Ok, so let's talk about this.

[RoadToRiches]

Next year, I will be in a position to do re-fi on my place.

I am still little stuck in two ways of thinking. The "YMMB" and "Get out of ANY debt" mode.

My thinking is, I want to get out of debt. I can't even imagine how awesome it would be not to have mortgage payment. I already did some numbers and know, that I will be able to pay everything from one paycheck (get paid twice a month) and have entire 2nd paycheck for myself, once I pay off my credit cards. The idea of not having that chunk of money to pay every month for mortgage looks very very good to me.

But then there is a Phil way. Don't pay your mortage off early and invest instead. I know the numbers make all of the sense in this case. I know I know. Long term.. I know...

So with that said, I am going back and forth here. I could possibly lower my mortgage payment by $380 bucks if I re-fi at current low rate, let's say 4.88% at 30 years ORRRRRRR....I can do 15 years at even lower rate and pretty much have the same payment as I have right now...no changes, just the time.

Here are the things I think are PROS and CONS for both scenarios FOR ME:


30 year mortgage re-fi:

PROS:

1. Considerably lower payment. It would be to the point where my payment would be MUCH lower than most of the apartment rents.

2. I could save the extra money

CONS:

1. I would still have this "mortgage" on my shoulders. As of right now, I am in debt mode so thinking about paying everything off sounds very good.

2. Resetting the clock on my mortgage again. I am 4 years deep into my current loan at 7%

15 year mortgage re-fi

PROS:

1. Pay if off early. Be completely debt free. I still think about my mortgage as DEBT because I OWE someone money. So thinking of not having to pay mortgage sounds pretty damn good.

2. Same payment as I have right now. No real changes because my current rate is high.

3. With all the credit cards paid off, I would have extra money, which I could accelerate mortgage payments even more. Possibly paying it all off in 7 years

4. Feeling "secure" when it's paid off. Don't owe anyone any money. Every penny (minus living expenses) is going to me to build wealth.

5. I could rent it without worrying about making enough to make a mortgage payment.


CONS:

1. No real changes to the payment. I know it's also a PRO though.

2. Math doesn't make sense if I think "30 year mortgage lowers payment, invest the difference but still have mortgage payments"


So talk to me. I am in between places. I know what makes sense math wise, but the "security" feeling of not having mortgage by paying it off early really really really sounds much better to me than the though of investing the difference and having mortgage.

[phil5185]

My thinking is, I want to get out of debt.

So it is a 'want', not a 'need'?

The $380/m that you save, invested at 11%/yr, is $1,005,000 when you are age 65 - that would be my choice. But you don't have to go all in if you want more spending money - half ($190/m) would be $500,000.

I should add - a paid off mortgage doesn't necessarily add security, that money comes from somewhere. Ie, if you save up $200,000 and use it to pay off the mortgage, that empties your $200,000 bank account. If you are out of work for an extended period, would you rather have $200,000 or a paid for house? (With $200,000 in cash you can make your $1500/m house payments, put gas in the car, eat, and job hunt for 4 or 5 yrs before you hit the wall. But with a paid for house and no money you could be in trouble within a month.)

[kansasflower]

If you are disciplined enough to invest the "savings" from the lower payment, go with the 30 year loan. If you will just spend the "savings" or if you feel that you are already saving/investing enough money, go with the 15 year loan.

[azphx1972]

It depends on your risk tolerance. I'm pretty risk averse, so I like the flexibility of a 30 year mortgage because it allows me to have a low payment while giving me the option to prepay it or do something else with my extra funds. I realize I am paying for this flexibility, but I'm ok with that because the rate is so low. Also in my case, it was a difference of almost $600 for a 15 year vs a 30 year, which is a significant amount of change (compared to my monthly net income). In your case, $380 may not be a big deal so you can go either way and not sweat too much about cutting things too close.

Good luck with your decision.

[Gardening Grandma]

I have some questions:
How old are you?
Is this a "forever" house? Or do you plan to sell and move in a few years?
Would you REALLY, honestly and truthfully save/invest the difference? Or would it be too tempting to buy a new car? Take a nice vacation? Raise your living standard a bit?

