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Author: Dilmatz Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 5076  
Subject: Update and next step(s) Date: 1/16/2004 3:14 PM
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Update:

Here's a link to my first post:

http://boards.fool.com/Message.asp?mid=19427842

and a follow-up saying what we were going to do:

http://boards.fool.com/Message.asp?mid=19447620

In about two weeks, our last payment will be made and except for the house, we will be debt free! We also have about $22K in an efund.

What next?

My first thought was this: open a Roth IRA (if we qualify -- I have to check the numbers, but I think we will) for both myself and DW before April 15. Then start the investment process -- whatever that means.

BUT -- and yes, that's supposed to be a big but -- a new wrinkle has surfaced. I was just doodling on a website and playing with a mortgage prepayment calculator. We were paying off our debt to the tune of $3K/month. If I were to apply that amount to our mortgage, we would be clear of that debt in just under 3 years. 3 years! Wow! I ran a variation of that scenario paying $2K/month and we could have it paid in just under 4 years. Still wow! This idea is blowing my mind. That's WAY more achievable than I would ever have imagined -- of course, all things remaining the same.

I don't know what direction to take. I signed up for the "Rule your retirement" seminar so that might help. What are your thoughts, fools? A paid off house would be QUITE the comfort when thinking about my retirement. That's a huge expense that we wouldn't have. But is that the smart thing to do?

Thanks in advance...
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Author: Frydaze1 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1785 of 5076
Subject: Re: Update and next step(s) Date: 1/16/2004 3:18 PM
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There are various opinions on this, mostly depending on your current interest rate, and your comfort level with risk.

I think most people agree that if you invest the money properly (and don't have horendous luck) you will make more by investing thatn you will save by pre-paying your mortgage. Also, your mortgage gives you a tax deduction (as will some of your investments).

On the other hand, some people are not comfortable having debt hang over their heads if they have the ability to pay it now, but are risking their money (gambling) on having more later.

Bottom line - this is a personal decision.

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Author: brewer12345 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1786 of 5076
Subject: Re: Update and next step(s) Date: 1/16/2004 3:33 PM
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Personally, I think you'd be wasting money to pay off your mortgage early, assuming you have a reasonable interest rate. As an example, most of my debt is my mortgage, which is a 15 year 4.99% loan. I would not even consider paying this note off early. After tax deductions, I am paying perhaps 3.5% for the use of the money. I can cover the monthly payments without trouble, and I will finish paying off the note at roughly the same time I estimate my portfolio will allow me FIREd status. In the meantime, I am using the money to invest in longer-term instruments that return far more than 3.5%. For example, I just bough some shares of SGU when they were on sale. This partnership spits out better than a 10% yield at the price I paid for it, and it has already appreciated about 6% over my purchase price. I have been patiently watching this stock for some time now, and if I had used the money to prepay my mortgage, I would not have been able to take advantage of the temporary dip in the share price.

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Author: Betsysmom Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1787 of 5076
Subject: Re: Update and next step(s) Date: 1/16/2004 4:26 PM
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If I were to apply that amount to our mortgage, we would be clear of that debt in just under 3 years. 3 years! Wow! I ran a variation of that scenario paying $2K/month and we could have it paid in just under 4 years...

As someone who is aggressively paying off her (our) mortgage, let me chime in. I am jealous of your 3 year payoff date! We're on our way to paying off our mortgage in 5 years, for several reasons. The major one is that we're not comfortable owing money. Also, my husband wants to quit his job and open his own business, so we're planning on doing that when we have the house paid off.

Do what's right for you.

Betsysmom


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Author: brewer12345 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1788 of 5076
Subject: Re: Update and next step(s) Date: 1/16/2004 4:40 PM
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Do what's right for you.

Betsysmom

***************

Always appropriate advice.

I'm just curious, though. Personally, I sleep better knowing that if the commode hit the windmill (so to speak), I could tap savings and investments roughly equal to my oustanding mortgage balance. Wouldn't very substantial savings give you comfort with carrying a loan?

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Author: Betsysmom Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1789 of 5076
Subject: Re: Update and next step(s) Date: 1/16/2004 5:24 PM
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Personally, I sleep better knowing that if the commode hit the windmill (so to speak), I could tap savings and investments roughly equal to my oustanding mortgage balance. Wouldn't very substantial savings give you comfort with carrying a loan?

Our savings are in retirement accounts, so we wouldn't touch them until retirement. (we do have emergency money that's liquid, but it's not enough to pay off the mortgage).

