Save LOTS of Money in the Long Run

[jIM_Ohio]

Thank you for the reply! Yeah, that makes a lot of sense. Sadly, I don't know very much about investing, so I just feel more comfortable having a rental while I'm in school so I can continue to sleep at night LOL. Is there anything in particular that you would recommend investing in?

Being able to sleep at night is important. Do not take on more risk because others tell you that is what a person should/would/could do.

In my case, for money I need "liquid", I have a CD ladder maturing every 3 months, then I invest the rest in an equity fund- PRFPX- which holds some equities, some bonds, some commodities, and some foreign currencies.

[jIM_Ohio]

It is important to realize the amount of the extra payment in proportion to size of the mortgage balance.

Agressive repayment schedules (if you can afford to send 3-4 extra payments per year) tip the curve towards paying off, where as if you can only afford to send only one half or one quarter of an extra payment each year, investing that small amount will show a better return.

Like I said in another post (I posted that before reading 3 pages of replies), in my case pre-paying something which frees up cash flow works because I can aggressively pay off in about 15 years, and the next 15 can compound the "no payment" plus "extra payment" more than 30 could compound only the "extra payment".

Many factors, numbers wise.

Plus other factors, emotion wise.

In the case of moving, my response would be to shorten the loan... if you lived in one house for 20 years, then moved, I would suggest getting a 15 year mortgage or a 10/1 ARM for the second house. Keep your repayment terms at the same length as the first... this should also verify you are not buying "too much house".

[St. Theresa]

shoot...i remember when i was little dad bought the home they still live in for i think $30,000. that was 1985. silly me grew up unaware of rising house costs - i didnt become fully aware of the high dollar housing market until i was around 22!! i lived as a teen thinking that all regular houses cost less than 50k. LOL!

It almost makes me wish I was older. I envy people who bought homes for what a new car costs nowadays. When my ex and I bought this house, it was $93,500 - truly a bargain home at the time. A few years ago, when the real estate boom was in full swing, it was worth at least $300K. The value's gone down a bit, but it will never, ever be worth less than $250K, unless a hurricane wipes Cape Cod off the map.

It ain't just the size of the home - it's the location. Massachusetts is at the very top of the list where high housing costs are concerned. The problem with where I live is that the jobs and wages don't coincide with the cost of living, and almost all my friends finally got sick of struggling and moved away.

I would love to move to the middle of nowhere for cheaper housing costs. Since I work for myself, and I charge the same amount no matter where I live, my money would go further. But my family is here - and my kids have even more family here than I and I don't want to uproot them.

I've struggled for the first 16 years of home ownership and parenthood. Somehow, I'll make it through the next four years.

I think.

[simpleyme]

I bought my first home at age 18 for 24,900 my DH made 20K a year the interest was 10 % we paid it off in about 7 years

I have told people i simply cannot pay more for a car than what I paid for my first house so in a few year i may have to start walking ;-)

[Coleroo]

i agree heavily about the emotional aspects of paying off a mortgage early. my husband and i were 23 when we purchased our home on a 30 year fixed. ...if we prepay on the schedule we have set to start in fall of 2008 (when both of our cars will be paid off), our home will be completely paid for by the time we're both 35 years old --- and thats based off of current salary, not counting extra we could have with pending raises over the next 10 years. how much more awesome could that feel? our oldest child will only be 10 at that time! we both have a tendancy to not want to spend our savings, period, regardless of where they're from...so having at growing fat wallet of liquid assets somewhere out there in savings land will not boost our emotional health during the next decade -- but being free and clear of a mortgage payment by our mid 30s will boost our moral tremendously! even with prepaying we will have enough saved to cover most emergencies.... (we compare that to the thought of being in mortgage hell until we're both 53!!!!).... in our opinion, as long as we are "in debt" my husband and i both feel "trapped" into working as a slave to pay off the burden. being mortgage and debt free will give us the freedom to *not have to work* as long or as hard during our children's growing up years... we simply hate debt of any kind. my husband didnt have any debt at all til he met me and i regret introducing him to debt! if it wasn't for me reading savingsadvice the past 2 and a half years i dont know how far in debt we'd be right now.

i know there are those of you out there who know how to use debt as a tool and have the emotional stamina to do so....and the wherewithall to invest in a winning high % investment.... but not us. we hate debt of any kind and have a very very low risk tolerance for anything other than our retirement fund... and regardless of how nice the numbers look on paper "prepay vs. invest", emotionally we could not deal with the mortgage debt for another 28 years (thats more years than we've been alive! so its unthinkable). to us, prepaying a mortgage provides the most secure, lowest-risk way to go.

granted now.... our home mortgage is only $80k - so my perspective on things is quite different i suppose than those who have home mortgages of $400k and upwards. not sure how we'd feel if we lived in HCOL areas...

