Mortgage payoff - Am I crazy?

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Placenshow
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Mortgage payoff - Am I crazy?

Post by Placenshow »

We have approx. $70k principal left in our mortgage (68 payments), with total interest remaining of $7500. Interest rate is 3.75%.

We recently received an inheritance from my FIL, with approx. $120k of it being cash. He also left IRA’s & stocks that we’ll keep in the market for now and hope for a rebound.

Am I crazy in wanting to use some of the cash to pay off the mortgage being we are close to the finish line with not much interest remaining? The mortgage is our only debt outside of normal monthly household utility/food/etc. bills.

The rest of the cash would be applied to our emergency fund.

My wife recently had her hours cut due to COVID-19 and my job is not entirely stable either. We have a sophomore in college and a junior in high school.

Not counting the recent inheritance, our net worth is a bit north of $500k.

Just looking to receive some helpful advice.

Stay safe.
bampf
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Re: Mortgage payoff - Am I crazy?

Post by bampf »

It is a common question here and there is no right answer. I like being debt free. It is liberating. This discussion is well fleshed out here. Search for payoff mortgage...
DucsRMe
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Re: Mortgage payoff - Am I crazy?

Post by DucsRMe »

From a math standpoint, if you can get a higher return on those funds, then the answer is no. And the stock market historically returns higher than 3.75% (of course, recent events have shown us just how much volatility can go into "average" returns . . . )

But, paying it off means a guaranteed 3.75% no-risk return on your money. Currently Money Market Treasury Funds are paying around 1% and will be paying 0.01% in a few weeks. You can still get 1.5% or a bit more on CDs.

I'm not a "pay off the mortgage at all costs!" guy (I still have one), but given the circumstances you've presented, I think it would make sense to pay it off, and then take that monthly mortgage payment amount and investing in the market within the bounds of your preferred asset allocation.
KlangFool
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Re: Mortgage payoff - Am I crazy?

Post by KlangFool »

OP,

A) How much cash do you have besides the 120K?

B) What is your Asset Allocation?

C) How many months of expense doe the does 50K represent if you pay off the mortgage?

D) What is the price of the house?

In this time of uncertainty, it is great to have a big pile of cash instead of a payoff house.

KlangFool

P.S.: So, your plan is to pay off a low-interest mortgage and take a more expensive student loan for your kids? How do you plan to pay for your kids' college education?
Last edited by KlangFool on Thu Apr 09, 2020 9:30 am, edited 1 time in total.
260chrisb
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Re: Mortgage payoff - Am I crazy?

Post by 260chrisb »

I'm not a "pay it off at all costs" guy and bought my home (and got a mortgage) later in life than most but absolutely you pay it off. You've got a good NW, you got free money, and you save $7500.00! Why give it to the bank? Protect yourself; you're going to have a well funded emergency fund and a paid for house!
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lthenderson
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Re: Mortgage payoff - Am I crazy?

Post by lthenderson »

Placenshow wrote: Thu Apr 09, 2020 8:56 am My wife recently had her hours cut due to COVID-19 and my job is not entirely stable either.
At least for me, this statement alone would make me want to keep the cash part of the inheritance as cash until things stabilize. You can always pay it off this fall or next year after things look better. The last place you want to tie up all your cash when you need it is in real estate in perhaps a falling real estate market.
BrownEyedGirl_27
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Re: Mortgage payoff - Am I crazy?

Post by BrownEyedGirl_27 »

Have you refinanced since the talk of the Coronavirus? If not I would see about getting that rate even lower. Of course I do not know how expensive it would be to get a new rate since I am not a mortgage expert.

I would read the Wiki “How to manage a windfall” on this forum and park the money in a FDIC-insured account while you think about what you’re going to do. You could just pay the whole thing off today but I think that depends on how you view holding debt and your past actions with handling a large sum of money. How badly does your wife want the mortgage paid off?

How is your emergency fund and college savings? With all the uncertainty going around it couldn’t hurt to add to it given what you have told us about your family situation.
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TomatoTomahto
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Re: Mortgage payoff - Am I crazy?

Post by TomatoTomahto »

I would probably keep the cash on hand, but perhaps not of you might qualify for some college financial aid (some schools don’t count home equity).

I’m normally a no-mortgage guy, but these times are extraordinary.
I get the FI part but not the RE part of FIRE.
stoptothink
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Re: Mortgage payoff - Am I crazy?

Post by stoptothink »

BrownEyedGirl_27 wrote: Thu Apr 09, 2020 9:37 am Have you refinanced since the talk of the Coronavirus? If not I would see about getting that rate even lower. Of course I do not know how expensive it would be to get a new rate since I am not a mortgage expert.
Nobody is going to want to do a refi when there is $70k left on a mortgage.

