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Thread: Paying off mortgage sooner

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    Dizzy Paying off mortgage sooner

    Hi,

    My mortgage is about 40% paid and right now I'm earning enough to be in a position to pay it completely within two years. There's a prepayment penalty but it's not a lot about $2000. The rate of the mortgage is 2.30%

    I know I have a really low interest-rate on my mortgage but I still feel like I need to pay it off as soon as possible. Well I could invest the money elsewhere the truth is I don't have the financial discipline to do that. The unit is an apartment that I don't plan on living in forever, but it would be suitable for the next few years and then for retirement.

    Does anyone have any thoughts on paying off their mortgage early? Has anyone done it?
    "Women have been leading men on to get rich quick since the beginning of time. The system is older than dirt. Don't be a player hater." - me

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    Smiley Re: Paying off mortgage sooner

    ^^^ you didn't say how long of a term your mortgage would 'run' if you only make scheduled payments at scheduled times. However, I hope I am correctly interpreting your above statement to mean that you don't plan to leave this condo apartment and move away within the scheduled term of the mortgage ?

    This brings us to point #1 the 2.3% interest rate. If this is 'for real', then putting your money just about anywhere else is going to 'pay' you interest and dividend earnings that are about equal to the amount of mortgage interest payments you would be saving. And this is especially true if you are sacrificing a mortgage interest tax deduction in the process. So even if there wasn't a pre-payment penalty involved, there's no real financial motivation to pre-pay your mortgage. Also, doing so could harm your credit rating. With that said, I did pay off my own mortgage early. But the interest rate was triple your 2.3% interest rate and there wasn't any pre-payment penalty.

    Tacking on a $2,000 pre-payment penalty is, IMHO, a total waste of money. I obviously don't know what your outstanding mortgage balance is right now, but logic and some back of the envelope math indicates that the $2,000 pre-payment penalty would 'eat up' a big chunk of your mortgage interest savings resulting from the pre-payment.

    Also, trying to read between the lines, it would appear that your current income level is well in excess of the amount needed to cover your mortgage, bills, and living expenses. However, I get the impression that you are concerned about having a large cash surplus that could precipitate a 'momentary lapse of reason'. So with that in mind, you might want to consider some of the following ...

    - open a Roth IRA and make the maximum contribution of $5,000 per year. This will essentially commit the contributed money to 'retirement' savings, with the added advantage of increased compound earnings thanks to the Roth's exemption from cap gain and dividend / interest income tax on earnings from the contributed money. Roth IRA money will remain 'unavailable' until you reach age 59 1/2, but does offer 'emergency' access to funds via an early withdrawl penalty.

    - purchase some Certificates of Deposit. The interest rate earned isn't all that great right now, but it is trending up. CD moneys remain 'unavailable' for the term of the CD ( anywhere from 3 months to 5 years ), but similarly offer 'emergency' access to funds via an early withdrawl penalty. I personally maintain twelve separate CD's, all with a one year term. I originally bought one CD on the first of every month for a year, and now I 'roll them over' into new 1 year CD's ( for higher amounts ) as they mature. My purpose was to create and maintain an 'emergency' fund, where if all hell were to break loose in my life the maturing 1 year CD's would provide me with a year's worth of 'monthly income' sufficient to meet all of my bills and living expenses.
    Last edited by Melonie; 10-15-2013 at 02:20 PM.

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    Default Re: Paying off mortgage sooner

    It's a 30 year mortgage and a variable rate (Canadian mortgages have interest rates fixed for less, mine was 5 years at variable), so the rate will change as interest rates get higher. Over the term of the loan there was about $90,000 interest on the $180k principle.

    There's a bit more to the story. Over the last year, while I was earning a lot, a bunch of bills were paid late and went to collections. I also paid my mortgage late once. in 2016 I would have to either pay it off (no penalty) or reapply to the same bank. I am not going to have the proof of income or good credit or anything else they will ask me for, and the rate is going to jump, maybe to 6%. There is some chance I will need to go to a high risk private lender.

    And while I am not absolutely sure I want to live in it, the building has a zero percent occupancy rate because of a new hospital opened nearby, so I know it can always be rented.

    Finally, there is an element of fear driving this. I recently turned 31 and my days in this fast money industry are numbered. I have maybe one year, at best two, before I can't bank this kind of money anymore. I've been in the industry one way or another for 10 years, and I am terrified that when I stop, I am going to have nothing. I feel like the minimum bar is paying off my mortgage, so at least that way I have a sense of security.

    My income is so unstable that I can't even think of trying to rent something, or getting another mortgage one day. I'm not going to get approved for anything.

    Mortgage interest is not a tax deduction for me because I'm Canadian. There are similar facilities to a Roth IRA etc., but I just cannot trust myself to have finds that can be cashed out. The only money I have ever managed to save is what I paid towards my mortgage.

    I feel convinced that some day I am going to end up with nothing if I'm not really careful now. Paying off my home feels like whats safest. What do you think?
    "Women have been leading men on to get rich quick since the beginning of time. The system is older than dirt. Don't be a player hater." - me

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    Default Re: Paying off mortgage sooner

    ^^^ indeed that changes a few important factors. Yes a variable rate mortgage with an upcoming 'reset' in interest rate is a significant problem. As you point out, there are basically three options. You can pay off your mortgage before the 'reset'. You can 'eat' the upcoming higher interest rate and it's accompanying large increase in monthly payment size. Or you can attempt to re-fi ( either via your existing lender or a new lender ), with the accompanying importance of verifiable income level, credit rating, equity, assessed value of the property etc. In Canada as well as the USA, these requirements are a lot 'tougher' to meet than they were a few years ago.

    Without a mortgage interest tax deduction to factor in, with the pre-payment penalty disappearing in 2016, and with the new factor consider i.e. the property being an easy and lucrative rental if you should choose to move, my previous concerns about pre-payment have pretty much disappeared.

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    Default Re: Paying off mortgage sooner

    Thank you for the advice. As a single woman trying to achieve financial goals there is nobody around to encourage me, it helps to talk about it!!
    "Women have been leading men on to get rich quick since the beginning of time. The system is older than dirt. Don't be a player hater." - me

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