Pay off mortgage?

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Grt2bOutdoors
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Re: Pay off mortgage?

Post by Grt2bOutdoors »

Meg77 wrote:OK I am all for having a paid off home, but I may be in the minority here on this particular question. Your interest rate is so low that I would be tempted to invest in muni bonds for a higher tax free rate of return compared to your tax effective mortgage rate. Even if your tax bracket is low or you don't benefit from the mortgage interest deduction because you don't itemize, there are munis paying over 3% right now which would be a higher after tax rate than you'd get by paying off the mortgage.

It's not guaranteed of course - bonds do go bad - but you also get the added benefit of maintaining liquidity. Interest rates have been ticking up, and it's widely expected that the Fed will raise interest rates later this month. In pretty short order you could have money market funds and savings accounts paying more than 2.5% again!

In short, I might be tempted to construct a muni bond ladder and use the income from that to pay your mortgage. As rates tick up over time you'll have even more income from the bonds than you need to pay the mortgage, which you can reinvest. But then again, the spread (for now) you'd make is small, and the much simpler solution is to wipe out the mortgage immediately instead. Then you can invest slowly - in munis or anything else - with the cash flow you'll be saving.

Good choices to have in any case! :sharebeer
I own munis, the last month has been brutal for munis - what I earn in a years time in NII was lost in the span of 3 weeks and then, I'd have to hold for the duration to earn it back plus some. So yes, muni bond ladder might be better, but you still have to hold to maturity or you'll get killed in price depreciation. It's going to be a while before money funds are yielding 2.5%, the 30 day Tbills sold on tuesday were yielding 0.41%, 6 months bills are yielding 0.61%, we have a ways to go. :wink:
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expat
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Re: Pay off mortgage?

Post by expat »

Lots of people say to pay off the mortgage without giving a good financial reason.
Grt2bOutdoors
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Re: Pay off mortgage?

Post by Grt2bOutdoors »

expat wrote:Lots of people say to pay off the mortgage without giving a good financial reason.
If you lose your source of income, it's one less bill you won't have to worry about. That is, it's X dollars more that remains in your bank account as opposed to that of a third party.
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kathyauburn
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Re: Pay off mortgage?

Post by kathyauburn »

timboktoo wrote: That said, the honeymoon feeling of paying off a mortgage eventually wore off for me and now I don't really think about it anymore. I think instead about the next financial obstacle. There's always a new thing to be anxious about, it seems, no matter how wealthy I become.

- Tim
Yeah but that's like saying having the mortgage off your back does not continue to pay dividends. It does. And while your honeymoon period may be over, I'm thankful every single day that I don't have a mortgage.

Maybe I have the perfect marriage?

People (not you) are always coming up with dumb, bogus reasons to keep a mortgage when it could be paid off. They're all dumb and bogus. Heck, if you want to be in debt again, you can always get a HELOC. Interest is tax deductible! Hurrah. lol
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HomerJ
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Re: Pay off mortgage?

Post by HomerJ »

mx711yam wrote:I paid off the mortgage on my rental house, which enabled me to then quit my job the next week to start a company I have wanted to do for years. Having a paid off mortgage was more important for me psychologically than financially. It offered freedom.
This.

My wife was able to quit a job she hated, once we paid off the mortgage. Low expenses is freedom.

Financially, it might be better to have $500k in investments, and a $200k mortgage, as opposed to just $300k in investments. Especially since the investment money is "likely" (but not guaranteed) to return more than the mortgage.

But psychologically, I'd much rather have no mortgage, and cover all expenses with my one salary, and let the $300k just sit there and grow.

Having to pull money each month from investments to pay the mortgage would just feel wrong. I'm not supposed to be pulling money from accounts. I should only be adding to them.
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bertilak
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Re: Pay off mortgage?

Post by bertilak »

HomerJ wrote:But psychologically, I'd much rather have no mortgage, and cover all expenses with my one salary, and let the $300k just sit there and grow.
It is more than psychological. It has financial advantages as well.
  • It is guaranteed. No "expected" returns that may turn out other than expected. The guarantee makes it better than a one-for-one trade-off.
  • You are not paying interest to the bank. You get to keep that money.
  • You STILL have the equity. It is in the form of your house. The bank no longer owns a (large) piece of it.
Those are real financial pluses. You need to decide if in total they are worth more than the potential appreciation and return of the investments you sell off. Don't forget to compare that to the potential appreciation of your house.

Another thing to consider in favor of paying off the mortgage: With the mortgage paid off the improved cash flow means you can take a bit more risk in your portfolio. I bumped my AA from 50/50 to 60/40. A little more volatility in return became acceptable because less in essential expenses to cover. This is from a retiree's perspective.
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Earl Lemongrab
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Re: Pay off mortgage?

