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Old 01-13-2014, 05:51 PM   #21
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We paid off our mortgage at the end of 2012, only to watch the spectacular gains in the stock market of 2013 and realize that we could have made a lot more if we put the money in the market. However, the reverse could have easily happened and the market dropped more than 20%, and then we would have been thrilled with the decision.

Regardless, I have no regrets. Don't underestimate how nice it is for some people to sleep at night knowing they own their home outright and have no other debt. Your exercise here is to figure out if you are one of those people. If you are, go for it and get rid of the mortgage. If you prefer to roll the dice, knowing that the stock market historically only goes down about once every three of four years, there's nothing wrong with that strategy either.

This question seems to come up a lot on the forums, with much lively discussion. Yet there is clearly no right answer. As opposed to something like "should I buy timeshare I can't afford to pay cash for and pay 12% interest to finance it?" That one would get a very strong response from this forum I suspect.
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Old 01-13-2014, 06:12 PM   #22
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Originally Posted by ERD50 View Post
The trouble with splitting the difference is that you have locked up your money, and you don't see any benefit until the future date when it is paid off.

If you save up and decide to pay it all off, then you get an immediate cash-flow benefit (well, assuming the payment was more than any investment cash flow).

-ERD50
...and the advantage is you don't entirely miss a stock market rally or participate in a crash. You get the safety of a guaranteed return and if things work out great for your investments you can still use them to pay off the mortgage. If the market crashes you can console yourself with you're lower mortgage principal.

Saying one approach is better than the other just gets us back to the same old pay off vs invest argument. Either one depends on circumstances and an unknown future, so hedge your bets and back both horses. I'm a strong advocate of averageness.
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Old 01-13-2014, 10:52 PM   #23
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Well Thanks for the great options. What they didn't teach us at Harvard.
This forums wisdom is amazing.
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Old 01-14-2014, 10:38 AM   #24
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Great job at such a young age. Agree with everyone about getting an emergency fund first. Then, max out your retirement funds. What's leftover you can split between your mortgage and taxed investments.

When do you want to retire or at least be FI? I wish someone would have shown me a simple math formula for retiring early when I was in my 20s so I could be FI before I burned out from work.

Have you seen this site? Getting Rich: from Zero to Hero in One Blog Post | Mr. Money Mustache Lots of good info on how to achieve FI at an early age.
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Old 01-20-2014, 03:44 PM   #25
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I am 28 years old and my only debt is my mortgage (30yr at 4%. Have about 98k remaining). After maxing out all my tax advantaged vehicles for 2014, should my focus be to direct additional monies to principal on this mortgage?
At 28, I would invest in
a) a Roth (but it appears you already have)
b) an taxable investment/brokerage account, to take advantage of tax-loss selling for similar vehicles. I've only started to do this (at 55).

My assumption is that over 5-10 years you will earn more than the 4%. If the mortgage were at 6-16%, I probably would change my advice.

We paid off our main mortgage a couple months ago, using idle cash, so don't do as I do, do as I say. We're close to semi-retirement, so I think the circumstances are different. (I think.)

Also paying off the mortgage locks up the cash unless you sell, although equity loans can help a lot on this, but perhaps at much higher rates if you need the money. So this isn't a clear-cut decider.
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Old 01-20-2014, 05:00 PM   #26
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It seems that everyone in this forum assumes that they are going to have their job forever or will find another job very fast. I would max out your tax deductable accounts and whatever you have left send it to the house; that is what I am doing.

I think having a house paid off opens a world of opportunities. You can take more risk and be more confident since you have a roof over your head no matter what happens.

I turned 29 three days ago and me and my wife are maxing out our 401Ks and have a mortgage of $59,900. The house should be paid of in the beginning of next year.

After paying of the house I plan to put 100K on Elon Must next IPO and watch it grow 350-400% in a year ; if I loose my money I would not care as much since I will have the house paid off and have plenty of years ahead of me to make the 100k back.

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Old 01-20-2014, 08:49 PM   #27
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It seems that everyone in this forum assumes that they are going to have their job forever or will find another job very fast.

