Does it make sense to pay off this mortgage?

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MrBachelor
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Does it make sense to pay off this mortgage?

Post by MrBachelor » Sun Mar 22, 2015 7:58 pm

Here's my story:
DW and I purchased our first home in March 2011, put 5% down and financed about $105k at 3.85% for 20 years.
Paid off my student loans and built up 6 month emergency fund while paying mortgage and PMI for 2 years.
Refinanced in March 2013 to 2.75% at 15 years ($99.6k). PMI dropped out due to new appraisal.
Saved up and bought car for cash in April 2014.
Started paying extra $1000 toward principal in August 2014 and have been since. $12k per year extra on house will have us paid off in August 2019 for a total of 8.5 years of mortgage. That could be cut shorter depending on salary increases.

We are currently 33 and 30 years old and putting 17.5% of our salary into 401k, 403b, and ROTH accounts in addition to paying the extra on the mortgage and saving $10k after tax per year for an important vacation (anniversary) and car next year. In 2017 this $10k and any additional salary could go toward the mortgage or retirement savings. We currently have about 3x of our annual expenses in retirement accounts.
Both jobs are secure (I'm in engineering and DW works for the state University).
Plan is to fill all retirement accounts once the house is paid off ($18k +$5.5k)x2=$47,000 and FIRE at 53/50 if the math works out for us.

Does it make sense to keep up with the $12k extra mortgage payments on the 2.75% loan or should we use these extra ~4 years to fill up our retirement accounts and keep the mortgage on the remainder of the 15 years?

Thanks!
Last edited by MrBachelor on Sun Mar 22, 2015 8:29 pm, edited 1 time in total.
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Carefreeap
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Re: Does it make sense to pay off this mortgage?

Post by Carefreeap » Sun Mar 22, 2015 8:02 pm

Given how cheap your mortgage rate is I'd throw the money at retirement (including taxable) accounts vs paying off a cheap mortgage you've already pre-paid. You have time on your side so let the magic of retirement compounding work for you. Having a big chunk of money outside of an illiquid asset will give you many options.

Congratulations on the great savings rate!

madbrain
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Re: Does it make sense to pay off this mortgage?

Post by madbrain » Sun Mar 22, 2015 8:04 pm

MrBachelor wrote: Does it make sense to keep up with the $12k extra mortgage payments on the 2.75% loan or should we use these extra ~4 years to fill up our retirement accounts and keep the mortgage on the remainder of the 15 years?
IMO, no, it does not make sense with a 2.75% rate, especially if your mortgage interest is tax-deductible .
You can always pay off the loan later when you ER, but you cannot make up for missed 401k / IRA contributions later on.

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MrBachelor
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Re: Does it make sense to pay off this mortgage?

Post by MrBachelor » Sun Mar 22, 2015 8:17 pm

madbrain wrote:
IMO, no, it does not make sense with a 2.75% rate, especially if your mortgage interest is tax-deductible .
You can always pay off the loan later when you ER, but you cannot make up for missed 401k / IRA contributions later on.
Wife and I are dual income no kids (and no plans for any). Mortgage interest is not deductible due to the low rate, low balance, and higher standard deduction. We are topping out the 15% bracket (+7% state) and have low cost of living.

I'm torn with the thought of paying off the mortgage early having gone through the Dave Ramsey plan to get out of debt. He advocates an early payoff while contributing at least 15% to retirement. I've run some calcs on my tax savings by shifting that $12k to 401k vs. keeping it toward the house. That is tempting in itself but so is that debt-free feeling.

We would like to fill the two ROTH accounts in order to buy a house when we retire. Maybe that is a suitable compromise?
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Toons
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Re: Does it make sense to pay off this mortgage?

Post by Toons » Sun Mar 22, 2015 8:21 pm

I recommend paying off the mortgage,,I agree with Dave on this one.
You won't regret it. :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

Ron Ronnerson
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Re: Does it make sense to pay off this mortgage?

Post by Ron Ronnerson » Sun Mar 22, 2015 8:41 pm

Don't forget to factor in the rate of inflation in your calculation. If you subtract that from your interest rate, are you really even paying any interest? Even if you are, it's got to be a lot less than 2.75%. I have a 30-year fixed rate mortgage at 3.25% (currently closer to 2.6% due to mortgage interest deduction) and am in no hurry to pay it off. Before refinancing, the rate was 5.25% and I paid extra at that rate.

