Refi to 15 year

[tripods68]

We are scheduled to close escrow this Friday (crossing our fingers!). Following DR's principle, we moved from 30 year mortgage to 15 year loan. After completing the FPU class, we are eager to pay it off sooner like in 5 years.

I run the amortization schedule based on $225K loan at 3.375. It will be paid off Dec 2020 (based on $4500 mortgage payment a month escrow included). We have no other debt. Our net income next year will be around 105K-$110K range after deduction (i.e., pretax retirement contributions 457 & 403(b), 529 plan, HSA, Healthcare, mandatory retirement contributions, federal & state taxes etc). We have built 6 months of EF of $30K. We also have additional $11500 in another account. We will be living on 55-60K a year income for the next four 5 years.

The total mortgage payment a year plus interest will be around 55K (of that
47K will go to principal). We are both on-board to do this. We will continue to maximize our retirement contributions and 529 plan while doing this.

I know its going to be tough. The main reason we want to do is just start doing it, build momentum so not get distracted and things becomes automatic. Any above raises over the next 4 years will be just a bonus.

Has anyone paid off their home in 5 years or less? If so, how did you do it.

[Jluke]

I saw you mention in another post paying the mortgage off in 5 years. Now I know how you'll do it.

Why didn't you go for a 10-year loan?

otherwise:

This is a perfect example of the power of paying a loan aggressively.

For the 15Y loan I think I matched your amortization schedule:

Interest if no extra payment = $62,000

Interest with appx $2500 extra per month to pay off in 5 years = 19,750
Interest Savings of 42k by paying off in 5 years vs 15 years.

Interest with appx 625 extra per month to pay off in 10 years = 40.2k
Interest Savings of 22k by paying off in 10 years vs 15 years.

[tripods68]

I saw you mention in another post paying the mortgage off in 5 years. Now I know how you'll do it

With 3 paychecks coming in a month, we are going to make 2 mortgage payment a month (2nd and 23rd), starting in Jan-16. Most of our bills are due within the first week of every month. This gives us more flexibility and manageable. It will be tight but its doable.

You're pretty close to the numbers I have. The total interest payment schedule in 5 years is around 17K (equivalent to a brand 2015 Nissan Sentra). But I digress, that just gives us more passion to knock this mortgage off silly.

This is our long term goal in 5 years, completely "DEBT FREE" and a million dollar net worth.

[Goldy]

We are doing something similar but it won't be paid off in 5 years, more like 8. Our house was 350k with a loan of 265k and we refinanced to a 5/1 arm after the first year at a rate of 2.5%. Similar to you we max our retirement and as a bit of a hedge we pay just over two payments a month to the mortgage which is over 26k a year to principle.

I can't wait to have a paid off house!

[tripods68]

We are doing something similar but it won't be paid off in 5 years, more like 8. Our house was 350k with a loan of 265k and we refinanced to a 5/1 arm after the first year at a rate of 2.5%. Similar to you we max our retirement and as a bit of a hedge we pay just over two payments a month to the mortgage which is over 26k a year to principle.

I can't wait to have a paid off house!

We want to achieve something BIG! Paying off a mortgage would be that! And those who have paid off their mortgage PROPS to YOU!

Our current mortgage is 5/1 adjustable at 2.875 but it's schedule to reset in a month. Its a waiting game every year "what's our new rate next year? Will it go up or down?" Rather than worrying the interest rate fluctuation year after year and having been to FPU which ended last week woke us up to get going. It's silly that we make 180K gross this year and not be gazelle intense towards our mortgage.

[Jluke]

We want to achieve something BIG! Paying off a mortgage would be that! And those who have paid off their mortgage PROPS to YOU!

I completely get the point of being debt free and am all for accelerating payments on the mortgage.

The one thing that is bugging me in your case is the loan balance of 200k+. It just seems like a lot of money to plug into one "investment" in just 5 years and in the end you can't tap into any of those dollars.

Does Ramsey speak to a healthy balance of building wealth (outside of retirement) and leveraging debt? or is it just kill all debt!??

