Friday, May 29, 2009

Why I Prepay My Mortgage

Anonymous left a comment yesterday and asked some questions about why I prepay my mortgage. I was going to reply but then I thought I would just make a post out of it because I am feeling lazy and I don't want to spend my entire Friday night sitting in front of my computer. I am guessing that this commenter hasn't read my blog for long otherwise they would know my reasons already.

So, Anonymous said:

-Do you know that "a big mean bank" would still take your house away if you stop paying monthly. Of course. This is part of the motivation to pay it off as quickly as possible. I want the mortgage to be gone before I lose my job or something happens which affects my ability to pay. I don't like the power the bank has over me.

-Paying ahead to increase equity does not count as regular monthly payment for interest/principal. That is the idea. I don't want to pay extra payments. I want to shorten and eventually end the loan early.

-In the mean time, you have to suffer with minimum living. True, my standard of living is considered 'minimum' by some. I happen to think it is creative, challenging and will help me reach my goals faster than anything else I can think of except winning the lottery or marrying a rich fellow. ;)

-Putting your extra payment into a mutual fund is more beneficial in a long run. When I first started my mortgage payoff plan I had $25k in the bank. I read everything I could find on the subject of investing verses pre-payment. True, investing will potentially yield more money at the end of 20-30 years if the stock market cooperates but paying off the mortgage will be a fabulous feeling! Plus I find watching the mortgage go down a lot more motivating than stressing out over a mutual fund's performance.

-Because it is more liquid and it earn more interest than you pay toward the house.
With potentially only 1 1/2 years to go before my mortgage is gone and the way the stock market is riding the waves, I like the security of paying off the mortgage. It really comes down to risk tolerance and I'm not willing to risk my house money. My 401k has lost 40% but I am ok with that. I have time to wait it out. This is all part of my diversified retirement plan. The house is my safe investment, my property is my back-up plan, my 401k is mostly in stocks, the money that I save after the house is paid off will be money to play with and social security, well, I'm not counting on that.

Here is some of the information that I read before making my decision back in December of 2007:
From Get Rich Slowly's blog:
Is It Better to Invest or Prepay Mortgage?
And from Bankrate.com:
Prepay Mortgage or Invest?

It's not the choice everyone would make but it is the choice that let's me sleep at night...and dream about what financial freedom I will have in 1 1/2 years!

15 comments:

Over the Cubicle Wall said...

Sounds like you put a great amount of thought and research into it and you have done what is best for you.

From my experience, paying mine off was the best financial move I have ever made.

Daizy said...

Yes, I am just a little jealous of you and your paid off house. :)

Over the Cubicle Wall said...

You'll be there before you know it, and your house probably cost over twice what mine did. That is really impressive.

Lizzie said...

I like the 'suffering from minimum living' question. Are you suffering? Sounds like you are having a great time to me. I am like you, I like the challenge of not thowing money at something to fix it or progress it.
I think you are doing the right thing with 'Daizy's desert'.

Big Sis said...

She's not suffering. She lived at my house for a while and all that "rich living" only made her fat and unhappy. (ha ha) When you take away all of life's little excesses, those little treats become what they were when you were a child...treats!! And you are so much the better for enjoying the inexpensive things in life instead of always yearning for the next shiny toy.

My house is paid off, too :)

Andy Hough said...

It is sometimes irritating to me when people make comments such as the "suffering from minimum living" one. If she had read your blog at all it should have been obvious to her that you're not suffering. It is quite possible to have an enjoyable live without excessive spending.

The Executioner said...

Comments like the one from Anonymous appear on my blog from time to time too. My favorite part of paying off my mortgage early is knowing that I am making a definite impact on my future cash flow once the mortgage is paid off. Sure, investing in mutual funds, stocks, gold, or lottery tickets MIGHT be more profitable in the "long run" than prepaying a mortgage; but then again, they might not. Anyone who put money into the stock market 10 years ago most likely has a zero or negative return during that time. Someone who instead began aggressively prepaying their mortgage 10 years ago is likely close to (if not already enjoying) a debt-free lifestyle. In the end, the choice to invest or pay down debt is nothing more than a personal preference. Anonymous is not right or wrong here; rather, he/she is simply unable to see that there are two sides to this coin.

Daizy said...

Hi Lizzie, according to my boss my life is incomplete without Netflix so maybe I am suffering and I don't know it!

Daizy said...

Big Sis, I must admit that I still get a little queasy when I see a Lindor truffle. That giant container in your pantry was definitely too much of a good thing! Truffles for breakfast lunch and dinner...baaaaaaddddd.

Daizy said...

Andy, I agree. That 'suffering' comment made me wonder. It is too bad everyone can't appreciate living with less. They are missing out on some great experiences that money can't buy.

Daizy said...

Executioner, it amazes me how convinced some people are that there is only one right way. And yet I never see the mortgage pre-payment side insisting that their way is the only way. It's always the investors who think our side is naive and foolish. Funny.

bugbear said...

An even safer strategy than prepayment would be depositing the prepayment cash in CDs or other money instruments so that if you lose income, you can still make the monthly payments. Then when you have enough cash, you can just make a balloon payment to finish off the mortgage.

Of course, it will cost you a little as the most you can get for interest on cash these days is maybe 2 percent, while prepaying the mortgage saves you the 7% or so I am assuming you are paying on the mortgage.

But I was talking about maximizing safety, not maximizing financial return.

Daizy said...

Yes, bugbear, I considered that route back when CD rates were 5%. I took a little risk to just pay it down outright but now I could pay it off by selling an acre or liqidating my 401k so I am not worried about losing the house.

Sallie's Niece said...

Ha, I love how all the most critical comments come from the anonymous ones. To tell you the truth I didn't particularly understand your plan when I first started reading your blog but heck it's your life and you clearly know what you're doing so just ignore the naysayers!

Daizy said...

Thanks Sallie's Niece. I'm not really sure of my plans either beyond the paying off the mortgage part!