A Perfect Example of Why Throwing All Your Money at the Mortgage Can Come Back to Bite You

August 20, 2013 2 Comments »
A Perfect Example of Why Throwing All Your Money at the Mortgage Can Come Back to Bite You

There are countless programs out there aimed at paying down the mortgage as quickly as possible, but they often highlight the interest savings without properly disclosing the risks involved.

While it may sound extremely enticing to pay down your mortgage in “half the time,” or “save $50,000” via some kind of payment accelerator, it doesn’t always work out exactly as planned. Or even close to it.

This harsh reality was revealed in a first person account over at the Yahoo! Contributor Network, in which Laura Quinn blamed her extra mortgage payments for getting her into even “deeper debt.”

Larger Mortgage Payments = More Debt

Ironically, extra payments to principal are intended to reduce debt and interest expense, but Quinn managed to accomplish the exact opposite.

While it sounds great on the surface, that money has to come from somewhere. And if it dries up your liquidity in the process, you could put yourself in a bind.

Quinn experienced this first hand after she and her husband set a lofty goal to pay off their mortgage by 2020.

When they first purchased their home in 2005, they had an initial monthly payment of $1,100 on a 30-year fixed, despite setting a goal to pay off the mortgage in 15 years by making payments of roughly $1,500.

Then they refinanced from a 30-year loan to a 15-year loan (at no cost), which increased their payment to $1,230. By the way, no cost loans mean higher interest rates, so another mistake was made here if their intention was to pay off the mortgage with the least amount of interest.

After that refinance, they refinanced again to lower their monthly payment to just $930, though they continued to pretend that they needed to pay $1,500 each month.

And if they ever experienced a windfall or came into some money, such as a tax refund, they’d throw that toward the mortgage balance one month early to ensure they could continue making the extra large payments if anything else came up.

Quinn seemed to be pretty happy with her progress back in late May of this year, and proclaimed that she and hubby couldn’t “wait to finally be free of our mortgage.”

Then the Unexpected Happened

As expected, something unexpected came along. They had some medical bills, and were forced to put $10,000 on a credit card while also taking out a $5,000 401(k) loan.

After all, she didn’t believe in maintaining an “emergency fund,” and was never good at setting aside cash for a rainy day, which she felt would just be a self-fulfilling prophecy.

For the record, the 15-year mortgage is set at a ridiculously low 2.75%, while the credit card’s APR is a much less attractive 15.24%. The 401(k) loan probably wasn’t cheap either, and it meant she couldn’t contribute to her retirement savings while paying it back.

Fortunately, she was able to pay off the 401(k) loan in one lump sum, and is now using the extra mortgage payment money to pay off the outstanding credit card debt.

So in essence, her quest to reduce her debt led to even more debt, despite holding a fixed-rate mortgage that could never surprise her.

[Do biweekly payments make sense?]

The New Goal Is to Set Aside Cash

As a result of her unfortunate series of events, Quinn has created a new goal to set aside $50,000 by the time the mortgage balance reaches $50,000.

The idea is that they’ll have cash on hand for any emergencies or unexpected costs, and save up enough to pay off the mortgage overnight if they feel like it. Still sounds like they can’t let that dream go.

Of course, first they have to tackle their credit card debt…

This personal story illustrates the risks involved with fixating oneself on paying down the mortgage.

Interestingly, the most unfortunate aspect of all of this is that it came at a time when mortgage rates were at record lows, meaning it’s the best time to hold a mortgage to term, not get rid of it.

Read more: Should you pay down your mortgage or invest instead?

2 Comments

  1. Diane September 3, 2013 at 4:55 am -

    The article does not only focus on the fixation of paying a mortgage off early, it highlights several decisions the home owners made that added to their financial concerns.

    Refinancing
    Not having any savings in a reserve fund
    Credit card use that led to debt

    Paying off ones mortgage early in and of itself is never a bad decision. The aspiration to settle a mortgage debt early partnered with a financial plan that includes saving for the unexpected and limited credit card debt is a recipe for succces!

  2. Colin Robertson September 3, 2013 at 1:37 pm -

    Very true Diane. But it seems many homeowners are overly ambitious in this department, and it winds up hurting more than helping, especially if other aspects of their financial situation aren’t squared away beforehand.

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