Post by Earl Lemongrab »

bertilak wrote:It is more than psychological. It has financial advantages as well.
  • It is guaranteed. No "expected" returns that may turn out other than expected. The guarantee makes it better than a one-for-one trade-off.
You could say the same thing about CDs. The stock market will never guarantee to be less risky than risk-free investments. That doesn't make the risk-free investment better.

Earl
Admiral
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Re: Pay off mortgage?

Post by Admiral »

As usual I'm in the minority here: Don't pay it off UNLESS you have plenty of other money in the bank/invested.

I am in year 1 of a 15 yr note fixed at 2.25%. I also itemize. My effective rate is around 1.5%.

Psychological "feelings" of financial freedom aside:

If I was to take my $300k and pay off my note, I'd save $50k in interest (about) But guess what? My diversification just went out the window (or, put another way, into my house.)

The entire point of the Boglehead philosophy is to be diversified in one's portfolio and to keep expenses low. How is sinking that much money into a single piece of property--AND one that the government is willing to subsidize for you with an interest deduction if you take a loan--diversification?

I have never seen a reasonable answer to this question.

Everyone can talk all they want about how great it feels to be out of debt. But a home is not a guaranteed good investment, it's a place to live. Home values rise and they also fall. There is nothing "guaranteed" about it. I hope mine goes up, but I don't count on it.

For me, I'd rather pay the 1.7% per year as a very low expense and have my liquidity. There have been very, very few periods of 15 or more years in the last 100 where one could not beat a 4% mortgage rate by investing in the S&P.

See for yourself:
https://dqydj.com/sp-500-return-calculator/
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bertilak
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Re: Pay off mortgage?

Post by bertilak »

Earl Lemongrab wrote:
bertilak wrote:It is more than psychological. It has financial advantages as well.
  • It is guaranteed. No "expected" returns that may turn out other than expected. The guarantee makes it better than a one-for-one trade-off.
You could say the same thing about CDs. The stock market will never guarantee to be less risky than risk-free investments. That doesn't make the risk-free investment better.

Earl
CDs do have a place in a portfolio. There are things CDs are good for (or no one would buy them).

Just like there are situations where paying off a mortgage is good to do (and just like CDs, for more than psychological reasons).
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bertilak
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Re: Pay off mortgage?

Post by bertilak »

Admiral wrote:There is nothing "guaranteed" about it. I hope mine goes up, but I don't count on it.
What is guaranteed is that your cash flow will improve.
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SGM
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Re: Pay off mortgage?

Post by SGM »

I paid off my mortgage early. Being 100% in stock at the time it struck me as a bond like diversification. Then there was the opportunity to invest what had been monthly payments in the past. I dollar cost averaged every month with the additional cash that was available in not having a mortgage. Interest rates were a lot higher when I paid of my mortgage too.

It was a comfort to have no mortgage debt when so many around us were under water back in 2008-9.
Admiral
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Re: Pay off mortgage?

Post by Admiral »

bertilak wrote:
Admiral wrote:There is nothing "guaranteed" about it. I hope mine goes up, but I don't count on it.
What is guaranteed is that your cash flow will improve.
So what? So instead of investing $300,000 today, I can have zero liquidity and I can instead invest my $2,000 a month mortgage payment every month? That does not improve my cash flow, it simply moves it.

Even putting aside that the value of this money is eaten away by inflation, virtually all of Vanguard's research (if one puts any stock in such things) shows that investing a lump sum is much better than investing piecemeal, assuming a long enough time horizon.
John Laurens
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Re: Pay off mortgage?

Post by John Laurens »

Pay off your mortgage. Paid off my mortgage earlier this year, and I haven't regretted it one time.

Always ask yourself questions in reverse. "if my house was paid for, would I go and get a mortgage to invest in xyz?"
Last edited by John Laurens on Thu Dec 01, 2016 3:10 pm, edited 1 time in total.
printer86
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Re: Pay off mortgage?

Post by printer86 »

Admiral wrote:
bertilak wrote:
Admiral wrote:There is nothing "guaranteed" about it. I hope mine goes up, but I don't count on it.
What is guaranteed is that your cash flow will improve.
So what? So instead of investing $300,000 today, I can have zero liquidity and I can instead invest my $2,000 a month mortgage payment every month? That does not improve my cash flow, it simply moves it.

Even putting aside that the value of this money is eaten away by inflation, virtually all of Vanguard's research (if one puts any stock in such things) shows that investing a lump sum is much better than investing piecemeal, assuming a long enough time horizon.
What do you mean "have zero liquidity"? No one is saying to eliminate your mortgage the minute you have one dollar more saved in a taxable account.
NDfan27
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Re: Pay off mortgage?

Post by NDfan27 »

The argument seems to be mostly financial vs psychological. I know some are arguing that there are financial benefits to locking in a guaranteed return by paying off the mortgage but I think there are psychological benefits to knowing that bank is struggling to beat inflation and I'm free to take advantage of higher returns elsewhere.

