Tuesday, November 19, 2013

New Year, Payoff Mortgage Plan

I have decided to pay my mortgage off early. There. I said it. I wrote it down. After having several at-home discussions, I have finally become comfortable with the idea. Thankfully over the past few years at my job I have been very fortunate and this has translated into a significant amount of disposable income that can be funneled into prepayments on the mortgage.

Explaining why this is a good idea has been done in many other places like FiveCentNickel and I know that there are not really any huge advantages to be gained from making the right call for me in either direction. Here's how I think about it. At my current mortgage rate of 5%, and assuming a steady return in the Stock Market of 7%, I am losing about 2% yearly by prepaying my mortgage. That is the simple math and for each 100K of mortgage, this is 2000 dollars. It is certainly not a small sum, but it is a finite sum.

Here's the problem with the "keep the mortgage" argument in my view. Of course you can consider the emotional gains of a paid off mortgage and I think that those are real. But I have a serious issue with counting on the stock market; the stock market, even when invested with mutual funds, involves risk. If I pay off that mortgage early, I never had to risk that money. And the issues with that stock market risk are highly correlated to other issues: employment, retirement account balances, and overall economic health. In short, each dollar I have prepaid will feel great if the market goes down and I lose my job.

This leads us to the next point. People always consider that the money put into the mortgage is lost. It isn't. First off, the house will appreciate in value, if for no other reason, than inflation, which has been, shockingly around 2%. So in a bad situation, I could tap that accumulated equity and effectively reverse the decision to prepay. It is not lost money.

When all is said and done, I am scheduling the paydown with a high upfront monthly prepayment and then gradually decreasing it over time. The schedule I have set calls for more than double payments on the mortgage and although it sounds like a lot, I am hopeful that this will create a 5 year timeline to pay it off. And it seems doable for us, which for me is the most important criteria.