On paper if I do the math I am debt free with a 20k surplus, but I haven't paid off my mortgage or car loan. I view the interest on these loans as insurance that allows me to have cash for life events.

thoughts?

[JoeP]

I'd keep the 15 year schedule and funnel more into your retirement savings. The reason is that the amount of interest you'll be paying on your mortgage is small, and that extra money has more time to compound in retirement instruments.

How long do you plan on staying in your current house?

[tripods68]

I completely get the point of being debt free and am all for accelerating payments on the mortgage.

The one thing that is bugging me in your case is the loan balance of 200k+. It just seems like a lot of money to plug into one "investment" in just 5 years and in the end you can't tap into any of those dollars.

Does Ramsey speak to a healthy balance of building wealth (outside of retirement) and leveraging debt? or is it just kill all debt!??

On paper if I do the math I am debt free with a 20k surplus, but I haven't paid off my mortgage or car loan. I view the interest on these loans as insurance that allows me to have cash for life events.

thoughts?

Jluke--
I strongly believe more than ever today DEBT is what’s wrong with our society. We want to teach our kids and future grandchildren to avoid debt completely. It’s a legacy we want to instill to them at early age. Keeping up with the “joneses” cost too much and for what? We like to impress people we don’t even like, cars we can’t afford. We are not here to impress anyone any more. I sold our 2012 WRX Subaru so I can drive a $3k beater.


Look at this way, we are reducing our mortgage liability ---a guaranteed risk-free transaction at 3.375 similar to a bond transaction - someone paying you interest for the next 5 years $600 a month. By paying if off sooner I'm saving about 45K total interest cost over 5 years instead of carrying at 15-year. The greater benefit would be our home is guaranteed not to be foreclosed and enjoyment of life. We can transfer our estate to our kid’s debt free.

Another way we look at debt if you are asks me "Would I buy a house today pay 225K at 3.375 carrying a mortgage?”. The answer is NO. We would not borrow to buy this house today. I would save up instead in 5 years to pay in cash. Mortgage deduction is not enough or even in a consideration why I should carry a mortgage.

Our ability to work and earn is our insurance + 6 months saved EF. That’s good for us. We’re not here to impress anyone. The insurance is having the title in our hand. I used to think carrying large amount of cash is what I needed to feel secure, but it doesn’t make me feel any better if we have debt to worry or not have the ability to pay for our kids college education in 8 years after high school.

If I get injured at work, I can collect worker’s comp and if it happens I become disabled we have disability insurance. If I die today, my wife and kids will get 1.5 million in term insurance policy payout in addition to retirements saved. We carry car insurance we don't even use. No debt = security

This is a 5 year plan we are executing towards wealth building. I hope I answered your questions.

[Jluke]

This is a 5 year plan we are executing towards wealth building. I hope I answered your questions.

Thanks! I struggle on a regular basis to figure out what is the best way to manage my finances and am looking to others to understand their experiences and perspectives.

it feels like a juggling act with debt vs savings vs retirement vs expenses.

In 2015 I used 15k savings to chip away at mortgage debt ($26k to principal total this year). Mortgage is currently at 54k, and applying $300 extra each month for payoff in 2018 or 2019, if I ride it out it's $3k in interest remaining.

I feel like my cash savings (60k) are there for me so I can be prepared for everything to fail - appliances, home improvements, job loss, etc. I know it is extreme, but that stuff adds up quickly.

debt: 54k at 2.875%; 7k at 0%; 17k at 1.9% (all these have 3-4 years to go).

I feel like I'm in a good place and I should just be patient and the debt will go away soon enough.

Am I not being aggressive enough?

[pflyers85]

I completely get the point of being debt free and am all for accelerating payments on the mortgage.

The one thing that is bugging me in your case is the loan balance of 200k+. It just seems like a lot of money to plug into one "investment" in just 5 years and in the end you can't tap into any of those dollars.

Does Ramsey speak to a healthy balance of building wealth (outside of retirement) and leveraging debt? or is it just kill all debt!??