I almost feel like it's a bit of a hedge against inflation. Actually, after typing that I found out via Google that it's a very unoriginal idea. Curious as to hear thoughts on that.

I agree that it's tough to make a solid financial case for paying it off early with such a low rate but if you're losing sleep over it them paying it off is probably the better choice.
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bertilak
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Re: Pay off mortgage?

Post by bertilak »

NDfan27 wrote:I almost feel like it's a bit of a hedge against inflation. Actually, after typing that I found out via Google that it's a very unoriginal idea. Curious as to hear thoughts on that.
If your expenses are X and 25% of that is a mortgage payment then only .75X of you expenses are subject to inflation (assuming you don't have a variable rate mortgage). In that sense you could say the mortgage is a hedge against inflation.

If you pay off that mortgage then your new expenses are 75% of your original expenses and the now-missing 25% is still not subject to inflation since it is not even there. So was that mortgage really a hedge against inflation or not? I think we are getting into subtleties of what is a hedge.

Paying off a mortgage trades a lost opportunity to invest for a guaranteed cash flow improvement. In retirement, the cash flow is more important than the absolute value of your nest egg, at least up to a point.

Here is another thing paying off a mortgage does for you: If your spouse is dependent on income that will go away if you die then paying off the mortgage is a form of insurance that your spouse will be able to keep up with expenses. Yes, that need not be done today but it might be prudent to do so at the time you have the money. You don't want the time to come when the market has just taken a big hit.
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John Laurens
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Re: Pay off mortgage?

Post by John Laurens »

I wish the OP had stated "with each response please state whether you currently have a mortgage or not". It would certainly give a better context for each response.
NDfan27
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Re: Pay off mortgage?

Post by NDfan27 »

bertilak wrote:
NDfan27 wrote:I almost feel like it's a bit of a hedge against inflation. Actually, after typing that I found out via Google that it's a very unoriginal idea. Curious as to hear thoughts on that.
If your expenses are X and 25% of that is a mortgage then only .75X of you expenses are subject to inflation. In that sense you could say the mortgage is a hedge against inflation.

If you pay off that mortgage then your new expenses are 75% of your original expenses and the now-missing 25% is still not subject to inflation since it is not even there. So was that mortgage really a hedge against inflation or not? I think we are getting into subtleties of what is a hedge.

Paying off a mortgage trades a lost opportunity to invest for a guaranteed cash flow improvement. In retirement, the cash flow is more important than the absolute value of your nest egg, at least up to a point.

Here is another thing paying off a mortgage does for you: If your spouse is dependent on income that will go away if you die then paying off the mortgage is a form of insurance that your spouse will be able to keep up with expenses.
You can still pay off the mortgage at any time, right? Well assuming you didn't put it all into equities right before a huge drop off.

I'd agree that a lot of it depends on how close you are to retirement. I have quite a few years left and I'm pretty sure I can consistently beat the effective 2% interest rate I'm paying on my mortgage.
NDfan27
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Re: Pay off mortgage?

Post by NDfan27 »

John Laurens wrote:I wish the OP had stated "with each response please state whether you currently have a mortgage or not". It would certainly give a better context for each response.
I still have 10 years left on a 15 year fixed mortgage at 2.875%. I deduct the interest on my taxes... If that helps where I'm coming from.
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Re: Pay off mortgage?

Post by Grt2bOutdoors »

I am nearly 1/3 into a 30 year fixed rate mortgage and plan on paying it off before year 10 is reached. Why? peace of mind, increased cash flow, cash in bank yields far less than after-tax cost of funding, tax write-off of interest is becoming less and less valuable as principal declines, can take more risk if I want to. Or maybe it was my spouse losing employment earlier in the year and taking a while to find new employer that has really lit the spark.
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Earl Lemongrab
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Re: Pay off mortgage?

Post by Earl Lemongrab »

John Laurens wrote:I wish the OP had stated "with each response please state whether you currently have a mortgage or not". It would certainly give a better context for each response.
In my case, had a mortgage that I paid off early and immediately took out a home-equity loan to invest. Still paying that.

I try not to be emotional in financial matters. Having or not having a mortgage/loan made no difference to my feelings or sense of security.

Earl
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bengal22
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Re: Pay off mortgage?

Post by bengal22 »

Erwin wrote:I have a 15 year 2.5% fixed interest rate mortgage. I have the cash, and I am tempted to pay it off given that I cannot see any safe investment at a higher after tax interest rate. Is there anything I am missing?
I am firmly in the don't pay it off category. However if you fit one of the following criterias pay it off:

1. Keeping money in cash
2. Find a mortgage scary and fear keeps you up at night

This whole forum is based on the relative safety of having a solid stock/bond allocated portfolio. You either trust that or you don't. There is no freedom in not having a mortgage if you have the monies available in cash or your portfolio to pay it off. Paying off your mortgage should be a financial decision not an emotional decision.
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frugalecon
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Re: Pay off mortgage?

