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Old 03-11-2009, 03:54 PM
 
Location: Visitation between Wal-Mart & Home Depot
8,309 posts, read 33,400,364 times
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Quote:
Originally Posted by acegolfer View Post
Another factor to consider when you pay off the mortgage balance is insurance claim in case of fire/flood. If you pay off the mortgage, then you are on your own to get the money from the insurance company.
This is true, you will not have a lender with more imminent "stroke" leveraging the insurance company, however, any money recovered from the insurance company will not be shared with a lender. It can actually be used to rebuild or repair the house.
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Old 03-11-2009, 04:34 PM
 
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The contract on insurance is the same. The only difference is when you have the home paid off;you control the money directly while if a big claim the lender will have to clear all payments.Usually they wil release money as the bils are filed with them on a big cliam;its a real pain in the neck. If say its a total they will take thier money first and if you don't have replacement you eat the depreciation.In other words their equity is always fully covered;while your may not be unless you pick better coverage.
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Old 03-11-2009, 05:43 PM
 
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I've been paying down my mortgage since it began, but recently I've been contemplating IF interest rates and inflation go sky high like a lot of people are saying, then it may not have been a good choice. Let's say my 5.375% rate is being paid down, and interest rates go to 15%. This means I'm losing out by paying down the 5.375 and should be using that cash to make 15% instead.

That is how you could lose.

Fwiw, I'm still paying it down, but who knows... If we get hyperinflation... possibly all bets are off. Shouldn't one just stick the extra $500 or $1000/month into the 15% CD at that point instead of clearing the 5.375%?
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Old 03-11-2009, 07:11 PM
 
Location: Visitation between Wal-Mart & Home Depot
8,309 posts, read 33,400,364 times
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Let me think about this...

Let's say your principal amount is $200,000 and your interest is 5.375%. Your monthly payment (ignoring inflation, insurance, utilities, etc. etc. for the time being) is about $1120. If you pay out the mortgage according to schedule you will wind up paying about $203,000 in interest. Paying down the principal at $1000/month over and above your schedule, however, means that you pay out the mortgage in 10 years and 3 months and only pay $60,500 in interest. In the long run you are about $143,000 ahead by directing that disposable income to your mortgage.

I have doubts that a 15% interest rate on a CD will be available, but directing the same $1000/month to that CD in a lump (compounded monthly) will leave you with about $545,000, so that makes sense.

However, back in the real world, let's say you pay off your house in 10 years, then direct the $2120/month you were spending on the house to a savings account with 3.75% interest for the remaining 20 years of the term of your loan. Then you would have something like $750,000 + 143,000 in interest that you never forked over to some A-holes at Wells Fargo. That's nothing to sneeze at.

Actually, to be fair, in the real real world no one is going to pay $2000/month for 20 years after they pay off their house. They are going to throw a party and buy a giant LCD screen and install a 7.1 system to go with it. It's the American way.
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Old 03-11-2009, 07:29 PM
 
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I've got a 30 year mortgage (closing in April). I have extra money to pay extra monthly. Right now if I pay it out over 30 years, i will be basically paying double the loan amount over 30 years (417k loan). What percentage would you guys say is reasonable to pay every month extra to reduce the timeframe significantly? 10% additional monthly?
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Old 03-11-2009, 08:27 PM
 
983 posts, read 3,489,685 times
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Quote:
Originally Posted by Fant View Post
I've got a 30 year mortgage (closing in April). I have extra money to pay extra monthly. Right now if I pay it out over 30 years, i will be basically paying double the loan amount over 30 years (417k loan). What percentage would you guys say is reasonable to pay every month extra to reduce the timeframe significantly? 10% additional monthly?
Here's my pecking order with extra cash.

1. Build 10 month emergency fund
2. Max out tax-deferred savings such as 401k.
3. If you have cash left, then I'll build a portfolio of index fund and principal payment. The allocation depends on your risk tolerance level.
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Old 03-11-2009, 08:32 PM
 
983 posts, read 3,489,685 times
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Quote:
Originally Posted by NewJersey? View Post

Fwiw, I'm still paying it down, but who knows... If we get hyperinflation... possibly all bets are off. Shouldn't one just stick the extra $500 or $1000/month into the 15% CD at that point instead of clearing the 5.375%?
Absolutely. If CD rate becomes higher than 5.375%, then it's better to invest in CD than paying off 5.375% loan. But that's not the case now. The highest 5 yr CD rate is a mere 3.500%. It's pointless not to pay off now expecting 15% CD rate in the near future.
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Old 03-11-2009, 10:23 PM
 
983 posts, read 3,489,685 times
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Quote:
Originally Posted by jimboburnsy View Post
Actually, to be fair, in the real real world no one is going to pay $2000/month for 20 years after they pay off their house. They are going to throw a party and buy a giant LCD screen and install a 7.1 system to go with it. It's the American way.
lol.

I think most ppl in this situation will buy a 2nd home (probably larger than the first one) and start all over again.
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Old 03-11-2009, 11:29 PM
 
Location: Visitation between Wal-Mart & Home Depot
8,309 posts, read 33,400,364 times
Reputation: 7038
Quote:
Originally Posted by Fant View Post
I've got a 30 year mortgage (closing in April). I have extra money to pay extra monthly. Right now if I pay it out over 30 years, i will be basically paying double the loan amount over 30 years (417k loan). What percentage would you guys say is reasonable to pay every month extra to reduce the timeframe significantly? 10% additional monthly?
Paying 10% should shorten the term of your loan by about 5 years and save about $80,000 in interest. Assuming 4% inflation (which may be terribly optimistic) you are actually saving $30,000.

If you pay down an additional $500/month you cut 10 years off the loan. With a loan that size about $500 additional principal each month is probably the threshold to get things moving.
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Old 03-12-2009, 09:27 AM
 
622 posts, read 2,853,845 times
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Quote:
Originally Posted by acegolfer View Post
Absolutely. If CD rate becomes higher than 5.375%, then it's better to invest in CD than paying off 5.375% loan. But that's not the case now. The highest 5 yr CD rate is a mere 3.500%. It's pointless not to pay off now expecting 15% CD rate in the near future.


Yes, but the idea is saving the payments and having a ton of cash to put towards the "'impending' inflation that may come. Everyone is convinced of the inflation coming, it is just a matter of when.

Yes, you can change the payments if/when the inflation hits, but if you did so now, then your cash would be greater to put into the CD or whatever vehicle you choose at the time of the inflation.

This is the first I've been thinking about this. I've been paying extra payments on a 30 year loan for 5 years. I have 7-9 years left on it at this rate. But if I save my cash and CD rates go to 8 -10 -12%... then it may be better to have more cash on hand while I pay the 'measely' 5.375%.

jimboburnsy , good post. thanks. I'll have to read it more carefully and digest it later.


PS Again, I've never worried about the dreaded inflation... , but these days people are making sense. It may come and come big.
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