Pay more on mortgage

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cwdejavu
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Pay more on mortgage

Post by cwdejavu »

I am considering to pay more mortgage every month to become debt free earlier instead of in debt for the next thirty years. How do you make the decision regarding pay more mortgage vs. invest more? Thanks!
Interest rate: 3.15% 30 year fixed
teddytimtam
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Re: Pay more on mortgage

Post by teddytimtam »

Many people on this forum will disagree with me, but what I would do and currently am doing is... pay off mortgage ASAP.

Sure, I could invest it in SP500 for long term gains, but... with no mortgage, no payment, no debt, the world is yours. Plus the grass is greener when you walk outside.

And to flip the scenario, if your home was 100% paid for, would you borrow or take a HELOC on your home to invest? I wouldn't. On the balance sheet, not paying off your mortgage to invest is essentially and fundamentally the same thing. If people say otherwise, then go tell those people with fully paid for homes to borrow against their homes to invest in the market?
annu
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Re: Pay more on mortgage

Post by annu »

What helped me see light of the day, calculate how much it will cost to pay using pre tax money. So for you
Pretax rate= 3.15/(1-fed rate/100-statebrate/100)

So if you expect to make more with investment, go ahead, else pay the mortgage...untried funding thr post but can't, but thisnisnwhatbstood out to me...
Unladen_Swallow
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Re: Pay more on mortgage

Post by Unladen_Swallow »

cwdejavu wrote: Sat Mar 14, 2020 1:17 am I am considering to pay more mortgage every month to become debt free earlier instead of in debt for the next thirty years. How do you make the decision regarding pay more mortgage vs. invest more? Thanks!
Interest rate: 3.15% 30 year fixed
I am a strong advocate of being debt free. We became debt free by 39yrs. Best decision we made.

While paying off our home, we had a large emergency fund for unforeseen challenges, and we continued saving in retirement accounts.

We opened a Taxable account only after we were debt free.

A couple of things (my personal philosophy)
- We saved for retirement while also paying down house quickly. It wasn't a choice of one or the other.
- If one can't do both, maybe one bought too much house.
- 30yrs to pay off house is a losing proposition as far as I'm concerned. 15yrs or sooner is my own viewpoint.

There are unique situations that result in exceptions I'm sure.

*Edited for typos
Last edited by Unladen_Swallow on Sat Mar 14, 2020 9:43 am, edited 1 time in total.
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teddytimtam
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Re: Pay more on mortgage

Post by teddytimtam »

Unladen_Swallow wrote: Sat Mar 14, 2020 2:13 am
cwdejavu wrote: Sat Mar 14, 2020 1:17 am I am considering to pay more mortgage every month to become debt free earlier instead of in debt for the next thirty years. How do you make the decision regarding pay more mortgage vs. invest more? Thanks!
Interest rate: 3.15% 30 year fixed
I am a strong advocate of being debt free. We became debt free by 39yrs. Best decision we made.

While paying off our home, we had a large emergency fund for unforeseen challenges, and we continued saving in retirement accounts.

We opened a Taxable account only after we were debt free.

A couple of things (my personal philosophy)
- Weaved for retirement while also paying down house quickly. It wasn't a choice of one or the other.
- If one fcan't do both, maybe one bought too much house.
- 30yrs to pay off house is a losing proposition as far as I'm concerned. 15yrs or sooner is my own viewpoint.

There are unique situations that resukt in exceptions I'm sure.

+1

Agreed. I wouldn't stop any retirement contributions while paying off the mortgage. Contribute for retirement (15%) then put any leftover income towards the mortgage. A good rule of thumb to determine if you have too much house is that your mortgage at a 15 year fixed rate should no more than 1/4 of your monthly take home pay.

Imagine after your debt free and you're able to put a whole mortgage payment plus extra into a taxable account? That's when your wealth building will take off!

Hey, after your debt free with paid off home and you disagree, go ahead and take out another mortgage.
Triple digit golfer
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Re: Pay more on mortgage

Post by Triple digit golfer »

teddytimtam wrote: Sat Mar 14, 2020 1:28 am Many people on this forum will disagree with me, but what I would do and currently am doing is... pay off mortgage ASAP.

Sure, I could invest it in SP500 for long term gains, but... with no mortgage, no payment, no debt, the world is yours. Plus the grass is greener when you walk outside.

And to flip the scenario, if your home was 100% paid for, would you borrow or take a HELOC on your home to invest? I wouldn't. On the balance sheet, not paying off your mortgage to invest is essentially and fundamentally the same thing. If people say otherwise, then go tell those people with fully paid for homes to borrow against their homes to invest in the market?
It's the same on the balance sheet, but not the same emotionally. You should understand because your decision to pay down your mortgage was an emotional one. "World is yours," and "grass is greener" are emotional statements, not financial. I certainly understand and can appreciate when people decide to put some money to both investing and extra on the mortgage. My dad did. I don't. I put all extra into investing. I have a 3.5% 30 year fixed mortgage.