On paper if I do the math I am debt free with a 20k surplus, but I haven't paid off my mortgage or car loan. I view the interest on these loans as insurance that allows me to have cash for life events.

thoughts?

Ramsey believes your greatest wealth building tool is your income and interest on loans are a hindrance to your ability to build wealth because that interest is working for someone else not you. He would rather you have some money set aside for emergency but use the bulk of your income to get out of debt before significantly saving/investing. The idea is if you have no outstanding debt other than a home mortgage you will be able to save and invest a lot more of your money and grow wealth much faster. Also without debt you will be able to easily cashflow minor emergencies because your bills will be limited.

[corn18]

One must consider the tax deduction for mortgage interest when determining the equivalent return. For me, with a 3.75% mortgage in the 39.6% tax bracket, my equivalent return is 2.2%. Lower tax brackets are higher equivalent return.

I am trying to make this decision right now as well. I am dumping a lot of money into my retirement savings but the mortgage really irritates me. Some things to consider:

1. Would you take out a home equity loan at 3.75% and put it in your retirement savings? If no, then maybe paying off the mortgage is a good thing. Most of us would never consider doing this.

2. Have you maxed your tax advantaged retirement accounts? If not, then maybe there is a trade here. At least max out a 401k to the employer match. Then decide between mortgage and retirement savings.

3. How's your cash flow? If you have a healthy EF and enough non retirement savings to cover any big costs coming up (college, surgery, etc...) then locking up money in a house could be fine. I wouldn't count on a HELOC ever.

4. You don't have to go all or nothing on the mortgage. DisneySteve taught us that. The 15 year mortgage is a great start for sure. Get that, put any left over money towards retirement. It's a balanced approach.

At the end of the day, there is no wrong answer to this question. If having no mortgage will make you happy and give you peace of mind, then go for it. I have nnever heard anyone ever say they regret paying off their mortgage.

Tom

[LivingAlmostLarge]

I think DR is wrong about building wealth. BUT he's also a guy who made his money from selling a product and tool to get out of wealth. So take what he says with a grain of salt.

I do believe in him however for getting people out of debt, living on a budget, and how to save in general. But anyone whose financially savvy will come out ahead investing and saving.

I've got quite a of friends who carry mortgages because they leverage their wealth to build more. Two in particular come to mind. One woman is a single mom who used to be in private equity (think mitt romney bain) she started her own company with partners. She "retired" at 45 and has mortgages on every place she owns and buys and sells for profit. But she's an investor not "playing" at being a landlord.

Another friend is a stay at home mom now, but she used to be in finance. They just bought a house and it was painful because they see it as something tying up liquid assets instead of them investing and making 10-15% a year. They have waited a long time to buy their first place because they didn't want to tie up their investments in a home.

But I don't necessarily think the average joe could go wrong by living on a budget, saving say Dave Ramsey's 15% but increasing it until you max out all possible retirement contributions which I think Tripod does $47k (2 401ks, 2 IRAs), maybe an ESPP, college funding, then focusing on the home. You can't get years back of contributions after you pay off the mortgage.

However you choose to allocate your money if you are "saving" it and not spending it does it really matter if you have a paid off home versus a mortgage? Probably not. Because you are changing behavior. And by saving your income whether it is investing or paying off a mortgage, you're being responsible.

[MonkeyMama]

I have never heard anyone ever say they regret paying off their mortgage.

Tom

I have!

I think you summed it up pretty well. I just don't agree with this very last part. It's possible to be too imbalanced or "house poor".

These discussions tend to be very black and white. The truth is that the vast majority fall somewhere in the middle. OP said he was funding retirement and college, etc., so I think it sounds smart.

