Mortgage Payoff Question

In light of such an uncertain financial future in this country over the life of a 30-year mortgage, how wise is it to try to pay it off early by making extra payments each month? Please keep reading before you reply so you understand the variables.

First, I'm a math and Excel whiz so don't need any help understanding mortgages, spreadsheets, math, or which variables to plug in. I understand all that. My more precise question is,

Is it better to:

A.) make extra monthly payments like our parents and grandparents did, or B.) bank the cash instead (or buy gold) and only pay the mortgage off when you can write them one large check.

My thinking is prejudiced by four big factors: 1.) you can never get "ahead" on a mortgage. No matter how many extra payments you've made, if you miss three in a row, the sheriff still shows up at your front door with eviction papers. 2.) I lived in Argentina in the late 70's at the tail end of one of their hyperinflation cycles. 3.) After buying my first house, the corporation which owned the business was caught up in a mini AIG-type scandal and we all lost our jobs. Even with a severance package, I know what it is like to shit bricks wondering how you are going to make a mortgage payment and feed the kids. 4.) When I read CRFB.org and Congressional Budget Office (CBO) 10-year forecasts, I can only think we're headed over the edge of a very high cliff. Congress's record only strengthens my belief.

When I think of a 30-year mortgage, I'm pretty sure life as we know it will be quite different 30 years from now. This summary (http://www.crfb.org/sites/default/files/2018_Long_Term_Budget_Outlook.pdf) by the CRFB of the CBO's 2018 Long-Term Budget Outlook is a real eye opener, especially when you consider that the CBO has a record of being too conservative. When I looked back at their 2008 report (https://www.cbo.gov/about/products/budget-economic-data#4), to see what they were saying 2018 would look like, they were way off on their guess about the national debt. They were projecting $12.7 trillion, we ended 2018 just a few pesos under $20 trillion.

So, I'm wondering what Mish readers would opine.

Option 1: Make extra payments to your bank account and only pay the mortgage off when you can do so in full. Option 2: Take the extra payment money each month and buy gold. Option 3: Do like grandma and grandpa did and pay some extra each month to the mortgage company. Option 4: ?

With option 1, inflation is irrelevant. Since inflation rewards debtors and punishes savers, and you are using the savings to pay down your mortgage, you break even. With option 2, if the feces hit the fan you should come out way ahead as inflation ups the price of your gold but your mortgage payment remains the same. On the downside, the price of gold could also drop. With option 3, you risk losing your house if the Greater Depression hits and you lose your job sometime before you get the mortgage paid off.

With options 1 and 2, of course, you end up paying more in interest. But it also guarantees you that you can make the monthly minimum and keep the sheriff off your doorstep in the event of a Greater Depression. With option 3, which has worked successfully for the past 200 years, you pay less in overall interest. But at what risk?

Thoughts on how to advise my kids??

Comments (6)
No. 1-5
hmk
hmk

I would not make the extra payment each month as I don't trust the bank to make the appropriate adjustments to your principal. I paid off a commercial mortgate early and would have paid thousands more had I not closely looked at the amortization schedule and pointed out their error. For my home I saved and then paid down principal on a periodic basis until it was paid off. Never regretted either. As a result my cost of living is low. Gold is a crappy investment I view it more of a safe haven in case of shtf secenario. It would go down in price during a deflationary depression most likely, it did in 2008/09.

Mish
Mish

Editor

You are asking what the economic future is. No one can accurately guess that. What will you do with the money if you don't pay down the mortgage?

I suggest paying down the mortgage but having a year in living expenses in the bank.

Latkes
Latkes

What is your risk tolerance? If it is high, go ahead and invest your savings into whatever you think will do well once the SHTF. If your risk tolerance is low, pay down your mortgage as fast as possible, while keeping some money aside for really bad times.

Personally, I am doing the latter by paying a lump sum towards my principal once every year.

St. Funogas
St. Funogas

Thanks a bunch for the comments.

So you noticed predicting the future is hard too? I’ve been having a devil of a time since my RadioShack Madam Tarot Crystal Ball went kaflooie back in about ’69. Seriously though, I was more interested in opinions on probabilities rather than certainties. That grad level stats class ruined me for life and I see everything in terms of probabilities.

They’ve had a year’s worth of payments in the bank since day 1. The extra payment each month will either continue to be an extra payment or the same money will be used to put aside as mentioned in the above three options, or since the stock market will always be around no matter what, they’d probably consider a mutual fund as option 4. By paying an extra $500 towards the principle each month, they can lower the mortgage to 18 years but it still seems like we have a very high probability of some pretty serious SHTF scenarios between now and 2037, the kind where mortgage payers lose their jobs. If that is the case, then gold would likely initially tank as it did in 2008 as HMK pointed out, but those of us who bought silver in 2008 and sold at $42 in 2011 would love to see a repeat tanking in 2019.

Latkes, they are pretty conservative with a low risk tolerance since they have kids. They will most likely keep making that extra monthly payment unless there was some good reasons to think that life may not continue as normal for the next 18 years. I’m guessing it won’t, but you guys seem to think it will be close enough to normal that they should just stay the course.

I paid for my house one c-note at a time as I bought materials to build my house so I’m free and clear. But it’s hard to read those CBO and CFRB 10-year forecasts and not think that some serious crapola is headed our way in the next decade or 15 years at most. And hard not to worry about my kids and other friends who are making mortgage payments.

Thanks gain for the comments and insights.

Latkes
Latkes

There are only two situations where it makes sense to not pay down the mortgage as fast as possible. 1) If you don't care about losing the home to the bank when the SHTF for you or 2) If you expect high inflation to erode the mortgage away. I doubt #2 is going to happen any time soon.