Bogleheads

[billb]

There are a number of threads recently about house pay off vs. investing in something that yields higher returns. There is also a wiki article regarding this "frequently asked question". More often than not, logic dictates investing the extra money into something with a better return.

I took the house payoff path for purely emotional reasons. Having a place to hang my hat was the number 1 reason, but last night I got another. Last month, our 14 yo saw a refund check from the bank (our escrow account refund after the payoff) and got curious. We explained to him what happened. Well, last night he mentioned again how "cool" it was that we'll always have a house. He figured out on his own that this opens doors and started asking me about investing the extra money. A number of things happened here. One, he obviously feels much more secure knowing that nothing is going to happen to us (he's witnessing foreclosures with his very eyes), second, he's interested in money and investing as a result of this. Third, I'm cool!

I would say that this "reward" is much too difficult or impossible to model.

[musiclover]

Congrats Bill.

I like the outcome you experienced and hope to get to that point soon.

[LH]

[touchdowntodd]

i hope to feel that in the future! i am 32 and on path to pay off my house on my 40th birthday (crosses fingers)... i refi'd in spring to a 15 yr 4.75% FHA fixed loan to do just this, and also made myself setup autodraft with a large monthly principal payment.. the 30 yr loan just made me feel like i had too much freedom, and i wasnt going to pay it off early.. its a bit of a stretch, but i still get to save about 13% a year of my income, and my employer matches 6% of that, so i feel good about it..

i agree taht i feel less "rich" for now, although thats relative in a home with $85k total income this year... i felt more like i had more options iwth the 30 yr, but also i knew it wasnt making sense, and i was wasting more money...

i will be the FIRST in my family to own a house.. and if i can pull it off before my 40th bday i wlil be VERY proud.. its a modest 1,100 sq ft 3 brdm ranch, but its all i need... i worry more about other things lol..

pay the house off.. and its great to hear about your child learning a lesson! it took a long time for me to realize what to do with money, i just thought everyone fought over it like my parents!

[366Abbott]

Congratulations Bill. I am still about seven years away from paying off my house and have had opportunities to pay down the principal more quickly, but ended up investing the funds.

Everyone has a different view of what is more important. The fact that you won't have to worry about losing your house is invaluable. If piece of mind is highest on your list, you absolutely made the right choice.

[dkdoy]

Paid off our house when i was 35 years old. It was amazing how many people have the opinion that it is not a good use of extra money. However, for me with the markets being basically flat for 10+ years it turned out to be a pretty good return of about 6% plus the peace of mind. What i really notice now is the ability to invest max dollars and still have money to pay cash for cars, vacation, or whatever else that pops up. Looking back now that has been the best thing that i could have done.

[Ziggy75]

Another look:

Having liquidity can also make you feel secure.

Yes, a paid off house is great. No argument here.

The problems come with the "paying off" part. The prepayment (extra applied to principal) part of your mortgage could be used to bolster your emergency funds, pay off loans, avoid car loans in the future, used for education (training), etc.

The argument is you could spend the money unwisely. Well, you could also spend money unwisely when you pay off the mortgage because you have a monthly surplus.

Your house payment will not go away until the whole mortgage is gone. (Even then you will continue to pay property taxes.)

[Stonebr]

[sscritic]

There is nothing special about paying off a mortgage. It is more impressive if you pay cash for the house in the first place.

The number of people who pay cash for houses might not be as small as you imagine. In troubled areas, the percentage of purchases that are all cash can be 40%.

http://economix.blogs.nytimes.....sein-cash/

http://www.calculatedriskblog.....es-in.html

http://www.sfgate.com/cgi-bin/....197NHM.DTL

[billb]

[billb]

[livesoft]

I'm laughing at paying off the house as knowing "we'll always have a house."

That is simply not true. Houses deteriorate. They fall apart. The neighborhood around the house could decline.

My wife's grandmother lived in a house that could not be given away when she died without great difficulty. No one wanted that house nor the land it was on.

My house is nice, but its value has not kept up with inflation. I will have to put at least $25K of additional money into the house in order to sell it. And I will have to keep paying property taxes, insurance, and upkeep on the house. Did you explain all the costs of a home to your son? Did you explain that if you don't pay the taxes that you can lose your home?

As it is now, my property taxes are more than the interest payments on my mortgage.

[billb]

[DaveH]

My wife and I have been operating in cash for quite a few years now (except for every day expenses which go on AMEX and are paid off each month). I've made an interesting observation:

- Virtually everyone I know who has a paid off house is very happy that they went that direction, even those who had to stretch a bit to pay the house off.

- Virtually everyone I know who doesn't have a paid off house isn't very impressed with the idea of paying off the house and thinks that the money may be better invested elsewhere, etc.