Not sure that is true. I think most on here have significant emergency funds that can cover the mortgage for a long while if they lose their jobs. People here understand that Roth contributions can be withdrawn without penalty in times of extreme need. Many People here have taxable investment accounts they can draw from as well. Most here who choose not to aggressively pay down their mortgages aren't willing to take the net loss of return for several years for that peace of mind. And some of us don't intend to live in our current homes for the rest of our lives, thus paying down the mortgage early becomes more conservative than our investment strategies dictate.

Finally, most of us realize that what we personally do isn't the answer for everyone, and rarely do we make broad reaching assumptions about the group just because we don't do it a certain way.
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Old 01-20-2014, 09:01 PM   #28
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Not sure that is true. I think most on here have significant emergency funds that can cover the mortgage for a long while if they lose their jobs. People here understand that Roth contributions can be withdrawn without penalty in times of extreme need. Many People here have taxable investment accounts they can draw from as well. Most here who choose not to aggressively pay down their mortgages aren't willing to take the net loss of return for several years for that peace of mind. And some of us don't intend to live in our current homes for the rest of our lives, thus paying down the mortgage early becomes more conservative than our investment strategies dictate.

Finally, most of us realize that what we personally do isn't the answer for everyone, and rarely do we make broad reaching assumptions about the group just because we don't do it a certain way.
And some of us decide to use some money to pay down the mortgage because 4% guaranteed return fits in with our investment plan as a fixed income analogue and we own a rental property. Then use the rest of the investable income to invest in the market. I like diversification.

Being mortgage free is an enormous psychological and financial asset going into ER. Could I have done better by investing in mutual funds.....well given the ups and downs since 2000 that's debatable. Being mortgage free since 2009 allowed me to put lots of money into a rising market.
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Old 01-20-2014, 09:27 PM   #29
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Not sure that is true. I think most on here have significant emergency funds that can cover the mortgage for a long while if they lose their jobs. People here understand that Roth contributions can be withdrawn without penalty in times of extreme need. Many People here have taxable investment accounts they can draw from as well. Most here who choose not to aggressively pay down their mortgages aren't willing to take the net loss of return for several years for that peace of mind. And some of us don't intend to live in our current homes for the rest of our lives, thus paying down the mortgage early becomes more conservative than our investment strategies dictate.

Finally, most of us realize that what we personally do isn't the answer for everyone, and rarely do we make broad reaching assumptions about the group just because we don't do it a certain way.
The problem is that you are assuming that he has significant Roth contributions or taxable investment to use in case of emergency. I am not saying he doesn't but he is only 28.

I agree with "nun" diversification is important in case of adversity. Also someone can argue that since we had an amazing 2013 and if he is putting all his money on the market he will be buying inflated assets. We might be do for a correction....
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Old 01-20-2014, 09:41 PM   #30
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...
I think having a house paid off opens a world of opportunities. You can take more risk and be more confident since you have a roof over your head no matter what happens. ...
This really overstates the case.

First off, a paid off mortgage does not guarantee 'you have a roof over your head no matter what happens'. You still have taxes, maintenance, utilities, etc.

And second, not paying-off the mortgage means you have that cash on hand to carry you through a possible bad period. The monthly payment for a $200,000 mortgage at 4% is less than $1000. So that cash could carry you through over 200 months of loss of income (over 16 years, assuming zero returns!). So where is the 'risk of losing your house'? In fact, having that cash cushion is more likely to give you more flexibility in bad times - you can buy food, or a new roof, or pay the taxes with that cash. If you pre-pay, that money is sunk, and not available for other needs.

-ERD50
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Old 01-20-2014, 10:24 PM   #31
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This really overstates the case.

First off, a paid off mortgage does not guarantee 'you have a roof over your head no matter what happens'. You still have taxes, maintenance, utilities, etc.

And second, not paying-off the mortgage means you have that cash on hand to carry you through a possible bad period. The monthly payment for a $200,000 mortgage at 4% is less than $1000. So that cash could carry you through over 200 months of loss of income (over 16 years, assuming zero returns!). So where is the 'risk of losing your house'? In fact, having that cash cushion is more likely to give you more flexibility in bad times - you can buy food, or a new roof, or pay the taxes with that cash. If you pre-pay, that money is sunk, and not available for other needs.

