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I am in search of opinions. We have a mortgage with a rate in the 4's. We have zero other debt and we have 18 months of reserves in cash accounts. We have 2 IRA's and we have 2 401k's which we are funding at 15%.
Should we pay down our mortgage with extra monthly payments or should we focus on building up more cash reserves for the impending double dip recession next year.
I can't make heads or tails of the stock market anymore.
I used to be solidly in the "pay down your mortgage" camp. Lately, however, after actually crunching some numbers figuring in inflation and opportunity cost, I am leaning more away from tying up money by paying down the mortgage early. After all, if your mortgage payment (P&I) is $1000, in 20 years, it will still be $1000, but $1000 will buy half what it does today in the market, so the money is worth more to you today. Theoretically, your P&I will become a smaller and smaller percentage of your income, even if your income only increases to match inflation.
Therefore, on mortgages with interest rates that low, it is probably smarter to invest the money elsewhere. You already have awesome saving habits, congratulations on that.
If you don't want to venture into the stock market, another possibility is investment properties (lots of pitfalls there too though, so do lots of research before making that jump, check out the Rental forum).
Personally, even given what I just said, since you already have 18 months of expenses saved, and IRAs and 401ks, I'd probably pay some extra toward the mortgage and save the rest. I'm not currently maxxing my (husband's) 401k, but otherwise I'm in a similar situation. I posted a thread about it here: //www.city-data.com/forum/perso...-ira-what.html that might have some alternate ideas for you as well.
You could also consider putting some of those savings into rolling CDs (bonds?, sorry, I don't know the difference well enough to know which one people do this with). I don't know the right terminology, but you get 1 CD/bond each month for 6 months (or a year with the number of months you have to work with) so that one matures every month, at which point you roll that money back into another bond. Then if you lose a job, you have money that comes available every month. That way, you are at least getting some interest on those savings.
Hopefully that all made sense. I am not an investing pro myself, I just read a lot and have asked a lot of questions, so if I said something blatantly incorrect, hopefully someone will come along and correct me.
I used to be solidly in the "pay down your mortgage" camp. Lately, however, after actually crunching some numbers figuring in inflation and opportunity cost, I am leaning more away from tying up money by paying down the mortgage early. After all, if your mortgage payment (P&I) is $1000, in 20 years, it will still be $1000, but $1000 will buy half what it does today in the market, so the money is worth more to you today. Theoretically, your P&I will become a smaller and smaller percentage of your income, even if your income only increases to match inflation.
Therefore, on mortgages with interest rates that low, it is probably smarter to invest the money elsewhere. You already have awesome saving habits, congratulations on that.
If you don't want to venture into the stock market, another possibility is investment properties (lots of pitfalls there too though, so do lots of research before making that jump, check out the Rental forum).
Personally, even given what I just said, since you already have 18 months of expenses saved, and IRAs and 401ks, I'd probably pay some extra toward the mortgage and save the rest. I'm not currently maxxing my (husband's) 401k, but otherwise I'm in a similar situation. I posted a thread about it here: //www.city-data.com/forum/perso...-ira-what.html that might have some alternate ideas for you as well.
You could also consider putting some of those savings into rolling CDs (bonds?, sorry, I don't know the difference well enough to know which one people do this with). I don't know the right terminology, but you get 1 CD/bond each month for 6 months (or a year with the number of months you have to work with) so that one matures every month, at which point you roll that money back into another bond. Then if you lose a job, you have money that comes available every month. That way, you are at least getting some interest on those savings.
Hopefully that all made sense. I am not an investing pro myself, I just read a lot and have asked a lot of questions, so if I said something blatantly incorrect, hopefully someone will come along and correct me.
Hi Lacerta,
What you described is a CD ladder. Those are great for short term liquidity while earning slightly more than one would in a standard savings account. I like the way you framed your thoughts, too. I agree on all points.