I would only pay extra if you have already maxed 401k, 403b, and Roths for the year. If you haven't done so, accept the debt and live with it. Also accept that you have not just a good rate but an amazing one.

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Re: Does it make sense to pay off this mortgage?

Post by Grt2bOutdoors » Sun Mar 22, 2015 8:42 pm

Pay it off!
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

DSInvestor
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Re: Does it make sense to pay off this mortgage?

Post by DSInvestor » Sun Mar 22, 2015 8:44 pm

You indicated that you're contributing 17.5% to 401k, 403b, IRAs. What are your annual contributions in dollars to retirement plans? Are you contributing to Roth or Traditional 401k/403b? Your mortgage interest rate is quite low. I suggest maxing out Tradtional 401k/403b first and then attacking the mortgage. Hopefully, you can max out and still have some cash flow to direct to the mortgage.

You're putting 12K after-tax towards extra principal payments. At your tax bracket, that's about 15K pre-tax. If you're within 10K of maxing out 401k/403b, maybe max them out and then direct 5K pre-tax (4K after-tax) to extra principal payments.
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MrBachelor
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Re: Does it make sense to pay off this mortgage?

Post by MrBachelor » Sun Mar 22, 2015 9:29 pm

DSInvestor wrote:You indicated that you're contributing 17.5% to 401k, 403b, IRAs. What are your annual contributions in dollars to retirement plans? Are you contributing to Roth or Traditional 401k/403b? Your mortgage interest rate is quite low. I suggest maxing out Tradtional 401k/403b first and then attacking the mortgage. Hopefully, you can max out and still have some cash flow to direct to the mortgage.

You're putting 12K after-tax towards extra principal payments. At your tax bracket, that's about 15K pre-tax. If you're within 10K of maxing out 401k/403b, maybe max them out and then direct 5K pre-tax (4K after-tax) to extra principal payments.

Contributions are $6100 pretax to 401k (plus $2500 employer match), $5300 pretax to 403b (plus $2650 employer match), and $5500 after tax to his ROTH. (oops, looks like this is only 16.5% employee contributions, 21% if you count the employer match. Gross salary $102k).

We have about $30k of retirement space available (pretax 401k/403b + ROTH). Currently paying $8100 on standard mortgage payment (does not include tax & insurance) + $12000 extra principle and saving about $10000 after tax for short term. Short term savings will decrease substantially after 2016 once we replace the older car.

Looks like I can't fill my retirement space without a salary increase or cut in spending.
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niceguy7376
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Re: Does it make sense to pay off this mortgage?

Post by niceguy7376 » Sun Mar 22, 2015 9:33 pm

I will stop paying the extra 12k to mortgage and divert it towards retirement accounts.

TradingPlaces
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Re: Does it make sense to pay off this mortgage?

Post by TradingPlaces » Sun Mar 22, 2015 9:46 pm

2.75% is such a low rate, that it does not make sense to prepay.

If there is any increase in interest rates, you will be EVEN better off by not paying it early.

One consideration is taxes:
- what is your marginal tax rate,
- are you able to use itemized deductions on your federal return or is the standard deduction better?

harikaried
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Re: Does it make sense to pay off this mortgage?

Post by harikaried » Sun Mar 22, 2015 9:49 pm

MrBachelor wrote:We have about $30k of retirement space available (pretax 401k/403b + ROTH).
I count ($18k + $5.5k) * 2 = $47k in retirement space each year, and you're using $16.9k of it or 36%. The $12k extra principal in pre-tax dollars (towards 401k/403b) would be $16k in the 25% tax bracket. If you did that, you would be using $32.9k in retirement space or 70%.

Although, if you put that much towards 401k/403b, your tax bracket would probably drop down to 15%. (Which could be useful for tax gain harvesting.)

madbrain
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Re: Does it make sense to pay off this mortgage?

Post by madbrain » Sun Mar 22, 2015 10:19 pm

MrBachelor wrote:
madbrain wrote:
IMO, no, it does not make sense with a 2.75% rate, especially if your mortgage interest is tax-deductible .
You can always pay off the loan later when you ER, but you cannot make up for missed 401k / IRA contributions later on.
Wife and I are dual income no kids (and no plans for any). Mortgage interest is not deductible due to the low rate, low balance, and higher standard deduction. We are topping out the 15% bracket (+7% state) and have low cost of living.