I am in the "pay it off" camp.
daheld
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Re: Mortgage payoff - Am I crazy?

Post by daheld »

You have a spouse whose hours were cut, your job is not entirely stable and potentially kids who are at home for an extended time without jobs. For the time being, I would not pay off the mortgage, and I am very averse to mortgage debt. It will cost you $7500 in interest to keep paying as usual. To me, that's a good deal for the peace of mind to know you have some added cushion. I would plan to re-evaluate in a year but would not pay off right now.
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vineviz
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Re: Mortgage payoff - Am I crazy?

Post by vineviz »

lthenderson wrote: Thu Apr 09, 2020 9:31 am
Placenshow wrote: Thu Apr 09, 2020 8:56 am My wife recently had her hours cut due to COVID-19 and my job is not entirely stable either.
At least for me, this statement alone would make me want to keep the cash part of the inheritance as cash until things stabilize. You can always pay it off this fall or next year after things look better. The last place you want to tie up all your cash when you need it is in real estate in perhaps a falling real estate market.
Paying down a mortgage would be problematic in this scenario, IMHO, but paying it off is not.

One immediate impact of paying off the mortgage is increase the effective amount of the existing emergency fund. The amount of money in an "emergency fund" that used to cover six months of expenses (for example) now possibly covers nine months or more, depending on what percentage of current expenses are going to principal & interest. Coupled with the extra $50k in emergency funds, plus the stocks/bonds that are being held in reserve it seems to me that the financial resiliency of this household would likely be improved, not compromised, by paying off the mortgage.

The key behavioral danger I see is the possibility of spending the monthly cashflow that used to cover the mortgage payment, instead of saving/investing it. On whatever day the OP pays off the mortgage, I'd recommend IMMEDIATELY setting up an automatic transfer into an investment account (high yield savings account, taxable account, Roth IRA, 529 plan, Treasury Direct account, etc.) as a way of preempting any consumption creep.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
dardeninvestor
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Re: Mortgage payoff - Am I crazy?

Post by dardeninvestor »

If you have 6 months of emergency salary for both your wife and yourself...and could cover the tuition of both kids as part of that emergency fund, pay off the mortgage.

Otherwise I would stay liquid.
Ron Ronnerson
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Re: Mortgage payoff - Am I crazy?

Post by Ron Ronnerson »

I would hold on to the cash. If you lose your jobs and are unable to find new ones for a while, cash will be more useful than a paid-off house. A paid-off house reduces your monthly expenses but cash not only pays for housing but all other expenses from electricity to food to car repairs. In a time of uncertainty, a pile of cash can be very useful. Your house is almost paid off anyway and most of your mortgage payments are going toward principal. I would be in no hurry to pay it off if my job was on shaky ground and my spouse had hours cut and millions were suddenly filing for unemployment all at once.
retire57
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Re: Mortgage payoff - Am I crazy?

Post by retire57 »

Get rid of the mortgage. We made that decision over 20 years ago and had so many more life options (travel and careers come to mind). It's much more than the numbers. You'll experience a freedom that mortgage-holders never will.
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gr7070
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Re: Mortgage payoff - Am I crazy?

Post by gr7070 »

Not crazy at all.

The 3.75% mortgage is roughly a tax-equivalent return of 4.75%. That alone is darn good when the stock market predictions for a decade have been 7%.

It is also guaranteed return. That guarantee is worth some amount mathematically. I don't think 2% is an unreasonable amount for that value; I suspect that's conservative.

So maybe a 6.75% return, greater? No brainier to me.
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gr7070
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Re: Mortgage payoff - Am I crazy?

Post by gr7070 »

You'll have $50k cash left over! Plus the remainder of the inheritance! Plus, presumably your existing EF!

I'd be unconcerned about "losing" that 70k sent towards the mortgage. As mentioned above it improves the EF rate.

I would not worry about that decision with these facts.

Pay off the mortgage!
invest4
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Re: Mortgage payoff - Am I crazy?

Post by invest4 »

Typically, I don't recommend going to great lengths to pay off the mortgage...particularly if doing so puts undue stress on finances and / or creates a lot of additional risk in case of job loss (15 year vs 30 for example).

However, I don't find OP's situation to the the vanilla variety we frequently discuss here.

The mortgage amount is low and the windfall substantial enough with plenty left to do other things. I say be done with it and enjoy the benefits (financial and otherwise).

:sharebeer
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JoeRetire
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Re: Mortgage payoff - Am I crazy?

Post by JoeRetire »

Placenshow wrote: Thu Apr 09, 2020 8:56 am Am I crazy in wanting to use some of the cash to pay off the mortgage being we are close to the finish line with not much interest remaining?