I would never go into more debt than I am comfortable with or take on debt that I already paid off to invest, but I certainly hold mortgage debt while investing.

Did you forego all investing 100% until your mortgage was paid off? If not, why not?
bryansmile
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Re: Pay more on mortgage

Post by bryansmile »

For many people, they will not be able to max out retirement accounts and contribute to kids college fund if they accelerate their mortgage payments. I'm one of them. What I've been doing is to always hold a 30 year mortgage and pay the monthly required amount, while maxing out retirement funds and contributing some extra to 529s. We are on target to retire early, and son's college tuition is funded by 50% principal investment and 50% gains over the years. And yes, we still have a 30 year mortgage at 3.25% and soon to be 3% which I don't plan to pay off anytime soon.
dknightd
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Re: Pay more on mortgage

Post by dknightd »

As others have pointed out there are many variables.

While working I could never afford to max out tax deferred space. So I paid on my mortgage as required and put as much as I could in tax deferred retirement accounts. I was essentially funding part of my tax deferred savings with the mortgage loan. It helped that during most of that time I could deduct part of my mortgage interest. I think this was the right thing for me to do. It might not be the right thing for you. I think if you are maxing out tax deferred space then it makes sense to consider paying more on the mortgage.
Now that I'm retired I'm paying off the mortgage as fast as I can without bumping myself up to the next tax bracket. Once the mortgage is done I'll consider Roth conversions . . .
If you value a bird in the hand, pay off the loan. If you are willing to risk getting two birds (or none) from the market, invest the funds. Retired 9/19. Still working on mortgage payoff.
mortfree
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Re: Pay more on mortgage

Post by mortfree »

Rather then paying extra consider funding a sinking fund that you can use to apply extra mortgage payments.

Given volatility and uncertainty right now I would rather have the cash.

If/when you believe things have stabilized then pay some extra.

You have next to no details for a real response.

In addition this topic is covered in the wiki.

Fixed fat finger typo/auto corrections.
Last edited by mortfree on Sat Mar 14, 2020 11:53 am, edited 1 time in total.
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grabiner
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Re: Pay more on mortgage

Post by grabiner »

mortfree wrote: Sat Mar 14, 2020 8:08 am Thayer then paying extra consider funding a sinking fund that you can use to extra mortgage payments.

Given volatility and uncertainty right now I would rather have the cash.
This is a reasonable strategy, but you have to look at the cost of doing it.

If you make an extra payment on a 10-year mortgage, you get the same benefit as if you had bought a 10-year bond, with yield equal to the mortgage rate. Paying $1000 now on a 3% mortgage will reduce your final payment by $1344. If you instead buy a 10-year bond, you will also have a guaranteed amount in 10 years, but the amount depends on the bond yield. If you buy a bond yielding 2%, you lose 1% per year on the difference, in order to keep the liquidity.

The reason I paid off my mortgage is that I don't need the liquidity. I have a large taxable account, even after paying off the mortgage, and I got a better return on the mortgage payment than on the bonds I sold to make the payment.
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fatlever
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Re: Pay more on mortgage

Post by fatlever »

I have my mortgage paid off. I was regretting it last year with all the posts of keeping good debt and putting that money into a market that only goes up. Feeling much better about that choice now which allows me to put extra money into the market, savings and probably has reduced the stress I would have had about a potential job loss and covering expenses if the current situation were to get a lot worse. :sharebeer
teddytimtam
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Re: Pay more on mortgage

Post by teddytimtam »

fatlever wrote: Sat Mar 14, 2020 9:08 am I have my mortgage paid off. I was regretting it last year with all the posts of keeping good debt and putting that money into a market that only goes up. Feeling much better about that choice now which allows me to put extra money into the market, savings and probably has reduced the stress I would have had about a potential job loss and covering expenses if the current situation were to get a lot worse. :sharebeer
This is why I am a strong proponent of paying off mortgage. Yes, one should keep a steady retirement saving in 401k with match or Roth IRA (~15% of income), but at the same time continue to tackle their mortgage. Being debt free = stress free in any downturn, job loss, medical emergency, disability, etc.

