Paying off house, accelerated or not?

[The Budget Man]

Originally Posted by Ima saver

My home has been paid off for about 30 years and it is a really great feeling!!

There's an added bonus you receive when you pay off your home quickly... It's called a fallback position.

Let me explain.

There are times in our life when things go well and we need to use those times to get ahead. There are other times when life is tough for many different reasons. If you have been getting ahead with your home loan and things get tough you have room to move. If you have just made the required payments then you are against the wall.

By building a buffer in your home loan you are giving yourself an insurance police without having to pay the premium.

Enjoy Your Money

The Budget Man

www.PersonalityBudgeting.com
For when you'd like to have a budget

[disneysteve]

Originally Posted by The Budget Man

If you have been getting ahead with your home loan and things get tough you have room to move. If you have just made the required payments then you are against the wall.

By building a buffer in your home loan you are giving yourself an insurance police without having to pay the premium.

I'm not really clear on your point. If I make extra principal payments on my home loan, it doesn't eliminate or reduce the need to continue making the regularly scheduled mortgage payments. So if I ran into financial difficulty, I couldn't stop making house payments. I would, however, have more equity that I could borrow against.

As for "building a buffer," if I hadn't been making extra principal payments, I would have been investing that money elsewhere and could draw from those funds if needed.

[lillyb]

I think I understand what you're saying, Budgetman. If I make some pre-payments (like paying Aug, Sept, Oct, Nov payments now, for example) and then continue making my normal monthly payments along with principal payments, then if something were to happen I'm paid ahead those 4 months worth. I understand and have considered that very thing. Yes, you could set that aside in an emergency fund, but that's just one less worry cause your home is paid ahead already 4 months. Plus, no chance of having a late charge, cause I know things can happen.

[Ima saver]

I have some land that I make payments on. I always like to keep my mortgages "in house " because it makes paying extra payments on it so much easier. I also pay every 28 days instead of once a month so now I am paying months in advance too because of that.

[getforfree]

I usually pay at least a few extra dollars in addition to my payment every month. In December, last year, i prepaid for 3 months ahead, so I could write off more interest that year, so it would put us in a lower tax bracket. I even used my EF for that, but I didn't worry because I can build it again, because I didn't have to pay mortgage for the next 3 months. I rather do that than donating, to cut my tax.

[ummabdullah]

i think ima is right.. you should pay off your mortgage.. My husband and I are mortgage free at the moment and we really love it.. were soon to have another mortgage.. and I'm dreading it cuz it means I have to budge more.. but I know financially its worth it.. in our situation..

all the xtra money you have can be saved and spent on loads of things.. that come up.. a business, car, another house, ectr.. and no headache...

[The Budget Man]

Originally Posted by disneysteve

I'm not really clear on your point. If I make extra principal payments on my home loan, it doesn't eliminate or reduce the need to continue making the regularly scheduled mortgage payments. So if I ran into financial difficulty, I couldn't stop making house payments. I would, however, have more equity that I could borrow against.

As for "building a buffer," if I hadn't been making extra principal payments, I would have been investing that money elsewhere and could draw from those funds if needed.

Building a buffer ahead of what you need to pay off on your home loan gives you three options for later on.

Option1 When interest rates rise you can keep your payment the same as you have already paid down the capital. (check the details of your loan)

Option 2 You can redraw money if you need it. (check with bank)

Option 3 Your loan is paid off more quickly and you no longer have the stress of it.

Putting spare or extra payments into your home loan is almost always the best way of getting ahead.

Enjoy Your Money

The Budget Man

www.PersonalityBudgeting.com
For when the budget needs to work

[disneysteve]

Originally Posted by The Budget Man

Putting spare or extra payments into your home loan is almost always the best way of getting ahead.

But my mortgage is less than 6%, and even less on a tax-equivalent basis.

My investments are earning more than that, some substantially more. My best fund last year was up about 30% I think. How would it have been better to prepay the mortgage (and saving just 5.8% in interest) rather than investing the money in that fund (and earning about 30%)? I realize that the mortgage savings is guaranteed and the other investments aren't, but it really isn't too tough to beat a 6% return today.

I do intend to pay off our home early, so I'm not opposed to the idea, but I'm not sure I would agree that it is the best way of getting ahead.

[jmjj215]

Originally Posted by disneysteve

But my mortgage is less than 6%, and even less on a tax-equivalent basis.

My investments are earning more than that, some substantially more. My best fund last year was up about 30% I think. How would it have been better to prepay the mortgage (and saving just 5.8% in interest) rather than investing the money in that fund (and earning about 30%)? I realize that the mortgage savings is guaranteed and the other investments aren't, but it really isn't too tough to beat a 6% return today.

I do intend to pay off our home early, so I'm not opposed to the idea, but I'm not sure I would agree that it is the best way of getting ahead.

Different strokes for different folks - it just comes down to your risk tolerance.

[Ima saver]

I paid my house off early before I even learned anything about investing, mutual funds, etc. I have always had enough money from the sale of my paid for house, to build a newer bigger house. now it helps that my husband builds the houses!! I just enjoy the lack of worry over mortgage payments.

[The Budget Man]

What do you do when the house is paid off?

For many people paying off a home is forced savings. You have to make the payment so you do.

Then comes the day when the home is paid off. All of a sudden the floodgates open and there are so many calls on your money that you just can't save or invest.

What has changed? You are still earning the same amount of money as before and for years you paid off the mortgae.

I found that the change was in my expectations. When I had to make payments, I did. My financial personality type requires me to put things on automatic or they simply don't happen.

In other words, I had to have investments equal to my old repayments, automatically go from my account. Within weeks of doing this my budget came back into line as my expectations had changed.

Some people are much more frugal than I. For me, savings happen automatically or they don't happen at all.

Enjoy Your Money
The Budget Man

www.PersonalityBudgeting.com
A budget to live with