I'm torn with the thought of paying off the mortgage early having gone through the Dave Ramsey plan to get out of debt. He advocates an early payoff while contributing at least 15% to retirement. I've run some calcs on my tax savings by shifting that $12k to 401k vs. keeping it toward the house. That is tempting in itself but so is that debt-free feeling.

We would like to fill the two ROTH accounts in order to buy a house when we retire. Maybe that is a suitable compromise?
OK, non-deductible interest changes things a little bit, but the effective 2.75% after-tax rate is still low.

What changes things more is your current low tax bracket, however. That makes full 401k contributions less attractive, as you are much less likely to be in a lower tax bracket in retirement.

Definitely fill the Roth IRA first in your case. If you or your wife have a Roth 401k option, you might also consider using it instead of traditional 401k.

You may also want to consider investing in stocks in your taxable account. Since you are in the 15% tax federal bracket, your dividends would be taxed at 0%. Check with your state to see if they would still be taxed at 7% or not.

Given that you already have a 15 year mortgage, I would not personally prepay any more, unless I wanted to take early retirement before the 15 years are up, in which case I would likely prefer not to have a mortgage payment. But it sounds like you are very debt adverse, so after that, it's a personal choice.

However, you indicated you wanted to ER in 20 years, so IMO, keep the mortgage, make the minimum payment, and invest the difference in a way that makes sense for your tax situation.

EnjoyIt
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Re: Does it make sense to pay off this mortgage?

Post by EnjoyIt » Sun Mar 22, 2015 11:26 pm

The problem with paying extra into a mortgage is that it takes years to make a big difference. The time you really notice something is when it is finally paid off. All of a sudden you have increased cash flow.

I will give you alternative advice. Open a new account dedicated to paying off your mortgage. Every month place the extra $1K there and invest it based on an asset allocation that would make sense for this account. At some point in the future you will have enough equity in that account that after selling and paying taxes will be enough to pay off your mortage. Then you can decide if you should actually pay it off, or continue investing in the market.

This way you get the best of both worlds. You invest because you belive that even after taxes investing will make you more money, but at the same time build some reserves to pay off your mortgage.

Yes it is a mind trick on yourself. But so what, the end result is a positive one.

Lafder
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Re: Does it make sense to pay off this mortgage?

Post by Lafder » Sun Mar 22, 2015 11:31 pm

Another vote for maxing your pretax retirement space, and using any leftover after that to pay down your mortgage :)
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MrBachelor
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Re: Does it make sense to pay off this mortgage?

Post by MrBachelor » Mon Mar 23, 2015 7:21 am

Thanks for all the consideration and advise in response to my inquiry. I recognize that I'm in a low tax bracket now and may soon move out of it unless we defer additional pretax money into retirement accounts. It makes a lot of sense to fill both ROTH accounts while we are still in the lower bracket. 2.75% is very low, even after tax considerations. But as mentioned earlier, debt is a personal finance decision as much as it is a mathematical one. It is a tough decision to consider being debt free in 4 years vs. 12.
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8foot7
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Re: Does it make sense to pay off this mortgage?

Post by 8foot7 » Mon Mar 23, 2015 8:38 am

I hate debt with a passion and am actively working on paying my own mortgage down, and yet I'm not sure I could bring myself to prepay a 2.75% mortgage. Not a market timer but inflation is going to eat up most of that rate sooner or later.

I'd make sure roths and 401ks were each maxed irrespective of your current tax bracket before I'd pay down something that low.

CoAndy
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Re: Does it make sense to pay off this mortgage?

Post by CoAndy » Mon Mar 23, 2015 8:41 am

I would just continue the path you are on and pay it off.

MGBGTV8
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Re: Does it make sense to pay off this mortgage?

Post by MGBGTV8 » Mon Mar 23, 2015 9:36 am

Your age and early retirement plans suggest that you need to keep the mortgage and put the extra payoff into your retirement plans (one of them).

I think the power of early contributions to have many years to compound returns is more compelling in 403b/IRAs than in your relatively cheap mortgage.

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Re: Does it make sense to pay off this mortgage?

Post by Kosmo » Mon Mar 23, 2015 10:17 am

I would not pay off the mortgage any faster than necessary.

