This has been discussed before, but I think my situation might be a little different because of the relatively small numbers involved. I’d appreciate any opinions because my knowledge of things financial is about equal to what ants know about driving stickshifts.
I bought a condo for about $50,000 six years ago. Put down $8000 and got a 15 year mortgage at 4.8%. About $18000 of the principal remains to be paid off. I live in the condo and have no plans to move as of now. Just came into some money, and I could prepay the whole thing.
Should I?
From what I’ve been reading, it might be smarter to just double my monthly payments. That way I’m keeping a lot of the cash in case something happens, but also paying the mortgage down quickly. Also, my interest rate is really low. But I really, REALLY would love to just get rid of the mortgage. It would mean I have zero debt in my life. Zero!
I got an unexpectedly large bonus a few years ago and used it to pay off my mortgage. From a purely financial point of view there are good points to be made on both sides, and I went back and forth for a while. But now that I’ve done it I realize it was a great decision. It’s one thing less to worry about – one huge thing.
If you have a decent cushion, whatever that means for you, and can still pay it off then do so. It’s very liberating.
Only other thing to consider is if you had something better to do with the money (like a specific investment). But sounds like you’re basically choosing between putting it in the bank and earning almost no interest, versus paying off the mortgage and saving the interest costs.
I paid off my mortgage for peace of mind (worth a lot to me) and to save the mortgage interest costs.
Do you know if there is a prepayment penalty on your loan? I would start there.
As a general rule, if you’re paying more in interest than you could invest the money at, then you are better off paying off the loan.
At this point, your payments should be more principal than interest, so even though you are still able to take the interest deduction, it’s getting smaller every year. How much does that deduction currently save you? Make sure to factor that in.
However there is, as you have noted, a lot to be said for having a good chunk of cash handy if you need it. But by the same token, if you were in a bind, how easy would it be for you to get a loan if you needed it? That’s a tough call to make. You have to weigh and balance a lot of unknowns based on limited information.
There’s no prepayment penalty. And despite the low interest rate, it is more than I’d make having it just sit in the bank.
Is the tax deduction equal to the amount of interest one pays? If so, it’s about $1000 per year. That’s far outweighed by my monthly payments. So I’m starting to lean toward doing it, especially since it wouldn’t deplete my savings. I’d still have a good cushion, even if I had to buy a car or something similar.
My worst fear is that something would happen requiring me to move. Although in that case, I’d probably still keep the condo if at all possible.
There is nothing like the feeling of not owing anyone anything. I understand that sometimes it might not make financial sense, but unless you can make a lot more by investing it you might prefer the feeling you get by paying it off. That was worth thousands to me.
Borrowing money may never be as cheap as it is right now. Personally, I’m thinking I should buy a second home just to take advantage of the historically low interest rates!
Actually, you can take out a rolling line of credit against your house at an interest rate that is lower than the mortgage rate. This is what I did when I paid my house off and I then applied this to all credit card charges which saved me $800 in interest. I was paying something like 4% interest when my mortgage was 8%. The interest rate was based on prime plus 1% if I remember correctly.
You could always pay it off, and since you said you could afford it, pay yourself back double the mortgage and put it away. Then you have the best of both worlds. In a few months you’d have savings, and if worse comes to worse you would be in great shape to get a loan if needed.
I vote for paying it off just for the wonderful feeling of it. As far as needing the cash for an emergency; once you pay it off you can get a home equity line of credit and never touch it unless you absolutely need it. If you lose your job in the future and need the cash the bank won’t loan you the money because you’re unemployed. With the credit line you’re covered in an emergency at a time when you can’t get a loan. It doesn’t cost anything either if you don’t use it.
This was the best advice I ever got from an otherwise truly terrible financial manager. I had the credit line when I needed it, a time when no sane bank would have given me a loan or line of credit. Saved my bacon and I am paying off the credit line now that things are better.
Pay off the mortgage and then shop around for a good HELOC.
Note: SP2263 is NOT the financial manager I was referring to, at least I don’t think so…
I just did this a couple of weeks ago; I’d been thinking about refinancing my mortgage to get a better rate then, when I came into a little money, I realized that no matter what type of savings I put that money into, the interest wouldn’t amount to half of the very best lowered mortgage rate I could get and I was better off not paying that interest for 15 more years.
Yes, it is nice feeling that the house is really mine now and not half the bank’s.
Insert “with the same level of risk” after “money at”. Paying off a mortgage is risk-free and so should just be compared with things like CDs and savings accounts. Clearly you cannot get 4.8% from that type of investment these days.
So as long as your liquidity will be fine (e.g. you have a suitable emergency fund), go for it and pay the mortgage off.
We just paid ours off also. Our only concern is making sure we set aside enough for taxes and insurance every year, about $3000 currently,since there is no escrow now.
Otherwise, it is a very freeing feeling.