Pay off mortgage ($30k left)?

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interest = 4%, Principle +interest = $700/month.

i now have $60k in the bank. my expenses is $30k/yr.
so if i pay it off, i still have a years expenses in the bank.

the problem is that my job is unstable. The contract I'm on is in the option years, which means the client has to renew every year for the next 2 years.
then it goes out for re-bid.
Client is not too happy with us at the moment.

last time i got laid off (2012), i was out for a little over a year (all of 2013).

obviously, i will wait till i get word it gets renewed this year before even pulling out my checkbook.
but if it does, do i pull the trigger?
 

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OP, don't take this the wrong way -- but you seem to be just looking for us to affirm what you were planning/wanting to ... (more)

RedWolfe01 (Sep. 07, 2016 @ 10:25p) |

If I were in your situation, I'd use part of your savings to put a down payment on another house. Then I'd either rent t... (more)

taylor0987 (Sep. 08, 2016 @ 8:45a) |

agreed .... although i would get a cheaper rate HELOC with much bigger line, pay off the original loan with HELOC, and i... (more)

prozario (Sep. 08, 2016 @ 9:46a) |

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There's no way I'd get rid of a bunch of cash if I had the kind of uncertainty you describe.

What's the benefit of paying off the mortgage? Mostly a feeling, I assume, but it leaves you just about on the edge of handling an unemployed stint that you portray as reasonably likely. If you keep the cash, you've got what should be a comfortable cushion, and will still be making steady reductions in that mortgage balance.

I guess the natural question is what to do with the money if not pay off the mortgage. Have you maxed out your 401k/ira savings? If so, I'd put it into non-retirement investments - open a Vanguard account and stick it all into a suitable Target date fund. You can cash it back out very quickly if there's an emergency, but if you can keep it there (and continue to add to it) for 5, 10, 20 years, it will surely give you a better return than the savings you'd get by avoiding your mortgage interest.

Given the job uncertainty I wouldn't be in a rush to pay off the mortgage.

On the other hand its costing you ~$1200 a year in interest on the mortgage. Thats not trivial. You might pay off the mortgage and then get a HELOC to use in case of job loss emergency.

yurgreat said:   interest = 4%, Principle +interest = $700/month.

i now have $60k in the bank. my expenses is $30k/yr.
so if i pay it off, i still have a years expenses in the bank.

the problem is that my job is unstable. The contract I'm on is in the option years, which means the client has to renew every year for the next 2 years.
then it goes out for re-bid.
Client is not too happy with us at the moment.

last time i got laid off (2012), i was out for a little over a year (all of 2013).

obviously, i will wait till i get word it gets renewed this year before even pulling out my checkbook.
but if it does, do i pull the trigger?

  Two questions:

1) How much do you save each month?
2) When is the earliest you can lose your job?

Why don't you dollar cost average the mortgage balance. Pay extra every month, and if things are looking bad, stop.

yurgreat, you said your expenses are 30k/yr. Does that include the mortgage? What's P&I out of the 30k/yr?

The most your money would do in a savings account is a bit over 1%. Paying off the mortgage is like getting 4% on that money. If you do lose your job, not having to worry about a roof over your head after having paid off the house is one less thing to worry about.

There is a small potential upside for paying off your mortgage and saving interest. The increased cash flow would be nice.

The downside is that you could be forced to make a poor decision if your employment sours and you have half of your current cash reserves.


If you have a thirty-year mortgage with original loan value of $147,000 and $30,000 left to pay, you are in year 27. Over the last four years, you will pay interest of about $1,200, $900, $600 and $300. That's $3,000 over four years, or $750 per year average. If your income is stable, it can't hurt to save $3K. If your income is not stable, you need to hang on to your cash imo. $750 per year is a small price to pay to have $30K at your disposal in a potential rough patch.

If you are out of work for three years, the mortgage will not be your only problem.

I would say go for it. You're getting a 4% return on your money. And once your mortgage is paid off, your expenses will be less. And if you get laid off you would still get unemployment right? So between reducing your expenses by $8400/year, unemployment if you get laid off, and extra savings you will be able to achieve before being laid off (assuming you don't get laid off tomorrow or something), you're savings should be able to last you 2+ years.