Contribute enough to the 401k's to keep your income in the 15% tax bracket (adjust contributions as necessary due to raises, unless you get a significant change in income). After that I'd make it priority to fill up the Roth IRAs. This essentially locks in a 15% tax rate (plus state) on all the money in the Roth IRA regardless of your future income. I'd take that unless you're certain your income will drop in the future, while you're still contributing to retirement accounts. If you plan to retire early, you'll also need to fill up taxable space until you can withdraw from retirement plans without penalty.

DSInvestor
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Re: Does it make sense to pay off this mortgage?

Post by DSInvestor » Mon Mar 23, 2015 10:29 am

MrBachelor wrote:
DSInvestor wrote:You indicated that you're contributing 17.5% to 401k, 403b, IRAs. What are your annual contributions in dollars to retirement plans? Are you contributing to Roth or Traditional 401k/403b? Your mortgage interest rate is quite low. I suggest maxing out Tradtional 401k/403b first and then attacking the mortgage. Hopefully, you can max out and still have some cash flow to direct to the mortgage.

You're putting 12K after-tax towards extra principal payments. At your tax bracket, that's about 15K pre-tax. If you're within 10K of maxing out 401k/403b, maybe max them out and then direct 5K pre-tax (4K after-tax) to extra principal payments.
Contributions are $6100 pretax to 401k (plus $2500 employer match), $5300 pretax to 403b (plus $2650 employer match), and $5500 after tax to his ROTH. (oops, looks like this is only 16.5% employee contributions, 21% if you count the employer ma
Are the 401k and 403b contributions large enough to max out the employer match? If not, I suggest increasing contributions to a level that will allow you to receive the maximum employer match, then max out the other Roth IRA for another $5500. Apply the remainder to extra mortgage principal payments.
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Re: Does it make sense to pay off this mortgage?

Post by Twins Fan » Mon Mar 23, 2015 10:56 am

MrBachelor wrote:But as mentioned earlier, debt is a personal finance decision as much as it is a mathematical one.

Exactly! That is what I often say when we talk about PERSONAL finance.

Just going by your posts, you seem to dislike debt. If you are very debt averse, I think it makes perfect sense to pay off the mortgage. Is it the optimal choice? Won't know for 12 years anyway. Do you care if it's the optimal choice... or would you be perfectly happy and cozy even if it's not, but you don't have a mortgage anymore?

There are much worse choices to make with the money that would leave you with nothing to show for it.

Also, is DW okay with your screen name still being Mr Bachelor?! :D

Zoe Jane
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Re: Does it make sense to pay off this mortgage?

Post by Zoe Jane » Mon Mar 23, 2015 11:22 am

You seem very debt-adverse so it will probably give you more comfort to pay down the mortgage. However, that is not likely to be the best choice from a mathematical point of view.

When we refinanced our mortgage to a lower rate we decided to save the difference between the old payment and the new instead of paying extra. This is because we are more risk adverse than debt adverse. Paying ahead does not remove the obligation to make the regularly scheduled payment. Therefore our goal was to pay off the mortgage in a lump sum. If one of us lost a job, the amount we have saved for mortgage pay down would be able to be used to make monthly payments if our emergency fund was fully depleted (not a high likelihood situation since we have a 1 year emergency fund and our monthly expenses can be paid with the lower salary).

inbox788
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Re: Does it make sense to pay off this mortgage?

Post by inbox788 » Mon Mar 23, 2015 12:39 pm

When making a decision like this, some people stress over all the compromises, but when the feedback is so close, it means that its probably a fairly indifferent and insignificant decision. Since you're in the loan for 5-10 years, does it matter if it's 2005 or 2009? If only we had a way to tell, and most likely it's somewhere in between. So once you weigh all the pluses and minuses, if you're still undecided, just flip a coin. Or maybe look back at the last 5 years and decide if we're going to have another similar 5 going forward. It may be considered market timing, but since I don't expect the next 5 years to match the last, maybe a more conservative path is prudent.

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MrBachelor
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Re: Does it make sense to pay off this mortgage?

