Married Life: Mortgage Prepayment for Refinancing
December 5, 2011
With just about all savings interest rates in the tank, PiC and I have agreed that without waiting for me to further flesh out our annual budget for 2012, his next expired CD will go into a large prepayment toward the mortgage.
It isn’t the amount we need to get us at the right loan to value ratio for a refinance but it will be a substantial step in the right direction, and there’s no reason not to start this process. This is our primary residence, and the interest rate is nearly 5% while savings rates are barely hovering around 1%.
Even if we wanted to move out and turn this place into a rental, the current total mortgage and HOA costs are too high in comparison to market rental rates for the same sort of housing for us to break even in this economic environment. Between bringing down the total loan cost a significant amount and locking in a much lower interest rate, I think we could ultimately save approximately 40% of the current mortgage. That’s no small beans in cash flow and would make it easier for us to take any kind of rental situation risk.
I plan to sock that saved cash away again because I’m pathological like that. 😉
Actually, there’s a good reason – we would just have put something like $65,000 cash into the process. That’s my current estimate of the cash cost. We should be able to swing it if we put together our savings, prioritized carefully and set aside a new emergency fund. The huge cash defusion will still give me indigestion, committing that much cash when I’m still worrying about my next job-related moves is worrisome, but I do think it makes sense overall.
As for allocations: while that increased cash flow needs to replenish our savings because it will have been much decreased and that makes me nervy, we still have to set aside money for mid-sized savings goals for 2013 as well. That’s yet another reason it would make sense to let loose the cash bomb, we’d only be limited to looking for ways to increase income to fund any expenses for the upcoming year that can’t be carved out of this year’s budget. I’m a fan of planning a year in advance to break down the savings necessary for really big bills like property taxes, travel, and that sort of thing.
I feel like I’d better hurry up and make all the changes we need to, I’m running out of steam already!
:: Is this normal to feel so responsible for stuff this early on? Was the first of married life this hectic for anyone else?
Ummm, maybe it’s not normal to think of the ‘benefits of marriage’ in quite the same terms you do (but after all, this is a finance blog first and foremost). Also, I would put forth the opinion that combining your finances and making forward financial plans aren’t to do with marriage, per se. Just because you now have a legal relationship doesn’t require you to combine your money. Bill and I have not and don’t intend to, but our circs are quite unusual, eg being citizens of different countries. I’m always a fan of pre-paying a mortgage. Because I had a variable rate interest mortgage, I’m not certain how much I saved by paying off my mortgage in 8 years, but I’m pretty sure it was a brilliant move, not to mention it was the foundation that allowed both of us to retire early. Finally, normal – whatever that is – is highly overrated IMO!
“Normal is highly overrated…” LOL! Right on!
We were nowhere near that responsible when we first got married. We were way too busy racking up debt to occupy ourselves with paying down a mortgage and planning next year’s savings.
To own a house outright in San Francisco is definitely something. Eventually real estate values will get back on track; maybe not soon, but when they do, whatever you’ve put into the principal on that place will pay you back in spades & diamonds.
It really is scary to pay out a large chunk of dough. When I paid off my last house, against the advice of my financial adviser, I was very worried that it was a bad move. And really, any time a large berg of money breaks off and floats away, it makes your stomach upset. But it turned out to be one of the best moves I made.
While I was still employed, it meant a) I had a higher standard of living because I wasn’t having to pour half of net income into mortgage payments that were mostly interest; and b) with that much pay freed up, I was able to put a lot more into savings.
After I was laid off, it provided a roof over my head that can’t easily be taken away from me. As long as I can pay the property taxes (not a given, of course…), I won’t find myself sleeping in my car.
And once I’m gone, it means my son will have a pleasant little house that he can live in, rent out for a pretty nice monthly income, or sell for about a quarter million dollars. More, if I outlive the housing bust.
I think you are being very smart and thinking about exactly the right sort of financial planning you need to think about to put yourselves on secure footing. I admire you for having the foresight and the resolve to do what you know is the right thing to do. It is so easy to forget about the underpinnings of a stable future while blowing money on unneeded crap in the moment. When you plan in the manner that you are planning, you don’t need to worry about filling your house with unneeded stuff or funding retirement. And I say HOORAY to that.
Sounds like a good plan to me!
When we got married we had no money, tiny incomes, and 10K student loan debt (his). We were 22 and just starting graduate school.
We tend to do big life things all at the same time. Like starting a first job, buying a house, and having a baby the same year. That sort of thing.
The times in between are more relaxing. Who needs to spread out the stress?
We had a couple thousand dollars total in our bank accounts when we got married, and then we moved halfway across the country and went a month and a half before our first paychecks during grad school…So our first 2 months of marriage were all about saving money and prioritizing things like furniture (mattress, then couch, then tables and chairs later), and of course starting grad school and dealing with all the living in a new state stuff. I’ll be honest, it sucked (financially)!
We’re about to start throwing a lot more money (relative to our usual payments) at our mortgage next month, for the same reason you said- bank interest rates are crap, and we’re paying a lot of interest on the mortgage. So…sounds like a good plan to me 🙂
@Shelley: I suppose I should have named that post “HR Benefits” to be more clear. If I was going to wax eloquent about marriage, I probably would have titled it more elegantly.
In any case I think it’s still too early for me to think I can talk about the benefits of marriage on that level, anyway. I mean, it’s only been a couple months now.
And I think you’re right, not just because you agree with me 😉 about prepaying the mortgage.
@FaM: Technically, just in the SF area, a detail that gives me much pause as I’m not sure how much it affects value (or lack of) in the future.
Still, a paid off mortgage is a paid off mortgage and my instinct has never been far wrong with these things.
@The Quest: It’s a good thing I happen to get claustrophobic easily, too, around too much stuff, so many of my instincts work FOR us in this matter.
@nicoleandmaggie: True. I did the move, new job, new lifestyle thing all last year. This year, well. Let’s not talk about that.
@InsomniacLabRat: I guess we really are going to have to suck it up and buy our dratted mattress because if you look at that, next year has already snuck up on us…