Would you pay off mortgage?

[jIM_Ohio]

Can you justify OP needing liquidity for the full $177k?

Yes, new houses cost money, and many people will not enter into contracts with conditions. Fewer conditions also improves negotiating power.

That's not the only other option.

agree, more than one option exists

Pay down mortgage substantially, make sure current home sells before buying new home, all cash is liquid and available upon sale of the current residence, interest has been saved in the meantime.

The issue here is OP would need to move twice in a short amount of time, and might not be able to enter contract to purchase until the contract to sell closes.

And the OP's rate on the new loan is independent of how much he owes on his former home.

Quote:
The OP's net worth will not change when cashing out savings and paying off (or paying down) mortgage. The only thing which changes is cash flow and liquidity of the money. If OP knows he (she?) will not be in house long term, he (she?) should not pay off the mortgage

That's not exactly true.

OP's net worth will not change immediately, but will change over the period with the lower balance. Because cash flow and liquidity aren't the only things that change. Interest expense goes way down too.

So scenario 1 - doesn't pay down mortgage at all: incurs about $9,352 interest expense in a year
Scenario 2 - pays down say... $100k of the mortgage: incurs about $3,977 interest expense.

At the end of one year, OP's net worth will be about $5,375 higher just by paying down the mortgage in the meantime. Adjust that for the deductible nature of the interest, and OP is better off by around $4k somewhere.

We both agree OP should not use all the cash to pay down current house.
I am suggesting keep 25% of next house price available as down payment- maintain liquidity and maintain flexibility with when OP can close on new house- gets OP the best price point and negotiating power.

That is probably between 50k-125k depending on price range of house purchase (200k-500k).

Your suggestion was 6 months expenses, which (just guessing) is about 15k-20k (much less than my suggestion).


I agree with your earlier suggestions OP is financially conservative. That is OK, OP just needs to determine what makes them feel better-

no mortgage or interest and higher cash flow in current house
or
optimum purchase situation on the new house with lower cash flow until either the house is paid off, or the move happens.

I would also suggest to OP that paying down a mortgage and paying off a mortgage are two very different things.

Paying down mortgage (as in taking 50-75k and paying down mortgage, but still having a mortgage balance) does not
a) increase cash flow
b) increase net worth
c) reduce your mortgage payment

Over time all 3 of those things are true (the longer the time, the more favorable the outcome), but short term the impact of those variables will be very similar to the previous month or previous year.

Paying off mortgage will
a) increase cash flow
b) eliminate mortgage payment

Paying off mortgage will not
a) increase net worth
OP's net worth will only change if mortgage payoff creates more cash flow, and some of that cash flow is put into assets which appreciate in value.





Which on $100k is a 4%(tax free) return, which is better than the 1.1% (taxable) he's currently earning.[/QUOTE]

[jpg7n16]

Yes, new houses cost money, and many people will not enter into contracts with conditions. Fewer conditions also improves negotiating power.


agree, more than one option exists

The issue here is OP would need to move twice in a short amount of time, and might not be able to enter contract to purchase until the contract to sell closes.

agreed that moving twice might be a hassle, but I thought the 2nd sentence is what you should shoot for. Always make sure home #1 sells before purchasing home #2. And avoid being stuck with 2 homes, one of which won't sell.

I thought that was the goal, not a setback.

That is probably between 50k-125k depending on price range of house purchase (200k-500k).

Your suggestion was 6 months expenses, which (just guessing) is about 15k-20k (much less than my suggestion).

okay, so I can see if you're trying to purchase before the home sells you'd need cash for the downpayment. I just thought avoiding that situation was the goal. And if house #1 sells, that's where you get the cash for downpayment on house #2. So no extra cash needed - hence my 6 months max recommendation.

But even with your range, that still leaves 25-100k underutilized.

Paying down mortgage (as in taking 50-75k and paying down mortgage, but still having a mortgage balance) does not
a) increase cash flow
b) increase net worth
c) reduce your mortgage payment

Over time all 3 of those things are true (the longer the time, the more favorable the outcome), but short term the impact of those variables will be very similar to the previous month or previous year.

Paying off mortgage will
a) increase cash flow
b) eliminate mortgage payment

Cash flow is a process that happens over time. Paying off the mortgage will not improve cashflow immediately either. It takes 1 payment cycle for it to start affecting your cash flow. In fact, the act of paying off the mortgage is a negative cashflow item.

Also, cash flow and interest are not equal. The cash flow may be identical in dollar amounts, but the effect to your net worth could be drastically different.

