<p>After POIH’s post#35, I agree, the plan to pay off the mortgage seems like a good one.</p>
<p>It sounds like job-loss is not imminent, it is just something being considered as part of a ‘worst case scenario’. And the analysis suggests that even in that scenario, it would be beneficial to have paid off the mortgage- at least for the first 16-20 months of unemployment.</p>
<p>BTW: Happy 20th anniversary!</p>
<p>RE: Financial advisors, very few investment advisors and even accountants know ANYTHING about financial aid, so don’t expect them to address any part of that.</p>
<p>As to the advice, all I can say is that if I had the cash available to pay off my mortgage right now without affecting my cash emergency fund and without affecting my ability to pay tuition, I would do it because it would feel good, every single day!</p>
<p>I would, though, want an HELOC just in case I needed that extra cash flow</p>
<p>If you go to a financial planner that charges by the hour and they give you poor advice, then you are stuck. If you take the advice, the adviser may also get paid by the financial company or into a product that is limited in scope and size. I pay my dentist and doctor by the hour and procedure (thru my insurance and deductibles), some of the procedures and recommendations have been faulty and unnecessary besides being downright wrong. Do you really think any entity either financial, medical, or educational does it without also thinking for itself? </p>
<p>Housing, is an Expense, not an asset!</p>
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<p>Only if you lose your job. Are you planning to do so?</p>
<p>vicariousparent :
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<p>Thanks, I cann’t believe it sometime as it seems to happen so fast; we just met at our university annual festival; got married right after graduating and now DD is all set to go to university on the eve of our 20th anniversary. Time flies!</p>
<p>owlice:
It is beneficial even if you don’t loose the job. The EFC with cash in bank and mortgage is $68000 while without mortgage it is $54000 a difference of $14000.</p>
<p>IvyHope- my wish for you is that none of the dire things that could go wrong will go wrong. You seem like a great guy. I’m sure you are. I could point to at least 20 members of mine and H’s immediate family who are living a retirement which is an absolute nightmare due to poor financial planning when they were in their 40’s. It always seems like such a good idea at the time- people don’t work hard, only to watch some crazy catastrophe or illness or unexpected wrench in the plan mess everything up. And yet so many smart, rational people end up broke and living on Social Security, or broke and living with their kids, or not broke but still unable to afford in-home care required to take care of a partner with alzheimer’s or who has suffered a stroke.</p>
<p>Sorry to be an alarmist- but you are being very short-sighted if the sum total of your financial planning is to take your cash and cash equivalent and pay off the house in order to qualify for more financial aid. College last 4 years- your D has her entire working life ahead of her. You could live another 55 years, as could spouse. You’ve got 25 more years of income production, less if you get sick, hurt, or die. I understand that you’ve got your near term emergencies covered, and I understand that as long as you’re working, you’re ok. What happens between the day you retire and the next 30 years after that? Are you going to barter the furniture for groceries??? Do you have disability insurance? What happens to your wife if you get hit by a bus tomorrow and survive, but are permanently disabled?</p>
<p>Your cash cushion is a wonderful asset which you could be using to ensure your peace of mind and your financial future. How does more financial aid do that for you??? If you lose your job then get another, your EFC goes right back up…</p>
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<p>Both figures are more than the cost of attendance.</p>
<p>Blossom’s advice is spot-on.</p>
<p>As an alternative to others who might be thinking about this issue while reading this thread – </p>
<p>We refinanced to a 15 year fixed six years ago @ 5.28%. The payment was about $100/mo. more than our 30-year loan payment. Mortgage is ~25% of current market value (which accounts for the housing decline in this area). We bought low and assumed one salary rather than two (I was working FT at the time). The mortgage will pay off four years after S2 graduates from college. We will get some FA during the two years both kids are in college, and during that time we expect to tap into our HELOC for the part we can’t do from current income and the kids’ Staffords/work/scholarships.</p>
<p>We’re already at the point in the loan where we are paying more than 50% to principal (yippee!), and by the time S2 graduates, the first mortgage will be fairly small. At that point, we’ll figure out whether it makes sense to consolidate the first and second into a 10-year primary mortgage, or to keep the two separate (esp. if the HELOC loan rate is lower).</p>
