Withdraw from mutual fund for martage payment... Question...

[mrpaseo]

I have a little over 10,000 sitting in two different Mutual Funds. I have decided to clean them out and put this money towards my mortgage.

I know you can not give a difinitive answer so would like some opinions and rough advise.

My concern is, should I wait until after the new year and take the capital gains, or should I just take out the money now and apply to the mortgage ASAP.

Current mortgage remaining: Just under $59,000
Current status: I am one month ahead on my payments (This is where I like to stay on my payments, always one month ahead).

No credit card debt, no vehicle payments, just my daughters braces (0%) for 150 per month and household bills.

My thought is, will save automatically 7% (Mortgage percentage) on the money, but I should be able to save more every month because I owe 10,000 less right?

If I do this I can pay about $14,500 off the loan on the first. That would drop the loan balance to about: $45,500 (500 towards interest and escrow).

Opinions?
Thanks,
Ray

[disneysteve]

1. Why do you want to do this?
2. Why do you have a 7% mortgage?
3. The actual rate isn't 7% because of the tax deduction. Real rate is more like 5.25%.
4. I don't know about you, but my mutual funds have been going wild this year. My best fund is up just over 73%. I have a couple up over 30% and others up 10-20%. I wouldn't sell them (and pay taxes on the money) to pay off a relatively low interest loan.

[maat55]

To add to Steve, do these funds have tax and penalty obligations?

[BillK]

A lot of people pulled money out early this year when things looked so bleak. Look at the market since March. You could hardly make a mistake unless you took to much risk.

You really need an adviser to help determine if you should even be considering this.

[mrpaseo]

1. Why do you want to do this?
2. Why do you have a 7% mortgage?
3. The actual rate isn't 7% because of the tax deduction. Real rate is more like 5.25%.
4. I don't know about you, but my mutual funds have been going wild this year. My best fund is up just over 73%. I have a couple up over 30% and others up 10-20%. I wouldn't sell them (and pay taxes on the money) to pay off a relatively low interest loan.

Dave,
I was hoping you took the time to answer. Let's see.


1. I want to pay off my Mortgage in 20 months. I retire in 30 months. I would like to retire with no bills save for the monthly household bills.

2. I have paid extra on my mortgage every month since the loan started, when I called to refinance, the bank told me I would not recover the finance charge.

3. Tax deduction? If you mean itemize, I have never been able to itemize, it's always better if I take the standardized deductions.

4. Please tell me what mutual funds you are invested in. I can not tell you how mine have been doing but nothing spectactular.


Ray

[mrpaseo]

To add to Steve, do these funds have tax and penalty obligations?

None... that I know of. It's not an IRA or retirement account of any sort.

[disneysteve]

4. Please tell me what mutual funds you are invested in. I can not tell you how mine have been doing but nothing spectactular.

None... that I know of. It's not an IRA or retirement account of any sort.

Most of my funds have done well this year. Here are YTD returns:

VFINX 21.00%
VGHCX 13.70%
VGTSX 34.38%
HRTVS 38.90%
JANSX 29.74%
OPGSX 72.03%

There are a couple of others but you get the idea. It has been a very good year so far. Of course, last year was horrendous but it has been a nice recovery thus far.

As for taxes, surely if these are taxable accounts, there will be tax implications. If you have gains, they will be taxed. Of course, if you have losses, they will be deductible.

[NJ11]

I have been a long time lurker..my $0.02 here.

With 20 months left, isn't it true that you are neither paying 7% nor 5.25% interest as most of the loan interest has been paid, true?

We are in similar situation, DH always likes to pay off the mortgage, but I always reminded him the difference between "feeling good" (no mortgage) or financial benefit.

[maat55]

It would be nice to payoff a house. But, equity does not earn interest. If you feel secure with your income and do not believe the stock market will have decent gains in the future, paying down is not all bad.

If I remmember right, you are in the military and have a stable income. And by history, the market will usually go up from this point.

I personally would ride the mutual funds and wait to use them for payoff later. Just my opinion.

[MonkeyMama]

I'd do it - I'd sell now while the market is "high." It's been a great year for the market. Still a lot of economic instability though. It's not like you have years to ride it out.

You've got only a few years left with a higher interest rate. You want to pay it off before retirement. Assuming you have enough liquidity, and taxes are minimal, I say go for it.

If you were younger and had more time I would advise to wait it out. Just doesn't seem the best advice to someone who wants to retire and pay off their home in a couple of years. In that case I do think it is a good time to exit the market. I just wouldn't put all my cash and investments into my home. I don't know what you have otherwise.

