I might consider paying the mortgage, but what I definitely would not do is buy the company - that's just asking for a whole new set of problems. It is tempting to know you at least would have a roof over your head no matter what else happens, if you did pay off the house.

I don't see why you should pay off a 4.875% mortgage. If you stick the money in a balanced mutual fund such as Vanguard Wellington, your expected financial position when the mortgage is finally paid off is much better than it would have been if you paid it off immediately.

What would make you feel more secure? You seem to have done very well in your financing.

The housing market is down in most areas. So are stocks.

You have 88K and the payoff is 54K. That's 34K left; still leaves you with the 5K for your IRA. And another cd maturing.

I think that an investment in your home is important and paying it off (be sure there is no hefty penalty for early payment) would be the best to do. I also think it would make you feel more secure.

That will lower your monthly expenses, and as long as you have your job will be able to build up your savings and investments as desired. Also, if you need another part time job I think you could find it.

Congratulations on doing so well!

I have the same urge to pay off my own mortgage, but it is the opinion of others that a) I have already paid off too much of my mortgage, and b) paying off the mortgage makes you far less "liquid"... which can be a bad thing.

4.75%??? How'd you get that??? Pretty nice! My 15 yr mortgage is 6.1%.

Given that there are some online banks paying 3.3+ %, it might be better just to keep your savings intact.

Psychologically, there are too battles: Paying off the mortgage makes your sweet little savings account look much less robust, or not paying it off makes your monthly expenses look high.

I pay $1,000 monthly as my minimum payment. Almost $700 of that goes into principle, though.... it's like "saving" $700 a month.
So, in effect, I am only paying out around $100 or so in interest (the rest is insurance and property taxes that have to be paid one way or the other).

For you, it just seems like 4.7% is cheap CHEAP money. Interest rates appear to be going up these days and you won't be able to get money that cheap for a while if ever.

You might be thinking that you could take a home equity loan if times get tough(er) for you, but that loan will cost you in fees and an ugly interest rate.

Right now, you have a nice cache of cash!

These days, that is a rare thing.

Me and my 6.1% loan are having a rocky relationship. I want to be debt free for emotional reasons, but I am not so sure it's a wise financial decision.

Look at Dave's posts in this forum. He is probably the most articulate supporter of *not* paying off a mortgage.

Kelt

This is a fascinating question.

Would it be a mistake to pay off the mortgage? No. You will earn the piece of mind of not having to pay $700 per month and can afford to work part time. This benefit is immeasureable to some.

There will be many who jump in and demonstrate that if you put all your money in equities you will have a higher return than 4.875% and therefore you will be better off not paying your mortgage.

But the esscence of financial planning and management is not maxing out your dollars and squeezing every ounce of returns out of your money, but rather having your money enable your life choices. So this is for you to decide.

But back to your situation... Your mortgage rate is so attractive that my view is you are better off parking your 54K in a money market account. Over the next 12 years you are looking at virtually a wash when you crunch the numbers (i.e. Average return of Money market is about 5%). So you can literally park this money in your money market and write a check every month from it to pay off the mortgage and the 54K initial investment should last all the way until the end of the mortgage. The added advantage of doing this is the liquidity you have over the next 12 years in case there is an emergency neeed for cash. One caveat, At this moment money market yields are impossibly low (Vanguard prime is about 2%) and if this lasts too much longer, then my suggestion will not pan out... But you have the option of revisiting this and paying off the mortgage at any point.

"(i.e. Average return of Money market is about 5%)"

Huh? Where are these money market accounts that are paying 5%? I want to sign up!

Over a 12 year period, the average money market yield has been probably 4-5%.

I would not invest in anything new right now - the market is tanking daily! The issue (mtge vs retirement funds) came up a few years ago in the financial pgs of our big city paper, and paying off the mtge won every time. Investments can be made later on if the market picks up, or using some of your other money, but if everything goes to pot short term (or even otherwise) you will have your house and not be paying interest on it (however low it is) forever.