Post by MrBachelor » Tue Mar 24, 2015 12:43 pm

DSInvestor wrote: Are the 401k and 403b contributions large enough to max out the employer match? If not, I suggest increasing contributions to a level that will allow you to receive the maximum employer match, then max out the other Roth IRA for another $5500. Apply the remainder to extra mortgage principal payments.
Yes, pretax contributions are large enough to max out the employer match. In fact, 403b contribution is $2650 larger than required for full match. That might be a good opportunity to compromise. Drop down the 403b to top of the match, fully fund the 2nd ROTH, and pay $8500 extra on the mortgage per year instead of $12k. I'll have to keep an eye on the AGI since I want to stay in the 15% bracket.
Twins Fan wrote: Just going by your posts, you seem to dislike debt. If you are very debt averse, I think it makes perfect sense to pay off the mortgage. Is it the optimal choice? Won't know for 12 years anyway. Do you care if it's the optimal choice... or would you be perfectly happy and cozy even if it's not, but you don't have a mortgage anymore? There are much worse choices to make with the money that would leave you with nothing to show for it.

Also, is DW okay with your screen name still being Mr Bachelor?! :D
You are correct, I dislike debt. I am not risk averse, but am debt averse. I would not take a 0% car loan either, but that is another topic. You make a good point, I don't care if it is the optimal choice. It is a personal choice about debt and the choices we make with our money. There are many worse things we could be doing with it.

DW is perfectly OK with my screen name. In fact she often uses "MrsBachelor". You might call it a family name :)

No one knows what the future will bring but a paid off house can go a long way to limit the stress associated with a job loss or other emergency.
Thanks all for your feedback!
Phylomath

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MrBachelor
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Re: Does it make sense to pay off this mortgage?

Post by MrBachelor » Wed Dec 19, 2018 11:20 pm

Here is a long time update on this post. Wrote the payoff check today for the mortgage. Surreal that it did not take as long as we thought. 7.5 years in total. Got a couple good raises and put it down quickly. Budgeting is key.

Looking forward to the next chapter in our life.

Thanks Toons. Always enjoy your posts and typically agree with your advise.
Phylomath

SimonJester
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Re: Does it make sense to pay off this mortgage?

Post by SimonJester » Thu Dec 20, 2018 12:24 am

MrBachelor wrote:
Wed Dec 19, 2018 11:20 pm
Here is a long time update on this post. Wrote the payoff check today for the mortgage. Surreal that it did not take as long as we thought. 7.5 years in total. Got a couple good raises and put it down quickly. Budgeting is key.

Looking forward to the next chapter in our life.

Thanks Toons. Always enjoy your posts and typically agree with your advise.
Congratulations! Now take that mortgage payment plus those extra payments and max out your 401K / Roth IRAs...

Dont forget to start budgeting / planning for insurance and tax payments.

When I did this 6 years ago I decided to bump up my insurance and add an umbrella policy as well...
"They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety." - Benjamin Franklin

willyd123
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Re: Does it make sense to pay off this mortgage?

Post by willyd123 » Thu Dec 20, 2018 9:06 am

I am nearing retirement at age 58 and haven't had a mortgage in about 15 years. If I had to do over again, I would NOT have paid off my mortgage and instead, I would have maximized the borrowing on my home at very low interest rates like the one you have now. I would have cordoned off an account with the equity from the home and invested these assets in a mix of equities and bonds and continue to contribute to that account until there was enough money to pay off the loan. This way, if I ever wanted to pay off the house, I could and your return on those assets would be way better than the after tax interest cost on your note, over the long haul.

To me this is the one area of finance where people use their emotions to make decisions rather than finance principals.

Silas
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Re: Does it make sense to pay off this mortgage?

Post by Silas » Thu Dec 20, 2018 9:55 am

I would probably pay it off just for convenience reasons.

It isn't worth holding at this point, even though it is cheap money, and you could allocate elsewhere.

One less thing to keep track of, and it isn't giving you any tax breaks.

rashad3000
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Re: Does it make sense to pay off this mortgage?

Post by rashad3000 » Thu Dec 20, 2018 10:57 am

Silas wrote:
Thu Dec 20, 2018 9:55 am
I would probably pay it off just for convenience reasons.

It isn't worth holding at this point, even though it is cheap money, and you could allocate elsewhere.

One less thing to keep track of, and it isn't giving you any tax breaks.
He already paid it off.

Golf maniac
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Re: Does it make sense to pay off this mortgage?

Post by Golf maniac » Thu Dec 20, 2018 1:17 pm

People here tend to be very adverse to any debt. You can responsibly use debt and be better off in the long run. The best investments I made was in my 20’s and early 30’s. That retirement money made a lot more over 30 years then the money I put in later. By maxing out my retirement accounts early in my career I was able to retire early and enjoy life with no financial worries.