Paying off mortgage will not
a) increase net worth
OP's net worth will only change if mortgage payoff creates more cash flow, and some of that cash flow is put into assets which appreciate in value.

That is not true. Of each mortgage payment, X% goes to interest based on the balance remaining. If the balance owed drops substantially, less goes to interest, more goes to equity. Any interest paid directly lowers net worth. Any transfer to equity has no effect on net worth.

Paying off or paying down the mortgage will begin to increase net worth at the next payment cycle (well technically, it will slow down the reduction of your net worth). Just like with cashflow. Both describe events that happen over time.

Just like if you switch to Geico and save 15%, you do not save 15% immediately, you save it over time.


And by lowering your expenses, over time you will raise your net worth. In this case, that expense is interest.

[disneysteve]

And by lowering your expenses, over time you will raise your net worth.

Only if you don't spend the money. Lots of people pay off a loan and then just add the money that was going to the loan payment to their daily spending so they end up no better off than they were. In the case of paying off a mortgage, they actually end up worse off because at least before part of the payment was going toward building equity. If they aren't saving the former payment, they are losing ground.

What we've always done when we paid off a debt was to put most of the former payment toward additional savings and left some of it, maybe 25%, for additional spending. So if a payment was $200/month, I'd add $150/mo. to savings and leave $25/mo. for whatever came along.

[jpg7n16]

well yeah, if you spend the money elsewhere, you haven't lowered your expenses

[MonkeyMama]

Depending on how much you need for down payment on new home, moving expenses, etc., etc., I don't see this as an all or nothing scenario by any means.

Pay off a chunk of the mortgage and hold onto some of the cash too. May be $100k pay-off and $77k saved for the move, or any combo that makes sense for your situation.

If you pay off say, $100k, you will save a significant amount of interest without completely sacrificing your liquidity. Which is what I would do.

In general, I would not advise buying a new home before you sell the old one, but I think OP's situation is a little unique in that he has the cash to completely pay off home #1. In that situation, I probably rather not move twice, either. IT just depends on the whole scenario.

[disneysteve]

I've only bought one house in my life and never sold one so there is one thing that I'm not following here. I agree that you shouldn't buy a house before selling your existing house but don't you still need the down payment money liquid? You can't depend on the proceeds from selling house #1 to buy house #2 because you need to settle on house #2 before settling on the sale of house #1. If you settle on the sale before settling on the purchase, you'd have no place to live in the interim.

[nick__45]

You posted this on another thread a couple of weeks ago and several of us contested it but you didn't respond. Where did you come up with this theory? If you don't pay your mortgage, the bank will foreclose. It doesn't matter how much you owe or what the house is worth. All that matters is that you don't pay your mortgage. And in this case, OP has enough in savings to pay off the house so foreclosure isn't even remotely an issue.

I didn't see it to respond to it. The matter is very simple math. Why would the bank want the house that is only worth $100k when they have a note worth $300k. This is why they agree with work with the feds to possibly go into some creative financing so people keep the house and continue paying. Not only taking the house worth much less cost the bank money, the process of foreclosure itself cost a lot of money because they have to track down who actually own the mortgage and figure out who gets paid/screwed when the chips fall. I have many people who owe a lot more than their house worth and just quit paying mortgage even though they are perfectly capable of. And they banks don't touch them. They stay in their house, rent free for over 2 years now, some going on for 3 years. The bank was loving it when these people did cash refi as the 1% origination fee was a hefty bonus to the underwriter. On average, the houses were bought in the early 90s and even late 80s for roughly $180k and refi-ed for around $400k-$550k, depending on neighborhood. So instead of having 10 years or less on the original note, people have a new 30 years ARM rate, which is actually lower than fixed rate, even in today's numbers. But they see their house as a good investment outlived its potential because they have already cashed it out. Now they just live rent free and could care less if the banks take the house.

The only people worry about credit scores are the only having not a lot of money and need to borrow to do business. If you pay your bills on time, your low score doesn't affect you at all.

In summary, would you be happy with me paying you only 100 dollars for the 400 dollars you let me borrowed last week? If I am a betting man, I think you would be very anxious foreclose/take back an items that worth a lot more than the loan amount I still have on it. It is very simple. Banks aren't dumb. They'll get their money in the end.

[EEinNJ]

It's tempting when you have a lot of cash lying around to feel like you have to "do something" with it. Paying off your house is a great goal, but you're not quite there yet if doing so would leave you cash poor.

