Pros and Cons of paying off house early

[skimom]

Would love some opinions on this. I love saving money, but am only really good at on the little things. I can find great deals at Walgreens, on hotel rooms, etc, but when it comes to the big things, I don't always think things through correctly. That is why I'm going to try to put this all down and get some input.

DH (age 47) and I (age 41) have 3 kids, ages 15, 13 and 9. Our oldest DD will be starting college in the fall of 2015. From what I'm reading online, we probably won't get any financial aid (other than possibly loans). Last year our AGI was around $106,000 and this year should be around $116,000.

Anyway, at this point, we have been putting extra money into a high yield checking account that is earning 3.1% and we have that up to around $45,000. We also have 401k accounts and Roth IRA. We don't come anywhere close to maxing either one out, but we slowly invest in them.

We have college accounts for each kid with also not anywhere close to what we will need I'm sure.

Both of our jobs pays a yearly bonus that is about 1/4 - 1/3 of our salary, so we live off of our monthly salary and then get this big lump sum payment at the beginning of each year. I started looking into the idea of paying off our mortgage with these lump sum payments. If we put a big chunk into our mortgage we would have it paid off around the time that DD starts college. Our current payment is around $800 a month and we have 12.5 years left if we keep payment the standard payment.

Just wondering the pros and cons of going ahead and paying off the mortgage by the time the kids start college. The extra $800 a month would be great to be able to help with their college, but I guess the flip side of that is that we could put the lump sum aside and use it to pay with when the time comes.

I've got to say though that the idea of being mortgage free in a few years sounds great!

I've probably rambled and not given all the information that is needed, so just let me know if you need any other information to comment.

Thanks!

[Shewillbemine]

My advice specifically relates to college and your children.

First, don't believe that just because you are a high income family that you won't qualify for scholarships, grants, loans and other financial aid. Every student should fill out the FAFSA each year. Many families lose out on plenty of opportunities because they just assume they make too much money.

Second, there are merit-based scholarships out there that have no bearing on your income level and assets. Those have more to do with your children's GPAs, test scores, extracurriculars, essays written (as required), and most importantly, if they apply at all.

Hundreds to thousands of merit based scholarships abound but most high school students fail to receive them because they a) simply don't know or b) don't apply for a variety of reasons.

Start at collegeboard.org and fastweb.com for scholarship searches. I'm sure others can chime in to your mortgage question.

[artwest]

Pros of paying off house:

You will free up $800 with no house payment.
You will OWN the house and the only way you could lose it is if you neglect to pay property taxes.
You will be debt free. (If you have other debt, pay that off first.)

Cons:

None.

I would pay off the house as quickly as possible.

[MonkeyMama]

The cons of paying off the house are what you could have done with that money otherwise. There is certainly a downside.

I personally plan to have my house paid off before my kids start college as well (specifically to help cash flow college, though well, we'd pay it off anyway - not a huge fan of debt).

The other thing about paying off a house is that if you have to do the large lump sums for 10+ years, that is a huge opportunity cost where you could have been investing or doing something else with the money (& with inflation it may really cost you more in the end). In this case, it sounds like you will have the house paid off in 3 years? In that case I would absolutely do so!

All that said, I would not do so unless retirement was taken care of. I understand why you are not maxing out - that would be like 40%+ of your income. But do you feel on track with your retirement? Only if retirement is on track, would I pay off the mortgage. Of course, you can always do both (beef up retirement and mortgage payments). I am assuming you have no other debt.

[riverwed070707]

I think the thing you have to keep in mind when figuring which is the better option is that bonuses aren't guaranteed and a lot can happen in a few years. You could lose a job, change jobs, lose bonuses, etc. It's great to plan ahead, but if I were making a decision like this I would also take into consideration what I would do if I didn't have that extra money anymore -- if your goal was to pay of the house, then you would just keep paying on it a few extra years but you also woudln't have those extra funds to help pay for school. If you put money in savings, you're still going to have some funds to help, just not as much as you had initially planned.