Post by frugalecon »

My approach has been to select the earliest date that I anticipate being retired and pay extra principal every month so that it will be retired by then. If interest rates rise enough so that appropriately dated zero coupon Treasuries yield more after tax (taking the differential state tax treatment of Treasuries vs. mortgage interest deduction into account) than prepaying the mortgage, then I will think about shifting to buying zero coupon Treasuries. We only have about 30 basis points more to go before I would consider this approach.

One thing that I do think about is that there can be uninsured risks associated with ownership of residential real estate, and with a non-recourse mortgage the bank bears some of this risk. Obviously a person takes on all of this risk when he or she pays off the mortgage.
Admiral
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Re: Pay off mortgage?

Post by Admiral »

printer86 wrote:
Admiral wrote:
bertilak wrote:
Admiral wrote:There is nothing "guaranteed" about it. I hope mine goes up, but I don't count on it.
What is guaranteed is that your cash flow will improve.
So what? So instead of investing $300,000 today, I can have zero liquidity and I can instead invest my $2,000 a month mortgage payment every month? That does not improve my cash flow, it simply moves it.

Even putting aside that the value of this money is eaten away by inflation, virtually all of Vanguard's research (if one puts any stock in such things) shows that investing a lump sum is much better than investing piecemeal, assuming a long enough time horizon.
What do you mean "have zero liquidity"? No one is saying to eliminate your mortgage the minute you have one dollar more saved in a taxable account.
Which is why I wrote "Don't pay it off UNLESS you have plenty of other money in the bank/invested." The OP did not state what his/her financial situation is. If I had a 200k note and 5 mil in investable assets then yes, I would pay it off (maybe! :wink: ) My point was that it's fine to pay off a big lump sum mortgage as long as one is diversified...ie. has other assets in stock/bonds/cash. If you're going to basically deplete your portfolio so you can have the "psychological well being" of a paid off house, I think that is a big mistake. This is all assuming one has a fairly low rate. I would not hesitate to pay it down if I was over 5%.

It's a fallacy to believe that real estate always holds its value or increases. And for argument's sake, let's say that, as Schiller has found, it only increases on average 1% per year. Why would I dump, say, 200k into such an asset for which the (small) gain could not be realized until I sell it...and then need to find a new place to live? You want a HELOC, great--that's a loan, just like your mortgage. Except it's not fixed.
inbox788
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Re: Pay off mortgage?

Post by inbox788 »

expat wrote:Lots of people say to pay off the mortgage without giving a good financial reason.
Lots of people buy homes with a mortgage without a good financial reason. Consider it the other side of the coin.

Once you eliminate the extremes in these two cases (cheap mortgage and expensive home/mortgage), the choice often does come down to flipping a coin because the opportunity cost approaches zero.
ParkersPaPa
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Re: Pay off mortgage?

Post by ParkersPaPa »

printer86 wrote:
ParkersPaPa wrote:
Erwin wrote:I have a 15 year 2.5% fixed interest rate mortgage. I have the cash, and I am tempted to pay it off given that I cannot see any safe investment at a higher after tax interest rate. Is there anything I am missing?
Same here. 2.5% APR for 15 years. Three years in and I'm just not motivated to divert other savings (maxed 401k) to prepay.
Are you saying that you have the entire balance of your mortgage in savings, but choose not to payoff your mortgage? Or do you just don't want to throw chunks of additional savings to merely pay it down? I can understand the latter, but not the former.
I don't have liquid funds to extinquishish the mortgage. I meant that I won't throttle my 401k to accelerate paying down the mortgage.
randomguy
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Re: Pay off mortgage?

Post by randomguy »

NDfan27 wrote:
You can still pay off the mortgage at any time, right? Well assuming you didn't put it all into equities right before a huge drop off.

I'd agree that a lot of it depends on how close you are to retirement. I have quite a few years left and I'm pretty sure I can consistently beat the effective 2% interest rate I'm paying on my mortgage.
You are paying 2.5% (ignore tax stuff) for the flexibility of not having your cash locked up in a house.

Personally I can't imagine not shoving it all into the stock market (and yes that is what I did). The odds of getting 3-4% nominal over 15 years is insanely high and I have plently of money for liquidity issues. And yeah if I could borrow money on margin with 2.5% fixed for 15 years with no callability I would leverage up my portfolio some more.
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Re: Pay off mortgage?