I would prefer to remain liquid in uncertian financial times. It sounds like your at a greater risk of losing your cash flow than your house, another vote for liquidity. Once your employment situation stablizes you can pay off your mortgage. It is so small you probably don't get any tax benefit from it. The interest rate is so low and with housing values decreasing and inflation increasing, no reason to pay it off. Remember, inflation is eroding the cost of the loan, better to pay it off later when your dollars are worth less than they are currently.

I like owning my home very much. Paying off the mortgage was a goal and we attained it without too much sacrifice. But I've always liked being "comfortable" with my bills, too, and predictable monthly bills that I am confident I can make (and not sweat), are fine with me.

I think I'd sit tight were I in your position. You clearly have a handle on expenses and how to save. Maybe you have to tighten the belt a hole... but a "down" market can mean opportunity for someone like yourself. Someone who knows how to save.

If you really want to, you can change your mind and pay the entirety of it off, or simply make a nice payment to principal. Your present situation demostrates nicely how regular saving/investing, and a mortgage can work together to build wealth.

Your dedication has purchased the luxury of "options". Good for you!

Hi rufusdufus,

I'm 3.5 years into a 15 year mortgage (4.875%). Starting balance $90K. Current balance $54K. Monthly payment $705.

OK... this means that your monthly leverage surrender is $485.62-ish...
and your monthly interest charge is $219.37-ish.

I can't say how much longer the secondary job may last, as that business is for sale and there's of course a possibility that I wouldn't be carried-along with a sale. It has been up for sale a couple times in the past and there were no takers. I don't think it's very likely to be shut down if there is no sale, but of course I can't say that with 100% certainty either.

This speaks volumes to your need for safety...
CASH is SAFETY...
accelerating the leverage surrender is no safety, potentially quite risky.

Would I be mistaken to pay off the mortgage balance?

With the limited info we have here, I would say "HECK YES... IN SPADES!!!"

That'd cut a significant $705 off my monthly "expense" and save considerable interest on the remaining balance.

Saving interest (especially at 4 7/8%) is "penny wise, pound foolish" at this point in your financial situation.

Stay in as much cash, as safely as you can, until you either have longterm stable employment secured again, OR you have sufficient passive earnings to live off of WITHOUT raiding the principal... THEN you may safely consider surrendering your leverage.

Cheers,
Dave Donhoff
Leverage Planner

I have not yet used any principle for living. On 4/1/2007 when the job was lost, my balance sheet listed cash assets of $247K. Today it's $256K. I should also state that I don't have any debt except the mortgage. I don't have a car payment and I don't carry credit card balances.

My concern is in saving the approximately $10,600 in remaining interest (did I figure that right?) if I keep paying it out per-schedule. I am an aggressive saver, and that $705 monthly payment could go all to me instead of partially to the mortgage company.

Hi rufus,

My concern is in saving the approximately $10,600 in remaining interest (did I figure that right?) if I keep paying it out per-schedule.

I'd have to run an amortization schedule to confirm... but if you have done that (and not just multiplied the $705 amount, of which only $220 is interest) I'll assume you're correct.

The question, however, is what is the NET effect on interest?
What would you receive if you put that $54k remaining into a safe growth account?
The difference between what you pay, and what you receive, will typically be very small.
That amount is basically the "cost of safety cash" or what is known as your "liquidity premium."

In some cases, if you are of longterm conservatism financially, you can actually end up with a net POSITIVE interest credit between what you pay and what you recieve.

I am an aggressive saver, and that $705 monthly payment could go all to me instead of partially to the mortgage company.

Right now $485 out of that $705 is already being taken out of one of your pockets and stuffed into the other. Only $220 is going to the lender, and the rest is simply surrendered into the land.

The riskiness of it, however, is that you are removing it from a pocket you control, and replacing it into a one-way pocket you cannot re-access without significant time, costs, and qualification (you have to regain other's 'permissions' for access to your own funds.)

Its not an insignificant amount of additional risk you are shouldering, all to potentially "save" maybe 0.5-1.0% overall.

"Measure twice, cut once" and safety is usually worth it.

Luck!
Dave Donhoff
Leverage Planner

What about *inflation*?