My wife recently had her hours cut due to COVID-19 and my job is not entirely stable either. We have a sophomore in college and a junior in high school.

Not counting the recent inheritance, our net worth is a bit north of $500k.
(shrug)

In the current situation, I'd value the liquidity more than the low rate mortgage. In highly unstable times, maximum flexibility is most important. You can always choose to pay it off later, when the situation stabilizes.

You didn't mention how much of your net worth is in an emergency fund.
Last edited by JoeRetire on Thu Apr 09, 2020 4:58 pm, edited 1 time in total.
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Big Dog
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Re: Mortgage payoff - Am I crazy?

Post by Big Dog »

vineviz wrote: Thu Apr 09, 2020 9:44 am
lthenderson wrote: Thu Apr 09, 2020 9:31 am
Placenshow wrote: Thu Apr 09, 2020 8:56 am My wife recently had her hours cut due to COVID-19 and my job is not entirely stable either.
At least for me, this statement alone would make me want to keep the cash part of the inheritance as cash until things stabilize. You can always pay it off this fall or next year after things look better. The last place you want to tie up all your cash when you need it is in real estate in perhaps a falling real estate market.
Paying down a mortgage would be problematic in this scenario, IMHO, but paying it off is not.

One immediate impact of paying off the mortgage is increase the effective amount of the existing emergency fund. The amount of money in an "emergency fund" that used to cover six months of expenses (for example) now possibly covers nine months or more, depending on what percentage of current expenses are going to principal & interest. Coupled with the extra $50k in emergency funds, plus the stocks/bonds that are being held in reserve it seems to me that the financial resiliency of this household would likely be improved, not compromised, by paying off the mortgage.

The key behavioral danger I see is the possibility of spending the monthly cashflow that used to cover the mortgage payment, instead of saving/investing it. On whatever day the OP pays off the mortgage, I'd recommend IMMEDIATELY setting up an automatic transfer into an investment account (high yield savings account, taxable account, Roth IRA, 529 plan, Treasury Direct account, etc.) as a way of preempting any consumption creep.
Cash is fungible, so this makes no mathematical sense to me. Regardless, give the uncertainty of jobs right now, I'd bank the cash and increase monthly payments once the economy and jobs situation improves.
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vineviz
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Re: Mortgage payoff - Am I crazy?

Post by vineviz »

Big Dog wrote: Thu Apr 09, 2020 10:30 am Cash is fungible, so this makes no mathematical sense to me.
Which part makes no sense?

No risk-free investment has a return > 3.75%, so paying of the mortgage is economically optimal.

And cash is only fungible until it is spent, which is why I suggest that saving is preferred over consumption.
Last edited by vineviz on Thu Apr 09, 2020 12:23 pm, edited 1 time in total.
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MJS
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Re: Mortgage payoff - Am I crazy?

Post by MJS »

The major advantage of a mortgage is that it acts as an inflation hedge.* Current future prediction gurus (yeah, 8 ball time!) suggest that there is an increased risk of inflation in the next few years.**

Given your financial situation, and thinking of your mortgage as a portfolio diversification tool, I recommend keeping it for now.

* Kitces. https://www.kitces.com/blog/why-a-mortg ... -that-are/
Dave Ramsey. https://www.daveramsey.com/askdave/home ... -inflation
** search google news for _ inflation risk _
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camillus
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Re: Mortgage payoff - Am I crazy?

Post by camillus »

I’m going to be that guy.

If the house were paid off currently, would you do a cash out refinance in order to invest?
RetiredInTheWest
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Re: Mortgage payoff - Am I crazy?

Post by RetiredInTheWest »

IMO with only 68 payments to go, you're going to have to pay this off one way or the other in less than six years. These are scary times, but it looks like you have enough liquidity (and keeping the rest as emergency fund sounds right). Could you borrow against the house if this doesn't work out?

I'd pay it off.
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gr7070
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Re: Mortgage payoff - Am I crazy?

Post by gr7070 »

MJS wrote: Thu Apr 09, 2020 12:22 pm The major advantage of a mortgage is that it acts as an inflation hedge.* Current future prediction gurus (yeah, 8 ball time!) suggest that there is an increased risk of inflation in the next few years.**

Given your financial situation, and thinking of your mortgage as a portfolio diversification tool, I recommend keeping it for now.

* Kitces. https://www.kitces.com/blog/why-a-mortg ... -that-are/
Dave Ramsey. https://www.daveramsey.com/askdave/home ... -inflation
** search google news for _ inflation risk _
Assuming it is an inflation hedge, the recommendations in this thread are to keep the mortgage and keep that cash liquid. Which exposes that cash to inflation risk.