But, those who have paid off houses seem happy about it, and 'no debt' is really worth a lot as a lifestyle/emotional choice. I'm all for it!

I think that taking on debt for a home or even an investment can make sense under the right circumstances. But, if you can pay off your primary home that is pretty great!
_________________
The fewer our wants, the nearer we resemble the gods. — Socrates

[Stonebr]

livesoft -- Whether or not to own a home at all is another question entirely. Sounds like you would rather be renting, and I respect that position.

I have found that maintaining a home is not all that hard or expensive if you take care of little problems from the start. Taxes, insurance, and other maintenance costs, even here in Massachusetts, are far less than rent on a comparable property. And when the big things like a roof or furnace have to be replaced, I'll have plenty of cash to cover the cost.

[DaveH]

[livesoft]

I am very happy to not be renting. I try not be emotional about my money and house.

[DaveH]

[Wagnerjb]

[DaveH]

There is more to it than that. Having no monthly payment is really nice.
_________________
The fewer our wants, the nearer we resemble the gods. — Socrates

[Polaris]

[Mitchell777]

Congrats Bill. It is an emotional thing for me also although it may or may not be the best financial move. On the other hand, to some extent, with property taxes I never really feel like I own the house.

[neverknow]

[Tyrobi]

[stevewolfe]

Agreed. We paid off our home when I was 35, wife 33. Very glad we did it and it was not at the expense of retirement funding or emergency funds.

Congrats to the original poster! Hope your days there are long and prosperous.

[TRC]

[Wagnerjb]

[swaption]

At the end of the day, it's all about risk/reward. Generally, it is always going to feel better emotionally to take less risk. The same is true for leverage on a house. Nothing wrong with paying it off, but I certainly wouldn't go as far as assuming it is a free lunch from a long run return standpoint.

I would also go further to say that the level of emotional benefit would be proportional to the prevailing level of risk aversion, which in the current cycle is certainly high. In other words, the emotional benefit of never being exposed to someone taking your house away is likely quite significant when lots of people are getting their houses taken away. But at the same time, the long term risk premium in accepting that risk is also likely relatively high.

[DiscoBunny1979]

[markcoop]

To me, my mortgage is the best loan I'm ever going to get. Low rates and tax-deductible interest. I just refinanced to a 15-year 4.5% loan. I am very secure in my feeling that I have much more cash available to me. I've always prided myself on maxing out on good deals (401K, ROTH, tax-free UGMA, 529 college plans, Coverdell college IRAs, various work benefits). Having a low-rate tax-deductible mortgage just seems like another thing that I'm taking advantage of. That gives me a much greater sense of security.

I'm really not knocking people who pay off their mortgage. Just feel there are also some people who like the feeling of having more cash today due to a great loan.
_________________
Mark

[schnoodlemom]

Count me as another that's looking forward to having our house paid off in 4 years. We won't be paying it off early, but when it's done we're done with debt we hope. We didn't have a large mortgage, so doing a 15 year fixed was easy without skimping on savings or lifestyle much. Timing is such that we'll have the mortgage paid off before the eldest goes to college and we need to do expensive repairs like new roof etc. So many variables, so we'll see.... I feel for those that live in areas where even modest homes are so expensive that this really isn't feasible. So many trade offs... Amanda

[Ron]

[markcoop]

[Ron]

[livesoft]

I would not receive any emotional reward for paying off my mortgage. Instead, I would be bummed out.

Since I have the mortgage on auto-billpay, I never have to write a check or think about the monthly payment. It just happens. I would not get any emotional reward for it not happening. I would not even notice. I can say this with confidence because I had a 0% car loan that was on auto billpay. I did not even notice when it was paid off because I hadn't been physically making the payments.

I would notice that my monthly investment income had dropped and that would upset me --- a lot. My mortgage rate is low enough that I have had risk-free CDs in my IRA paying me a higher rate.

I know that my home costs me money. I don't fool myself into thinking that I could live in it without some kind of income. I must write a huge check for the property taxes each year and I will write that check next month. As long as I own this home, I will be writing that check. This year I may get an emotional reward because the amount is lower than last year, but I doubt it.

[Wagnerjb]

[stevewolfe]

We paid our home off 2.5 years ago. It was an emotional and financial decision. We were never able to write off a cent of our mortgage interest - not a cent - so no benefit there to having it. We looked around at an environment with record low interest rates and decided that a guaranteed 4.99% by paying off the mortgage was a good deal compared to the after tax return of fixed income investments at the time.

Looking back, coming through a period of deflation - with the future inflation / deflation mix uncertain, I'm confident we made the right choice to pay off the home. We've reaped emotional benefits as well as a good guaranteed return on the money over the short run.

Not to mention we now invest that payment money in addition to having kept our retirement accounts maxed all the while during the pay down and since. So I'm hard pressed to see how this was a bad financial decision for us.