If, instead of paying off the mortgage, we invested the money in a non-retirement account, you have to factor in risk: guaranteed 5% money vs. volatile taxable investment returns.

Betsysmom



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Author: monica3674 One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1790 of 5076
Subject: Re: Update and next step(s) Date: 1/16/2004 10:05 PM
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My DH and I were in somewhat of the same position. We have about 3k that we can invest each month. I am planning to stop working at the end of the 2004-2005 school year. It would be nice not to have the mortgage payment to make each month b/c all we will have then is DH's salary.

What we did was refinance to a 10 year mortgage @ 5.375%. Our first payment was like $640 principal, $460 interest. We don't pay anything extra toward the principal. Instead, we put $2k/month into our Ameritrade taxable account, 600/mo in VTSMX (taxable), $300/mo into 529 plans, and fully fund our Roths and DH's 401k.

This way, we can benefit from the higher (usually) investment gains in the stock market, but if we need money for some kind of emergency, it is there for us to withdraw.

When we were first married, we aggressively paid down the mortgage. We started at 135,200 (15yr, 8.25%). Fortunately, from June 2000 until probably June 2002, most of our extra money went to the mortgage. What we did put in the stock market is just now getting back to the levels we bought it at.

Think about a 10 year mortgage. You get many of the benefits of prepaying the mortgage, but you've still got extra money to put in the market.

Monica

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Author: KBecks Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1791 of 5076
Subject: Re: Update and next step(s) Date: 1/17/2004 9:23 AM
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Personally, I would do a little of both -- pay a little extra on the mortgage, but invest most of that extra $3k per month.

Over time those early invetments and compounding will help you more, IMHO.

We pay a little extra on our mortgage, mostly as a feel good thing, but also because we have very little equity in our house at this point. But while larger payments on the mortgage are tempting, we will put any extra money into the market, where there should be better returns in the long run.

Our mortgage will be paid off before retirement, which is most important for us.

However, one poster brings up a good point -- if you have enough cash in savings/investments to pay off the mortgage whenever you please, that may provide extra confidence in the investing plan.

KBecks

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Author: foobarista Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1802 of 5076
Subject: Re: Update and next step(s) Date: 1/18/2004 4:47 AM
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For us, this year we will cross the threshold where we'll have enough
available cash (outside of tax-advantaged retirement funds) to pay
off the mortgage if we want to. At that point, the mortgage becomes
"rent" on that money. We figure that if we can earn more on that
money than its "rent", we're making money. Also, we will likely buy
a business in the next couple of years and need the money easily
available. It's currently in a private REIT-like investment fund
making 10%, so it'll stay there. But we do sleep well knowing that
we _could_ nuke the mortgage if we want.

--Foobarista

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Author: warrl Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1809 of 5076
Subject: Re: Update and next step(s) Date: 1/18/2004 11:01 PM
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BUT -- and yes, that's supposed to be a big but -- a new wrinkle has surfaced. I was just doodling on a website and playing with a mortgage prepayment calculator. We were paying off our debt to the tune of $3K/month. If I were to apply that amount to our mortgage, we would be clear of that debt in just under 3 years. 3 years! Wow! I ran a variation of that scenario paying $2K/month and we could have it paid in just under 4 years. Still wow! This idea is blowing my mind. That's WAY more achievable than I would ever have imagined -- of course, all things remaining the same

It's a matter of exactly what different things you want to achieve and exactly when you want to achieve them.

In terms of wealth and flexibility, and assuming you have at least 5 years to expected retirement date, the best approach would probably be to:

(1) Refinance your existing mortgage to as low a fixed rate as you can get (assuming that this will get you a lower-than-current rate, under 6.5%, and save you money month-to-month - or that it will get you a lower rate and you can take cash out without raising your payments, which would be even better), then make only the payments required on it.

(2) Increase your investing by the full extra $3K you have now, plus the decrease in your mortgage payment.

(3) When you retire, take a quick look and see if your balance is less than 25 times your annual payments. If it is, take money from your investments and pay off the mortgage in one huge lump. If the balance is higher than that, continue making monthly payments until it's lower and then pay it off.

This maximizes your expected wealth, and also builds up a large amount of relatively-liquid assets in case of emergency. You can sell stocks for cash in a few days and you don't have to move. House sales typically don't close nearly that fast and you usually have to move when you sell your home.

However, it does NOT give the emotional satisfaction of knowing that your home is paid for.