Does that not give you a similar net inflation risk as paying off the mortgage with that cash?

The OP doesn't need that extra 70k in cash (they have plenty beyond that), exposed to inflation risk, *and* paying interest on the mortgage. Just take the inflation risk of the paid off mortgage (granting that it exists regardless of the arguments) without the added interest expense.
KlangFool
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Re: Mortgage payoff - Am I crazy?

Post by KlangFool »

gr7070 wrote: Thu Apr 09, 2020 12:39 pm
MJS wrote: Thu Apr 09, 2020 12:22 pm The major advantage of a mortgage is that it acts as an inflation hedge.* Current future prediction gurus (yeah, 8 ball time!) suggest that there is an increased risk of inflation in the next few years.**

Given your financial situation, and thinking of your mortgage as a portfolio diversification tool, I recommend keeping it for now.

* Kitces. https://www.kitces.com/blog/why-a-mortg ... -that-are/
Dave Ramsey. https://www.daveramsey.com/askdave/home ... -inflation
** search google news for _ inflation risk _
Assuming it is an inflation hedge, the recommendations in this thread are to keep the mortgage and keep that cash liquid. Which exposes that cash to inflation risk.

Does that not give you a similar net inflation risk as paying off the mortgage with that cash?

The OP doesn't need that extra 70k in cash (they have plenty beyond that), exposed to inflation risk, *and* paying interest on the mortgage. Just take the inflation risk of the paid off mortgage (granting that it exists regardless of the arguments) without the added interest expense.
gr7070,

<<The OP doesn't need that extra 70k in cash (they have plenty beyond that), >>

<<We have a sophomore in college and a junior in high school.>>

How do you know that to be true? Especially with one kid in the college and another one about to enter college?

KlangFool
Andyrunner
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Re: Mortgage payoff - Am I crazy?

Post by Andyrunner »

I was going to pull the trigger this month but decided against it.

Wife and I both work for the same employer who is having cash flow issues due to COVID-19 (hospital). We decided to hold off till its all over, in the long run our jobs are safe, but this is a new world right now. In reality, what is another few months.
petulant
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Re: Mortgage payoff - Am I crazy?

Post by petulant »

I also vote for paying off mortgage. There will be a huge cash pile left over afterward, and as vineviz pointed out, the need for an emergency fund will be reduced once the mortgage payment is no longer required.
vested1
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Re: Mortgage payoff - Am I crazy?

Post by vested1 »

One thing I haven't seen anyone else mention, at least in this thread. You've just received $120,000 tax free dollars. If you pay off your mortgage you will have (fill in the monthly P&I) less expense. You will also have $50,000 tax free money left. Gain and loss is a daily crap shoot right now, more so than usual, but the amount of expense that is reduced from your existing budget is a sure thing if you pay off the mortgage.

When I paid off my mortgage I didn't commiserate with myself about all the money I could have made by investing our sudden windfall, or compare a rosy estimate of return to a known interest rate. I did see an immediate increase of $1,241 a month in spendable income however. I also saved almost 100k in interest that I would have paid over the remaining life of the loan. That part was very real to me.

I suspect it is also real for the others who chose to pay off their mortgage early. Maybe some of them chose to invest the money that would have gone to P&I after that, maybe they didn't, but at least they had a choice that wasn't theirs before they paid off the mortgage.
Last edited by vested1 on Thu Apr 09, 2020 1:19 pm, edited 1 time in total.
mbasherp
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Re: Mortgage payoff - Am I crazy?

Post by mbasherp »

I’m in the pay it off camp. You didn’t mention how many months/years you can get by without jobs, but assuming you aren’t liquidity strained at all, go for it.

Why? Because I realized that without our mortgage, we could squeeze our monthly budget inside the provisions of two unemployment benefits. What’s better than having cash to pull out of savings if needed? Not needing to pull anything from savings in the first place.

This is also why I feel so strongly that paying off a mortgage is great, but paying down can be dangerous. And why having no mortgage allows one to take more portfolio risk (because you’re less likely to dip into it).
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gr7070
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Re: Mortgage payoff - Am I crazy?

Post by gr7070 »

KlangFool wrote: Thu Apr 09, 2020 12:46 pm
gr7070,

<<The OP doesn't need that extra 70k in cash (they have plenty beyond that), >>

<<We have a sophomore in college and a junior in high school.>>

How do you know that to be true? Especially with one kid in the college and another one about to enter college?

KlangFool
I don't know that. However, I think it's a reasonable assumption for someone with a solid net worth and a reasonable inheritance. Additionally, no other significant expenses or savings goals were noted when noting they had no debt.