Post by grabiner »

Erwin wrote:I have a 15 year 2.5% fixed interest rate mortgage. I have the cash, and I am tempted to pay it off given that I cannot see any safe investment at a higher after tax interest rate. Is there anything I am missing?
What is your tax bracket? I have 12 years left at 2.625%, which is only 1.89% after tax in my 28% bracket. I could earn 2.56% exempt from federal tax on Admiral shares of Long-Term Tax-Exempt (with a slightly longer duration), so I would prefer that to paying down the mortgage now even if I had enough cash to pay it off; I would get 0.67% as a reward for taking on very little more risk.
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printer86
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Re: Pay off mortgage?

Post by printer86 »

Ok, since we're all friends here, I'll tell you my mortgage payoff story.

Almost two years into our 15 year mortgage, I got a series of significant commission checks. These checks amounted to multiples of my outstanding mortgage. While I think I'm good at my job, you never know if you'll ever hit this kind of home run again. I decided to take the sure bet and eliminate about 13 years of interest payments. The remaining funds went to our taxable accounts.

Reasoning
I have no idea how disciplined I'll be with our investments in the future. Will I get scared during the next market correction and doubt my AA to the point that I make a bad decision? I just don't know. So, I eliminated the future risk and took to sure thing by paying off my mortgage.

There was an identifiable cost savings by paying off the loan. Was it as good as investing the funds? I just don't know. But, by coupling the cost savings with the personal risk mitigation, I feel like I made the right call.

YMMV
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Re: Pay off mortgage?

Post by mesaverde »

This is a question I've dealt with also.
I have a 15 year 2.5% fixed rate mortgage with 15 years remaining and a $120,000 balance.
After maxing out retirement accounts, I could pay the mortgage off in 5 years, but am choosing to invest in a Vanguard taxable account instead.

The likelihood of earning at least 3-4% over the next 15 years and not putting a significant amount of $ in an illiquid asset (a home) led me to this decision. And I still retain the option of paying the mortgage off if I ever decide to do so.
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Re: Pay off mortgage?

Post by stickman731 »

expat wrote:Lots of people say to pay off the mortgage without giving a good financial reason.
As I stated earlier I paid off the mortgage, then 18 month later was given a severance package which allowed me to retire early. No ongoing bill / debt was the best financial decision one can make on any purchase.

I was fortunate and lucky - my company was unexpectedly acquired and they offer packages. Those who did not accept are now regretting it - they are having layoffs with a lot less severance (about 1/2) and eliminating the pension benefits. The Bogleheads actually convinced me to accept the offer.

Not having debt is the best financial reason for a safe and secure future along with good health (god willing).
casualflower
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Re: Pay off mortgage?

Post by casualflower »

Is there a rush? I'm 3 years into a 30 year at 3.8%. I owe $180K. I could pay it off, it'd be a stretch leaving me with almost no liquidity, but even if I had 2-3 the payoff amount laying around, I probably still wouldn't. A 3.8% mortgage is a historical anomaly. That rate has value. It's very probable interest rates will rise over the next 5-10 years. It's possible, but pretty unlikely, that they'll go down.

Right now, 15 year bonds are make it a dead heat between paying off and not. In 5 years, it's much more likely you'll want to be investing that money and you probably won't be able to get that rate again on a HELOC (or a mortgage) in your lifetime. Additionally, in 5 years, you'll still be able to pay it off if you want.

I'm ignoring the psychological argument. I don't care about that.
orca91
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Re: Pay off mortgage?

Post by orca91 »

expat wrote:Lots of people say to pay off the mortgage without giving a good financial reason.
Paying off a debt and not paying interest anymore is a plenty good financial reason all on it's own.

Is it optimal? Don't know and depends on the situation. But, it's definitely not a bad financial thing to do.
johnubc
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Re: Pay off mortgage?

Post by johnubc »

Pay it off.

Making up numbers here - you need to pay $5,000 in order to not pay taxes on $5,000 - or keep the $5,000 and pay taxes on it. Either way, you have more money in your pocket if you do not have to pay the interest.
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Re: Pay off mortgage?

Post by dharrythomas »

We paid ours off early and don't regret it. We increased savings by about 50%. Then we backed off some as I realized that we're on track. When Warren Buffett moved back to Omaha in the 1950s, he paid cash for his house (about 1/6 of his net worth)--I'm pretty sure I have no business taking more risk than Buffett was/is comfortable with. :D

For many people, the mortgage interest deduction is a bait and switch as they take the standard deduction. Most who don't use a big portion of the interest just to qualify for itemization. The biggest beneficiaries of the mortgage interest deduction are banks and real estate agents, it's a sales tool more than a true consumer benefit.

For me it was about risk control, managing monthly cash flow, and flexibility. It is hard to go broke if you don't borrow money. It's not only the probability of the outcome, the magnitude of the consequences of being wrong must also be considered.

Dave Ramsey says being debt free allows you to be more generous.

Good luck

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Re: Pay off mortgage?

