Boston Gal's Open Wallet

Good luck with your decision. I would say keep a good cushion of cash, just in case. I was hoping to pay off my house too and worked hard to pay down my mortgage. While I had a hefty emergency fund, I still wasn't certain I could manage an extended period of unemployment. It was only a matter of time before I was laid off since I worked in housing. I bought a long time ago and had equity, so I refinanced to a lower monthly payment and got some cash out before I got laid off. Thankfully, I haven't had to spend any of my "house money" yet, but it's tough to see that mortgage balance these days. Since I'm now on my sixth month with no real job and only minimal consulting work, it was the right thing for me to do at the time, painful as it was.

 

I'm with Mrs. G. Liquidity, Liquidity, Liquidity. That is the primary issue, then being debt free. You just never know how important liquidity is until you need it, then, your credit has already been turned off. See all the companies that have failed? Many failed because they did not have sufficient liquidity. So I say with such low interest rates, refinance at a low rate and save your extra cash (even if it costs you a little). Once the economy is back to normal, you can start paying off the mortgage but there is no rush. You are a good saver. You are better having the cash just in case... you just never know.

 

The problem with aggresively paying down your mortgage in a period of employment insecurity is the payment is not reduced, just the principal. An eight or ten month emergency fund might not be enough if unemployment in your field is high.

It's better to accrue the cash, even if interest rates are low, until you can pay off the entire loan at once. Take the tax write-off for the interest and save your money. When interest rates pick up, the compound interest on your larger savings balance will accelerate the mortgage payoff date.

 

Recently when I mentioned to a friend that my wife and I now have enough cash to pay off our mortgage he asked, "so why don't you go ahead and pay off that mortgage, if you need cash down the road you can just take out a home equity loan."

I replied, "but if one of us gets laid off we might not be able to get a loan, so we prefer to keep a cushion of cash in these uncertain times."

 

BG,

I agree with Mrs. G and Marty. A hefty emergency fund is way more important than paying down debt. If you lose your job, you'll need that emergency fund just to service your debt, let alone paying it down!

Maybe you can strike a compromise. This is a little arbitrary, but it has a nice symmetry to it:

Keep accumulating cash until it equals one half of your outstanding debt. Then split your extra income equally between saving and paying down debt.

Good luck on your decision!

Michael

 

I vote to pay the debt down. Once you don't have a mortgage, it will probably make a decent dent in what your monthly burn rate is. Without a mortgage payment, 20% of my expenses would disappear, reducing the amount I need in my emergency fund and allowing me to invest more aggressively and sleep better at night ...

 

You seem to have a stable job.
Take that 100k and pay down your home mortgage!!!

 

Hi BG,

This is just a nit-picky question, but shouldn't a reduction in your liabilities be color-coded green instead of red on your spreadsheet?

Thanks for your blog, I enjoy it very much.

 

Despite living in NY these days, I always seem to be offering comments about the way things work back back in Australia.

Anyway, I was going to mention Mortgage Interest Offset Accounts, that are pretty popular in Austrlia. The concept is keep your cash in an account and instead of getting interest paid (that is taxable), it reduces your mortgage interest payments.

A note is that most mortgages in Australia are floating rate which makes this concept work more easily.

Would it be worthwhile looking for a similar concept over here and building up that account over time?

 

I think you should keep at least $100k in cash to weather uncertain times. But I'm not sure you need more than that. How many years could you live frugally on $100k, while still receiving rental income from your condo. One? Two?
Then, I'd sink half of your additional money into your mortgage. You should not be paying such a high price for debt servicing with so much cash coming in each month!

 

Well, like you, i have competing interests for my money. It's very, very important to me to eliminate my only debt, my mortgage, as quickly as possible, so that i can fully focus on retirement savings since i want to retire at age 60, in 10 years.

So i've been aggressively prepaying my mortgage with an extra $425/monthly. If i keep that up, i'll have the whole thing paid off in 6 more y ears. I think it's smart to focus on that now with savings interest rates being as low as they are since my mortgage is 6% and with a $62K balance, it doesn't make sense to refinance.

At the same time, i'm fully funding my 401k, IRA and the "cathc-up" contributions for both that you can do once you're 50.

And i went ahead with my screened porch conversion into sun room project this year to take advantage of the federal tax credits.

Who knows about my job stability, but i just decided to go for it. My one weak link now is my low emergency fund, at about $6K, but if i had to, i could sell some taxable mutual funds, something i'd rather not do, but I've got about $100K in non-retirement mutual funds if i needed it. I consider it part of my retirement portfolio anyway.

 

Not knowing much about your employment situation, it seems to as though having so much in cash could be overly-conservative. Do you work in an industry/location where it could take over a year to find a new job if laid off, even after any severance runs out?

Lastly, while paying off your mortgage early may not be the most rational thing to do financially, you should consider how much peace of mind/happiness it would provide. If significant, it could be worth doing.

 

Yeah, I tend to agree with some comments about keeping some of your money by not paying off the mortgage right away. Putting it in several baskets will lessen the risks.


And I admire your passion for blogging. :)

 

I'm a fan of being debt free, including your mortgage, and am at that point in my life where I've paid off everything, including my house. Having said that, you can have your cake and eat it too by using a bit of arbitrage. Take the money you were going to use pay your mortgage down and put it in a GNMA mutual fund...Vanguard is a good choice. The fund invests in mortgages and throws off 4-5% interest and has very little price fluctuation. If you need the money sooner, withdraw it. If you build up enough to lump-sum out your mortgage, do so. Viola!