Even with that, let's assume they have no college savings, which seems an unreasonable assumption; they'll have the added inheritance, 50k cash, no mortgage payment they can utilize to save up (after Corona obviously) and to help cash flow at the time, and ultimately can very likely result go back into mortgage debt if really needed after all those things but probably not needed for a number of years.

I'm ok with making reasonable assumptions and approach it that way. We don't need perfect information to proceed.
Last edited by gr7070 on Thu Apr 09, 2020 2:45 pm, edited 2 times in total.
grettman
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Re: Mortgage payoff - Am I crazy?

Post by grettman »

Placenshow wrote: Thu Apr 09, 2020 8:56 am We have approx. $70k principal left in our mortgage (68 payments), with total interest remaining of $7500. Interest rate is 3.75%.

We recently received an inheritance from my FIL, with approx. $120k of it being cash. He also left IRA’s & stocks that we’ll keep in the market for now and hope for a rebound.

Am I crazy in wanting to use some of the cash to pay off the mortgage being we are close to the finish line with not much interest remaining? The mortgage is our only debt outside of normal monthly household utility/food/etc. bills.

The rest of the cash would be applied to our emergency fund.

My wife recently had her hours cut due to COVID-19 and my job is not entirely stable either. We have a sophomore in college and a junior in high school.

Not counting the recent inheritance, our net worth is a bit north of $500k.

Just looking to receive some helpful advice.

Stay safe.
I suspect that many people who lost their jobs recently would like to have a mortgage free home right now.
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lthenderson
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Re: Mortgage payoff - Am I crazy?

Post by lthenderson »

vineviz wrote: Thu Apr 09, 2020 9:44 am
lthenderson wrote: Thu Apr 09, 2020 9:31 am
Placenshow wrote: Thu Apr 09, 2020 8:56 am My wife recently had her hours cut due to COVID-19 and my job is not entirely stable either.
At least for me, this statement alone would make me want to keep the cash part of the inheritance as cash until things stabilize. You can always pay it off this fall or next year after things look better. The last place you want to tie up all your cash when you need it is in real estate in perhaps a falling real estate market.
Paying down a mortgage would be problematic in this scenario, IMHO, but paying it off is not.

One immediate impact of paying off the mortgage is increase the effective amount of the existing emergency fund. The amount of money in an "emergency fund" that used to cover six months of expenses (for example) now possibly covers nine months or more, depending on what percentage of current expenses are going to principal & interest. Coupled with the extra $50k in emergency funds, plus the stocks/bonds that are being held in reserve it seems to me that the financial resiliency of this household would likely be improved, not compromised, by paying off the mortgage.

The key behavioral danger I see is the possibility of spending the monthly cashflow that used to cover the mortgage payment, instead of saving/investing it. On whatever day the OP pays off the mortgage, I'd recommend IMMEDIATELY setting up an automatic transfer into an investment account (high yield savings account, taxable account, Roth IRA, 529 plan, Treasury Direct account, etc.) as a way of preempting any consumption creep.
What happens if both were to lose their jobs which the OP seems to indicate could be a possibility? What happens if getting a new job takes months or longer and a move to a different location/new home? The OP hasn't been very specific but that could mean they are forced to sell a house in a potentially very slow housing market just to get their money out to put a down payment on another house. In times of uncertainty, cash is always king over a paid off house.
Atilla
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Re: Mortgage payoff - Am I crazy?

Post by Atilla »

Right now cash is KING. Hold onto the money until this stupidity passes over - then pay off the mortgage once you are both more secure in your jobs.

If you both had bullet-proof government jobs or something comparable, I'd say pay it off now.
redmaw
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Re: Mortgage payoff - Am I crazy?

Post by redmaw »

What else are you going to do with the cash?

if your other option is sitting it in a "high yield" savings account earning sub 2%, then definitely pay it off. You still keep 50k to cover dual unemployment for a while(plus unemployment,, plus existing emergency funds) and lower expenses going forward. Definitely an improvement from just sitting on the cash.

If it were me I would be buying stocks while prices are depressed (probably dca in over the next 6-12 months). This of course assumes your original emergency fund is adequate. If the worst happens,everyone loses their job, you burn through your existing emergency fund, and unemployment, you can sell the stock...even if its at a loss. Or more likely just stop buying since I don't think the current troubles will last 6-12 months I suggested as a dca period. If the market rebounds before it's all in, sure use what's left to payoff the mortgage.
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vineviz
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Re: Mortgage payoff - Am I crazy?

Post by vineviz »

lthenderson wrote: Thu Apr 09, 2020 2:38 pm What happens if both were to lose their jobs which the OP seems to indicate could be a possibility?
That's ALWAYS a possibility, and as you mentioned the OP hasn't given us enough detail to analyze any scenarios exhaustively.

