Jul 13, 2009

Re-thinking the Mortgage Payoff Plan

On a day-to-day basis, I tend to focus on the small picture: save a few dollars on milk and cereal, buy the boys' clothes a year ahead on clearance, pay insurance bills in full to avoid the installment plan "convenience" fee, etc.

But lately I've been thinking more about the big picture: our long term goals, what's likely to happen in the next five to ten to twenty years, and especially, how do we balance liquidity with paying off the mortgage?

While both my husband's and my jobs seem secure for the moment, we are definitely not immune to the economic crisis that our country – and particularly, our home state of California – is weathering right now. We could be hit by pay cuts or layoffs, a steep decline in the quality of our local public school, or even a medical crisis or something unpredictable.

Pay cuts or layoffs are unlikely but not impossible or even improbable. One of my best friends and her husband were both laid off earlier this year and just found jobs after months of searching. It was stressful, to say the least, but they survived as well as anyone could due in large part to their conservative spending habits and savings. We want to be in the same position, just in case.

Additionally, you may recall that I've spent much of the last two years researching public and private schools in an effort to determine where to send our oldest next year. I was pleased to discover that our local public school is at least as good as any private school that we could afford. But of course, whether the public school is able to maintain its high standards in the midst of this recession remains to be seen. Class sizes are increasing this coming year. The school board has approved a three-year plan to eliminate full-day kindergartens and all arts and music programs, cut salaries by five percent in 2011-2012, and require furlough days. Governor Schwarzenegger wants to "suspend" mandatory school funding. I'm cautiously optimistic that because our public school seems to have a committed administration and an active PTA, it will be able to adjust to these restrictions without a loss in quality. The PTA, if it is able to raise enough money, can provide funding for supplemental arts and music programs, for instance.

But, who knows what the situation will be in a year or two? It would be nice to have the option of sending the boys to private school should that become preferable.

It would also be nice to pay off the mortgage in six years, as we'd originally planned. But sometimes it's necessary to strike a balance.

For the time being, we are splitting our debt snowball and directing half to our mortgage and the other half into savings. I created yet another subaccount at ING to keep this money separate. My thinking is that we will re-evaluate every six months or so, and if things look good, we can make a large principal payment on the mortgage that will keep us on the path to full repayment in six years. On the other hand, if we feel like hoarding cash, we can do that too.

This plan worked well for us when it came to paying off my student loans – and in fact, we did that a few months earlier than I'd anticipated. So hopefully things will work out that well when it comes to the mortgage too.

Previously: How I'm paying off my student loans


rebecca said...

We are in a similar situation. We are down to one payment and then we will have an extra money to go somewhere. While its exciting to think about adding it onto the double mortgage payments, sometimes its important to think about the short term future and the possibility that in a year, or two we might not have a steady income. We should probably also consider putting at least a few hundred dollar a month into a high yield savings account.

Abbie said...

We must be on the same wave-length. A couple of weekends ago I woke up with a perspective on debt, and decided for the first time that becoming debt-free was at the top of my priority list. I figured it was better for my consumerism, my childrens' future, and even my family's shorter-term financial security. It was so heartening to read about your student-loan payoff journey since my husband and I both have loans from our MBAs, and to read this article about your re-evaluation. It is hard to change sometimes, to pull back, or redirect our thinking...but you are inspirational, and your flexibility to put the real priorities first is very nice to read. Thanks for this wonderful post! and I don't usually leave links, but if you wanted to take a peek at my post about our journey to becoming debt-free, it is here: http://www.organizing-life.com/create-inspiration-and-beauty-at-home/
Thanks! Abbie

Gina @ MoneywiseMoms said...

We're doing mortgage payoff too, and although I felt like we had enough "emergency fund," I'm still holding back a little more each month for fluidity. You just never know. In the long run, an extra year on the mortgage won't make that big of a difference when we've saved 10-15 years total over the term of the loan.

Kacie said...

Sounds reasonable to me!

Camille said...

My husband is a high school band director so we are putting extra way "just in case". As LAUSD proves, the arts are the first to get cut -- such a shame! I didn't see any mention of cutting funding to sports, but maybe they did that already. We were ready to start cutting down debt, but instead we're preparing for a possible lay off or pay cut for the 2010-2011 school year.

Tia said...

I think it is a smart move to put the extra away in savings right now. If you had asked me a few years ago if I would be unemployed and our family would be also dealing with 2 day (and now possibly 3-4 day) furloughs a month I never would have believed it. The 2 day furloughs have meant the money that should be paying down my husband's student loans has disappeared but if they hit 3 & 4 days it will mean no money even going into savings and probably a bill or two starting to eat the existing savings away. The more prepared you can be the better.

I hope your local school PTA can ramp up and keep the precious extras because the schools have already lost so much.

Chief Family Officer said...

@Camille - Yep, maybe your husband ought to consider a different subject as a backup plan. I'm okay with supplementing that kind of thing outside of school, but we can afford it. I feel bad for all of the families that can't, and of course, for all of the teachers who are losing the subject they love. I definitely think you're wise to be prepared now!

@Tia - Those furloughs are devastating. I don't understand how the governor or anyone could think that state workers should just take a 10-20% pay cut, when salaries are supposed to be bargained for. Good luck to you, and I hope those additional furlough days don't happen!