[haban01]

Going through this economic downturn, It comes back the peace of mind and lack of worries the people that "own" their own home compared to having to pay a mortgage everything month. This also reduces your monthly fixed costs and can keep your "survivual" during these lean times.

GLTA!
_________________
Eric Haban

"Stay the Course"
"Press on Regardless"

Wisconsin Diehards Chapter Coordinator

[dkdoy]

[stan1]

What's missing in this discussion so far is use of the word "risk". Our goal is to have a comfortable and very low risk retirement, not to accumulate as much wealth as possible. We take only as much risk as we need to accomplish this goal.

We are paying off our mortgage early because it reduces risk by enabling us to live entirely off pension income when we choose to retire. We'll have more than enough extra to pay for nice new cars and multiple vacations per year. That is not an emotional decision; its a perfectly logical decision to head into a very low financial risk retirement.

Making an informed decision to lower risk is anything but an emotional decision. When you get to the point where you have "enough" there is less need to take risk. It is a personal decision based on your individual willingness, ability and need to take risk. Deciding to change your asset allocation to add more treasuries/bonds to reduce risk when you have "enough" (or are well on track to have "enough") is not an emotional decision. Neither is paying off a mortgage early.

[Blue]

Our view on this topic has evolved over the past few years.

Holding a mortgage is negative fixed income. Prepaying a mortgage is a *riskless* asset with a guaranteed interest benefit.

Given the current interest rate environment and our particular tax situation (and view of potential tax code changes in regard to deductibility of mortgage interest at higher tax brackets), prepaying the mortgage is something we are actively doing because it is among the best after tax return/risk options available to us on the fixed income side. Overall we feel that prepaying our mortgage is helping us "minimize our chances of being poor".

[Unormal]

I think a reasonable assessment is that early in your investment life you can afford to take a bit of risk, and later near or at retirement you probably should be throttling off the risk... So a 30 year mortgage taken around your 30th birthday looks like a remarkably reasonable glide slope to me.

[SpecialK22]

I think both sides have brought up some very compelling arguments. Certainly, various factors influence the decision to pay off the loan early, both financially and emotionally. One other aspect that I feel plays a significant role is the total loan amount.

1.) With a smaller loan, you may not be paying enough in interest to make the tax deduction beneficial over the standard deduction.

2.) With a larger loan, aggressively paying it off could lead to a significant portion of one's net worth in a single assett; this of course is risky from a diversification standpoint.

3.) A smaller loan is more manageable financially than a larger loan. Less reserves would need to be set aside to help pay a smaller loan in an emergency; therefore, an individual could afford to take more risk with his or her remaining capital in an attempt to achieve larger gains elsewhere.

My own opinion is that for those nearing retirement or in retirement it is generally less risky to have the mortgage paid off vice keeping the mortgage. For those who are younger and likely still will generate significant income over their working lives, it is likely more risky to aggressively pay off the mortgage while neglecting other opportunties, such as saving for retirement. Obviously, additional factors come into play such as significantly long periods of unemployment which make carrying a mortgage riskier.

My personal priority at 27 is:

Max out retirement accounts (Roth 401(k) and Roth IRA)

Continue to contribute to an emergency fund. Even after establishing one which meets one year expenses, I still favor adding more and taking a little more risk than MM such as with GNMAs for future contributions.

Pay down principle on the mortgage.

Given my long investment time frame before retirement, I hope that stocks will return their long term averages thus making them a better investment than paying down a mortgage at 5%. If I near retirement and still carry a mortgage, I will likely shift priorities and aggressively pay of the mortgage. However, I think the mortgage should be paid off well before retirement unless I end up with multiple properties.

A lot depends on how one quantifies risk in determining the best approach or how much they would be willing to risk in order to gain more, much like everything else with investing.

There is certainly something to be said for peace of mind, so congratulations to those of you who have found that through paying off the mortgage.

[SpecialK22]

[Fbone]

If it's an either or situation ...

Either extra house payment or retirement accts then it's an easy decision.

Either extra house payment or stuffing boatload of cash under mattress after maxing out retirements accts its an easy decision.

[SpecialK22]

[TRC]

[quote="DiscoBunny1979"]

[stevewolfe]

Right. I kind of thought that the idea of still owing property taxes as an argument against the emotional value of paying off the home was kind of a red herring. Everyone who has property taxes owes them regardless of whether or not you own your home. In relation to the cost of your home and the debt typically incurred in a mortgage, the property taxes are small.

Not to mention, where I live anyway, you have to be 3 years behind on them before your home is published in the paper for sheriff's sale. I'd tend to think that most folks here who have paid their homes off have an emergency fund.

Also, despite the sentiment, nowhere on my deed does it mention the school district or the local municipality as a co-owner in my property. As long as I pay taxes (a responsibility of citizenship by my way of thinking) there is no consequence (such as home loss).

