[quote=EconProf]Since early retirement and I both live in Santaluz and face Mello-Roos fees, we met up today to compare notes. It turns out the decision of whether or not to pay off the MR is not at all clear cut.
I brought my tax bill with me so we could crunch the numbers to see if it is worthwhile. I also called earlier today, the number on the tax bill to learn my cost to pay it off, and got additional information about MR.
My bill contains two MR payments, CFD#2 for $2108 per year, and expiring in 2030, and Poway Unified, CFD#4 for $904 per year. I only called the number for the first, which revealed that my cost would be “about $30,000” to pay off (exact amount would cost me $500 to find out, but would apply as a credit to the payoff). That means if the amount stayed the same for the next 17 years, I would pay a total of about $36,000.
It clearly appears I should NOT pay it off, given that I could invest that $30,000 today and have it double assuming a mere 4.2% annual ROR compounded. Of course the unknowns are 1) Will that $2108 stay the same for 17 years, and 2) Will that expiration date of 2030 stay the same.
The guy I talked to on the phone was reassuring on both counts, but I do not share his confidence. Still, changes in 1 or 2, or both, would have to be pretty major to prompt me to pay it off. And the hurdle of 4.2%, (or 5%, or 6% depending on assumed changes in 1 or 2) should be pretty easy to beat with alternative investments, or paying down my other mortgages, of which I have many.
Early retirement and I also determined that the two MR fees are based on different factors. It seems the first depends on square footage, and the Poway Unified one depends on property value. Interesting.
Anyway, I am not paying off the MR, based on this information, unless someone here can bring other evidence to bear.[/quote]
Interesting point EconProf. My first thought was maybe this is due to timing of the payoff being difference.
When I paid the MR off, we still had 22 years to go on the MR. Total cost over the 22 years would have been $150k. With the payoff at $58k, and one of the MR at 7.5% the calculation came out in favor of payoff as we essentially “earn” $92k by paying the $58k upfront.
Now I have to assume the bulk of the principle is back-end loaded, much like mortgages. Therefore, homeowners are paying primarily interest the first few years.
Assuming I have 17 years left on the MR, with payoff reduced slightly to $50k, residual 17 years of payments would still be $121k. So it would still be worth paying off, but the benefit is not quite as impressive.
Looks like the big difference here between econprof and my scenario is the interest rate involved.
Econprof’s CDF #2’s payoff is $30k with 17 years left, but because the interest rate is only 4%, yearly obligation is only $2100. My CDF11-3’s payoff was $26k with 22 years left, but interest rate was 7.5%, yearly obligation was $3000.
So essentially with the low interest rate of CDF2 and less number of years left on the MR, the payoff strategy doesn’t make sense.
I do wonder why PUSD can get CDF2 rate down to 4% but CDF11-3 is still at 7.5%.
