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I have a second mortgage that was originated in 2006 for roughly $60k at 9.125%. It is a 15 year mortgage amortized as a 30 year mortgage with a baloon payment due in 2021 for the remainder (roughly $47k). I have been unable to get the lender to work with me to lower the rate and I am under water. I'm not in a crisis or anything - I dutifully make my payments and am not struggling.

Right now, if I add an additional $400 per month to the payment, it will be paid in full by the date required. I'm trying to decide if it is worth it to pay it off early or to just save that extra $400 per month either in a savings account or invest it in something.

At 9.125%, the math seems to indicate that my investment would need to be above 9.125% to make it "good". Part of me likes knowing that the balloon payment will be voided if I add the extra payment. The other part of me likes just holding that cash in my savings for extra emergencies. By the due date I will have about $33k in cash, so I would need to come up with about $15k on my own which is doable by just saving some more. I am debt free except for my mortgage and have 6 months of e-fund, save 20% of my income for retirement, and generally am in a good spot I think.

Any advice? I'm struggling with this just from the fact that I know that this house is not my final house and I hope to either sell or rent it out in a few years and move.

Any advice is appreciated.

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  • Even if you can reduce the effective interest rate with tax deductions, it'd be hard to beat the risk-free return of early payoff. Unless you think we're about to enter a period of high inflation, of course...
    – Rick Goldstein
    Commented May 15, 2014 at 16:54
  • I was in a similar situation and paid off the 2nd mortgage. No regrets here. I enjoy the feeling of freedom that comes from less debt. ;-) The bank is making a nice profit off of your loan, and even though you're giving them more money short-term, you'll be giving them far less long term. Plus if you want to rent it out sooner rather than later, not having the 2nd mortgage means better cash flow. I'd say put all the numbers in a spreadsheet and calculate how much you'd save long term with $x extra payment.
    – mpontillo
    Commented May 15, 2014 at 16:55

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Have you considered refinancing to a 7-year fixed?

I just ran a few numbers on your situation and came up with this:

  1. 9.125% is a really high interest rate.
  2. If you make minimum payments through 15 years, you're paying over $75,600 in interest, and only $12,200 in principal.
  3. If things play out and you get through the 15 years and make the final balloon payment, you're looking at having spent $135,600+ on a $60,000 mortgage (226% of the original loan value)

Unfortunately, most of the damage has already been done (100+ payments), as you've already spent about $45,000 on interest and only about $5,000 on principal (depending on when in 2006 you took the mortgage out), and by my estimates, if you time it now to pay it all off by the end of the 15 years, you will still have spent about $122,000+.

If you can't refi, then I'd suggest paying anything extra you can manage against the mortgage.

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  • Yeah, if I knew then what I know now I would have paid extra on it from the start. I was just uneducated. It will never happen to me again, that's for sure.
    – Mike
    Commented May 15, 2014 at 17:40
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    It may not be possible to refinance because of the statement "I am under water"
    – mhoran_psprep
    Commented May 15, 2014 at 20:44
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    @mhoran_psprep Another reason why the OP needs to pay as much as he can toward this mortgage: once he gets enough equity, he can refinance to a lower interest rate.
    – Ben Miller
    Commented May 16, 2014 at 14:07
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9.125% is a very high interest rate. Ignoring the fact that you have a very large balloon payment due 7 years from now, this loan is costing you at least $4500 a year in interest. True, you get some of this back as a tax deduction, but the odds that you'll beat this by investing somewhere are not that great.

Pay off the second mortgage, as soon as you can, and see if you can get a different lender to refinance it in the mean time.

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