Only you know the answer to that last question.

There is no right answer. We are paying off a 15 yr mortgage early, but we are in our 60's and this is our "forever" house. Most folks prefer to own their home outright when they retire. But I've known younger folks who've done it. I've never heard anyone say they regretted it either.

[Peace Of Mind]

Here is an article that may help you decide:

homefinancefreedom.blogspot.com/2007/10/homeownership-cost-cliches-housing.html

What helped me decide was calculating how much money you will need to generate your mortgage payment (whether it's a 15 yr. or 30 yr. loan amount) after you retire. It's a real eye opener. If you can put money away for retirement and pay your mortgage off you will be in much better shape IMO.

[oreo]

Despite popular opinion on these boards, I'm paying an additional $800/month toward my mortgage. I just refinanced for 30 years (was already 7 years into it) specifically to get to a point where either myself or my husband could cover 100% of the bills if one of us were out of work. That being said, I'm currently 46 and want to get the house paid off before retirement (hopefully around the 15 year mark). I have some money saved as well (and will continue to save some money each month in addition to the extra going toward the mortgage). If my job gets cut, I go back and pay the minimum payments until I get another one. Even on unemployment I'd have about $300 more than my monthly bills after the refinance.

[RoadToRiches]

Some good replies here. Keep them coming!

I am 35 years old and I will not be in this house forever. In-fact, I would like to move in about 5-8 years. Maybe sooner. Who knows. I am sick of this snow here and I would like to move to Florida.

[midjd]

I will defer to the real estate experts on here, though you sound like you'd be disciplined enough to invest at least most of the savings from the 30-year-loan.

Just saw you've paid off more than $3K in the last month, that's amazing! Keep up the good work!

[Gardening Grandma]

I am 35 years old and I will not be in this house forever. In-fact, I would like to move in about 5-8 years.

In that case, I'd refi at 30 yrs and save/invest the difference. The Phil route, if you will..... I'm assuming that you have a sufficient EF and that your retirement savings is on track?

[RoadToRiches]

Thank you midwest..I am paying off my stupid credit card debt now. I am on track to get it done by this December. As of right now, nothing else matters but paying off my credit cards. I am just trying to learn and get advice so by the time I get to that January 1st, 2012 date, I will have the solid knowledge of what to do with all this money that I will have! lol

gardening, right now, since I am paying off my debt, I have saved up 1200 in my EF. My retirement is NOT on track at all. I have only like 8 grand in my 401k. I stopped my contributions (I know I know I know.. but this is what works for me now..I just want to get this debt paid off!).

My thinking would be like this:

If I take out 30 year re-fi:

1. Contribute to 401k up to 6% (my company match) - for now.
2. Use the savings from the lower payment on my mortgage to get my EF to 6 months of living expenses.
3. Open and max out Roth IRA
4. Max out 401k


Those would be the steps.

I am starting to really think that 15 year loan wouldn't really make sense to me just for a simple fact that I really will not stay here all my life. But then again, if I took out 15 year loan, I would be forced to pay that same payment I am paying now and pay off my place faster.

So lets say that I will decide to move in 8 years. Two scenarios come in:

1. I do 30 years and lower my payments, save during those 8 years. Sell this place and move somewhere else.
2. I do 15 years and have the same payments as I have now. I COULD pay it off in 8 years as well in this scenario. My savings sound be hurt though since I wouldn't be able to save as much as I would if I went with scenario 1. But paid off place... I can sell it, rent it, do whatever.. and move.

[Gardening Grandma]

Looking at your current balance - is the $12,990 cc debt or SL? Interest rate?

I'd suggest taking the 30 yr, then
1) contributing to the 401K to 6% to get the company match
2) get the EF up to 6 mos
3) throw everything else at the debt (assuming that it is high interest debt)..

THEN look at Roth, investments etc.