To the thrifty OP,
You are going to get many differing opinions on paying down your mortgage and I think it boils down to what gives you comfort when you sleep at night. It's apparent with your savings habits you seek security. If you and yours have jobs with relative stability, I would consider saving at your current rate while looking into a 15 year mortgage if you haven't already. Just be aware of the break even costs on refinancing and your intent to stay in your current home.
Another consideration is that a bank will foreclose on a home whether or not you owe 10K or 100K. Some people like the idea of liquidity over having money tied up in the mortgage. I prefer the liquidity of cash to some extent, even if it's only in hand for a few months. I add extra income to my minimum cash reserves and then disburse it as a semi annual booster payment to my mortgage. I don't do this to try and leverage any extra gains in interest on the savings, which is what some may suggest you do (i.e. investing in 5 or 10 year notes and then applying that amount to your mortgage at maturity). I just get a little psychological boost from it. I personally think that having a 15 year term on a mortgage and investing 20% of my income is already quite enough, but I add a little extra for the psychological bump of having my home paid off a couple years early.
I highly suggest investing your reserves beyond six months in short term, guaranteed interest funds in a CD ladder. Lacerta correctly points out opportunity cost. Havin that much liquid cash not keeping with inflation is excessive.
And if you are not rebalancing your 401k quarterly, that's a smart move as well. It sometimes seems counterintuitive to move money from a fund that has kicked butt for six months into bonds, but that's exactly what someone needs to do periodically. Even if our economy enters into a double dip recession, this will create buying opportunities. Asset allocation coupled with a well defined long term plan, and I stress the long term plan, is the best way to weather the storms of the market. Deviating from your plan because of market jitters is a great way to lock in your losses. Don't deviate because the market gets choppy.
You have built a damn fine umbrella for a storm. Go see a fee-only CFP for advice on where to put your savings beyond six months.
And all of us are feeling jittery and questioning conventional wisdom these days, but hang on until the first nuke drops, okay?
Last edited by Spraynard Kruger; 06-30-2010 at 11:47 PM..
I am not a big fan of paying down a 4% mortgage to lose out on 8% earnings (long run). I do agree that the next year or so is going to be very interesting and personally, I would park more money into savings, at least for a year or so to get a better picture of what the market is going to do. Even "stable" jobs are no longer stable so you can't even count on that any longer.
I've neve been an advocate of paying down a mortgage without an overall plan of how that all cation of capital figures into one's ultimate plan to deal with inflation and future tax consequences.
I also tend to believe that it is foolish to "sock away" cash without considering what you really want to accomplish. I have not had to poke fun too much lately at those who argue for keeping their reserves in bullion or bullion grade coinage, but when I do I tend to remind them to also stockpile bullets and food if the really think that paper money is going to be worthless...
Realistically, for most people with decent equity in their homes, the wisdom of paying down a low rate mortgage is questionable. If anything drastic happens to home values and / the banking system it makes little sense to have paid down an secured loan on an asset that drops in value. Even if the banking system remains heathly and home prices appreciate there is little benefit to having more cash that is illiquid. For those who have only a sliver of equity or a bad interest rate it makes sense to shrink the debt to the point where refinancing will be an option. Beyond that invest to diversify.
I used to be solidly in the "pay down your mortgage" camp. Lately, however, after actually crunching some numbers figuring in inflation and opportunity cost, I am leaning more away from tying up money by paying down the mortgage early. After all, if your mortgage payment (P&I) is $1000, in 20 years, it will still be $1000, but $1000 will buy half what it does today in the market, so the money is worth more to you today. Theoretically, your P&I will become a smaller and smaller percentage of your income, even if your income only increases to match inflation.
The problem here is this assumption:
that the poster's income will at least maintain the same purchasing power over time. And it very well may. However, what if the OP's job disappears tomorrow, as I have learned happens to those in "stable" jobs - not me, but a good friend whose company simply closed that branch office. And, you don't allow for disability or even retirement.