On the flip, I'm not a proponent for parents putting their own goals on hold to save for their kids' goals. If your daughter's school is going to cost as much as 12 years worth of mortgage payments, I think I'd tell her she needs to find a way to pay for it. Just because you have the ability to pay for school, doesn't mean you have to pay for school. While I'd like to help my daughter out, I feel I would be hurting her more than helping her by paying for it all up front. Ideally, I'd like to let her do it on her own and after graduation pay off her loans in full so she can have a fresh start. For parents who's kids are close to college age, the great thing about this plan is that it gives you 4 more years to save and kids don't have the expectation that you're just going to take care of everything. I think they appreciate it more after they've put in the hard work. JMHO

[skimom]

Thank you for all the thoughts so far. Here are few comments on the comments:

Originally Posted by Shewillbemine

Start at collegeboard.org and fastweb.com for scholarship searches. I'm sure others can chime in to your mortgage question.

Thanks so much for the websites. I remember getting quite a few scholarships for college and some of them were basically because no one else applied. I wasn't sure where to start looking for this, so these sites looks great!

Originally Posted by artwest

Pros of paying off house:

I would pay off the house as quickly as possible.

This is kind of what I was thinking, I love the idea of no mortgage!

Originally Posted by MonkeyMama

The cons of paying off the house are what you could have done with that money otherwise.

All that said, I would not do so unless retirement was taken care of. I understand why you are not maxing out - that would be like 40%+ of your income. But do you feel on track with your retirement? Only if retirement is on track, would I pay off the mortgage. Of course, you can always do both (beef up retirement and mortgage payments). I am assuming you have no other debt.

This is another question I have. I'm not sure how I feel about our retirement savings. DH and I both have a defined benefit plan at our company. We will receive about 60% of the average of our last 5 years of earnings when we retire. Most online calcuators that I've found show what you need to have as a lump sum when you retire, but we don't have the option of a lump sum, just the monthly payments. Is there anywhere that I can put in an estimate of the monthly payment that we will receive and see what we will need to have saved in addition to this? I'd love to find somethink like that!


[

Originally Posted by riverwed070707

I think the thing you have to keep in mind when figuring which is the better option is that bonuses aren't guaranteed and a lot can happen in a few years. You could lose a job, change jobs, lose bonuses, etc. It's great to plan ahead, but if I were making a decision like this I would also take into consideration what I would do if I didn't have that extra money anymore -- if your goal was to pay of the house, then you would just keep paying on it a few extra years but you also woudln't have those extra funds to help pay for school. If you put money in savings, you're still going to have some funds to help, just not as much as you had initially planned.

On the flip, I'm not a proponent for parents putting their own goals on hold to save for their kids' goals. If your daughter's school is going to cost as much as 12 years worth of mortgage payments, I think I'd tell her she needs to find a way to pay for it. Just because you have the ability to pay for school, doesn't mean you have to pay for school. While I'd like to help my daughter out, I feel I would be hurting her more than helping her by paying for it all up front. Ideally, I'd like to let her do it on her own and after graduation pay off her loans in full so she can have a fresh start. For parents who's kids are close to college age, the great thing about this plan is that it gives you 4 more years to save and kids don't have the expectation that you're just going to take care of everything. I think they appreciate it more after they've put in the hard work. JMHO

This also sounds like what went through my mind. If the bonuses were significantly less, I guess we'd just not be able to make the big payment in year 2 or 3 or whenever it happened. We'd just go on making our regular monthly payment. I also feel ok with the $45,000 that we'll be keeping in the high interest checking account as backup cash reserves.

I also agree about wanting the kids to have "some skin in the game". I don't want them to think that they can go anywhere they want and we'll just cover it all. For at least 3 years, we'll have 2 in college at the same time, so we probably wouldn't be able to pay it all anyway.

I like your idea of taking out loans and then helping them with the loans after they graduate. If they don't take it seriously, it could leave it all on their shoulders. I don't forsee that being a problem, but you just never know.


Thanks again for all the advice and thoughts!

[bjl584]

What is the balance, interest rate, and term remaining on your mortgage? Do you have any other debt? If so, can you list them? What is the balance of your retirment accounts?

Is the cash you are saving for college? Or for some other purpose? Without knowing, it looks like you are becoming cash heavy and may want to redirect that money.

Financial aid is still a possibility. Slim, but I would at least try. Scholarships are also an option.

[skimom]

Originally Posted by bjl584

What is the balance, interest rate, and term remaining on your mortgage? Do you have any other debt? If so, can you list them? What is the balance of your retirment accounts?

Is the cash you are saving for college? Or for some other purpose? Without knowing, it looks like you are becoming cash heavy and may want to redirect that money.

Financial aid is still a possibility. Slim, but I would at least try. Scholarships are also an option.

We currently owe right at $92,000 on our mortgage. It is at 4.5% and we have about 12.5 years left at the current payment. We do not have any other debt.

