Just paid down a big chunk of mortgage...but why does it feel wrong?
Would you pay 100% cash for a house today?
Yes and I have for my last two houses. Being debt free is a great feeling that most people will never attain. To me it was almost the equivalent of achieving self actualization on Maslow's hierarchy of needs, at least in a financial sense.
Please explain how getting more equity is not helping me make money when I sell? I am not trying to argue. Just trying to understand.
Because the equity increase came from your own money. It was a transfer.
I think this example was used before: Say you agree to sell your used car for $5,000. Then you go to the buyer, and say "I am going to put ten $100 bills on the dashboard, but now I want $6,000 for the car"
I suppose you can say you got more money for the car, but your net worth is the same either way.
You could discount this by any lower interest that was paid on the mortgage, but you could also offset that by any opportunity cost of not having those funds liquid and available for investment.
IOW, transferring money from one account to another does not make you richer. If it did, I'd be making transfers each and every day!
... Being debt free is a great feeling that most people will never attain. To me it was almost the equivalent of achieving self actualization on Maslow's hierarchy of needs, at least in a financial sense.
But that's not true for everyone. For me, I get an awesome, powerful, "putting it to the man" feeling when I see I have a sub 3% mortgage while the market has been soaring. And I could pay it off in a heartbeat if I wanted.
I see what you and Running Bum are saying. Thank you for the explanation.
Say you buy a house for $100K, and sell it for $150 K a few years later. That's $50K in profit, no matter how much you owe on it.
Case 1, you make extra payments of $20K, so you have $30K in equity, owing $70K. You get $80K cash at closing.
Case 2, you invest the extra $20K elsewhere and make normal payments. So you $10K in equity, which means you still owe $90K. You get $60K cash at closing. But you also have that $20K elsewhere, so you still have $80K cash.
This ignores the return you made on your $20K investment in case 2, and any interest you saved by paying down the mortgage in case 1.
If you pay the loan faster than planned you save the interest.
I figured I'd give an update on my progress here, since it's been about 5 months since I made that $10,000 payment on my mortgage. At the time, I still owed about $141K, and the mortgage was scheduled to be paid off in May of 2024.
Well, I made a $4K payment in September, $2K in October, $2K in November, $2K in December, and then $10K for this month (January). The required minimum is $1847.
Now, the outstanding balance is down to $123,845.04, and if I do $2K per month from here on out, it'll be paid off in January 2023...so just six more years!
Are you being credited with paying down the principle vs just pre-paying the mortgage payment ?
It's not that hard. The Vanguard Long Term Corporate Bond Index Fund (VLTCX) has more than one thousand of them with an average coupon rate of 5.2%.
We took out a couple 5/5 Penfed loans on places we had free and clear. At the same time, we had Penfed CDs that paid the same 3% rate they were charging us for the loans. It made great sense to me, because we could leave the CDs alone and use the borrowed money in our lending adventures rather than have the house equity just sit there. Now we've received notice that our Penfed home loan interest is bumping up to 4%. While 4% is still a remarkable rate looking back over the last 30+ years I don't really have a use for the funds. The Penfed CDs mature 1/18 and having borrowed money sit in a savings account earning 1% while we pay 4% seems wasteful. First world problem for sure. We will probably pull the loan payoff money out of the 1% savings account and get rid of the house payment. While last year we made some equity gains in the stock market we only broke even with the California tax free bond fund, so unless we want to really be pushing our lending and making that money work I don't feel real secure with being able to have it make 3% or better. Wurra wurra.
Yeah, it's going to paying down the principal. Do they even make mortgages or other loans where paying extra just goes toward pre-paying the interest? That sounds like it shouldn't be legal to me. Also, what advantage would there be to simply pre-paying interest, rather than paying down the principal?
The payment of $10K included the regular payment of $1847; of which a portion of that $1847 was to pay interest and a portion of the $1847 went towards principle. So that is why the difference. The actual payment extra amount that went directly towards principle was $8153.
I have heard some mortgage service companies will take the pre-payment and simply count it as advance payment of the regular amount, unless told to apply it to the principle.
It never happened to me, but I watched them like a hawk and kept it simple like pay regular amount + 10K at one time, then see the remaining balance (online) go down as expected.
Ultimately, at these low mortgage rates, you are likely to come out ahead long term not paying off your mortgage. The price for that is a (probably small) increase in the risk you are taking.
This decision is going to come up for me shortly, as I just bought a new house with a big mortgage and will have a large chunk of money available when I sell the old house.
My preference would be to hang onto the money looking to invest it in stocks when I find some at rational valuations. My wife will want to pay down the new mortgage and take the guaranteed 3.5% return since we have so much already invested in the stock market.
I think we will probably go with her plan, since the mortgage is big enough that it could conceivably cause us pain in a bad deflationary environment.
Paying down the mortgage reduces tail risk but reduces your expected return.