While I wouldn't forego adding to more liquid savings, I definitely would not negate paying down the mortgage. If you already have a mortgage below 5%, I wouldn't refi to get a shorter term, I'd simply find out if your mortgage holder would permit interest only payments (without penalty) and I'd make an every other month or every month payment to the principal equal to what extra you are putting into savings.
While our circumstance is that we are retiring in 1 year and 2 months, our usable income will not change - our housing costs will be cut by two thirds and that's a huge savings. In the meantime, we have extra income that we are splitting between savings and a full mortgage payment extra as a principal only payment. If we were to continue with this optional payment, the house would be paid off in 9 years rather than the full 15. The nice thing about an optional principal only payment is that you don't have to make it - whereas refinancing to a larger monthly payment is not optional and doesn't allow for emergencies such as illness, disability, or job loss.
that the poster's income will at least maintain the same purchasing power over time. And it very well may. However, what if the OP's job disappears tomorrow, as I have learned happens to those in "stable" jobs - not me, but a good friend whose company simply closed that branch office. And, you don't allow for disability or even retirement.
I'm not sure I understand what you are arguing here. If a person loses their job, isn't it better to have not paid down the mortgage, and instead put that money into savings to survive the unemployment period? So whether you keep a good paying job and the mortgage becomes a smaller share of your income, or you lose your job and need the money you didn't put into the mortgage to live on, either way it is better to not have paid the mortgage down early. Even if you have paid off your house, if you don't have any savings at all, the house is going to sell at a Tax Auction eventually, and then you still don't have a place to live.
I don't think paying down the mortgage early is a bad thing, especially psychologically, but I don't think it is necessarily the best use of the money. However, if you have sufficient savings to weather a long unemployment period, and don't have any place else you can (or are willing to) invest that will get you more than your interest rate, paying down the mortgage isn't a bad choice.
I agree I wouldn't refi on a rate that low if the only goal is to pay the loan off sooner, all that does is costs you the refi costs and obligates you to make the extra payments every month, which you could do by choice anyway.
1. We are heading back to a Double Dip Recession. Make preparations. Stocks going DOWN.
2. I would Only contribute to your 401K's up to the amount your Employer matches, and what ever funds you have left,
First fully fund your Roth Ira accts. As you qualify
Second, Fully Fund your Separtate Traditional IRA accts. To the Max. If you qualify
Third, Bump your reserve acct. to 24 months.
Fourth, Any Money you have left ... Pay toward your Mortgage.
Every penny you pay toward your mortage now is worth the intrest rate you are immediatly getting on that money.
At 4 % +, Just try to get that rate on any short term fixed income FDIC insured investments today.
Not CD's .. Not Money Market Funds .. Not Savings Accts. Stocks , Not unless your are crazy.
3. Normally 8 months for a Reserve acct. would be enough, but in todays enviroment I would make it 24
months.
The Risk here is if you lose your JOBs. Without that income your house becomes at risk. A No No !!
Better Safe than Sorry.
When things get Safer (and that could be a while), you can put that extra money to work as the economy improves, or put part of it on your Mortgage and still keep 8 -12 months for safety sake.
I too commend you for a stellar working and common sense saving attitude.
Thanks for the opinions. I did a lot of research on the web and opinions are all over the place. The best I can come up with is don't put any extra or very little extra on the mortgage. Invest the rest that is above and beyond my existing investments into bond funds.
I am in search of opinions. We have a mortgage with a rate in the 4's. We have zero other debt and we have 18 months of reserves in cash accounts. We have 2 IRA's and we have 2 401k's which we are funding at 15%.
Should we pay down our mortgage with extra monthly payments or should we focus on building up more cash reserves for the impending double dip recession next year.
I can't make heads or tails of the stock market anymore.
I'd unload those accounts if I could . They are already talking about taking over them too .
I'd save the money because you neer know what they will do next .
What if you had to leave because of some new desaster ? We are old people and they are after us big time . Young people are next . They are trying to tax us out of a home and living . They want us to pay for their amnesty bill . They are all rich and the only ones getting richer in this economy .
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