[RoadToRiches]

12990 is all credit cards. Interest rates vary:

Just paid off my highest card of 2600 at 22%

So now I have (in order of payoff)

680 at 17.25%
3398 at 16.25%
1600 at 15%
960 at 14%
960 at 8%
2700 at 0% - this is on payment plan. It will end some day.
2493 at 0% - payment plan at 57 a month until paid off

Mortgage is 980 right now

Income - 65k

[RoadToRiches]

I think 30 year is one for me. Just for a fact that I do not plan on staying here all my life. I would like to move. By taking out 30 years, it would lower my payment and I could have more cash to invest/save

[Apple]

You added the "I know, I know" part about not putting anything aside for retirement right now, but if your employer offers matching, I'd at least put that much into it. Paying off debt is great, but automatically doubling every dollar you set aside into retirement is pretty darn nice too.

[RoadToRiches]

Apple, I understand. Believe me, I know I should be putting at least 6%. I managed to have my 401k at 8k. I stopped this year though in order to have more money to put towards debt. You have to understand one thing, that I been living with this debt for so long. It's such a heavy bag to carry on my back for so long. I know it's more mental. I know mathematically it better to get that match and just prolong my credit card debt life. It's just that I desperately want to get rid of this debt. I sleep it, eat it and live it right now. I don't want to live like that anymore. In my head, I am willing to lose that 6% match just to get out of debt. You know? It's hard for you guys to understand being in good financial situations and debt free, putting your money where it belongs. That is something hard for me to think like that right now.

I got over way of thinking to pay off lower balances cards first. I am not doing that. I used to think it would be good because of the boost you get. But I decided to go "math" way. Highest rate cards first, regardless of balances and I am learning to skip the small victories and just celebrate the big ones instead.

I just want to be free already. The thought of not having credit card bills, in case I lose my job or something happens, sounds like a dream to me now. I want to get there the fastest way possible. I know it's going to cost me 401k match. I know it's the right way to do it...put 6% in and just keep paying cards off for longer time. I just can't get over that hump of doing it that way.

[Apple]

I understand--I'm not always "totally logical" either, but I'm the one that has to be happy with how I manage my money, not anyone else. I also got my first job in fifth grade so I've been working on my financial situation longer than most my age

So, I might be missing something with the whole 15 year vs 30 year payment option, but I've always figured do a 30 year loan, and if you want to pay it off faster just put more principle on the payment. Has anyone run the math to see which would cost less in interest? My own thinking I'd see it as the 30, just pay it off in less than half the alloted time (with no prepayment penalty). Also, the lower payment would mean that if you did hit a financial roadblock you could more easily afford the payment. Right now I'm paying cash to finance the new house, but eventually I'll have to get a loan in order to move in before DS leaves home. I'm thinking I'd put a 30 year mortgage on maybe 50% of the appraised value.

[❤ mollymouser ❤]

IF you are risk-averse and the stock market isn't really your thing, by all means work at getting your mortgage paid off ASAP.
IF you will gain significant peace of mind from doing so, by all means work at getting your mortgage paid off ASAP.

IF you can't decide for sure what to do, why not opt for the lower interest refi @ 30 years, but still work at paying extra on your mortgage to get it paid off much faster?

[cronewitch]

I have done all the methods. One house I paid in full in less than 7 years while living in poverty. It was a high interest rate ARM that adjusted every year. It was great because I saved a fortune paying it early and every year the minimum payment went down. The mortgage before this was 15 year fixed and I didn't pay extra actually took out cash to invest. Current is 7 year ARM because the rates were too good to resist. Since I was 62 when I got it the first adjustment is when I am 69 and I should be retired before then and move so it won't matter.

The super low rates now should be taken full advantage of. I got 3.458% and expect to earn at least than on investment. I have enough invested to pay it off any time I want so the payment doesn't feel like a risk. I am paying 612.47 a month and many people pay more than that in rent. I have just set up an automatic transfer from checking to investments of 2K a month, I could pay down the mortgage but I just don't see the need.

Paying extra on a mortgage gives no benefit until it is paid off in full, it actually puts you in a worse position since you have less tax deduction for interest.