<p>We are not comfortable with having all our cash tied up in the house at this stage of our lives (not that we could pay off the mortgage at this stage, anyway), and given my medical issues, extended unpaid medical leave and my continued limited ability to work, the 15 year was a good way to make progress on the mortgage without leaving us too exposed if my income disappears again. We haven’t spent our home equity on renovations or lifestyle choices, so it’s there for tuition or medical expenses if need be. All these years of living frugally have paid off when medical disaster struck. </p>
<p>I will now put on my pension hat and say SAVE FOR RETIREMENT. There is no guarantee anyone’s kids will be able to support their own families plus parents/in-laws down the road.</p>
<p>POIH: MIT will expect you to tap into home equity if you don’t have a job (and you’ll have to make payments on that, too). Gotta figure that into your cash flow in a worst-case scenario.</p>
<p>Paying off the mortgage still leaves insurance and property taxes to pay – add that in, too.</p>
<p>If you lose your job – expect the COBRA payment to maintain your medical insurance to run $1200/mo. for family coverage. If you don’t have life insurance except what’s provided by your employer, figure that expense, too – and if you have a medical condition, you may be rated or declined.</p>
<p>I bought an individual life policy in 1991 when I was pregnant with S2 – came with a COL rider. Got it to replace my earnings if something happened to me with the intent that it would pay for college for both kids. Was darned happy I had done so, as I am now uninsurable, but the coverage is still in force.</p>
<p>blossom:
I’m not sure if you understood the situation properly. We are not doing this to make our DD eligible for FA because if that was the case we would have done this last year and DD won’t be eligible as long as I’m employed at my current salary.
The question I asked was “If it is the right time to pay off the mortgage?”. or in other form “When is the right time to pay off mortgage?”</p>
<p>If I go thru your response then there will never be any good time to pay off the mortgage. Since we still have another 20+ years to retire we should be able to save more than our mortgage by just saving the monthly payment to a saving account with no interest.</p>
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I’m not sure how much cash cushion is required for peace of mind.</p>
<p>EDIT: My post (below) was crossposted with the last one from PIOH!</p>
<p>From OP’s posts on this thread, the summary:</p>
<p>H & W are both in their early 40’s.</p>
<p>Sounds like they refinanced 5 years ago into a 30 yr fixed mtg, at 5% interest. They have 25 yrs to go.</p>
<p>They have 50% equity in their home at today’s market rates.</p>
<p>They have the remaining 50% equity in cash in the bank, which they have had for the last 5 years, and instead of most of us who kept (i.e, lost) our money in the stock market, they had it earning 5% in a CD. Now the CDs have matured and are earning 2% interest.</p>
<p>They have calculated that if they eliminate their mortgage, the INTEREST portion of their mortgage payment will be equal to the difference between MIT tuition and the tuition that they have been paying for their D at her elite private high school.</p>
<p>They will apply the PRINCIPAL portion of their eliminated mortgage payment towards retirement.</p>
<p>After D graduates from MIT (unless they are paying tuition for her medical school), they will start applying the INTEREST PLUS PRINCIPAL portion of their eliminated mortgage payment towards retirement.</p>
<p>Under all circumstances they will have at least 12-15 months’ living expenses sitting in cash in the bank. (Perhaps they haven’t calculated COBRA costs. I am pretty sure OP is math savvy enough to have factored in property tax and insurance costs).</p>
<p>One could go further and make more detailed calculations based on the posted numbers and figure out the exact dollar amounts involved, but OP’s family seems to be doing quite well financially and does not sound like a typical ‘living beyond their means’ family. They seem to have pretty good savings habits.</p>
<p>The financial aid angle here seems to be just a distractor. OP knows that his daughter will be full-pay at MIT as long as he (and maybe his wife) is/are employed. His calculations seem to suggest that his D would qualify for more aid if he pays off his mortgage rather than just sits on his cash. I have no idea if he is misreading the MIT FinAid calculator. But since he still has his job and if he loses it he may well find another one before his D graduates, this may not be the most important consideration. </p>
<p>Blossom’s advice about planning for contingencies is good. Everyone should consider retirement, long term disability, long term care insurance, life insurance, etc. Others have also given good advice.</p>
<p>But none of the advice addresses OP’s original dilemma: What to do with all this money sitting in the bank if you are risk-averse and you won’t consider more risky investments like stocks or bonds? Paying off the mortgage does not seem like such a terrible idea. I have at least one similarly risk-averse relative who paid off his mortgage in his 40’s- and never regretted it.</p>
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According to the EFC calculator that doesn’t seem to be the case. But this not the reason for paying off the mortgage.