Retirement accounts
401k - DH $86,000
401K - me $60,500
Roth - DH $25,000
Roth - me $25,000
for some reason, I can't log onto our retirement website, but could get the information of our estimated monthly payments when I get home.

The cash is I guess just because it's earning 3% and everything else that we had was not doing very good, so I thought for now 3% is at least safe and it's something. Probably not the best thinking, but that's really it.

Also, we have about $20,000 (combined) put away in the kids names for college at this point.

[Petunia 100]

You might consider depositing the bonus money into a separate savings account each year and continue making your mortgage payments. When the balance in savings is enough to pay the mortgage in full, do so.

You will not save any interest in the meanwhile, but since you plan to have enough to pay in full in only 3 years time, it isn't going to cost all that much (in mortgage interest you might have saved). In exchange, you gain the advantage of increased liquidity in the meanwhile.

In the event you use the bonus money to prepay your mortgage as you receive it, any income interruption will derail your plan. You won't have cash in the bank and you won't have a paid for home. You will have more equity, but that doesn't pay any bills.

It is awesome that you and your spouse have pension plans, but you need your own retirement nest egg as well. Pensions can be reduced and even eliminated. If that should happen to you, you don't want to be left destitute. If that doesn't happen to you (and hopefully it won't), then you will be in the fortunate position of having more money than you need. A good rule of thumb is that you need $25 saved for every $1 of annual income you need.

[Like2Plan]

I think a few more specifics might be needed to come up with a conclusion.

I am coming from a perpective of having a DS who is just finishing college and for the first time since he was born, we are no longer putting money aside for his college! We did reach our goal to pay for 100% of his college.

Here is the dilema I see now-a-days (depending on how much support you plan to give to your children). $800.00 a month may not cover 100% of the college expenses especially when you have more than one child in college (Our DS's tuition and fees and room and board at a public college is over 20K this year.) You may end up trading a home mortgage for a plus loan--the Plus loans are currently set at a higher interest rate than current mortgage rates.

Some factors to consider:
1. How much help do you plan to give your children per year?
2. Will your children attend public or private college or community college?
3. What percentage rate is your current mortgage?

It may make more sense for you to hold on to your bonuses and keep your mortgage in place. Of course, the savings will also impact fincial aid.

[bjl584]

As an alternative to paying off the mortgage, you may want to look into a refi. You could lessen your interest rate and term. You could have it paid off in a decade or less.

How do you plan to pay for the kids' college. 100%? Or are you going to make them pay/get loans for a part of it? Scholarships? Financial aid?

Don't jeopardize your own finances to pay for your kids' college. A lot of people make that mistake.

[KTP]

Max out 401K and Roth, anything leftover can go toward the college costs.

Kids should go to local community college for 2 years to get the core requirements done (Calculus I, II, and III are essentially taught the same at Podunk U and MIT...the difference being the MIT classroom will have about 400 students and cost $40,000/yr)

Also find out what your kids want to major in. If they say "Women's Studies" or some other useless degree, inform them that they can only live at your home for 10 years after they graduate before they need to look for a higher paying job than Starbucks.

If they scored 1500+ on the SAT and are interested in computer science, skip the 401K and Roth, pay for them to go to a good school, and keep up a good relationship with them after college.

[disneysteve]

Originally Posted by KTP

inform them that they can only live at your home for 10 years after they graduate

Is that supposed to say 1 year?

I agree with the others. Retirement savings comes first. 15% of gross annual income to retirement. Then you can consider funding college savings. Then, if you are debt-free except the mortgage, you can think about prepaying the mortgage if you still have extra cash available each month.

[MonkeyMama]

Originally Posted by skimom

This is another question I have. I'm not sure how I feel about our retirement savings. DH and I both have a defined benefit plan at our company. We will receive about 60% of the average of our last 5 years of earnings when we retire. Most online calcuators that I've found show what you need to have as a lump sum when you retire, but we don't have the option of a lump sum, just the monthly payments. Is there anywhere that I can put in an estimate of the monthly payment that we will receive and see what we will need to have saved in addition to this? I'd love to find somethink like that!

It might be wise to start a new thread to ask this retirement question.

Do you also pay into social security (will you get social security in addition to pension?). Pensions do come and go, but with the triple sources of income (social security, 401ks/IRAs, and pension), you may not need to save near as much as the average person, into your IRAs/401ks. I'd probably err on over-saving too, but you have to balance that against realistic financial goals.