Say you had a mortgage of 200K and paid an extra 20K a year for 5 years then hit a major problem like disability or long term unemployment. Your next mortgage payment is the same as your first, you only owe half as much but you don't reduce the minimum payment. Would you rather at that point own 100K less on the mortgage or have 100K invested? If you tried to spend equity you might do something like refinance to a higher rate and with fees to access money you didn't need to pay to start with.

People say they don't want a mortgage in retirement but I do want one. My mortgage payment is a fixed expense if it wasn't an ARM. So if I buy a retirement house at 65 with a mortgage of $1,000 a month for 30 years it is a hedge against inflation. Say my income goes up 3% a year and inflation is 3% a year without a mortgage I break even but with a mortgage I have that amount that doesn't inflate. Say 15 years go by and I am 80 I would still be paying the $1,000 a month but now it is a smaller percent of my budget. If I die at 90 it would mean I never needed to pay the last 5 years but if I live past 95 I would run out of payments.

If I didn't have a mortgage and ran out of money I might have to pay huge fees for a reverse mortgage to get my equity so I don't want a huge amount of equity. I do want to have some equity maybe 50-70%.

[formerexpat]

It's just up to you. Phil does really well, good for him getting 11%, only place I get that is from rentals we've bought and paid cash for, in fact some of those 25% or more.

How are you getting an >11-25% ROI for places you've paid full cash? How cheap were these places and what are you renting them for?

Building wealth is primarily about spread management. You can become wealthy without spread management but optimizing your wealth has to use this plan. If you can borrow at 5% and invest at >10%, you do it in a heartbeat.

Keep good, low debt - never enter into high, bad debt [as you are learning now with your credit cards].

BTW, keep that 0% interest credit card for the life of the loan and the other 0% for as long as the promotion runs...but build up the $2.7k to pay it off when that time comes.

[Apple]

I think you're getting ahead of yourself. Get those credit cards paid off, then worry about what to do with the mortgage.

Personally, I'd disagree, but I'm a huge planner when it comes to this kind of thing. I know where I want my money to be headed several years in advance, even if I don't know exactly how I'll get there. I'm also convinced I want to retire at 51 at the latest (I'll have 30 years in with my employer). It's also good to have a goal if you've got any tendency toward debt. I hate consumer debt so I don't get into it, but I could fritter away my money with the best of them if I didn't have set goals I'm trying to achieve. Right now it's the house I'm building. Every time I think about buying something I step back and think "what is it I really want that this could this pay for?" $20 I talked myself out of spending will pay for a fixture or two in the kitchen, $30 will pay for the hanging pendant lights I want to make for the dining area, $500 will pay for the wood flooring in at least one room. I've cut my spending way down and I'm not any less happy than I was, in fact, I feel good that I'm getting one step closer to my goal. And, even though I'm far from achieving the current goal, I'm already thinking about the next one.

[Gardening Grandma]

So now I have (in order of payoff)

680 at 17.25%
3398 at 16.25%
1600 at 15%
960 at 14%
960 at 8%
2700 at 0% - this is on payment plan. It will end some day.
2493 at 0% - payment plan at 57 a month until paid off

Mortgage is 980 right now

Income - 65k

Is the mortgage a balance of 980K? What is the current interest rate? Fixed? ARM?

These would be my priority over the mortgage:
680 at 17.25%
3398 at 16.25%
1600 at 15%
960 at 14%

Where else can you get a guaranteed, no risk return in double digits?

[RoadToRiches]

No no no.. my payment is $980 a month, including taxes, insurance, etc. lol If it was 980k I wouldn't be on here since I wouldn't be able to afford internet access! LOL

[Gardening Grandma]

Apr 16, 2011 10:55:25 GMT -5 RoadToRiches said:

No no no.. my payment is $980 a month, including taxes, insurance, etc. lol If it was 980k I wouldn't be on here since I wouldn't be able to afford internet access! LOL

Thanks for the clarification. I was HOPING that was the case!!! LOL ;D