I would max out yours and your DW’s retirement accounts. Your return over the next 30 years will be significant and allow you to make choices in the future without any worries financially.

rich126
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Re: Does it make sense to pay off this mortgage?

Post by rich126 » Thu Dec 20, 2018 1:27 pm

Golf maniac wrote:
Thu Dec 20, 2018 1:17 pm
People here tend to be very adverse to any debt. You can responsibly use debt and be better off in the long run. The best investments I made was in my 20’s and early 30’s. That retirement money made a lot more over 30 years then the money I put in later. By maxing out my retirement accounts early in my career I was able to retire early and enjoy life with no financial worries.

I would max out yours and your DW’s retirement accounts. Your return over the next 30 years will be significant and allow you to make choices in the future without any worries financially.
I basically agree with you. Obviously there is a sense of freedom and it can prevent you from doing something stupid (i.e., you can't invest money poorly if you don't have it available to invest) but it could also present problems. As someone once told me, "people are always willing to loan you money when you don't need it, but when you do need it you may not be able to get it".

Of course I can't say I've followed my own advice. About 10 years ago I was refinancing my home and figured I wanted it paid off before I retired so I went with a 10 yr loan (and the rate was lower). A year later I ended up moving east and have been renting it out and it will be paid off in a bit over 2 years. If I had gone with a 30 yr loan it would have generated a lot of cash flow instead it is breaking even (made out extremely well on price appreciation, one reason why I wasn't going to sell it in 2011).

Saving early helps use the power of compound interest, and using loans allows you to pay it back with inflated dollars. Obviously doesn't work too early when rates are very high but (housing) loans are fairly easily refinanced.

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MrBachelor
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Re: Does it make sense to pay off this mortgage?

Post by MrBachelor » Thu Dec 20, 2018 10:58 pm

SimonJester wrote:
Thu Dec 20, 2018 12:24 am

Congratulations! Now take that mortgage payment plus those extra payments and max out your 401K / Roth IRAs...
Been doing 15% in 401k/403b but did not fund my roth in 2018. Doing the roth for 2019 and need to replace a car.

Dont forget to start budgeting / planning for insurance and tax payments.
Canceled the escrow a few years and have been budgeting t&i for a while. No problem.

When I did this 6 years ago I decided to bump up my insurance and add an umbrella policy as well...
Vehicle and home liability at $300k but dont have umbrella policy. No need just yet.
Phylomath

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MrBachelor
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Re: Does it make sense to pay off this mortgage?

Post by MrBachelor » Thu Dec 20, 2018 11:14 pm

willyd123 wrote:
Thu Dec 20, 2018 9:06 am
I am nearing retirement at age 58 and haven't had a mortgage in about 15 years. If I had to do over again, I would NOT have paid off my mortgage and instead, I would have maximized the borrowing on my home at very low interest rates like the one you have now. I would have cordoned off an account with the equity from the home and invested these assets in a mix of equities and bonds and continue to contribute to that account until there was enough money to pay off the loan. This way, if I ever wanted to pay off the house, I could and your return on those assets would be way better than the after tax interest cost on your note, over the long haul.

To me this is the one area of finance where people use their emotions to make decisions rather than finance principals.
Thing is, you had 15 years worth of opportunities to take a low cost loan on your paid off home and invest in the market but did not. We can all look back at periods of time that could have made us a lot of money for some risk.

Dont forget personal finance is personal.
Phylomath

bironology
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Re: Does it make sense to pay off this mortgage?

Post by bironology » Fri Dec 21, 2018 6:15 am

willyd123 wrote:
Thu Dec 20, 2018 9:06 am
I am nearing retirement at age 58 and haven't had a mortgage in about 15 years. If I had to do over again, I would NOT have paid off my mortgage and instead, I would have maximized the borrowing on my home at very low interest rates like the one you have now. I would have cordoned off an account with the equity from the home and invested these assets in a mix of equities and bonds and continue to contribute to that account until there was enough money to pay off the loan. This way, if I ever wanted to pay off the house, I could and your return on those assets would be way better than the after tax interest cost on your note, over the long haul.