[disneysteve]

i know there are those of you out there who know how to use debt as a tool and have the emotional stamina to do so....and the wherewithall to invest in a winning high % investment.... but not us. we hate debt of any kind and have a very very low risk tolerance for anything other than our retirement fund... and regardless of how nice the numbers look on paper "prepay vs. invest", emotionally we could not deal with the mortgage debt for another 28 years (thats more years than we've been alive! so its unthinkable). to us, prepaying a mortgage provides the most secure, lowest-risk way to go.

There is certainly value in this. At the end of the day, you need to make decisions that allow you to sleep at night, not lie awake worrying about your finances and your future.

For some people, prepaying the mortgage might be the right decision. Just understand that doing so will ultimately cost you thousands and thousands of dollars in lost investment potential.

I would still suggest that for folks who feel this way what you should consider doing is this. Invest the extra money, get the benefit of the higher yield, and then when your investment account balance matches your mortgage balance, cash out and pay off the house. That actually gets your house paid off even earlier, thanks to the higher return on the investments.

[Snowgirl]

I'm also in the keep the mortgage basket. My mortgage doesn't keep me awake at night, it's just a lodging cost. If I weren't a homeowner, I would have to pay rent anyway. Might be a bit cheaper, but with the real estate increase in the last years, I'm not sure. We have a reasonable payment, and we are already doing our part on pre-paying it: we are set-up with a bi-weekly "accelerated" schedule, on a 20 years amortization, which brings us down to 17.3 years. We'll be mortgage free before we're 40, provided we don't upgrade!

Meanwhile, I'm contribution to the max in our RRSP (retirement) accounts, where the money invested is tax deductible and growing tax free. We have a nice chunk of change there, and I hope to be able to retire in style by 55, earlier if we up our investments as our salaries increase and our mortgage goes away (but we might have kids to increase our expenses thought!).

A mortgage free home won't help my retirement since I intend to keep it, so my money will be tied in. And the way I see it, if I end up in dire circumstances, I'll have trouble getting liquidity against the house (banks don't like to lend money if you don't have a job!), whereas I can get money from my investment easily. While I understand this philosophy is not for everyone, and that peace of mind is worth it, some people just refuse to look at the global picture of their personal finances and refuse to believe the straight numbers.

[scfr]

This guy has a great set of financial calculators Hugh's Mortgage and Financial Calculators They are worth getting familiar with, because gut feeling or calculations with innacurate assumptions and incorrect numbers will take money out of your pocket in your lifetime.


Lynda

Thanks Lynda. I didn't save the numbers we ran when we decided to pay off our mortgage early, nor did I remember the exact balance on our mortgage at that time, but I ran the calculator to the best of my memory. The number sounded about right (in the ballpark of the figure we came up with), and confirmed what a good idea it was for us to prepay the mortgage!

[LivingAlmostLarge]

to scfr and scanner, my dad was a doctor who was self-employed and carried a mortgage. There was a lot of reasons and divorce had to do with it. Just the way things work out with malpractice, etc, if anything had happened with 4 kids and the amount of insurance he had to carry, it was better to have a mortgage even being self-employed. Trust me it varies by state, and where we lived, it made more sense even with the risk. He consulted attorneys, CPAs, and insurance people because of the financial trusts he had set up, alimony, child support, etc. Every case is unique. BK the house can be taken in some states, other states have homestead exceptions like Monkeymama pointed out. So even for self-employed people it matters where you live.

My in-laws had the same thing except money was inherited and tied in a family trust so there were other reasons for how money was spent instead of paying off the mortgage. My FIL is self-employed but has a hefty inheritance and the way it works is through a paid for home (mortgaged though). So things are unique to say the least.

BUT in general prepaying the mortgage is a bad idea, until you have the mortgage amount saved in a taxable account in full. Then the risk is lessened, because you have money to fall back on. Until then you have a prepaid, illiquid asset. So the average working joe, should invest the money. Especially if they haven't saved the maximum in a Roth IRA or 401k.

Also yes employers do buy out homes even if the price dropped. It's how they get you to move. Our neighbors in the same field as us, moved and their house sold for $50k less. They sold to the company who bought it at $700k (what they paid) and in turn the company sold it at a loss for $650k. The $50k was taxable income, but it was incentive to move. The company then paid the taxes on the taxable income no less.

DH and I got that sort of relocation package as well when we moved. They also paid all our transaction costs for buying and selling our homes and 2 pts on our mortgage. And they paid our taxes. It really depends on your situation.

And we're not unique. Everyone we know and work with has the same compensation packages. So it really is dependent on the situation.

When we move again if we lose money on the house so what? We're not going to prepay unless a good reason comes up. And yes we could move cross country again, actually are planning on it. So for us there are many extenuating circumstances.