Like I tell everyone, if you don't like being debt free after no mortgage payment, go take out a HELOC and get yourself back on payments :sharebeer
chevca
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Re: Pay more on mortgage

Post by chevca »

cwdejavu wrote: Sat Mar 14, 2020 1:17 am I am considering to pay more mortgage every month to become debt free earlier instead of in debt for the next thirty years. How do you make the decision regarding pay more mortgage vs. invest more? Thanks!
Interest rate: 3.15% 30 year fixed
This is where the personal part comes into the personal investment and personal finance sections. If you're debt averse, you may feel better paying off the mortgage aggressively. If you aren't, you may feel better hanging onto the mortgage and investing extra money.

My thought on it are, max out all tax advantaged opportunities you have and then decide on investing in a taxable account, or paying down the mortgage.
HEDGEFUNDIE
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Re: Pay more on mortgage

Post by HEDGEFUNDIE »

Sounds like a terrible idea to me. If the economy continues to fall apart would you rather have money in your house or in the bank?
mortfree
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Re: Pay more on mortgage

Post by mortfree »

grabiner wrote: Sat Mar 14, 2020 8:57 am
mortfree wrote: Sat Mar 14, 2020 8:08 am Thayer then paying extra consider funding a sinking fund that you can use to extra mortgage payments.

Given volatility and uncertainty right now I would rather have the cash.
This is a reasonable strategy, but you have to look at the cost of doing it.

If you make an extra payment on a 10-year mortgage, you get the same benefit as if you had bought a 10-year bond, with yield equal to the mortgage rate. Paying $1000 now on a 3% mortgage will reduce your final payment by $1344. If you instead buy a 10-year bond, you will also have a guaranteed amount in 10 years, but the amount depends on the bond yield. If you buy a bond yielding 2%, you lose 1% per year on the difference, in order to keep the liquidity.

The reason I paid off my mortgage is that I don't need the liquidity. I have a large taxable account, even after paying off the mortgage, and I got a better return on the mortgage payment than on the bonds I sold to make the payment.
Agree with the math.

You left off one of my statements though. When things stabilize.

What if OP loses his job and the extra payments weren’t enough to payoff the mortgage?

No job, no heloc, no refi.

Or things stabilize enough in the next 0-12 months (I know nothing) and the extra payments can resume with cash saved.
carminered2019
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Re: Pay more on mortgage

Post by carminered2019 »

HEDGEFUNDIE wrote: Sat Mar 14, 2020 11:09 am Sounds like a terrible idea to me. If the economy continues to fall apart would you rather have money in your house or in the bank?
but your monthly expenses is much lower with no mortgage or answer to your bank so why it's a bad idea ?
HEDGEFUNDIE
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Re: Pay more on mortgage

Post by HEDGEFUNDIE »

vipertom1970 wrote: Sat Mar 14, 2020 12:24 pm
HEDGEFUNDIE wrote: Sat Mar 14, 2020 11:09 am Sounds like a terrible idea to me. If the economy continues to fall apart would you rather have money in your house or in the bank?
but your monthly expenses is much lower with no mortgage or answer to your bank so why it's a bad idea ?
You’re assuming your future income stream is as solid as money in the bank today. Not an assumption I would...take to the bank.
MotoTrojan
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Re: Pay more on mortgage

Post by MotoTrojan »

HEDGEFUNDIE wrote: Sat Mar 14, 2020 11:09 am Sounds like a terrible idea to me. If the economy continues to fall apart would you rather have money in your house or in the bank?
+1. I don’t have a mortgage now but I certainly would be market timing in the sense of paying my minimum monthly payment and investing the rest. Early February I may have been paying a bit extra towards the mortgage with the market at historically stretched valuations.
retire57
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Re: Pay more on mortgage

Post by retire57 »

I can only speak from my experience. We paid cash for a home in 1999 versus dumping it into the market and it was absolutely the correct decision for us. Having no debt over the past 20 years has given us enormous flexibility in our careers in addition to a priceless sense of security.

Good luck with your decision!
dandinsac
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Re: Pay more on mortgage

Post by dandinsac »

cwdejavu wrote: Sat Mar 14, 2020 1:17 am I am considering to pay more mortgage every month to become debt free earlier instead of in debt for the next thirty years. How do you make the decision regarding pay more mortgage vs. invest more? Thanks!
Interest rate: 3.15% 30 year fixed
I am NOT prepaying my mortgage which I just refinanced @3.25% for 20 years. Here are my reasons:

1. With a very low interest rate, prepaying doesn't shorten the time to payoff the mortgage that much. in my case, if I prepaid $300/month I would pay off the loan by July 2037, which is 44 months early. If I saved that $300 in a savings account that netted 0.5% interest, I could pay off the loan in March 2037 which is 36 months early.

2. If I prepay the mortgage, I lose the hedge against inflation.

3. If I have the cash, I can change my mind and do a prepayment at any time.

4. Having more available funds provides for flexibility in buying a new house, which we are considering in the future. If we find a great deal, I want to be able to move fast.