As you make mortgage payments, you pay in dollars that are less and less valuable. But, wait! Isn't inflation even-handed, making ALL your dollars (saved, invested) less valuable?

Hmm...if real estate is continuing to go up in your market, maybe owning the house outright IS the better plan for you, since you already have a nice cushion of savings.

Hi Chisue,

What about *inflation*?

A MOST EXCELLENT topic!

As you make mortgage payments, you pay in dollars that are less and less valuable. But, wait! Isn't inflation even-handed, making ALL your dollars (saved, invested) less valuable?

Inflation is ONLY even-handed on liquid assets... hard assets are the beneficiaries of inflation.

VERY SIMPLISTIC EXAMPLE:
Let's say you borrow $100,000.
You use it to buy $100,000 home.
After tax interest rate is 4%
Real rate of inflation 4% (so, a wash.)

The rule of 72 tells us inflation will halve the value of the currency in 18 years.
That 50% drop in the real value of the dollar reflects in what appears to be a doubling of the price of the real estate (100% appreciation.)

The same amount of labor that would have earned $10 earlier, will now be paid $20.
(That's ignoring the increased value of the worker from 18 years of experience.)

The $100,000 mortgage will carry half the payment burden it had initially.
The $100,000 property will, on average, have doubled as it appreciated in reverse correlation to inflation, to $200,000.

If no leverage were used, the property would have appreciated along with inflation all the same,
HOWEVER, it would have been at the "full burden of ownership" instead of by using a wasting-currency in devaluation.
==========================================

Think of it along the analogy of an ocean sailboat...

Without a sail, a raft can only go the speed (and direction) of the current it sits in.
WIth a sail, but without a keel & rudder, a raft can be blown along almost as fast as the wind, but no faster (and again, trapped to the same direction, at its whim.)

A boat that has both keel/rudder systems, AND sails, can use opposing forces.
The pressure of the current going one direction, and the wind going at an angular direction, will allow a good sailer to travel FASTER than either the current OR the wind.

Another example is when you squeeze a watermelon seed between your thumb & forefinger, SHOOTING it out like a bullet into the air.

Using the opposing forces of inflation-caused devaluation of "other people's money" (leverage) and the inflation-caused appreciation of hard assets (especially real estate) together gives the common man an advantage against the government-caused decays of value.

Leveraged real estate is the purest form of a "hedge" that the common civilian has at their disposal to turn inflation into their financial advantage.

Cheers,
Dave Donhoff
Leverage Planner

you are in a great situation. i would definitely use the cash to pay off the mortgage and start banking your payment into savings/investments.

HOWEVER,

your job situation does not seem secure. you are working part time which appears to allow for you to continue to make mortgage payments. your cash savings will allow you to ride out any loss of employment (if it happens).

if you are secure in your part time work i would pay off the mortgage. it will leave you about $30k which should be a decent emergency fund and start banking your mortgage payment. Your RISK of losing your home to unpaid mortgage payments is gone.

i dont know your age so that may be other issues to consider (retirement, disability, dependents, etc.).

Actually, I'd have about $200K left after pay-off, of which about $118K is in "untouchable" retirement funds.

I don't like to take heavy risks on investments, and am not very learned on the market. With the numbers dropping daily, where could $50K be put that would earn a 4.875%+ return?

I opted today to park the $50K in another CD, 7 months @ 3.94%. At least that's guaranteed. At that time I can decide again whether to make the pay-off. Perhaps a good time to do the pay-off is when the interest drops below the point of tax-deduction.

It should be stated that I did an early pay-off on a previous mortgage and it was a very satisfying thing.

Age is 46.

you have over $80k in cash savings which is excellent. definitely pay off the mortgage and keep the money parked in conservative investments.

you are still young and should consider what are your goals for the money. at your level of liquidity you dont need the mortgage for the tax deduction which is minimal anyway.

right now CDs/money market accounts are your best bet until you decide what you want to do.

good luck

You are very young to be so conservatively invested. You are not even keeping up with the rate of inflation.