To me this is the one area of finance where people use their emotions to make decisions rather than finance principals.
This is what I'm doing right now. At 3.25% interest rate on my 15 year mortgage which pays off on schedule in 2028, I've wrestled with the question of accelerated principal payments and decided that I prefer the chances of better than 3.25% with my taxable investments, and I also prefer NOT having so much of my net worth as home equity. So I'm sticking with the 15 year payoff plan as scheduled. In fact I kinda wish I chose a 30 year, but that ship has sailed.

mortfree
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Re: Does it make sense to pay off this mortgage?

Post by mortfree » Fri Dec 21, 2018 6:22 am

MrBachelor wrote:
Thu Dec 20, 2018 10:58 pm
SimonJester wrote:
Thu Dec 20, 2018 12:24 am

Congratulations! Now take that mortgage payment plus those extra payments and max out your 401K / Roth IRAs...
Been doing 15% in 401k/403b but did not fund my roth in 2018. Doing the roth for 2019 and need to replace a car.

Dont forget to start budgeting / planning for insurance and tax payments.
Canceled the escrow a few years and have been budgeting t&i for a while. No problem.

When I did this 6 years ago I decided to bump up my insurance and add an umbrella policy as well...
Vehicle and home liability at $300k but dont have umbrella policy. No need just yet.
You can fund the 2018 Roth until April 15, 2019.

bironology
Posts: 128
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Re: Does it make sense to pay off this mortgage?

Post by bironology » Fri Dec 21, 2018 6:26 am

I also think a paid-off home is over-rated for most folks. Especially if the equity of the home would be more than 25% of your net worth.

Once it *is* paid off, great! But a concerted effort to pay off quickly at the expense of other balancing acts with your personal finance is an emotional activity rather than an objective and calculated activity.

Got an emergency fund? Enough if you are laid off without a job for 2 years? All set with retirement? On track? Have you done the math (spend 20 hours in spreadsheets like I have convincing yourself you're on track?)?

This is a reaction to seeing friends and other family members scrape every penny to pay down the mortgage early so they can brag about having a paid off home and talk about the feeling of relaxed ecstasy. But if I inquire about other aspects of their financial picture (since they started the conversation not because I'm nosy) I almost always find that they have no clue about their retirement outlook, are overly optimistic about the need for an emergency fund, would be crushed if their roof needed to be replaced or a car suddenly crapped out - they'd be taking out loans for that stuff. Ridiculous!

Don't get me wrong, I'm looking forward to the paid off home, but not before I have 3-4X the home's worth in assets that I can access without begging a bank to give me a home equity loan. That doesn't sound like independence to me.

SimonJester
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Re: Does it make sense to pay off this mortgage?

Post by SimonJester » Fri Dec 21, 2018 8:22 am

bironology wrote:
Fri Dec 21, 2018 6:26 am
I also think a paid-off home is over-rated for most folks. Especially if the equity of the home would be more than 25% of your net worth.

Once it *is* paid off, great! But a concerted effort to pay off quickly at the expense of other balancing acts with your personal finance is an emotional activity rather than an objective and calculated activity.

Got an emergency fund? Enough if you are laid off without a job for 2 years? All set with retirement? On track? Have you done the math (spend 20 hours in spreadsheets like I have convincing yourself you're on track?)?

This is a reaction to seeing friends and other family members scrape every penny to pay down the mortgage early so they can brag about having a paid off home and talk about the feeling of relaxed ecstasy. But if I inquire about other aspects of their financial picture (since they started the conversation not because I'm nosy) I almost always find that they have no clue about their retirement outlook, are overly optimistic about the need for an emergency fund, would be crushed if their roof needed to be replaced or a car suddenly crapped out - they'd be taking out loans for that stuff. Ridiculous!

Don't get me wrong, I'm looking forward to the paid off home, but not before I have 3-4X the home's worth in assets that I can access without begging a bank to give me a home equity loan. That doesn't sound like independence to me.
This is an area where I am a fan of the Ramsey approach, being Debt free, emergency fund in place, 15%+ towards your retirement, kids college fund on track and then you pay down the mortgage. So when completed you have an emergency fund, retirement is on track, you kids will get through school without 200K in debt and you have a secure place to live in your retirement without a mortgage payment when you get there.

I think a lot of people opposed to paying off the mortgage in these threads assume if you are doing that you are not contributing to your retirement. If you are maxing out your tax free space, your option is to invest in a taxable account or pay down the mortgage and essentially pay into a guaranteed cost savings.

Its about risk tolerance, for me it was one of the BEST decisions made.
"They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety." - Benjamin Franklin

bironology
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Re: Does it make sense to pay off this mortgage?