Of course, you are getting comments to max out your retirement, which is ridiculous (I think I calculated before that was about 40% of your income - if you both maxed out a 401k and an IRA. Not ridiculous for everyone, but may be in this case). The standard advice is 15%, but that also doesn't really mean anything. If you only have $200,000 saved (retirement funds), maybe you should be contributing more than 15% to retirement (considering your age). Anyway, I would take all that advice with a grain of salt. What you need to do is figure how much you need to live on (in retirement) and work backwards from there. For example, how much is the bare minimum you need to live on (on an annual basis)? How much are you currently contributing to retirement accounts? With this info you can work backwards to estimate how much you should be saving.

[Ima saver]

Speaking as someone who paid there house off at a very early age, the feeling is wonderful. I paid off my house at age 32 and have not had a house payment since. I have traded up in house twice, but still have no mortgage. No house payments for over 30 years!

[sblatner]

We paid off our house last fall and have a son going to college in 2013. We used most of our savings and are now saving for college and anything else that comes up. We own our own company and have good cash flow so I'm not worried about saving. It is a great feeling to not have a house payment.

We refinanced our house a couple years ago to a five year fixed. Interest rate was 3.75% or around there. Our payment went down, we continued to pay the old amount and the amount due went down really fast. You might want to look into a no cost refinance for a short time. You could then continue paying the $800 (or even more) for a year and then use your bonuses to pay it off before 2015. I would not refinance if I couldn't get a true no-cost loan. You would never make up paying for the fees.

This has been an excellent thread to read.

[NorthernCalGal]

I am curious as to why no one has mentioned the advantage of the mortgage interest tax deduction -- this is saving you money on taxes so that effectively brings down the cost of that loan. And it is already at such a low interest rate. I would think you would be better off investing in 529K plans for college for your kids that would most likely make much better rates of return than what you are paying for your mortgage. Just a thought.

[sblatner]

Originally Posted by NorthernCalGal

I am curious as to why no one has mentioned the advantage of the mortgage interest tax deduction -- this is saving you money on taxes so that effectively brings down the cost of that loan. And it is already at such a low interest rate. I would think you would be better off investing in 529K plans for college for your kids that would most likely make much better rates of return than what you are paying for your mortgage. Just a thought.

The further you get into a mortgage, the less of a tax deduction you receive. I would think at 12.5 years left on a mortgage, skimon is not paying much in mortgage interest anymore. When we paid off our mortgage, our interest was less than a $100 a month.

[photo]

Originally Posted by Shewillbemine

Every student should fill out the FAFSA each year.

It simply isn't worth the time for some. The deadlines are ridiculously early, and people often have to file amended returns, especially with K-1s. However, it is true that some families who do not file out a FAFSA will not realize they qualify for aid. The last time we filled out FAFSA our EC was over $60,000 which covers nearly any university. Therefore, it isn't worth the effort for us. However, a salary of just over $100,000 may qualify. For those who apply, it's strongly recommended to apply early because aid is distributed on a first-come, first-served basis.


Merit-based scholarships are obviously very much worth the effort for those with strong academic records.

Originally Posted by Shewillbemine

First, don't believe that just because you are a high income family that you won't qualify for scholarships, grants, loans and other financial aid. Many families lose out on plenty of opportunities because they just assume they make too much money.

It isn't how much you make but it's how many assets you have. If you are a saver, then FAFSA punishes you because you have to divulge all amounts in IRAs, savings, and other investments. It's a bad deal for students whose families have assets but who decide they will not finance their children's educations.

[skimom]

Originally Posted by sblatner

We paid off our house last fall and have a son going to college in 2013. We used most of our savings and are now saving for college and anything else that comes up. We own our own company and have good cash flow so I'm not worried about saving. It is a great feeling to not have a house payment.

We refinanced our house a couple years ago to a five year fixed. Interest rate was 3.75% or around there. Our payment went down, we continued to pay the old amount and the amount due went down really fast. You might want to look into a no cost refinance for a short time. You could then continue paying the $800 (or even more) for a year and then use your bonuses to pay it off before 2015. I would not refinance if I couldn't get a true no-cost loan. You would never make up paying for the fees.

This has been an excellent thread to read.

Do you know where you would go about looking for a true no-cost refi? I called our local bank that our current loan is through and they have a 3.25% rate now with no points, but we would still have to get an appraisal and they said to estimate about $1500 cost associated with refinancing.