What we DO know is that we have, for now, a dual income household with a net worth in excess of $620k including an existing "emergency fund" of unknown size.

Let's imagine that hypothetically the mortgage payment is equal to about 20% of monthly household spending. Further, let's also imagine that the household has emergency fund equal to nine months of household spending.

Paying off the mortgage immediately extends the duration of the emergency fund by reducing monthly expenses by20%, so now it is nearly 11 months worth of expenses. Furthermore, the remainder of the inherited cash (approx. $50k) plus the stocks/inherited IRA accounts bumps up the emergency fund even more and this could easily amount to over nine additional months of non-discretionary expenses.

So hypothetically, we have couple that MIGHT lose one or both of their jobs at some point with nearly 20 months of savings in an emergency fund that can save an ADDITIONAL 2-3 months of expenses each year until that job loss potentially happens simply by redirecting the previous mortgage payment. And that's before we consider the possibility of a HELOC or home equity loan, hardship withdrawal, etc.

Could such a household face an economic shock that would deplete a 20 month emergency fund? Of course it's possible but I don't see enough red flags here to suggest declining the chance to get a guaranteed risk-free 3.75% return on some portion of the inheritance.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
KlangFool
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Re: Mortgage payoff - Am I crazy?

Post by KlangFool »

vineviz wrote: Thu Apr 09, 2020 3:36 pm
lthenderson wrote: Thu Apr 09, 2020 2:38 pm What happens if both were to lose their jobs which the OP seems to indicate could be a possibility?
That's ALWAYS a possibility, and as you mentioned the OP hasn't given us enough detail to analyze any scenarios exhaustively.

What we DO know is that we have, for now, a dual income household with a net worth in excess of $620k including an existing "emergency fund" of unknown size.

Let's imagine that hypothetically the mortgage payment is equal to about 20% of monthly household spending. Further, let's also imagine that the household has emergency fund equal to nine months of household spending.

Paying off the mortgage immediately extends the duration of the emergency fund by reducing monthly expenses by20%, so now it is nearly 11 months worth of expenses. Furthermore, the remainder of the inherited cash (approx. $50k) plus the stocks/inherited IRA accounts bumps up the emergency fund even more and this could easily amount to over nine additional months of non-discretionary expenses.

So hypothetically, we have couple that MIGHT lose one or both of their jobs at some point with nearly 20 months of savings in an emergency fund that can save an ADDITIONAL 2-3 months of expenses each year until that job loss potentially happens simply by redirecting the previous mortgage payment. And that's before we consider the possibility of a HELOC or home equity loan, hardship withdrawal, etc.

Could such a household face an economic shock that would deplete a 20 month emergency fund? Of course it's possible but I don't see enough red flags here to suggest declining the chance to get a guaranteed risk-free 3.75% return on some portion of the inheritance.
vineviz,

College education funding for 2 kids will deplete those funds in less than 20 months. Or, OP will end up taking a more expensive student loan to bridge the gap. That is a very big elephant in the room.

KlangFool
J295
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Re: Mortgage payoff - Am I crazy?

Post by J295 »

Pay off the mortgage in equal installments starting in April through the end of the year, and if a speedbump comes along during that time you can readjust if necessary
ddurrett896
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Re: Mortgage payoff - Am I crazy?

Post by ddurrett896 »

Without knowing your income and emergency fund, it's hard to advise.

If income is stable and EF looks good, I'd throw like $20-$30K towards the mortgage and bank the remainder. Then start overpaying the mortgage each month by a couple hundred dollars.
mbasherp
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Re: Mortgage payoff - Am I crazy?

Post by mbasherp »

KlangFool wrote: Thu Apr 09, 2020 3:44 pm
College education funding for 2 kids will deplete those funds in less than 20 months. Or, OP will end up taking a more expensive student loan to bridge the gap. That is a very big elephant in the room.

KlangFool
To paraphrase you from upthread, how do you know OP is paying for the children’s college?

Not all parents contribute savings toward their kids education. Certainly not all parents take student loans for their kids either.

I think it’s best to focus on what information is provided. But if we’re going down a road on our own, wouldn’t it be valuable to have paid off the house and fewer assets in sight of the FAFSA?
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gr7070
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Re: Mortgage payoff - Am I crazy?

Post by gr7070 »

lthenderson wrote: Thu Apr 09, 2020 2:38 pm What happens if both were to lose their jobs which the OP seems to indicate could be a possibility? What happens if getting a new job takes months or longer and a move to a different location/new home? The OP hasn't been very specific but that could mean they are forced to sell a house in a potentially very slow housing market just to get their money out to put a down payment on another house. In times of uncertainty, cash is always king over a paid off house.
Let's address your perfect storm...

