit raise, haven't asked in awhile. But he is paying extra on the loan also to try and get it down. He is 50, so not young. He has no other debt and newer vehicles.
He also has a 401k and pension plan when he retires, so hope he will be good.
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phil5185
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Post by phil5185 on Jan 17, 2022 17:46:28 GMT -5
Great analysis, Phil. Wait...you're not Phil?
No, not too much house. You have "30-year, fixed rate funds" locked up at under 3%. And the lender cannot not ask for that money early, they cannot raise the interest rate.
The 30 year US home mortgage has provided some of the best working capital in the world, other nations require periodic refinances, shorter loans, etc. But in the US, Joe Citizen can enter a bank, ask for $500k, demand it for 30 years, get a fixed rate, and get the money - so why is everyone so anxious to prepay their loans??
I usually keep my borrowed money in a SP500 Index Fund, the 30-yr average return is about 11%/year.
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honeysalt
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Post by honeysalt on Jan 17, 2022 18:11:12 GMT -5
honeysalt since you’re saving so much be careful to not put in a lot into 401k , you’ll need to take around 4%/year in RMDs . If your income is too high in retirement you’ll be caught by IRMAA. A surcharge on Medicare that can be really a lot eg, extra $340 month or more Suggest to look into Roth or if your company offers a 401k Roth At their income even maxing 401K is not going to be much as a percentage of income and is probably a large tax break. Thank you for pointing this out, jerseygirl. As minessotapaintlady noted, we don't really have a choice - tax break wise this is important for us and we don't have roth 401k's and are over the limit for roth IRA's.
I didn't know about the IRMAA though - great to know for planning!
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honeysalt
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Post by honeysalt on Jan 17, 2022 18:25:22 GMT -5
Great analysis, Phil. Wait...you're not Phil?
No, not too much house. You have "30-year, fixed rate funds" locked up at under 3%. And the lender cannot not ask for that money early, they cannot raise the interest rate.
The 30 year US home mortgage has provided some of the best working capital in the world, other nations require periodic refinances, shorter loans, etc. But in the US, Joe Citizen can enter a bank, ask for $500k, demand it for 30 years, get a fixed rate, and get the money - so why is everyone so anxious to prepay their loans??
I usually keep my borrowed money in a SP500 Index Fund, the 30-yr average return is about 11%/year.
Phil! Your ears must be burning. I was telling my partner over the weekend about reading a thread years ago where you mentioned you still finance cars at 0% and invest.
Thank you for commenting - both now and over the years. While I haven't always listened, you have really influenced and improved my framework when thinking about investing. Nearly all of my retirement funds are in an SP500 Index Fund, thanks in large part to you.
My taxable account is another story thanks in large part to wanting to have some fun.
Honestly, If I had taken action on the advice you gave earlier - going all in with some investments, rather than dollar cost averaging - I'd have a lot more money today. Don't have a time machine, but will listen now
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Knee Deep in Water Chloe
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Post by Knee Deep in Water Chloe on Jan 17, 2022 18:32:45 GMT -5
Great analysis, Phil. Wait...you're not Phil?
No, not too much house. You have "30-year, fixed rate funds" locked up at under 3%. And the lender cannot not ask for that money early, they cannot raise the interest rate.
The 30 year US home mortgage has provided some of the best working capital in the world, other nations require periodic refinances, shorter loans, etc. But in the US, Joe Citizen can enter a bank, ask for $500k, demand it for 30 years, get a fixed rate, and get the money - so why is everyone so anxious to prepay their loans??
I usually keep my borrowed money in a SP500 Index Fund, the 30-yr average return is about 11%/year.
Seriously, I was getting worried about you phil5185 because I hadn't seen you in so long. Good to know you're still around.
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countrygirl2
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Post by countrygirl2 on Jan 20, 2022 23:01:08 GMT -5
We were still very comfortable paying things off. We never had much debt, and have none, don't intend to. Has served us well, we saved, invested, and paid cash so we are ok.
We may not have millions but we have enough for what we want to do and live the rest of our lives. So we are happy with it.
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countrygirl2
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Post by countrygirl2 on Jan 26, 2022 15:47:28 GMT -5
Talked with son, he is making $140k, will get a raise this year, thought he made more. He bought a house and paid $250k down, it was $560k, he would have had too much house if he could not have paid that down and also no mortgage insurance. His interest rate is below 3% and he is paying extra but I'm not sure how much. He is the only one working, he does have enough in savings to pay it off if he had too, but it is invested. We hope to add some to it when we sell our rentals so we can help pay against the principal, we don't mind.
Once he retires, he said he can work as a contractor making a lot more money. But he wants to get his pension before he does.
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