Post by mortfree »

my real numbers: age 39. Original balance was $168,000 for one home, with 2 refinances.

Contrary to some assumptions, my monthly cash flow actually decreased b/c I wasn't maxing my 401k... but paying off the mortgage allowed me to do so, comfortably.

mortgages........................ actual int paid........ Years ........ int expected
int from 30Y (168k at 6.75%).... $17,811.00....... 2006 to 2008...... $224,272.00
int from 15Y ((161k at 5%).... $34,368.00....... 2008 to 2013...... $48,406.00
int from 10Y (94k at 2.875%)... $6,351.11...... 2013 to 2016........ $14,270.00

TOTAL INTEREST $58,530.11 Interest Savings: $165,741.89 (30Y expected minus total interest paid
Last edited by mortfree on Fri Dec 02, 2016 5:02 pm, edited 4 times in total.
Admiral
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Re: Pay off mortgage?

Post by Admiral »

mortfree wrote:my real numbers: age 39. Original balance was $168,000.

Contrary to some assumptions, my monthly cash flow actually decreased b/c I wasn't maxing my 401k... but paying off the mortgage allowed me to do so, comfortably.

mortgages...... actual int paid........ Years ........ int expected
int from 30Y.... $17,811.00....... 2006 to 2008...... $224,272.00
int from 15Y.... $34,368.00....... 2008 to 2013...... $48,406.00
int from 10Y... $6,351.11...... 2013 to 2016........ $14,270.00

TOTAL $58,530.11 Interest Savings: $165,741.89 (30Y expected minus total interest paid
You don't note your interest rate. I can (and did) save even more in interest by refinancing from 4% to 2.25%. If you pre-paid your mortgage without maxing out your tax-advantaged space, that was a financial mistake (in most cases, based on tax bracket of course).
leftcoaster
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Re: Pay off mortgage?

Post by leftcoaster »

I struggle with this too.

I have about 7 years left on a 15y @ 2.875% and could pay it off tomorrow.

Or I can open one of those 3.01% FDIC insured 7 year CDs. Or I could invest in the CA intermediate muni fund for a tax equivalent yield of 3.8% with some more risk.

I have maxed everything I can think of - Roth. Mega Roth. 401k. HSA. ESPP. EE bonds. I bonds. EE and I bonds in a trust. 529. I have direct deposit for another 40% of my take home pay into a taxable account. My wife's entire salary above 401K max goes to the IRS.

I make a +25% principal prepayment every month for no rafional reason.

What would folks here do in my situation?
onmyway33
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Re: Pay off mortgage?

Post by onmyway33 »

Grt2bOutdoors wrote:
expat wrote:Lots of people say to pay off the mortgage without giving a good financial reason.
If you lose your source of income, it's one less bill you won't have to worry about. That is, it's X dollars more that remains in your bank account as opposed to that of a third party.


I am in the pay it off earlier club. I am 4 years into a 15 year mortgage with a 3.0% interest rate. I also max out all available tax advantaged retirement space. After that, I make double payments every month on my mortgage to significantly decrease the time to payoff. Admittedly, my rationale is mostly psychological, and I could probably make more than 3% if I put my monthly surplus in the market. I have always held about 80% of my investments in stock index funds and I retained my stock-heavy allocation throughout the great recession, but I was single, lived in an apartment with few financial obligations, and had less than $100,000 invested. Now I have a higher paying but less stable job, a family, a higher level of invested assets, and a few more monthly financial obligations. I think I will be more able to stay the course in rough financial seas without a monthly mortgage payment.
"When the market's going up, we think it's going to go up forever. When the market goes down, we think it's going to go down forever. Neither of those things actually happen" - John C. Bogle
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jimb_fromATL
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Re: Pay off mortgage?

Post by jimb_fromATL »

mortfree wrote:my real numbers: age 39. Original balance was $168,000.

Contrary to some assumptions, my monthly cash flow actually decreased b/c I wasn't maxing my 401k... but paying off the mortgage allowed me to do so, comfortably.

mortgages...... actual int paid........ Years ........ int expected
int from 30Y.... $17,811.00....... 2006 to 2008...... $224,272.00
int from 15Y.... $34,368.00....... 2008 to 2013...... $48,406.00
int from 10Y... $6,351.11...... 2013 to 2016........ $14,270.00

TOTAL $58,530.11 Interest Savings: $165,741.89 (30Y expected minus total interest paid
As a matter of curiosity, what were your balances and rates; how much did you pay extra and at what intervals?
Were these three different homes that you paid off quickly or were you paying extra and refinancing?
If refinancing, what were your closing costs?

jimb
mortfree
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Re: Pay off mortgage?