[disneysteve]

With 20 months left, isn't it true that you are neither paying 7% nor 5.25% interest as most of the loan interest has been paid, true?

This is not true.

The interest rate doesn't change. What changes is how much of each payment is being applied to interest and how much to principal. The interest is based on the outstanding balance. As the balance decreases, the interest decreases. By the time you are close to payoff, there is not much interest, but it is still calculated at the same percentage as it was with payment #1.

[disneysteve]

1. I want to pay off my Mortgage in 20 months. I retire in 30 months. I would like to retire with no bills save for the monthly household bills.

I'd do it - I'd sell now while the market is "high." It's been a great year for the market. Still a lot of economic instability though. It's not like you have years to ride it out.

You've got only a few years left with a higher interest rate. You want to pay it off before retirement. Assuming you have enough liquidity, and taxes are minimal, I say go for it.

If you were younger and had more time I would advise to wait it out. Just doesn't seem the best advice to someone who wants to retire and pay off their home in a couple of years. In that case I do think it is a good time to exit the market. I just wouldn't put all my cash and investments into my home. I don't know what you have otherwise.

I think MonkeyMama makes a good point. Normally, I say not to sell investments to pay off a mortgage. In your case, however, your interest rate is high and you are doing pre-retirement planning. Even if the actual dollars and cents don't support prepaying the loan (and they might), the peace of mind of being mortgage-free upon retirement is significant.

In this case, selling some shares to get rid of the mortgage might be the best way to go.

[NJ11]

This is not true.

The interest rate doesn't change. What changes is how much of each payment is being applied to interest and how much to principal. The interest is based on the outstanding balance. As the balance decreases, the interest decreases. By the time you are close to payoff, there is not much interest, but it is still calculated at the same percentage as it was with payment #1.

First of all, I am not aruging/suggesting whether the OP should pay off the mortgage, it depends on people's risk tolerance. Then there is always the emotional factor.

But let's look at the numbers..and may be I am confused here..

From bankrate's amortization-calculator.aspx (can't post link)

I plugged in $100000.00 at 7% for 30 years. For simplicity, I assume the discussion was on whether to pay off the mortgage at 12 month mark.

Beginning at year 30, with 12 months outstanding, the amount owed will be7688.98. If the person chooses NOT to pay off the mortgage, the amount of interest paid for that year will be 294.62, from what I calculated, it is about 3.8%. I just can't see how the 7% comes in, nor the 5.25%.

Obviously, there can be an argument on the opportunity cost for the 7688.98, but as it is not included in the analysis of 7% or 5.25%, hence I will omit here.

My understanding is that mortgage payment is "top heavy" is that more interest is paid in the beginning of loan term even the interest rate remains constant. Therefore, with 12 months remaining, it is like borrowing 7688.98 with 294.62 interest. Orwe can only apply 294.62 for "tax-reduction" as it is the amount of interest paid.

[disneysteve]

But let's look at the numbers..and may be I am confused here..

From bankrate's amortization-calculator.aspx (can't post link)

I plugged in $100000.00 at 7% for 30 years. For simplicity, I assume the discussion was on whether to pay off the mortgage at 12 month mark.

Beginning at year 30, with 12 months outstanding, the amount owed will be7688.98. If the person chooses NOT to pay off the mortgage, the amount of interest paid for that year will be 294.62, from what I calculated, it is about 3.8%. I just can't see how the 7% comes in, nor the 5.25%.

Okay. You really got me thinking here because I knew what I posted was accurate but I had to figure out how to prove it.

You aren't crunching the numbers the same way the lender actually does so you are arriving at a very different number.

Look at that amortization schedule again. Pick any month you'd like. Doesn't matter if it is month one, month 50 or month 360. Take the outstanding balance at the start of the month. Subtract the principle paid that month. Calculate 7% of the remaining balance and divide by 12. That will approximately match the interest charge for that month. It won't be exact because of how and when they actually make the calculation, but it will be pretty close.

I hope that makes sense.

[skydivingchic]

The problem with your basic calculation NJ11 is that the principal falls each month, so the interest is calculated on fewer dollars each month. So for the month with a balance of $7688.98, the interest paid that month would be $44.85. The rest of the payment ($620.45) goes to principal, so the next month you pay interest on only $7068.53. That month you pay $41.23 of interest and $624.07 of principal. Each month you pay interest on less principal. Disneysteve's calculation is correct (principal remaining multiplied by 7%/12) will be the amount of interest you pay. It is true that you pay far more interest (by absolute dollars) in the first years of a mortgage because there is a far larger principal balance in the first years. However, if you have a fixed rate mortgage the percent of interest you pay each month remains the same.