This may sound obvious, but if you do pay off your mortgage, make sure that you actually SAVE the money you would have been paying monthly, at least until you re-build enough savings to deal with potential periods of unemployment. If you pay it off it may suddenly feel like you have extra income to spend due to the lower monthly expenses.

SlimTim said:   What's the benefit of paying off the mortgage? Mostly a feeling, I assume,
Paying off the mortgage early is more than just a feeling, it's about having more money. Having an extra few thousand dollars in my pocket because I didn't throw it away on mortgage interest is a good feeling.
Also, not having a $700 monthly mortgage bill every month is a really good feeling, too, especially if you lose your job.
And to prepare for getting laid off and having access to cash, I would set up a HELOC before losing my job, since one needs income for that.
Of course, everybody has different personalities, and some people have a hard time banking their savings or avoiding tapping a credit line unnecessarily, so for them, perhaps keeping the mortgage is wiser.

$700 a month mortgage. I'm a bit jealous.

I vote pay it off. You're clearly employable, and a years' savings should easily get you to your next job. If it doesn't I don't see how 2 years' savings would make much of a difference.

mapen said:   
SlimTim said:   What's the benefit of paying off the mortgage? Mostly a feeling, I assume,
Paying off the mortgage early is more than just a feeling, it's about having more money. Having an extra few thousand dollars in my pocket because I didn't throw it away on mortgage interest is a good feeling.
...
Of course, everybody has different personalities, and some people have a hard time banking their savings or avoiding tapping a credit line unnecessarily, so for them, perhaps keeping the mortgage is wiser.

Retaining a mortgage is more than just a feeling, it's about having more money.  Having many extra thousand dollars in my pocket because the mortgage rate is artificially low and much less than my opportunity cost is a good feeling.  Makes little financial sense to pay off a mortgage early if you aren't already maxing annual IRA and 401k/403 contributions, regardless of the fact that it might be a "good feeling".  If someone's already maxing their tax sheltered contributions and would be choosing to buy treasuries or bonds with that additional money instead, then sure, paying the mortgage is a "better return" and makes sense in that case.

Of course, everybody has different personalities, and some people have a hard time investing their savings or avoiding spending money unnecessarily that's not tied up in real estate, so for them, perhaps paying off the mortgage is wiser.
Stubtify said:   $700 a month mortgage. I'm a bit jealous.
$700's not necessarily that tiny of a mortgage payment at current rates.  Mine's around $700 for $160k+ financed at 30yr ($200k house, 2300+sq ft, ~10yrs old).  Interest is a measly $500/mo (On first month of 30 yr term, so principle balance is 100% of starting).  Property taxes more than cover my standard deduction, so all of the mortgage interest is deductible.  Sure, if you add property taxes/insurance on there then it's ~$1300.  Which only illustrates that the interest is under 40% of my house cost, before even considering maintenance, repairs, and utilities.  Add those in and the "interest" is well under 30% of the recurring house expense.  Paying off the mortgage only reduces monthly bills slightly, if the house is too big an outlay then the more prudent course is buying a smaller house.

mapen said:   
SlimTim said:   What's the benefit of paying off the mortgage? Mostly a feeling, I assume,
Paying off the mortgage early is more than just a feeling, it's about having more money. Having an extra few thousand dollars in my pocket because I didn't throw it away on mortgage interest is a good feeling.
Also, not having a $700 monthly mortgage bill every month is a really good feeling, too, especially if you lose your job.
And to prepare for getting laid off and having access to cash, I would set up a HELOC before losing my job, since one needs income for that.
Of course, everybody has different personalities, and some people have a hard time banking their savings or avoiding tapping a credit line unnecessarily, so for them, perhaps keeping the mortgage is wiser.

I think Bend3r already countered this one way, but it sounds to me like you've got a couple things exactly backwards.

"Paying off the mortgage...is about having more money."
Huh? You mean more money in 20 years? Paying off the mortgage costs $30k in this relatively small example. That's money that you do not have. Without a payment due every month, you'll gradually get access to that money again. But looking at that dropped payment in a vacuum is naive - it's what car salesman want you to do. The choice isn't monthly payment or not, it's monthly payment and $30k cash versus no monthly payment and no cash.