[dkdoy]

[quote="TRC"]

[Ron]

I've told this story in the past, but maybe I will have a new audience with the folks on this thread so here goes....

Regardless of what you think (e.g. pay off vs. invest, or buy vs. rent) a lot of folks are talking about what may happen. I'm just giving an example of what actually happened, in my/wife's situation.

We've been married for 40 years, and during that time, we've owned four different homes. Unlike many, we did not overreach in our home purchases, but buying what we could afford with 20% down and payments that would not break us. Back in the "old days ", there were no such things as PMI.

As our needs changed, our income increased, and our desire to move up considered, we sold our current home and bought another. The first three homes had their note/mortgage paid before we closed on the next.

Our last (our current, terminal home) was built in 1994. It was the first home we built - the first three being "pre-owned". They were great homes to lead us to what we actually wanted, and today (15 years later in our current home), we have no regrets and no desire to move on.

In 1994, our mortgage/note (the term is actually "note", the term mortgage gets used incorrectly in most conversations/articles) was for 30-year fixed, at a rate of 6.875%. That wasn’t bad at all, since our previous notes were in the 9-10% range.

In 1994, my wife/me were 46 years of age, which I would suspect is a good deal older than the folks on this thread. That means that if we would have kept to our original schedule of payments, we would have the home paid off by age 76. At the time, we did not see that as a problem, since our projected cash flow based upon our working till our SS FRA age of 66 only meant that we would have payments ten years into retirement, at a monthly payment (with inflation) which would result in being very little.

As a side note, my wife/me have always had the "marriage rule " that I would be responsible for all expenses related to the home - e.g. note payments, insurance, upkeep, taxes. That came about due to my wife not working for the first eight years or so due to her staying home to care for our disabled son. While she worked before we were married, and desired to do so after, "things" don't necessarily turn out as planned (but that's another story, not to be discussed on an open forum). Anyway, she did not contribute at all to the note payment for our first three homes. However, with this home (which was a dream come true, for her), she looked to the future, considered retirement, and decided to contribute to pay the home off before we reached retirement.

With her contribution, along with my extra payments (both against principal), we paid the home off in a bit less than 5.5 years. Not bad for a 30-year note.

If anybody remembers the period of 1994-99, this was the period of the last "bubble", which was in the tech sector. I remember being chided at the time by folks at work, who were borrowing and taking out HELOC's to put into the market. They thought my idea of paying down debt in the current market was "dumb".

As for us? We just plodded along and applied our "extra cash" in paying down our debt. So what exactly did happen? Well, according to our original amortization schedule, we "saved" $125k in foregone interest. That is the interest we would have paid if we kept with the original payment schedule. BTW, that $125k is net, which means at our tax rate at the time, we would have had to "earn" over $150k to pay that interest. True, we would have gained some by tax credits, but again I'm not interested in getting back 50 cents for $1 paid in interest (as I've stated before).

Anyway, as some will recall, late 1999 (much like late 2007), the equity market fell. At that time, the money I was putting into the note (normal payment plus my "extra") was used to increase my 401k - even beyond the federal limits so I was contributing above the line. My wife? She continued to work and took her "contributions" to be able to pursue her passion of travel (around the world). Something we still do.

So late 1999, through the "bust" of 2002 (something like today), we were able to buy equity funds "on the cheap", and it enhanced our retirement portfolios greatly after the market returned to normal.

In 2005, reviewing our retirement portfolio holdings, I came to the realization that even based upon normal long-term returns, there was a possibility of retiring earlier than that "magic 66" age. At the same time, I had been going through a personal downturn, due to conditions at work which were driven by my company being bought out and the new owners not necessarily being in tune with my beliefs (they were European - I'll let it at that). After 26 years with the company, I was looking for a way out.

My wife simply said to me it was time to move in another direction (either a job, or retire). I guess I needed her "blessing" to make the change after so many years. So I started to look at both options (job or retire). By late 2006, I had made my decision. Due to both my age and education, it would make little sense to pursue another job (anyway, I was working since the age of 14, and I was "tired" ).

Early 2007, I retired (age 59), and my wife was also to retire at that age since we were financially independent (e.g. had enough income sources to live in the manner we wished, without employment). While I retired, my wife did not. Today (at a ripe old age of 61), she continues to work, since she is not "emotionally ready" to pull the plug. No problem; I still do my volunteer work several times a week and happy in retirement.

The point of this long story is that in our case (and for us, only), the decision to buy a home, pay it off early, and the "luck" of investing allowed us (at least me) to retire seven years before planned - at an earlier age. I'm not saying anybody on this thread should do anything different, nor change their basic beliefs. I'm just trying to add an "actual life story" for reflection.

- Ron
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