Should I pay off my house

Question

I purchased my house (3 bedrooms, 2 full baths) in 1997 for $84,500. I have already made $166,500 of mortgage payments on a 9% interest rate loan. I have $53,000 left in payments. It recently appraised for approx. $71,000. I have made two unsuccessful attempts to refinance (but that’s a different story).

I am looking at purchasing about 3 acres of property on which there is a similar house in well-developed area. I have about $100,000 cash in personal savings and $10,000 in my daughter’s account (she is 6 years old). Besides the mortgage, my biggest debt is a $31,200 car loan (2014 Infinity Q50) on which there is zero interest (actually, there was interest but, it has been paid in full in the amount of $600. My credit rating is “Excellent”).

Should I pay off my house?

Answer 1

If it were me, I'd be debt free today, Monday, at latest. 100K-(53K+31.2K) = 15.8K would be my bank balance by this afternoon.

I am not sure why you would count 6K of your daughter's money as yours to use. Either it is her money, or yours, not both.

If you still want debt, which I think is silly, you might try to refi your home with a home equity loan. That loan would be in first position, at a fixed rate, and for a fixed term. Regions bank did some thing like this for a person with excellent credit and plenty of equity. They got a 7 year loan at 2.6% when the prevailing interest rate on a 15 year was about a point higher.

Answer 2

9% would be an absurdly high rate in the US by today's standards, so you should at the very least consider refinancing to fix that.

Paying off completely is of course another way to fix that.

Which approach makes more sense depends on what you plan to do with the money instead if you do refinance -- if you can put it in an investment which yieds a higher percentage than the loan costs you, than refinancing the mortgage could actually be a profitable decision.

You also need to consider what the bank will want to see in order to give you a mortgage on the new property. I have no idea whether they'd be happier that you had no prior mortgage, that you had the mortgage but also had the cash to pay it off, or if they wouldn't care.

Remember that you want to be able to make at least a 20% down payment on the new property to avoid the insurance fees. That requires that you have a reasonable amount of cash-equivalent on hand. And generally, "house rich but cash poor" is an awkward state to be in.

Answer 3

If you get a mortgage on the new property, you can almost surely get better than 9% today. I refinanced my house a year or so ago at 4%.

You didn't say how much the new house will cost or how much of your cash you're willing to put to it, but just to make up a number say the house costs $200,000 and you'll pay $100,000 with cash. So you could keep the $50,000 at 9% and get a new $100,000 at 4%, or you could pay off the old loan so you have $0 at 9% and $150,000 at 4%. Clearly plan B is significantly less interest -- 5% x $50,000 = $2,500 per year.

If you can afford to buy the new house without getting a loan at all, it gets more complicated. By not getting a loan, you avoid closing costs, typically several thousand dollars. Would the amount you save on closing costs be more than the difference in interest? I think probably not, but I'd check into it.

If paying off the old loan means that your down payment on the new place is now low enough that you have to pay mortgage insurance, you'd have to factor that in. I can't say without knowing the numbers, but I'd guess PMI would be less than the interest savings, but maybe not.

Oh, I assume that you're planning to keep the old house. If you sell it, this whole question becomes a moot point, as most mortgages have a due-on-sale clause.

Answer 4

You owe only $38,860 to pay off your loan now, possibly less.

From what you say about your loan, tell me if I got this right:

30 year loan $75,780 original loan amount 9% annual interest rate $609.74 monthly payment You have made 272 payments Payment number 273 is not due until late 2019, possibly early 2020

If I have correctly figured out what you have done, you have been making monthly payments early by pulling out payment coupons before they are due and sending them in with payment. You are about 4 years ahead on your payments.

If I have this correct, if you called the bank and asked "what is my payoff amount if I want to pay this loan off tomorrow" they would answer something like $38,860. When you pay a loan off early, you don't just owe the sum of the coupons still remaining. In your case, you owe at least $16,000 less!

Indeed, if there is some way to convert your 4 years of pre-payments into an early payment, you would owe even less than $38,860. I don't know banking law well enough to know if that is possible.

You should stop pulling coupons out of your book and paying them early. Any payments you make between now and when your next payment is actually due (late 2019 sometime?) you should tell the bank you want applied as an early payment. This will bring your total owed amount down much faster than pulling coupons out of your book and making payments years early.

If there is someone in your family who understands banking pretty well, maybe they can help you sort this out. I don't know who to refer you to for more personal help, but I really do think you have more than $16,000 to gain by changing how you are paying your mortgage.

Good luck!