There is a lot to consider here. While you may not currently want to invest, you may at a later date. Taking cash back out of your home will be an expensive choice. I recommend you keep at least 3 months of your monthly expenses as liquid reserves for emergencies. If you truly have no other needs for the cash (pending purchases, other bills, emergency reserves) then by all means pay down the mortgage. If you do not have ample reserves, I suggest keeping the funds liquid.

Fri Sep 28 2007, 10:10

Jason,

Your best bet is to see a Capital Management professional.

My opinion - I'd always prefer to make certain my money was working as hard for me as possible. Like you, I'm in the Bay Area and probably won't enjoy the appreciation we've had over the last decade. Still, I'd prefer to make my equity work for me rather than for the lender that holds my mortgage!

Don't let the headlines on real estate fool you. Real estate is local, not national. The real estate market, while slowing here in the Bay Area, is performing quite well in many other parts of the country. While it does require it different mindset, many people in California are taking their equity and buying property in sound investment markets out of state. Not as speculators, or as flippers, but with the intent to build wealth over the long term. I include myself it that group - and have bought homes in Austin, Atlanta and Albequerque over the last year. I'm happy to say my properties are appreciating very nicely, and by utilizing local area property managers my investments are well taken care of.

About a year ago a woman I consider a mentor told me she wished she had leveraged herself more heavily in real estate ~15 years ago - knowing the opportunities she's missed. The trick is knowing the exact neighborhood in the right market.

Good luck!

Sun Sep 23 2007, 18:35

You might want to consider an extra two payment a year to have a rapid pay down or cut the payoff time in half. I would not make a lump sum payment of 30K but would consider having the money liquid for a future investment. The Bay Area is a great place for investing due to it's high demand.

Tue Aug 7 2007, 15:58

No. The rate of return on the equity in your home is *zero*. If you want to be conservative, there are many banks that are offering competitive rates on money market accounts and certificates of deposit paying over 5% right now (Countrywide, HSBC, ING Direct, E*TRADE, etc). That would reduce the "spread" to under 1%.

If you had an interest only mortgage where payments are recast (automatically re-calculated based on the new principal balance), there would be some value in that, but you have a 30-Year Fixed which I assume is fully amortized (principal and interest payments).

I believe that you are far better having cash-on-hand that you can have available should any opportunities or emergencies arise. If you suddenly need the equity back, you are going to have to borrow it at the rate of Prime Rate (currently 8.25%) +/- some index.

You should consult with your financial advisor to determine which strategy is best for you.

-Aaron Wheeler, President, Oakville Properties & Oakville Capital

Tue Aug 7 2007, 15:33

Laura Rowley, writing at Yahoo Finance, has a good article about this very question. I'd encourage you to check it out and compare it to your situation. (see link below for the article)

The answer depends on my factors, depending your mortgage rate, your tax bracket, and what returns you would get on alternative investments. A financial planner would be an excellent resource to discuss your specific scenario with. If you are in San Francisco, I'd be happy to suggest several financial planners who might be able to help you.

Tue Aug 7 2007, 15:31

I like the idea of paying more on your principal. Your money is working smarter for you given the interest rates. Also keep in mind that real estate in SF, despite the national numbers that the local media love to quote, is still appreciating.....albiet not at the rate it has been in years past.

Tue Aug 7 2007, 15:12

Here are just a few things to consider when finding the "right" answer for you:

1) How long do you plan on staying in your house? If this is your retirement home then I say go for it! Paying down the principal on your mortgage balance will be beneficial to you in that you'll have more equity later and you'll shorten the length of time you will have to continue paying the loan.

2) Does your mortgage have a prepayment penalty? If it does not, then pay away. If it does, then make sure that the prepayment penalty time period has expired otherwise you will be seeing some hefty fees when you try to pay more than the required amount monthly. Some prepayment penalties can be as bad as 6 months worth of your interest payments, which adds up!

3) What are you trying to accomplish? Is it because you want more equity in the house? Is it because you just don't want to worry about your mortgage in the future? If so, then by all means, pay down your mortgage--if you have the means and you want that peace of mind, it is worth it. On the other hand, are you trying to "diversify" your investment portfolio? Are you trying to get into more real estate investments, perhaps even considering your home as your investment? Your home is truly your investment, whether you plan on retiring in it or selling it in the future. But if this is the case, assuming that you probably already have equity in the home, perhaps instead of paying down your principal even more you can consider investing in real estate elsewhere.

It sounds like from how you posted your question you are looking into paying down your mortgage more as an investment than for peace of mind. I would recommend you contact a local Realtor and see if s/he can help you find some sound real estate investments either in your area or if you would like, elsewhere. Keep in mind that the real estate market is also not doing that well either. In comparison to the stock market it is much more stable but you have to mentally prepare yourself for possible losses in real estate too as a property investor.

I hope this helped answer your question and you're able to make a decision. You're in a great position right now having what sounds like a great mortgage, equity in your home, and having the ability to pay down your loan balance. Best of luck in your decision-making!

Tue Aug 7 2007, 15:12

Jason,
I would suggest talking to a good financial planner to help you make the right decisions for YOUR situation, as every individual, and their tax complications are all different. Your age, how long you have lived there, will live there, what you are doing for a retirement account- all of this has baring on your decisions.

Should you determine that you should pay down your principal, which may be wise- make certain that everything extra you send in is applied to your principal. This will increase your equity, and later if you would like you could invest it in another property when the market heats up, should you desire. This is assuming that you are planning to live here for some time, not moving in the next few years.

Patti Phillips
2007 President, North San Diego County Women's Council of Realtor's

Tue Aug 7 2007, 15:11

I would say it was like money ih the bank - in a good year you will be earning more than enough to make up for any shortfalls of the past few months/quarters in real estate.

Tue Aug 7 2007, 15:07