Post by mortfree »

Admiral wrote: You don't note your interest rate. I can (and did) save even more in interest by refinancing from 4% to 2.25%. If you pre-paid your mortgage without maxing out your tax-advantaged space, that was a financial mistake (in most cases, based on tax bracket of course).
interest and loan balance details for original loan and the 2 re-fi's added to original post above...

All of this was done pre-bogleheads.

yes, it would appear to be a financial mistake since I didn't try to hit 18k. The mortgage was purely a psychological move and going against the norm with debt payments was very clear to me.

Now I can move forward maxing the 401k and roth accounts. net worth is 630k (house is around 230k), if that helps to give perspective where it's not as huge a mistake since I wasn't neglecting retirement altogether(?).
mortfree
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Re: Pay off mortgage?

Post by mortfree »

jimb_fromATL wrote: As a matter of curiosity, what were your balances and rates; how much did you pay extra and at what intervals?
Were these three different homes that you paid off quickly or were you paying extra and refinancing?
If refinancing, what were your closing costs?

jimb
repost from before so people see the requested additions: this is probably a huge mistake in the boglehead world so I'll gladly put myself out here as a "What not to do". and maybe 1-2 people will say it was a decent move.

I don't remember closing costs - I did pay each time so that was a loss on my part; nothing earth shattering though.
One year I did $100 extra, then $200 extra for 1 year, then $800 extra for 1 year... some years I paid exact amount. after I hit 74k, that is when I got aggressive and paid it off over 12 months due to bonus and stock options that were higher than normal (unexpected income).

************************************************
my real numbers: age 39. Original balance was $168,000 for one home, with 2 refinances.

Contrary to some assumptions, my monthly cash flow actually decreased b/c I wasn't maxing my 401k... but paying off the mortgage allowed me to do so, comfortably.

mortgages........................ actual int paid........ Years ........ int expected
int from 30Y (168k at 6.75%).... $17,811.00....... 2006 to 2008...... $224,272.00
int from 15Y ((161k at 5%).... $34,368.00....... 2008 to 2013...... $48,406.00
int from 10Y (94k at 2.875%)... $6,351.11...... 2013 to 2016........ $14,270.00

TOTAL INTEREST $58,530.11 Interest Savings: $165,741.89 (30Y expected minus total interest paid
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Earl Lemongrab
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Re: Pay off mortgage?

Post by Earl Lemongrab »

It would be better if people kept investing money rather than letting large amounts of cash accumulate. Then you don't have this problem!

Earl
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grabiner
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Re: Pay off mortgage?

Post by grabiner »

leftcoaster wrote:I have about 7 years left on a 15y @ 2.875% and could pay it off tomorrow.

Or I can open one of those 3.01% FDIC insured 7 year CDs.
These are not comparable Paying off the mortgage is equivalent to buying a portfolio of 84 CDs maturing in 1 to 84 months, since you get the benefit every month. And since that CD portfolio, or one of comparable average maturity, would yield about 2%, paying off the mortgage is a better deal.
Or I could invest in the CA intermediate muni fund for a tax equivalent yield of 3.8% with some more risk.
Again, this isn't quite a fair comparison. The CA fund has a duration of 5.2 years, versus 3.5 for your mortgage. (But if you are in that high a tax bracket, it may still be a better deal; you are getting a good reward for the interest-rate risk.)
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leftcoaster
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Re: Pay off mortgage?

Post by leftcoaster »

grabiner wrote:
leftcoaster wrote:I have about 7 years left on a 15y @ 2.875% and could pay it off tomorrow.

Or I can open one of those 3.01% FDIC insured 7 year CDs.
These are not comparable Paying off the mortgage is equivalent to buying a portfolio of 84 CDs maturing in 1 to 84 months, since you get the benefit every month. And since that CD portfolio, or one of comparable average maturity, would yield about 2%, paying off the mortgage is a better deal.
Can you break this down a bit further? I have the amount for payoff available now, in cash. I can either deploy it in the CD @ 3.01% for 84 months or I can pay off the mortgage and stop paying out the 2.875%.
Or I could invest in the CA intermediate muni fund for a tax equivalent yield of 3.8% with some more risk.
Again, this isn't quite a fair comparison. The CA fund has a duration of 5.2 years, versus 3.5 for your mortgage. (But if you are in that high a tax bracket, it may still be a better deal; you are getting a good reward for the interest-rate risk.)[/quote]

Are you saying 3.5 years as a way of expressing average duration? I think so but wanted to confirm.
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grabiner
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Re: Pay off mortgage?

Post by grabiner »

leftcoaster wrote:
grabiner wrote:
leftcoaster wrote:I have about 7 years left on a 15y @ 2.875% and could pay it off tomorrow.

