Hi Sniffdog, Can you comment on when it makes sense to prepay vs when it makes sense to keep the cash and invest it? When we first looked at it - it seemed like a no brainer to prepay. But when we started looking at the other options (we are great savers), we thought we might do better keeping the cash and and investing it. I'm VERY GLAD to read that you're double & triple thinking, with critical logic, about your financial management!!! You need to determine what your real after-tax cost of interest is on your new mortgage. You can do that by determining your combined federal & state marginal tax bracket... then reduce your face mortgage interest rate by that factor. Example; Combined fed & state tax bracket = 35% Face mortgage rate = 4.875% Reduce the 4.875% by 35%... do this by multiplying 4.875% by the inverse of 35% (or 65%)... So, 4.875% * 65% = 3.17% SO... THIS is your net "cost of leverage" on the funds you seperate from your real estate. NOW you can begin looking at your various options of those funds, and what the options are worth to you. I say it that way because there are more than only the obvious. OBVIOUS is a straight comparison of savings & investment returns... i.e. can you get a post-tax return or interest credit better than 3.2? ANOTHER very serious alternative benefit to consider is the REPLACEMENT VALUE of those funds for safety purposes. Example; If you kept a chunk of funds in liquid access (checking account or money market account) at *only* a 2.2% yield... your difference between cost of leverage and credit would be a NET COST of 1%..... HOWEVER, doing so would give you the reserves that would allow you to AVOID the need to pay for a certain amount of insurance coverage. The savings on that insurance coverage offsets the net costs of your keeping the funds liquid... and often times puts you back in the net profitable range again (greater savings than costs.) There are many more "replacement" considerations to think about as well, of course.... If you lock your money into the real estate equity to "save" 3.2%... and in doing so you fail to have enough cash to take advantage of a safe business or retirement investment opportunity that would have yielded 10%, you're losing big time... not just in returns, but in longevity risk (the risks of running out of income before you run out of breath.) SO... weight carefully. Luck, Dave Donhoff Leverage Planner

Hi Sparksals, Some clarifications, if I may... If you're going to pay the mortgage off in 12-15 years, why not get a 15 year mortage? I'd say: Because getting a 15 year term puts your feet to the fire and locks you OUT of any safety management of your own equity. It removes your ability to plan and adjust to life. PLUS in actuality it ends up costing you more in real cash, in the end. You will save a considerable amount of interest and the rate will be a bit lower than the 30 year fixed rate. Actually, if you run the numbers, and apply ONLY the potential earning rate of conservative CD savings interest to the additional amount of principal trapped in a 15 year term versus a 30 year term, you pay far less with a 30 year mortgage. Ignoring the very real loss of savings interest income from the money you may be trapping into the real estate equity on an accelerated basis can be hazardous to your wealth ;~) That is an option if you think you can afford the 15 year payment. If you're taking out a 30 year mortgage for the security of a lower payment in case one of you lose your job, then adding to the principal will have the same effect of reducing interest, but you'll still pay a higher interest rate. THIS is true... which is why it is both safer, and smarter, to accelerate the elimination of your mortgage by sending all your free money into a seperate, liquid, savings-based "Mortgage Freedom Account" than to actually dribble it into the mortgage bank prematurely. The most important thing to check with your conventional mortgage is that there are no prepayment penalities. Actually... prepayment penalties on residential financing are so extremely tame, and offer the potential of strong savings (often reduced rates are offered in return for PPP periods,) that it is really something to look at favorably. By law, PPP can never be applied to accelerated payments less than 20% of the original balance... that's 1/5th of the entire loan amount... so if you WERE determined to dribble away your cash to the mortgage company, that is a LOT of dribbling you can get away with and still get the lower interest rates. In addition, there are SOFT PPP which apply only to payoffs greater than 20% due to refinancing only (not sales,) and HARD PPP which apply to both refinances and sales. Taking the rate discounts for a SOFT PPP when available can be a real win... and anyone paying a premium for a 30 year fixed, but avoiding a rate discount with a PPP, is simply conflicting their own financial values. WEIGH the options carefully, and KEEP ALL THE VARIABLES IN MIND! Eliminate ALL of your debt as fast as possible... HOWEVER, not a DAY EARLIER than it has completely served you! Cheers, Dave Donhoff Strategic Equity & Mortgage Planner