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Author: WtinkyBoo One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1812 of 5076
Subject: Re: Update and next step(s) Date: 1/19/2004 1:53 PM
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(1) Refinance your existing mortgage to as low a fixed rate as you can get (assuming that this will get you a lower-than-current rate, under 6.5%, and save you money month-to-month - or that it will get you a lower rate and you can take cash out without raising your payments, which would be even better), then make only the payments required on it.

Here is the opposite of this post. If you look at the Buying/Selling a Home Board there are a lot of good suggestions on this:

http://boards.fool.com/messages.asp?mid=20162957&bid=100144

In particular. If you think that you can pay your mortgage off in 3 years and you know that you have the discipline to do it then go to a 3 year ARM. You can drop your rate down to the 2-3% range. You will have even more cash flow then your current mortgage and you pay your mortgage off in 3 years or less.

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Author: WtinkyBoo One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1814 of 5076
Subject: Re: Update and next step(s) Date: 1/19/2004 5:45 PM
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Just read your OMs. Sounds likes you are finally getting along. Doesn't it feel good to be out of debt? We paid off 9k in Discover card debt last summer and it was an incredible burden to get rid of. We did not really realize how much we had been agonizing about it until it was gone.

To counter my post I just posted. Personally we went with maxxing our Roths instead of paying more on our home loan. Our ROTHs last year got about a 30% return. We did however refinance to a 20 year loan for the same payment as our 30 year loan.

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Author: warrl Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1817 of 5076
Subject: Re: Update and next step(s) Date: 1/20/2004 2:22 AM
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(1) Refinance your existing mortgage to as low a fixed rate as you can get (assuming that this will get you a lower-than-current rate, under 6.5%, and save you money month-to-month - or that it will get you a lower rate and you can take cash out without raising your payments, which would be even better), then make only the payments required on it.

Here is the opposite of this post. If you look at the Buying/Selling a Home Board there are a lot of good suggestions on this:

http://boards.fool.com/messages.asp?mid=20162957&bid=100144

In particular. If you think that you can pay your mortgage off in 3 years and you know that you have the discipline to do it then go to a 3 year ARM. You can drop your rate down to the 2-3% range. You will have even more cash flow then your current mortgage and you pay your mortgage off in 3 years or less.


On a strictly financial basis, you are - on average - more than a full percentage point better off to take a $12,000 lump now and invest it in the S&P500, rather than improve your cash flow by $1000 a month for a year and invest that money.

Again on a strictly financial basis, and after allowing for risk, if you can take out a long-term loan at 6% or less in order to make a long-term investment with an average return of 7% or higher, you are clearly ahead. If you do this by refinancing an existing loan (for longer remaining term and/or lower rates) to get cash out without increasing the payments that you are already comfortably making, it looks like a good bet.

But that's a financier talking, not an economist. People (including some "economists" and their employers) sometimes confuse the two, but they are very different.

A financier talks about money.

An economist would ask you what you value, and how much you value it compared to other things.

If you value highly the security of owning your home outright, and are less impressed with the security of knowing you could pay off the loan on your home in a week any time you want, then the economist might well tell you to pay off your mortgage as quickly as you can.


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Author: soccermom1414 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1869 of 5076
Subject: Re: Update and next step(s) Date: 1/27/2004 7:25 AM
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Hi, y'all, from Tennessee! I'm new to this board and wanted to make a few comments. I've been reading a lot of the posts from its beginning to now.

First off to Monica---Wow! If I had known when I was your age what you know and had my head on as straight, we would have long been retired. I am in awe. Congratulations and I hope things go as planned for you and your husband.

My husband makes a stellar income, but for years we mostly spent it. We also have 4 children and I am a SAHM. We are now 50, and two of the kids are out of the house and thru college. The other 2 are high school juniors. We "saw the light" about 6 years ago and have been saving aggressively ever since. Our net worth is now about 900K and we have no debts. The plan is for my husband to retire in about 5 years---if he can stand his job that much longer, and that is a big IF---when the last 2 kids graduate from college. We are frugal enough now that our savings rate of over 30% of gross should continue even while paying their tuition. Both of them will likely get some nice scholarships (both academic and athletic), so that should help.

Re paying off a house vs putting the money in investments----Even though we were big spenders for years when we should have been savers, we still hated debt and all forms of it. So we paid down the mortgage fairly aggressively and always kept credit cards and cars paid off. Six years ago we paid off the mortgage. Since then we also lost a good bit in the bear market early on since we were not diversified (yeah, we've been real stupid!). In our case, I'm very glad we used our money to pay off the mortgage as I am quite sure it would have been lost in the market or spent otherwise. And the peace of mind that comes from owning your own home free and clear and having no debts whatsoever---PRICELESS!

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