"Some people have a hard time banking their savings or avoiding tapping a credit line unnecessarily, so for them, perhaps keeping the mortgage is wiser"
You sound like you think a mortgage is a type of protection for the undisciplined, but that $30k in hand could easily be wasted by someone with little discipline or appreciation for the long term. Paying off the mortgage might be best in that case - it locks the money into a vehicle that will be slow and expensive to pull it back out of for any reason. But with some pretty straightforward information and good habits, it's easy to use the money from a cheap mortgage in very productive and safe ways.

"Also, not having a $700 monthly mortgage bill every month is a really good feeling, too, especially if you lose your job."
This is subjective, but I'd feel MUCH better having $30k cash and that $700 per month bill. If OP's expenses jump or his unemployment lasts a little longer than it did last time, he could come pretty close to owning his home free and clear and having no way to pay for property tax, gas, food, etc. Your suggestion of a HELOC before it's needed would be some level of protection, but those can be reduced or closed any time before you draw on them too.

It still sounds to me like the mortgage payoff is mostly about a feeling to you, too. That's worth something, but I think it's important to recognize that you are foregoing an objectively better financial alternative.
 

How much notice do you get before layoff?
If it's 4 months or more - payoff the mortgage. Then, if you're laid off - take out a mortgage for living expense.
4%is a really high rate right now.

camiolo said:   4%is a really high rate right now.
  4% is not "a really high rate right now", especially with the size of the mortgage taken into account.

Zero cost 30yrs are around 3.75% (using 160k loan in TX as example).  For $30k mortgage you will have trouble finding someone who will finance it, and it would likely be impossible to find a zero cost loan for that amount (checked my lender with TX third party fee estimates and even with a $35k mortgage they don't offer 0 cost, it costs ~$2000 for ~4.867% APR 30yr, ~$2500 for 4.5% 15yr, $3400 for 4.32% APR 5/1arm.  And $35k is the minimum mortgage they offer...)

The FWF solution to this dilemma is clearly cash out refi.

donotdrinkPBR said:   The FWF solution to this dilemma is clearly cash out refi.
  Unless it's a really small house, in which case OP couldn't pull out much cash.  But sure, if it's a 250k house, cash out would be relatively cheap to pull out $170k.  Then the FWF solution is to pull out the cash and invest (or bump up tax-sheltered retirement contributions to max) IF someone is disciplined enough to do so.  If they're not, then they're still better off just paying down the mortgage, because "dead money" savings is better than "no money" savings.

SlimTim said:   
"Paying off the mortgage...is about having more money."
Huh? You mean more money in 20 years?

  
One should always be planning for their long term future. Debt is bad. The interest is costing OP thousands that they could be saving or investing for their future or for emergencies. OP did not say they could safely invest the mortgage money for more than it is costing him/her in interest costs.

mapen said:     
One should always be planning for their long term future. Debt is bad. The interest is costing OP thousands that they could be saving or investing for their future or for emergencies. OP did not say they could safely invest the mortgage money for more than it is costing him/her in interest costs.

  So OP should spend his entire emergency fund paying off the mortgage so he'll have more money monthly to put towards an emergency fund?
   

Did you read the OP? There will still be an emergency fund.

donotdrinkPBR said:   The FWF solution to this dilemma is clearly cash out refi.
 Actually you raise an interesting point.
If we are talking about a $147K 30-year mortgage in year 27, the home may have been purchased for about $185K in or around 1990.

How much would such a home be worth in 2016?  Maybe $300K?  With $30K pay-off, you have $250K (possibly much more) in equity.  OP may not want to put that on the table for whatever reason, but it could open up some interesting alternatives.  But it gets more complicated if the job goes away, equity or no equity.

mapen said:   
SlimTim said:   
"Paying off the mortgage...is about having more money."
Huh? You mean more money in 20 years?

  
One should always be planning for their long term future. Debt is bad. The interest is costing OP thousands that they could be saving or investing for their future or for emergencies. OP did not say they could safely invest the mortgage money for more than it is costing him/her in interest costs.

  Not all debt is bad.  Cheap debt can be good.  Delaying future long term "risky" investment to first pay down low-risk low-return mortgage debt decreases the time horizon for long term investments, which both decreases expected return and increases the volatility/risk.

You can't eat your house... no way am I paying down a mortgage unless Im swimming in liquidity and job security.

cleanbeat said:   donotdrinkPBR said:   The FWF solution to this dilemma is clearly cash out refi.
 Actually you raise an interesting point.
If we are talking about a $147K 30-year mortgage in year 27, the home may have been purchased for about $185K in or around 1990.