Hi Billl, While Dave's plan may make perfect mathematical sense, it really hasn't proven to be a way for the average joe to amass wealth. Actually yes, it has, in big, bold spades. It not only proves to be *A* way, it is indisputably the safest & fastest way. The path that most people seem to have more success with is to just pay off their house early and then live "bill free" in relative comfort. Actually, "MOST" people (literally 9 out of 10, per bond turnover records) who try that approach; A) have more risk of default (and subsequent loss of home) from insufficient reserves, B) Back-slide on their "pay-off plan" when they (completely contrary to their "for sure this time" plans) statistically move every 5-8 years, and/or refinance every 3-5 years. Anyone with the discipline & presence of mind to make a habit of paying a "little extra" to the mortgage will generally have zero problem instead paying that same "little extra" toward a safer Mortgage Freedom Account instead. They don't have to be financial super-athletes... in fact, the action to follow is identical, the difference is simply the safety and speed of payoff (the MFA trumping in both categories.) Of course, the CORE issue all about education... which is the entire reason most people show up to financial communities like this. If our community were the financial equivalent of the average "McDonald's diners" they wouldn't waste their valuable undisciplined time learning about dry topics like finance. FORTUNATELY, the presentation of the best of current financial strategies, and the integration of classic mometary principles, is a worthwhile pursuit for all. Cheers, Dave Donhoff Leverage Planner

Hi Mike, I GUESS we're financially independent; we've accumulated a healthy retirement fund and contribute $1200 to it monthly. We have a $25,000 rainy day fund and increase it monthly. We have no vehicle loans, no credit card debt. The house is worth about $525-550,000. That doesn't fit the definition of financial independence. QUESTION: Do you now recieve (or could you now receive) enough after-tax cashflow income from your retirement accounts, without withdrawing principal, to pay for all your current and future anticipated expenses? IOW, can you stop all employment immediately and live in the lifestyle of your choice on your investment yield alone? If yes; CONGRATULATIONS, you have reached financial independence. If NO... A) don't quit that day job, and more importantly, B) don't burn your growth money in non-growth directions. I guess my question is, why not go for the 15-year to get the lower rate, since the basic monthly payment will remain the same ($2077 vs the current $2055)? Because focusing on the payment as the primary determinant is distracting you from the much more critical issues in your financial life. Again; The wiser outcome (for responsible people) is NOT to try to eliminate your mortgage a little snip at a time, but to accumulate a SINGLE LIQUID ACCOUNT big enough to completely pay off the mortgage all at once... and AVOID sending a single dime to the mortgage that you could have otherwise sent into the growth account. If you do the math (or work with a knowledgable advisor who can do it for you) you will see that you will eliminate your mortgage as a liability faster this way, safer this way, and with far less uncertainties. ================================= Hi Joanne, Dave, are you saying that Mike should not refinance at all, or that he should not pay the extra $1,000/month? No.... Assuming Mike is mature & responsible with his money, the most conservative plan would be to refinance at 80% of the value (or more, if hte existing balance is more) using a 30 year term (unless a 40 year term is available at the same rate.) If he is statistically likely to stay put longer than 6-8 years, he would be wisely advised to buy the interest rate down at the point of rate lock to the lowest rate he can which will lock in enough interest savings to recoup the up front points by the 5th year. That will likely drive his total monthly mortgage payments down (even lower than his current $2,055,) and then all of the payment savings and every dollar of additional discretionary cashflows ought to go into a "cascade of buckets" (meaning a hierarchy of funded accounts, starting with immediate cash reserves, annual reserves, major repair reserves, and then longterm insured tax-advantaged growth accounts.) Further, it is *likely* that once he has his reserves properly funded he will also be able to adjust his various insurance coverages to reduce his premiums. Because of the safety reserves he will be able to increase his deductibles, increase his co-pays, and extend elimination periods. All these savings flow right into his longterm growth funds, which establish a self-climbing UPWARD spiral of funds for a change. but if it's a true no-cost refi (i.e., it's not just that the costs are rolled into the mortgage), then what's the downside? If your finances are poorly structured, and you replace the structure with an identical financial structure but merely drop the rate (all for "free") you are still left with an inefficient structure. GIGO. Most people lose much more money from financial leaks & inadvertant monetary giveaways due to not understanding amortization, taxes & insurance premiums than they can ever gain in a lifetime by increasing their investments by a percentage nor from decreasing their mortgage by a percentage. IOW... most people are trying to sail a boat full of holes across the ocean... and their best idea of a solution is a bigger horsepower engine. Yes, it will make a difference... but plugging the leaks & eliminating the barnacles will do it much faster, safer & more certain. Cheers, Dave Donhoff Leverage Planner