They'll have 50k cash. A paid for house. Presumably an already appropriate EF. What's possibly a sizable inheritance in mutual funds. A half million dollar net worth. Two people looking for work - doubling their ability to find an income. A paid for house if needed to sell, priced per the market it should sell in a reasonable time (by definition that's what a properly priced house does).

In other words, they would appear to be set up incredibly well to weather even the harshest of storms. Do they really need to plan for the tornado that starts a forest fire that burns through a hurricane?

They'll be far, far better than those who are already set up quite well by normal personal finance approach of 3-6 months EF, acceptable mortgage, small car loans, small student loan no other debt, etc. And those people should be just fine in most difficult positions.
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gr7070
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Re: Mortgage payoff - Am I crazy?

Post by gr7070 »

KlangFool wrote: Thu Apr 09, 2020 3:44 pm College education funding for 2 kids will deplete those funds in less than 20 months. Or, OP will end up taking a more expensive student loan to bridge the gap. That is a very big elephant in the room.

KlangFool
OP can weigh-in further on their college and highschooler or can take your recommendation for heavy consideration of this fact.

Even if they have no college savings and are footing the bill for, say $30,000 annually they still have a ton of money to result handle that significant scenario that right now is a very manageable "reduced hours".

I'm truly unconcerned for them - that's not said disdainfully. They are in great shape and will be in even better shape with a paid for house.
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Watty
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Re: Mortgage payoff - Am I crazy?

Post by Watty »

gr7070 wrote: Thu Apr 09, 2020 10:11 am You'll have $50k cash left over! Plus the remainder of the inheritance! Plus, presumably your existing EF!

I'd be unconcerned about "losing" that 70k sent towards the mortgage. As mentioned above it improves the EF rate.

I would not worry about that decision with these facts.

Pay off the mortgage!
tentative +1 on that.

One thing I would do is to make up a spreadsheet and do a "fire drill" to plot out how long you would be OK if you both got laid off the day after you paid off the mortage. Be sure to take unemployment insurance into account including any of the special supplements that were in the recent emergency legislation.

Also do the same spreadsheet as if you did not pay off the house.

It is not perfect since it can be frozen but you might want to get a home equity line of credit on the house if you pay it off so that you could draw of the home equity if you need it.

The choice to pay it off or not does not need to be made immediately. It would cost you very little to just put the money into something like a CD or savings account for six months and then decide.
KlangFool
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Re: Mortgage payoff - Am I crazy?

Post by KlangFool »

gr7070 wrote: Thu Apr 09, 2020 4:41 pm
KlangFool wrote: Thu Apr 09, 2020 3:44 pm College education funding for 2 kids will deplete those funds in less than 20 months. Or, OP will end up taking a more expensive student loan to bridge the gap. That is a very big elephant in the room.

KlangFool
OP can weigh-in further on their college and highschooler or can take your recommendation for heavy consideration of this fact.

Even if they have no college savings and are footing the bill for, say $30,000 annually they still have a ton of money to result handle that significant scenario that right now is a very manageable "reduced hours".

I'm truly unconcerned for them - that's not said disdainfully. They are in great shape and will be in even better shape with a paid for house.
gr7070,

My kids' college education cost 30K per kid per year. If OP is unemployed, it won't take long to use up that 50K. The bottom line is this. OP needs to take college education funding into consideration before paying off the mortgage. There are folks that pay off the mortgage and then take a more expensive student loan for their kids. They assume that they will be employed when their kids go to college.

KlangFool
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Toons
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Re: Mortgage payoff - Am I crazy?

Post by Toons »

Pay It Off
Tomorrow
: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
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JoeRetire
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Re: Mortgage payoff - Am I crazy?

Post by JoeRetire »

grettman wrote: Thu Apr 09, 2020 2:28 pm
Placenshow wrote: Thu Apr 09, 2020 8:56 am We have approx. $70k principal left in our mortgage (68 payments), with total interest remaining of $7500. Interest rate is 3.75%.

We recently received an inheritance from my FIL, with approx. $120k of it being cash. He also left IRA’s & stocks that we’ll keep in the market for now and hope for a rebound.

Am I crazy in wanting to use some of the cash to pay off the mortgage being we are close to the finish line with not much interest remaining? The mortgage is our only debt outside of normal monthly household utility/food/etc. bills.

The rest of the cash would be applied to our emergency fund.

My wife recently had her hours cut due to COVID-19 and my job is not entirely stable either. We have a sophomore in college and a junior in high school.

Not counting the recent inheritance, our net worth is a bit north of $500k.