Forget about trying to get a few extra percent return by investing it, if you have major plans like buying a house in the next few years. Sure, you might get lucky and have 200K when you're ready to move- but what if it turned into less than $150K? If you're already maxing out your retirement plans, you have plenty of market exposure.

Why not pay off the student loans and save the cash towards your EF and house payoff? When you go for a mortgage on your next house, you'll have one less payment counting against you.

Oh, and owning two homes when you really only want one, is a miserable situation, a financial and emotional burden. So don't use the cash to shop for a new house until you're present one sold, especially these days.

If you're already in a house and area you like, finding an upgrade that worth it can take months of looking. Why not start now? It will help you decide how you want to spend that money.

[JuniorTT]

Thanks to everyone for the responses so far...

DW and I are spending the week out of state with family so I'm minimizing my time online. Can't wait to reply in earnest next week though.

[scfr]

This is the first time that our bank account has exceeded the mortgage balance and boy am I tempted to pay off the mortgage.

What were the reasons for not making extra payments toward the mortgage when the bank account had $25K, $50K, $100K, $150K, etc? Do those reasons still apply?

[CarePlus]

No Way

I would not payoff the mortgage. You can do better then 5% interest on that money with the correct investment

[loansta]

Double sized payments would be a simple suggestion...also invest some of that cash!!! 1% sucks.

[JuniorTT]

How much do you plan to spend on your next home? I would want to have 20% of that sitting in savings in 2011, for the down-payment. You might be able to avoid a contingency on selling your home first, and you could use the cash from your home sale to pay down the next mortgage, which you'll benefit from longer term.

So, if you're purchasing a $500,000 home, that's $75,000 now (you'll build it up to $100,000 again by 2011). Add to that your EF, moving costs, and extra funds in case you need to pay two mortgages while your first home sells. I wouldn't be comfortable with less than $50k.

So that leaves $52k that you could use to pay down your mortgage and reduce your interest payment. Doesn't make sense to pay it all off at once and leave yourself with so little cash.

Another consideration in my state (MA) is that home sale and mortgage records are public online. So by paying off the mortgage, potential buyers of your home would be able to see that you have no mortgage. I'd rather keep it private, and accomplish that by paying the mortgage down without paying it off.

Most of the houses I seem to like are around $600k give or take. However, my wife is about to drop down to part time so we wouldn't be able to afford that much house.

We've been tempted to use the cash to avoid a contingency on our next but having two mortgages is a slippery slope I don't want to be on. We've built our net worth to ~$580k at 30 yrs old by making smart (boring) financial decisions and carrying two mortgages is outside my comfort zone.

Interesting comment about public records. I feel like I've only ever seen purchases and refinances in the newspaper (Pennsylvania) but I could be wrong.

[JuniorTT]

If you have that much money in the bank, why do you still have school loans. Pay those stupid things off. What is the point of keeping them around forever? Then use the remainder to pay off most of the mortgage with the 167k. 15k for emergencies should be enough since you no longer have much of a mortgage left. You stated that you are saving heavy for retirement, so concentrate on putting 100% down on your next house by saving more and get rid of the debt. No amount of interest deduction from the IRS is ever worth it. I envy the position your in.

We haven't paid off the student loans because they are 1.625% interest and will be effectively even lower once we can start deducting it again (starting in 2011 for the foreseeable future now that DW is dropping to part time for our first baby). I agree it's annoying though.

Thanks for the compliment . I think we are way ahead of the curve for savings (I'd estimate in the 95th percentile for our age) but I still feel stressed as though we can't afford anything.

[JuniorTT]

Can you justify OP needing liquidity for the full $177k?


That's not the only other option.

Pay down mortgage substantially, make sure current home sells before buying new home, all cash is liquid and available upon sale of the current residence, interest has been saved in the meantime.

And the OP's rate on the new loan is independent of how much he owes on his former home.


That's not exactly true.

OP's net worth will not change immediately, but will change over the period with the lower balance. Because cash flow and liquidity aren't the only things that change. Interest expense goes way down too.

So scenario 1 - doesn't pay down mortgage at all: incurs about $9,352 interest expense in a year
Scenario 2 - pays down say... $100k of the mortgage: incurs about $3,977 interest expense.

At the end of one year, OP's net worth will be about $5,375 higher just by paying down the mortgage in the meantime. Adjust that for the deductible nature of the interest, and OP is better off by around $4k somewhere.

Which on $100k is a 4%(tax free) return, which is better than the 1.1% (taxable) he's currently earning.

Couldn't have said it better myself. This is really why I'm tempted to pay the whole thing off even though it's a little risky to temporarily have a low EF.