Use Cash to Pay Off Mortgage?

[ultrarunner]

It just seems backwards to pay on a 5% mortgage each month and get less than 1/10 of a percent on money in the checking and around 1% on savings... even term rates don't get you much more.

Aside from the satisfaction of eliminating debt vs. keeping a nest egg available... what am I missing?

I always try to keep 6 months living expenses liquid for emergencies and limit any significant debt exclusively mortgage debt.

I have equity in my Real Estate... although, not anywhere near the paper profit of a few years ago.

Looked into getting a lower than 5% rate and it just didn't pencil out... first there were owner-occupied requirements that eliminated all but one and the one remaining didn't qualify for the streamline refi without about 2% in added costs and possible pay down to get 60% loan to value.

 

[milkman636]

It does seem backwards. Interest rates will probably stay in the basement for a while. Our government wants us to keep our money in circulation instead of in banks. They pretty much generate some sort of tax revenue from every transaction, and it supposedly helps to keep the economy going.

Loan terms are also tight. My bank recently sent me a letter inviting me to review mortgage refinance options. They quickly decided that they could not offer anything better than my currrent loan. There has been a lot of stimulus flying around the last couple of years, but not much for a middle class working guy that's not upside down.

Maybe I could to find a new career mismanaging a bank or large corperation.....

 

[Eyeshade]

Pay it off. The rates are in your favor and there is a real peace of mind that comes from not owing money. The side benefit is that when congress argues about eliminating the mortgage deduction you can yawn, instead of panic.

 

[herd]

Pay it off. The rates are in your favor and there is a real peace of mind that comes from not owing money. The side benefit is that when congress argues about eliminating the mortgage deduction you can yawn, instead of panic.

Given your situation as you described, by all means pay off the mortage. I cannot imagine too many better feelings of knowing that your home is paid for, free and clear. I am down to about $22,000 on mine, vs about $250,000 or so value. I would love to be able to just knock it out but like you, I try to keep 6 months money on hand.

Unfortunately, that's the extent of my savings, so I can't just knock it out right now. But, I do admire very much those who no longer have a mortage.

 

[hitekcountry]

If you had a house paid off would you go out and take a loan on it and pay 5% on the loan so that you could stick the money in the bank at 1%?

Yea I would pay it off, I know that for sure because that's what I did. It's a nice feeling not oweing anything to anyone.

 

[kidr]

I'm no financial whiz for for sure. Maybe some one with more knowlege could explore this angle. It seems you would be paying off your loan with inflated dollars down the road. The 1% interest is not really 1% if you figure in the the miracle of compounding, and don't touch that money. In the future interest may rise. Putting you in a better place. Assuming of course you have a fixed morrtgage.

 

[scoutcub]

Assume you're talking about a rental...
You're on the money(haha) contemplating paying it off. Using your money to the best advantage, pay it off.

I'm in the same boat, looking at paying off a rental next month. Trying to wipe all debts off the books except 2 mortgage's in 2011.

I thought I was doing great getting a mortgage (15yr fixed) this past May for 4.35%..... now the rates have dropped even more.....

Good luck!

 

[Gizmo2]

We paid our mortgage off this year. Went down to 3 months of emergency funds to do it but now have well over 8 months of emergency funds, adds up fast when not having the BIG payment. Not to mention 3 months emergency funds instantly turned into 5 months (or so) because we did not have the mortgage payment to deal with if I lost my job tomorrow. Saving 5% is like making 5%! And what a day the payoff day was.

 

[bp fick]

We paid our mortgage off this year. Went down to 3 months of emergency funds to do it but now have well over 8 months of emergency funds, adds up fast when not having the BIG payment. Not to mention 3 months emergency funds instantly turned into 5 months (or so) because we did not have the mortgage payment to deal with if I lost my job tomorrow. Saving 5% is like making 5%! And what a day the payoff day was.

Good for you. Yup, we wiped out almost all of our cash in buying our place without a mortgage, but the savings account quickly gets built back up when not having to make a monthly payment. Plus, no threat of re-possession, ever! Regardless of the circumstances. Priceless.

Just gotta keep those taxes paid.

 

[QueBota]

If you are in the last 1/3 of a 30 year mortgage, most of your payments are going directly to principle. If you are in the first 1/3, most of your payments are going towards interest.

If I were in the first 1/3 of a 30 year and had the cash I would consider paying it off. However, if you need access to the funds after payoff, it is going to cost you to access the equity, and, depending on your property, the equity may not be what is was, and in the worst case may never be what it was.

Making an extra principle payment or two each month would be a good compromise. You could keep most of your cash on hand and eliminate a large portion of the total interest paid. If you obtain a 30 year mortgage on a $250K property and take the full 30 years to pay, the total of all P&I payments will exceed $500K, not to mention the addtional costs of taxes, insurance and maintainence.

We refi'ed a while ago and opted for the 30 year over the 15 even though the 30 year APR was a bit higher (4.5 vrs 4.25 at the time). If things go as planned we hope to pay it off in approx. 10 years, leaving us the option of making the minimum 30 year payment if we get in a bind.

There is also the issue of current dollars versus future dollars. My parents bought their place in 1953 and their mortgage was a whoping $83 per month, at times, they had difficulty making that payment. As time passed their finanacial situation improved and during the last 15 years of the mortgage the $83 payment had a minimal impact on their monthly budget.

Considering the current and future economic outlook, the downward trend of real estate prices, having cash reserves at this point may be prudent.

Sorry for rambling,
Dave