Or I can open one of those 3.01% FDIC insured 7 year CDs.
These are not comparable Paying off the mortgage is equivalent to buying a portfolio of 84 CDs maturing in 1 to 84 months, since you get the benefit every month. And since that CD portfolio, or one of comparable average maturity, would yield about 2%, paying off the mortgage is a better deal.
Can you break this down a bit further? I have the amount for payoff available now, in cash. I can either deploy it in the CD @ 3.01% for 84 months or I can pay off the mortgage and stop paying out the 2.875%.
If you buy a 7-year CD, you will get all your dollars in 7 years.

If you pay off the mortgage, you will get back dollars every month (in the payments you have eliminated), which is better because you avoid the interest-rate risk.

This is why I suggest an equivalent comparison as a portfolio of multiple CDs; these CDs give you a payment each month. You could buy a portfolio of CDs which would make your mortgage payment every month, but it would cost more than the mortgage balance.
Or I could invest in the CA intermediate muni fund for a tax equivalent yield of 3.8% with some more risk.
Again, this isn't quite a fair comparison. The CA fund has a duration of 5.2 years, versus 3.5 for your mortgage. (But if you are in that high a tax bracket, it may still be a better deal; you are getting a good reward for the interest-rate risk.)[/quote]

Are you saying 3.5 years as a way of expressing average duration? I think so but wanted to confirm.[/quote]

This is correct. Paying off the mortgage saves you 84 payments of almost equal present value in 1-84 months, so it has an average duration of 42 months.

And by the same logic as above, you could buy a portfolio of CA municipal bonds which would make the after-tax portion of your mortgage payment each month, and probably come out slightly ahead of paying off your mortgage.

In addition, if you buy the bonds and bond yields fall, you retain the option of paying off the mortgage; if you pay off the mortgage and bond yields rise, you can't re-borrow the money at the original mortgage rate to buy bonds (and even if you could, you can't deduct interest on a loan taken out to buy municipal bonds).
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leftcoaster
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Re: Pay off mortgage?

Post by leftcoaster »

@grabiner, so bottom line, you'd recommend just paying it off?
Admiral
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Re: Pay off mortgage?

Post by Admiral »

I am not understanding this bond discussion, perhaps.

Interest rates and mortgage rates are still at or near historic lows, as are bond rates. Let's say one has a 15 YR note at 3%, or after deductions let's call it 2.5%

That rate is fixed for 15 years. Let's also say that today one can buy a guaranteed investment (CD or bond) yielding 2.5% after taxes. So, it's a wash.

Let's say it's likely that rates will be trending upward over the next 3 years. Again anything is possible but this is just an exercise.

Even if I had sufficient liquidity to pay off the mortgage with a lump sum today, would I not be smarter to begin investing my lump sum, a bit each month, as rates rise, and then pay off the mortgage sometime in the future, when I can earn more money investing my (now non-existent) payment each month? And meanwhile as inflation goes up (one assumes) the effective cost of my mortgage payment goes down.
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Re: Pay off mortgage?

Post by SmileyFace »

Admiral wrote:I am not understanding this bond discussion, perhaps.

Interest rates and mortgage rates are still at or near historic lows, as are bond rates. Let's say one has a 15 YR note at 3%, or after deductions let's call it 2.5%

That rate is fixed for 15 years. Let's also say that today one can buy a guaranteed investment (CD or bond) yielding 2.5% after taxes. So, it's a wash.

Let's say it's likely that rates will be trending upward over the next 3 years. Again anything is possible but this is just an exercise.

Even if I had sufficient liquidity to pay off the mortgage with a lump sum today, would I not be smarter to begin investing my lump sum, a bit each month, as rates rise, and then pay off the mortgage sometime in the future, when I can earn more money investing my (now non-existent) payment each month? And meanwhile as inflation goes up (one assumes) the effective cost of my mortgage payment goes down.
You are making a lot of assumptions as to which way rates are headed, whether inflation will increase, and so on. The only sure thing is that if you pay off your mortgage you will save 3% a year - everything else is speculation. Thus folks looking for the sure thing pay off the mortgage and don't need to use words like "likely", "assume", and "if" the way you just did.
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Re: Pay off mortgage?

Post by KlangFool »

Folks,

Your choice and your life. But, it does not make any sense for me to pay off my 30 years 3.49% mortgage anytime soon.

1) That 3.49% is getting subsizied by mortgage interest deduction.

2) My portfolio is generating 2.X% to 3% annual interest and dividend. Because of tax loss harvest, qualified dividend and so on. Essentially, I am paying zero tax on annual interest and dividend.

Essentially, in my case, it is a wash. My dividend / interest income cancel out the mortgage interest. My house's appreciation is not tied to whether I pay off the mortgage loan. But, if I pay off the mortgage loan, I am putting more money / eggs into the house.

Why would it be safer if I put more of my eggs / money into the house basket? Especially, I do not save any interest by doing that?

KlangFool

P.S.: I could pay off my mortgage at any time if I am actually saving a lot of interest. I can review my decision every year.
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