Post by bironology » Fri Dec 21, 2018 8:34 am

SimonJester wrote:
Fri Dec 21, 2018 8:22 am


This is an area where I am a fan of the Ramsey approach, being Debt free, emergency fund in place, 15%+ towards your retirement, kids college fund on track and then you pay down the mortgage. So when completed you have an emergency fund, retirement is on track, you kids will get through school without 200K in debt and you have a secure place to live in your retirement without a mortgage payment when you get there.

I think a lot of people opposed to paying off the mortgage in these threads assume if you are doing that you are not contributing to your retirement. If you are maxing out your tax free space, your option is to invest in a taxable account or pay down the mortgage and essentially pay into a guaranteed cost savings.

Its about risk tolerance, for me it was one of the BEST decisions made.
I listen to Dave Ramsey's show at least 2 hours a week during my long commutes. I agree with 95% of what he says, and there is deep, deep wisdom in his approach and philosophy. The baby steps are brilliant, and I listen to the show to gain the insights regarding all the little quagmires that life presents. I've learned quite a lot from him. In fact, I'm about to pen an internal presentation about applying the same principles to "technical debt" for a software development organization. I love the guy and I recommend his books, podcast, and program to everyone.

On the mortgage payoff, I have to apply my own situation and deviate. No debt other than house: check. Maxed out retirement contributions: check. college funding: check. After all that, dump extra income into the mortgage: uncheck. Some folks disagree with Dave on the basis of potential return in the market vs. the mortgage rate, but my issue is the % of my net worth that will be in the home vs. other more liquid forms of assets that will allow me to capitalize on opportunity. So, I've split the difference by using a 15-year mortgage, and placing extra income into taxable investments as a means to catch-up on decades of underfunding retirement contributions.

Works for me, and the house will be paid off in 10 years. In addition to that, within about 2 years if I wake up one day and decide to write a big check, I can do it. My only prescription for others is to consider your tolerance for % of net worth locked into your residence. For me, 25-30% works. 50% doesn't.

bironology
Posts: 128
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Re: Does it make sense to pay off this mortgage?

Post by bironology » Fri Dec 21, 2018 8:38 am

I'll also add that living in a frothy real estate market makes a difference, which manifests in that % net worth metric I referenced.

In Boston or NYC or San Francisco areas, paying off your house will pretty much totally consume your financial picture even if you are in the top 10% of earners. In other regions, if my mortgage was <$200k for example, early payoff would be a no-brainer for me.

Again, % of net worth is a big lever.

kaboora
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Re: Does it make sense to pay off this mortgage?

Post by kaboora » Fri Dec 21, 2018 3:07 pm

Hi Guys, I too need your opinions/suggestions on same subject:
We both are working, maximizing 401Ks, Roth IRA backdoor: Btw, this doesn't mean we have enough for our retirement, we are immigrants and came to US in our mid 30s, so started saving for retirement quiet late.
We have a daughter who is 14th year old, so 3.5 years more to go to college, so since last three years, we have started investing in 529 plan using vanguard age based 529 portfolios. But return on our investment in this account is dismal: total investment (principal) is $62500.00 and its current value is $63,057.73.
Mortgage: It's 30 year 3.5% interest rate mortgage which started in 2016. We live in bayarea. Our outstanding principal balance is $530K. In our current monthly mortgage payment of $2528.00, $1543.77 is interest and only $984.35 is principal.
We could go for 15 year mortgage but didn't do so as back then, itemized deduction wast substantially higher than standard deduction, but that is no longer valid now. Standard deduction now is 24000 and itemized deduction (interest payment $18000.00 and total cap of $10000 on local tax and property taxes) ie total 28000: both are pretty close.

We are not able to decide how to invest in taxable account so that return minus tax will be higher than our mortgage interest rate of 3.5 (given our experience with the investment in 529 account).
We calculated the gain by extra mortgage payment: by paying extra $30000 one time amount, we get overall saving $43000 in interest.
Isn't that a reasonable option ? If not, what is your recommendation ? Thank you.

Grt2bOutdoors
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Re: Does it make sense to pay off this mortgage?

Post by Grt2bOutdoors » Fri Dec 21, 2018 3:15 pm

How secure is your employment?
Do you have sufficient assets in case of job disruption?
Saving $43K over 27 years, doesn't sound like such a great return to me.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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