How much would such a home be worth in 2016?  Maybe $300K?  With $30K pay-off, you have $250K (possibly much more) in equity.  OP may not want to put that on the table for whatever reason, but it could open up some interesting alternatives.  But it gets more complicated if the job goes away, equity or no equity.


It depends on the market. Anywhere on the west coast, where I live, a house purchased in 1990 for 185k has to be 1 million plus. I purchased my house in 2004 for 220k and it just appraised for 640k.

Alluded to a couple of times, but the simplest solution is a HELOC.

Based upon what you said, you can already get a HELOC for more than 30K based upon the equity in your home.

Get a HELOC, use the cash to pay off the mortgage, and then you have the HELOC sitting there in case of emergency. And, you'll have even more liquidity, less interest (my PSECU heloc is 3.5%), and a longer window if you decide you need to use the funds.

A Heloc is a no-brainer, no matter what you decide to do.

stanolshefski said:   
yurgreat said:   interest = 4%, Principle +interest = $700/month.

i now have $60k in the bank. my expenses is $30k/yr.
so if i pay it off, i still have a years expenses in the bank.

the problem is that my job is unstable. The contract I'm on is in the option years, which means the client has to renew every year for the next 2 years.
then it goes out for re-bid.
Client is not too happy with us at the moment.

last time i got laid off (2012), i was out for a little over a year (all of 2013).

obviously, i will wait till i get word it gets renewed this year before even pulling out my checkbook.
but if it does, do i pull the trigger?

  Two questions:

1) How much do you save each month?
2) When is the earliest you can lose your job?

  I save $10k/yr.
I could lose my job at any time. I am very replaceable. my co-workers can easily pick up the slack till they hire a replacement.
 

Treffen said:   "i now have $60k in the bank. my expenses is $30k/yr.so if i pay it off, i still have a years expenses in the bank" 

Wouldn't your expenses be less per year without the mtg?

  wow! never realized that.

$700 month x 12 = 8400.
so after mortgage is paid, my expenses will be $21.6k/yr.
with $30k left in the bank + 6months unemployment (@$350/week), I will have way more than 1yrs expenses in the bank after payoff.

looks like paying off the mortgage is the way to go

yurgreat said:   I could lose my job at any time. I am very replaceable. my co-workers can easily pick up the slack till they hire a replacement. 
  I appreciate that you realize this. Many people don't.
Is the long term play here to learn another skill to make yourself less replaceable?

yurgreat said:   
Treffen said:   "i now have $60k in the bank. my expenses is $30k/yr.so if i pay it off, i still have a years expenses in the bank" 

Wouldn't your expenses be less per year without the mtg?

  wow! never realized that.

$700 month x 12 = 8400.
so after mortgage is paid, my expenses will be $21.6k/yr.
with $30k left in the bank + 6months unemployment (@$350/week), I will have way more than 1yrs expenses in the bank after payoff.

looks like paying off the mortgage is the way to go

  
OP, don't take this the wrong way -- but you seem to be just looking for us to affirm what you were planning/wanting to do and haven't really noticed that most of the folks here said NOT to unless it was for personal and not financial reasons.

Which is fine, its not a situation where either answer is truly "wrong."  There is a little more money on the table letting the loan ride, and a little more liquidity in having cash versus less less debt -- but not so much that its going to make a huge difference in this timeframe.

If I were in your situation, I'd use part of your savings to put a down payment on another house. Then I'd either rent the newly-purchased house out or move into the it and rent out the current house. Moving to the newly-purchased house gives you the advantage of getting an owner-occupied interest rate on the new mortgage. (Or cash-out refi current home to buy rental with cash, etc). If you can keep a tenant in the rental, this would give you some income during those times when you don't have work.

Of course, if you don't want to be a landlord, or if you live in an area where it's hard to buy a rental that would be cash flow positive, then this won't work out for you.

donotdrinkPBR said:   The FWF solution to this dilemma is clearly cash out refi.
  
agreed .... although i would get a cheaper rate HELOC with much bigger line, pay off the original loan with HELOC, and if needed wait the mimnium period to avoid any fine and pay down the HELOC but keep the line open in case of job loss.



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