Would you pay off 3/4 of your house with your savings?

Question

If you had enough money saved to pay off half or 3/4 of your house, would you use your money saved to lower your mortgage payment and just start saving all over again? Now consider that this decision is being made, because a spouse became disabled, and the earnings just went from 2 incomes to 1.

My husband & I are in our early 30's. My purpose would be to re-finance, have a lower and possible more affordable mortgage payment that may be all my responsibility for the next 30 years, but if we start using our savings, I may never get the opportunity to reduce my mortgage again by so much.

Answer 1

First let me extend my best wishes to you and your spouse and hopes and prayers for recovery.

You should calculate your monthly revenue: the one income plus any disability payments you will receive from now on plus interest earned in the savings account. Then determine whether you will be able to make all of your payments: mortgage, taxes, car payments, utilities and other regular bills with this revenue.

If you can continue to make these payments and still have some left over for savings, that makes the decision very easy. You should keep your savings in the savings account because (1) the mortgage payments are tax deductible and so your after tax cost of the mortgage is pretty low (2) you may need liquidity in the future and if you pay down your mortgage, you may not be able to get another mortgage.loan at current interest rates in the future because of the single income situation.

If you cannot make payment of all of your ongoing bills out of your ongoing revenue then you have to make a decision as to how to get to that point. It may involve

(a) paying down some of the mortgage with savings so that your monthly payments will go down to the point where your single income will be able to cover all bills. Make sure to keep something in reserve for emergencies, i.e. do not utilize the entire savings account.

(b) investigating whether you could generate greater income from your savings. You may want to consider triple tax free municipal bonds. I would not recommend investing in stocks unless you know exactly what your are doing.

Bottom line, unless it is really necessary because of cashflow shortfall, it is better to keep the mortgage and maintain the liquidity of the savings account for emergencies.

Good luck and best wishes.

Answer 2

I would not use all my savings to pay off my home. In fact, I could pay off my home tomorrow, but I would not choose to do that. Most people will earn more money in the long run by saving and investing thier excess money and simply making their regular mortgage payments. That way your home equity (and net worth) goes up and up and up as your home appreciates and as you pay down your mortgage--without you having to "save" anything! That's the beauty of home ownership.

If you pay off 3/4 of your mortgage, your payment will drop, but maybe not by as much as you expect. And meanwhile you'll lose the cushion of having cash in the bank in case of emergency.

However I don't recommend digging into your savings either. You're far too young! You'll run out eventually, and then what will you do? If your income has gone down--for whatever reason--then your spending needs to go down too. That may mean you can no longer afford your mortgage, and perhaps you should sell the house and relocate to somewhere smaller/cheaper.

Answer 3

No, I would keep the money available to make mortgage payments or other expenses if it is needed, but I would try to just cut back on as many expenses as possible. Once you put the money into the mortgage, you can't get it out without refinancing and paying more fees. I would keep it free and ready as needed. Good Luck; I am sorry to hear about your spouse.

Answer 4

I wouldn't. Especially if someone just lost income. Seems like you may need that savings for buffer. You'll also lose some tax deduction on the house by paying it down.
That's a tough decision to make. I guess it also depends on the amount of your house payment and how much income you just lost. Don't forget, if the spouse is disabled, they are probably eligible for disability income.

Answer 5

Keep atleast a small buffer-- dont use every last dollar of your savings- but in your case it may be a good idea. If you see your income being permanently reduced, this may be the only long term solution for you unless you want to sell the house and buy a smaller one outright.

Answer 6

I think it depends on how old you are, and if you have other things like retirement savings. If you are young, let's say in 20's to mid 30's, sure. But if you are approaching retirement within 10 to 15 years, you will need the retirement funds. Or you can move to somewhere cheaper, sell your current house, and buy another one outright with the equity.

Answer 7

No, although you will have more equity in your house, you won't be able to access it if you need cash. Besides, paying off a chunk of your mortgage will not lower your payment, it will only reduce the amount of time that you pay, unless you refinance.

Answer 8

Definitely not because you will be cutting your mortgage tax break for the future. Look into refinancing instead because you will most likely need the savings since the household income has decreased.

Good luck.

Answer 9

Probably a bad idea because (a) you won't have savings after that and (b) you will lose a hefty tax deduction. You would benefit by paying a good financial counselor before doing anything rash.

Answer 10

I would (and am) pay it off over time so as to maintain a reserve for emergencies etc .. ie not deplete funds