The downside of my approach is that this approach costs more. If we end up staying in the house for the next 17 years, saving versus prepayment will cost about $20,000 more in interest.
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1789
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Re: Pay more on mortgage

Post by 1789 »

MotoTrojan wrote: Sat Mar 14, 2020 12:29 pm
HEDGEFUNDIE wrote: Sat Mar 14, 2020 11:09 am Sounds like a terrible idea to me. If the economy continues to fall apart would you rather have money in your house or in the bank?
+1. I don’t have a mortgage now but I certainly would be market timing in the sense of paying my minimum monthly payment and investing the rest. Early February I may have been paying a bit extra towards the mortgage with the market at historically stretched valuations.
+2> People don't like it but times like these are the proof that cash is the king. It is needed to survive and invest when needed like nowadays.
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Re: Pay more on mortgage

Post by willthrill81 »

As long as you have adequate liquidity, paying down your mortgage probably provides the greatest guaranteed after-tax return you can get about anywhere these days.

That said, I fully expect that stocks will provide a higher return than 3.15% over the long-term.

Go with the option that excites you (and your SO, if applicable) most and/or lets you sleep best at night.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Pay more on mortgage

Post by abuss368 »

1789 wrote: Sat Mar 14, 2020 1:35 pm +2> People don't like it but times like these are the proof that cash is the king. It is needed to survive and invest when needed like nowadays.
I have always said there is an old saying that "cash is king" and for good reason. Not so much for a return but piece of mind and that it is there when needed. And at some point cash is always needed.
John C. Bogle: “Simplicity is the master key to financial success."
Triple digit golfer
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Re: Pay more on mortgage

Post by Triple digit golfer »

I have considered it a thousand times and every time I come to the same conclusion: don't pay a dime extra and invest according to my 80/20 AA.

1. Will very likely outperform my 3.5% mortgage over the next 26 years (remaining time on mortgage).

2. Gives me liquidity if I should ever need it

3. Ultimate flexibility. I can pay more at any time in the future if I choose to.

4. Adding bonds means my emergency fund is growing if I should ever need it, since I ultimately consider my bonds my emergency money, outside of a few months expenses in savings.
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Re: Pay more on mortgage

Post by abuss368 »

Triple digit golfer wrote: Sat Mar 14, 2020 2:10 pm I have considered it a thousand times and every time I come to the same conclusion: don't pay a dime extra and invest according to my 80/20 AA.

1. Will very likely outperform my 3.5% mortgage over the next 26 years (remaining time on mortgage).

2. Gives me liquidity if I should ever need it

3. Ultimate flexibility. I can pay more at any time in the future if I choose to.

4. Adding bonds means my emergency fund is growing if I should ever need it, since I ultimately consider my bonds my emergency money, outside of a few months expenses in savings.
Makes sense. While I understand the thought behind investing in bonds when carrying a mortgage, I agree with your strategy. I will not sell our bonds to pay down our very low interest rate mortgage.
John C. Bogle: “Simplicity is the master key to financial success."
carminered2019
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Re: Pay more on mortgage

Post by carminered2019 »

Triple digit golfer wrote: Sat Mar 14, 2020 2:10 pm I have considered it a thousand times and every time I come to the same conclusion: don't pay a dime extra and invest according to my 80/20 AA.

1. Will very likely outperform my 3.5% mortgage over the next 26 years (remaining time on mortgage).

2. Gives me liquidity if I should ever need it

3. Ultimate flexibility. I can pay more at any time in the future if I choose to.

4. Adding bonds means my emergency fund is growing if I should ever need it, since I ultimately consider my bonds my emergency money, outside of a few months expenses in savings.
would you still pay off the mortgage if your bond AA is 3x the mortgage ?
Triple digit golfer
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Re: Pay more on mortgage

Post by Triple digit golfer »

vipertom1970 wrote: Sat Mar 14, 2020 2:33 pm
Triple digit golfer wrote: Sat Mar 14, 2020 2:10 pm I have considered it a thousand times and every time I come to the same conclusion: don't pay a dime extra and invest according to my 80/20 AA.

1. Will very likely outperform my 3.5% mortgage over the next 26 years (remaining time on mortgage).

2. Gives me liquidity if I should ever need it

3. Ultimate flexibility. I can pay more at any time in the future if I choose to.

4. Adding bonds means my emergency fund is growing if I should ever need it, since I ultimately consider my bonds my emergency money, outside of a few months expenses in savings.
would you still pay off the mortgage if your bond AA is 3x the mortgage ?
In that case maybe I would just to get rid of it because either I'm wealthy or close to paying it off anyway. Right now bond allocation is only about 40% of the mortgage balance and I don't intend on paying more any time soon.
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