I think age and job stability are factors that play into it. In my 20s I would absolutely borrow equity and invest it. I would never do that in my 50s. I mention job stability because our mortgage pre-payments have gone by the wayside with my spouse's lack of employment. We are discussing a possible 5-6 year mortgage payoff strategy (depends on a lot of what-ifs) since my spouse is working again. But I think it's going to be a more likely "hoard cash/investments and pay off as we feel comfortable" kind of strategy. If I knew my income would be guaranteed for the next 5 years then it would be a done deal. But I don't know, and I really don't see the point of paying our mortgage just to borrow for college. I guess is where *we* are at with that. Retirement is a non-issue since we've funded so far ahead. Retirement is first and foremost for us, and would not be affected by any extra mortgage payments. We just personally struggle with the liquidity factor. In addition, our own mortgage is far below our means, so there is a lot of, "What's the point?" in our discussions. I don't expect our own mortgage payoff to be hugely life changing from a financial standpoint. We are probably pretty good with just "most the payment going to principal" - we might be happy when we get to that point. But the flip side of that is all of our other ducks are in a row so that is our next financial goal. & is where any extra money would go. Which is why we are discussing it. Paying off the mortgage also clearly speeds up our retirement timeline, and is maybe the next logical step for us anyway.

I do see the value in not having a mortgage, but it just would be at the expense of other more important things if we did it before our 40s. We've never planned to have a mortgage past age 50.

[tripods68]

Thanks! I struggle on a regular basis to figure out what is the best way to manage my finances and am looking to others to understand their experiences and perspectives.

it feels like a juggling act with debt vs savings vs retirement vs expenses.

In 2015 I used 15k savings to chip away at mortgage debt ($26k to principal total this year). Mortgage is currently at 54k, and applying $300 extra each month for payoff in 2018 or 2019, if I ride it out it's $3k in interest remaining.


Am I not being aggressive enough?

You have 60K in cash and 54K in mortgage balance. And how much is your mortgage payment? 1400 - 1700 range. I'd say you can easily pay off your mortgage TODAY and rebuilt savings plus EF easily next year. Assuming you can save $2K a month x 12 = 24K in 12 months, saving 3K mortgage interest payment. Do you expect to lose your job in the next year or two. If so i'd still pay off the mortgage. That's what I would do.

[tripods68]

I have!

I think you summed it up pretty well. I just don't agree with this very last part. It's possible to be too imbalanced or "house poor".

These discussions tend to be very black and white. The truth is that the vast majority fall somewhere in the middle. OP said he was funding retirement and college, etc., so I think it sounds smart.

I think age and job stability are factors that play into it. In my 20s I would absolutely borrow equity and invest it. I would never do that in my 50s. I mention job stability because our mortgage pre-payments have gone by the wayside with my spouse's lack of employment. We are discussing a possible 5-6 year mortgage payoff strategy (depends on a lot of what-ifs) since my spouse is working again. But I think it's going to be a more likely "hoard cash/investments and pay off as we feel comfortable" kind of strategy. If I knew my income would be guaranteed for the next 5 years then it would be a done deal. But I don't know, and I really don't see the point of paying our mortgage just to borrow for college. I guess is where *we* are at with that. Retirement is a non-issue since we've funded so far ahead. Retirement is first and foremost for us, and would not be affected by any extra mortgage payments. We just personally struggle with the liquidity factor. In addition, our own mortgage is far below our means, so there is a lot of, "What's the point?" in our discussions. I don't expect our own mortgage payoff to be hugely life changing from a financial standpoint. We are probably pretty good with just "most the payment going to principal" - we might be happy when we get to that point. But the flip side of that is all of our other ducks are in a row so that is our next financial goal. & is where any extra money would go. Which is why we are discussing it. Paying off the mortgage also clearly speeds up our retirement timeline, and is maybe the next logical step for us anyway.

I do see the value in not having a mortgage, but it just would be at the expense of other more important things if we did it before our 40s. We've never planned to have a mortgage past age 50.

Those who have not listen to Dave Ramsey principle as follow:

Baby Step 1: 1000 EF
Baby step 2: Pay off all debt
Baby step 3: 6 months of EF
Baby step 4: 15% Retirement contributions
Baby step 5: College fund for those have children
Baby step 6: Pay mortgage sooner (15 year fixed) extra should go towards reducing mortgage.
Baby step 7: Wealth building and giving

We are in baby step 4, 5, 6. In 5 years we expect to be in baby step 7- Wealth building and tremendous giving.