It is not that our cash will get tied up in the house. We have equivalent cash/stocks to what we will be paying off along with our 401K accounts.
So I’m just trying to figure out when it will make sense to payoff mortgage.</p>
<p>vicariousparent: Thanks for putting it so clearly.</p>
<p>I think vicariousparent has the understanding of POIH correct. THE POIH’s are basically a family with a conservative financial planning philosophy and some money to manage. </p>
<p>Looking back at some of the “worthless advice from internet strangers”, very little of it is applicable to their conservative financial philosophy.</p>
<p>One thing I do have to point out that is not correct thinking is the idea of paying off a house that may be losing value is a bad strategy. The mortgage on the house is payable no matter what the value on the house is. Yes, some folks seem to be walking away from houses worth less than the mortgage balance and IIRC this year and this year only, the IRS is letting folks off the hook for imputed income from the part of the mortgage not recovered at the bank auction. However, in any other year, if you walk away from a 100K mortgage and the bank only recovers 80K from the auction, you get a 1099 from the bank that says their $20K loss is your $20K income and you get to pay income tax on that!</p>
<p>Bottom line here is that a mortgage must be paid eventually regardless of what the house is worth.</p>
<p>In the end POIH is asking for a valid reason why paying off the mortgage isn’t the best conservative ROI for their available cash. He has indicated that there is plenty of cash cushion beyond the funds necessary to do this, and is wondering if there is anything he is missing. I haven’t seen anything mentioned so far.</p>
<p>BTW, having the mortgage paid off after the children are finished with college (the first years use of the extra cash flow) will allow them to rebuild more cash savings with plenty of time (given their early 40’s age) to retire comfortably (although I’d bet they are probably well ahead on that front as well).</p>
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<p>So withdraw the initial amount. Keep it safe for however many days you have to, and then paydown the HE Line. I’m guessing the current interest rate on the HE line is no worse than your mortgage.</p>
<p>Let’s also lay to rest the idea that tax effects make borrowing a benefit.</p>
<p>Let’s say you pay $1,000 of interest on your mortgage, and you are in the 30% tax bracket. That deduction saved you $300 on your taxes. Net cost of borrowing is $700. I don’t think I am missing anything by saying it COST YOU $700.</p>
<p>The differences between the cost of the mortgage at 5% vs the earnings on the CD of 2% is 3%. And ALL THE NUMBERS are pre-tax. If you want to talk after tax, then adjust all the rates to after tax numbers. That’s the only way to compare apples to apples. No reason to mix in oranges and bananas to confuse the analysis.</p>
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<p>I wish they would print this line on all dollar bills, right under the line that says “In God we trust”.</p>
<p>Thank you OperaDad for posting that.</p>
<p>I’m sure you are using MIT’s institutional EFC calculator and not a FAFSA based one.</p>
<p>POIH,</p>
<p>We paid off our mortgage with the same intent as you are proposing, however we did this several years “before” our oldest entered college. We would be full pay either way with mortgage or without. We got rid of mortgage, socked away the money we would have paid in mortgage/interest into CD’s. Spouse and I both have strong retirement funds, so it is not sacrificing one for the other. We do not qualify for any significant tax breaks because of mortgage deduction, it was stupid in our situation to believe the deduction was worth anything. The peace of mind of not having the mortgage issue hanging around our neck if a job loss occurred and again not unlike what you are thinking, if job losses occurred, we would still be full pay.
On top of a cushion, we have a HELOC for dire emergencies, have not had to use it, but it is there.
Property taxes/insurance are still way below market if we had to rent a home.
For us it was the best thing we ever did.
Although spouse cries poor mouse all the time, I don’t think he realizes how lucky we are. Most families with two incomes spend as two income families, we never did. We bought a home as a one income family, spent as a one income family, yet we have always been a two income earning family.
My father thought we were stupid to pay it off, saying “oh your losing your mortgage deduction” if most people ran the numbers properly, they would realize that is a fallacy, just makes one feel ok about paying a mortgage. In fact paying it off early lessened our AMT liability somewhat. For us it was a sound move.</p>