Dollar-cost averaging of stocks means exactly that - if you buy steadily, through BOTH bull and bear markets over a 20 year period, you will have a lower cost of investment dollars than if you try to "time" the market, which simply can't be done on a consistent basis.

People who act upon panic reactions to the fluctuations in the markets are the ones who have the worst overall results. This has been borne out time and again, study after study. Most people have lousy investing instincts.

Select a reasonable allocation of at least 75% stocks/25% bonds; diversify into no less than 4 market sectors, preferably 5, to reduce risk; and buy steadily over time.

Start increasing your bond percentage up to another 15% when you're within 5 yrs of retirement.

What is happening in the markets now is allowing you to buy more shares with the same amount of money. This will be to your advantage when the markets turn positive again, which they will at some point. They always do! Although we may not know the exact length of these cycles, market fluctuations are a fact of life.

Good luck to you as you make your decisions about your own financial future. It's a complex issue, but you are starting off correctly.

BTW, I'm deliberately not addressing the issue of mortgage pay-off because that is truly a personal decision. There is no absolute right or wrong decision, in this case.

Greetings rufus doofus,

There are two rats that eat your cheese.

There's an agency, the partner in many of your financial affairs, that asks you a question each year, and makes a statement.

The question from the income tax people: "How much did you make, last year"?

The statement: "We want part of it".

You can keep only that part of your income that remains after you've paid that income tax to your financial partner, the income tax people.

I wasn't sure from your message whether the interest on your mortgage is deductible, or not. If not, another reason not to pay off most or all of the amount owing.

The other rat that eats your cheese?

When you put money into a CD, you have that guarantee that you referred to - that the guys using your money will pay back every dollar that they got from you, in addition to the rent on the money.

There's another guarantee that they never mention - they won't pay one dollar more than you gave them, either.

BUT - the value of each one of those dollars shrank, every year since the early 30s.

When you put your money into a bank account, a money market fund, a bond or a CD ... you're not keeping the full after-tax amount of interest that the borrowing agency's paying you.

You must put part of the earnings with the amount invested, in order to maintain purchasing power of those dollars.

Your actual earnings are what's left.

And, don't forget ... the rats eat first.

Good wishes for making increasingly wise use of your income and assets.

ole joyful

Last year I opted to pay off our mortgage. Crazy move according to some as it was 4.75%. I crunched the numbers every which way and it really was a wash. I did make sure there was enough liquidity elsewhere for 'just in case'. Sounds like you are considering that carefully as well. Good for you.

Meanwhile here, the unexpected is playing out, as husband lost his income for a time. My work and our savings are keeping us afloat nicely, and we can continue this way for a couple years. If necessary we could then tap early pensions, sell some equities, or even begin to draw down some of the retirement funds. Most likely though he will get back to work.

Had I held the money, there would have been no foolproof investment options. Interest rates have plummeted on CDs and savings. And had I instead shifted that money into mutual funds, I'd have taken a really huge hit and been kicking myself. Tough year for investing.

I have NO regrets on the decision to pay off the mortgage. It has been very helpful not to have that monthly payment. Somehow the ratcheting down in our spending would pale against that large mortgage payment every month. As it is, I can walk instead of drive, shop Goodwill, cook creatively and spend very little. All is OK.

Riding this spell out sans the mortgage payment is working out well for us. Do crunch your numbers carefully though, and be sure your 'just in case' scenarios are well covered.

In my humble opinion...I would definately pay off the mortgage. Think of the security! You will always have a place to lay your head. :-)

I'm no financial sophisticate, but I vote for paying off the mortgage. That $705 will quickly grow if stashed away safely, a portion of it can be used to buy the funds that others are recommending. Stocks are "on sale" now. You are in a great position, low-debt. It could be NO-DEBT, with money left to invest.

Nobody ever went broke paying off debt. There are plenty of broke people who leveraged their way to better returns...

Hi nicemac,

I think the more important thing to remember is;
Nobody every went bankrupt when they had more cash than needed, regardless of debt.

Reserves & budget management trumps leverage retirement.

When you have enough cash to take on all surprises, then you afford to eliminate all productive leverage safely.

Cheers,
Dave Donhoff
Leverage Planner