Just looking to receive some helpful advice.

Stay safe.
I suspect that many people who lost their jobs recently would like to have a mortgage free home right now.
I suspect that many people who lost their jobs recently would rather have $120 in cash right now.
Lenders are allowing people to defer their mortgage payments.
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.
huskerfan1414
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Re: Mortgage payoff - Am I crazy?

Post by huskerfan1414 »

Boy, this place amazes me. In no way can I say that others are wrong, but if its me I am paying off that mortgage, assuming this is the house you are going to stay in.
-Guaranteed roof over your head for life no matter what. Plus equity.
-68 mortgage payments that now stay in your pocket, so its not like the money is disappearing. Youre basically loaning it to yourself. You can invest those payments or build your EF even more. Wow.
-7,500 in savings by not paying that interest.
-furthermore, I realize that sentimental thoughts should not interfere with investing....but this way you’d be able to guarantee that your FILs hard earned gift and legacy will be put to good family use and not be threatened of being lost at all. Seems like a good use of a legacy fund.
Cant go wrong with the house.

But, I’m no financial expert.
“I’m confident, but not really sure.” -Tom Petty
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Placenshow
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Re: Mortgage payoff - Am I crazy?

Post by Placenshow »

Thank you all for your responses, sorry I've been a bit tardy responding to some of your questions...please see my responses below.

Current EF: $30k

HELOC: Yes, $100K, has not been touched.

House value: Approx $300k

College: To date, we've been paying for college via cash flow on our end + assistance from our daughter. Two years in, no debt. She goes to a state school, approx $16k/year. There is a 90% chance my son will go to the same school in 2021 (he is also looking at Navy/Air Force).

Monthly household expenses: With home, approx $4200....without home, approx $2700.

Household income: Approx $125k/year

Asset allocation: 70/30

Thanks again!
absolute zero
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Re: Mortgage payoff - Am I crazy?

Post by absolute zero »

You have not stated the non-cash value of your inheritance. But from what you’ve shared:

- $620k+ net worth including the inheritance
- small remaining balance on mortgage ($70k)
- Reasonable (not high/not low) interest rate of 3.75%
- $320k of your net worth will remain in cash/stocks/bonds if you do pay off the mortgage

I think this one is simple. Whether or not you pay-off that mortgage will likely have minimal impact on your financial future.

Do what will make you and your wife feel good.
Last edited by absolute zero on Thu Apr 09, 2020 6:49 pm, edited 1 time in total.
Ron Ronnerson
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Re: Mortgage payoff - Am I crazy?

Post by Ron Ronnerson »

camillus wrote: Thu Apr 09, 2020 12:30 pm I’m going to be that guy.

If the house were paid off currently, would you do a cash out refinance in order to invest?
I can't speak for anyone else but, depending on the interest rate that I could get and other factors, I would very possibly do this. It is a personal decision, though, so it's not surprising that the responses have been mixed.

In my opinion, if both the OP and spouse lose their jobs, cash will help weather the storm better than not having a mortgage. Since it was mentioned that job losses could quite possibly materialize, I would hold on to the cash until things weren't so unpredictable. There have been difficult economic times before but we are living through not only tough times but weird times. Pretend you're in the year 2019 and someone tells you that in early 2020, everything will shut down, toilet paper will become a highly sought commodity, no one will be allowed within 6 feet of another, and people will put on gloves and masks to leave their house for a weekly trip to the grocery store. In such an absurd scenario, I'd personally love to have a large pile of cash.
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Re: Mortgage payoff - Am I crazy?

Post by KlangFool »

Placenshow wrote: Thu Apr 09, 2020 5:37 pm Thank you all for your responses, sorry I've been a bit tardy responding to some of your questions...please see my responses below.

Current EF: $30k

HELOC: Yes, $100K, has not been touched.

House value: Approx $300k

College: To date, we've been paying for college via cash flow on our end + assistance from our daughter. Two years in, no debt. She goes to a state school, approx $16k/year. There is a 90% chance my son will go to the same school in 2021 (he is also looking at Navy/Air Force).

Monthly household expenses: With home, approx $4200....without home, approx $2700.

Household income: Approx $125k/year

Asset allocation: 70/30

Thanks again!
Placenshow,

A) Pay off the mortgage -> EF = 30K + 50K = 80K. Annual expense = 32.4K +16K = 48.4K

If you lose your job, your HELOC is canceled, you can last 80K/48.4 = 1.65 years with your EF.

B) Do not pay off the mortgage -> EF = 30K + 120K = 150K. Annual expense = 50K + 16K = 66K.

If you lose your job and your HELOC is canceled, you can last 2.27 years with your EF.

KlangFool
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