[greenegirl]

I know we have this conversation here every once in a while, and I just came across this <a href="http://finance.yahoo.com/expert/article/moneyhappy/30425" target="_blank">article</a> about paying down your mortgage quickly versus putting that extra money into investments. This article clearly explains the financial advantages of not paying down your mortgage. If you follow the link to her blog, she includes some calculations to help you determine if you would be better off to not pay down your mortgage.<br><br>
When this discussion comes up, I usually argue on the paying off the mortgage side. Mostly I make these arguments because of various aspects of our personal financial situation when we bought the house. In addition, we are maxing out the 401k contributions, so some of the comparisons in the article do not apply to us.<br><br>
We have stopped making extra mortgage payments at this point because we have reached a level of equity with which we are comfortable. We only put down 5% when we bought this house. We have owned the house less than 2 years and now have 23% equity, not including appreciation. If we count appreciation, we have 39% equity in the house. I was concerned when we bought the house because I felt we bought at a high point that was not necessarily sustainable in this market. I still believe that to be the case and, although prices have not yet crashed, I do expect them to later this year.<br><br>
Now that we are comfortable with the level of equity we have in the house, we are working toward meeting other financial goals, mostly paying off the car loan which is our only other debt. We are also agressively saving to increase our emergency fund, which is currently at about 4 months. We would like it to be at least a year due to the volatility of my husband's job market and the fact that I am going to stop working at the end of June in order to attend school full time. We will not get a year in the emergency fund before I stop working, but we will be most of the way there!<br><br>
I think this is an important conversation because financial advice tends to be given as one size fits all. Is it better to pay off your mortgage early? Or is it better to contribute to a retirement fund? You need to do your homework, understand the different reasons why one or the other might be better and make a decision based on the factors that affect your family the most. What fits you best?

 

[velochic]

Thank you for that article. It sums up much of what I've read spread out over several investment/finance books.<br><br>
It pretty much summarizes why *I* am choosing to not pay off my mortgage very early.<br><br>
I do want to say that we are paying off our loan in 20 years. That, in a way, is "paying off" a 30 year loan early. But we are doing the 20 year term because the house will be paid off the year we retire (and it happens to be the year dd starts college). So, with dd in college, we don't want to have to have a monthly burden of house payment while we are also enjoying the first years of retirement. We're also in that comfortable place where if for some reason the spirit moved us, we *could* pay off our mortgage. It's a safe place to talk from, and for some people they are like <img alt="" class="inlineimg" src="/img/vbsmilies/smilies/dizzy.gif" style="border:0px solid;" title="Dizzy">: about that concept. For young couples, I totally advocate that if they feel they can get returns on their investments (after taxes) over what their adjusted mortgage rate is (after tax deduction), then carry that mortgage and enjoy letting the cheap money make more for you. They'll still be building equity in their home (paying more into a mortgage doesn't make your house *worth* more, it just makes you own more of it), and if they stay the course in investments, have enough money in funds and savings to pay off the house whenever they want... but have the money liquid instead of tied up in equity. Of course, these kids can't be having a bunch of high interest loans... those need to be taken care of. I'd be nervous trying to invest my money when I have a loan above about 8.5%. If you have just a few down years in the market, you've just lost. Get those high loans paid off.<img alt="" class="inlineimg" src="http://www.mothering.com/discussions/images/smilies/lol.gif" style="border:0px solid;" title="lol"><br><br>
Like the article said, though, for some it's emotional. Some people don't have your kind of discipline to save and use their home as a "safe haven" for savings. But, yeah, in the case that a job is lost, the equity they are so relying on can't be tapped because banks don't loan money to people (even equity loans) who don't have jobs. If you have a true emergency account set up, such as you are doing (such that we have), you truly have funds at your fingertips to live. And that emergency fund is different for different people, as you pointed out. For us, dh is tenured... it doesn't get any more stable than that. We keep only about 6 months salary in emergency. We use Vanguard's Prime Money Market Mutual Fund.<br><br>
Anyway, I'd be happy to discuss this more, but I think the article pretty much says how I feel. And I ramble on about it enough as it is. Thanks again! <img alt="" class="inlineimg" src="http://www.mothering.com/discussions/images/smilies/winky.gif" style="border:0px solid;" title="Wink">

 

[velochic]

I didn't see where you mentioned this in your post, but I'm assuming you were paying PMI and that is why you were interesting in increasing your equity to above 20%?<br><br>
I think that's a smart move - to work toward getting PMI off of a mortgage loan, but if you carry high consumer debt, it's important to run the numbers to see if over the course of repayment, you are going to pay more in interest (say on a credit card) than you would on PMI.<br><br>
It doesn't sound like that was the case for you, but if anyone else read this thread, I thought I'd mention it. Run the numbers.<br><br>
By the way, you made some good points. I hope others will read it and glean some information from it. <img alt="" class="inlineimg" src="http://www.mothering.com/discussions/images/smilies/smile.gif" style="border:0px solid;" title="smile">

 

[greenegirl]

Actually, we were not paying PMI. We did 80/15/5, so had two mortgages. Most of the reasons I wanted to have at least 20% equity was because I strongly believe we bought our house at a high price that is not sustainable in this market. It was the right time to buy a house, and our house is a home, not an investment, so we went ahead with it. But with the lack of stability in my husband's job market, I was really scared at the prospect of him losing his job and finding a new one in a place we would have to move to and not being able to sell our house because we owed more on it then it was worth. We have enough equity in our house right now that the market could drop 30% and we could still sell our house and come out with cash in hand rather than having to pay.<br><br>
At the time we bought our house, DH had been laid off from a job. He got 8 months notice of when he would be laid off and had a new job lined up so that he ended his old job on a Friday and started the new job on a Monday. He started the new job about 2 weeks after we closed on the house. He has now been there for almost 2 years. The first layoffs were done a month ago and he did not get laid off. This job really appreciates all his hard work and we just found out yesterday that he is going to be receiving a bonus because of that! We are much more stable now then we were when we bought the house. We also don't think we will stay in this house forever -- it is the first house either of us have purchased and at some point we will outgrow it. All of these factors play into our decision to stop making extra payments on the mortgage.<br><br>
We have no debt other than the mortgage and a car loan. We bought the car last fall, almost a year before we expected to have to buy another car, so took out the loan. Now we are aggressively paying it off. We are buying another car this month, and are paying cash for it. The car we bought last fall we bought brand new. The one we bought this month we bought used from my parents. We will drive these cars pretty much into the ground before we get rid of them, and so don't expect to have to buy another car for 7 to 10 years.

 

[srain]

I just ran across that article too- and I'm sticking with my mortgage! I wrote more here:<br><a href="http://rainfamily.blogspot.com/2007/04/this-article-while-it-seems-to-be.html" target="_blank">http://rainfamily.blogspot.com/2007/...ems-to-be.html</a>