-ERD50
So would you recommend just staying in cash. What if you buy an investment that loses. Paying off a mortgage has always been a useful saving discipline, adding a few dollars more each month seems like a prudent ( if conservative) investment. Both camps have good arguments; there's the guaranteed return and future security of paying down the mortgage, and liquidity and potential gains of investing in the market. Why not divide your money between both.
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Old 01-20-2014, 11:18 PM   #32
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So would you recommend just staying in cash.
I don't recommend anything - I just think things should be looked at for what they are.

Quote:
What if you buy an investment that loses.
How is this any different from any other equity investment?

Quote:
Paying off a mortgage has always been a useful saving discipline, adding a few dollars more each month seems like a prudent ( if conservative) investment.
?

If you have the money to pre-pay, you have already 'saved it'. Now it is a question of locking it up in your home equity, or investing it.


Quote:
Both camps have good arguments; there's the guaranteed return and future security of paying down the mortgage, and liquidity and potential gains of investing in the market. Why not divide your money between both.
I think most people already divide it between the two. They have some investments and they may have a mortgage. I'm not talking about putting all your net worth into a mortgage.

-ERD50
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Old 01-21-2014, 01:56 AM   #33
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I, too, have a similar conundrum and have been told on this forum that your mortgage is not a guaranteed 4% return because of inflation. Your future dollars will be worth a lot less and your mortgage will stay the same. Food for thought.
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Old 01-21-2014, 06:57 AM   #34
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Keep in mind that if you itemize your taxes you can take the Mortgage Interest Deduction which actually has the effect of making you interest rate that much lower (depending on your tax bracket). This could make that 4% interest rate more like a 3% effective rate which makes it that much more likely that you can find better alternatives by NOT paying down the mortgage.

Examples of safer than the stock market but higher yield might include P2P lending or rental real estate. I am using both of those while maintaining our 15 year mortgage at 3%.
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Old 01-21-2014, 07:09 AM   #35
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This really overstates the case.

First off, a paid off mortgage does not guarantee 'you have a roof over your head no matter what happens'. You still have taxes, maintenance, utilities, etc.

And second, not paying-off the mortgage means you have that cash on hand to carry you through a possible bad period. The monthly payment for a $200,000 mortgage at 4% is less than $1000. So that cash could carry you through over 200 months of loss of income (over 16 years, assuming zero returns!). So where is the 'risk of losing your house'? In fact, having that cash cushion is more likely to give you more flexibility in bad times - you can buy food, or a new roof, or pay the taxes with that cash. If you pre-pay, that money is sunk, and not available for other needs.

-ERD50
Yeah you can still loose your house even if is paid off. But usually the largest expense on someones budget is the mortage; is usually way higher then someones bill, taxes and maintenance. Having no morgage decreases risk since is easier to come up with the money for the other smaller expenses. Also if everything goes to crap at least you have something to show for.

I remember that someone did the calculations of paying the mortgage early vs investing and in my case i would have 30-40k more at retirement with a 7% return. Obiously the longer someone works the larger the difference assuming continious employment. To me the extra 30-40k at retirement is not worth the peace of mind a paid off house brings. Also like i stated before not having a house payment allows me to go after high risk high return investments that could make up the cash difference.
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Old 01-21-2014, 07:17 AM   #36
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I am 28 years old and my only debt is my mortgage (30yr at 4%. Have about 98k remaining). After maxing out all my tax advantaged vehicles for 2014, should my focus be to direct additional monies to principal on this mortgage?
I've been struggling with this recently too, but I have about 15 years on you so my circmstances are a bit different. That being said, I'll tell you what I've been considering. What I owe on my mortgage accounts for about 10% of my liquid investments. Since the runup of 2013 I've recently considered pulling some off the table to have enough to pay off the mortgage in cash (savings acct or short term bond fund). I could do this and still maintain my equity/FI allocation, just that the FI part would have alot more cash in it. Since I am still working, I see no reason to pay off a very low (3.125%) mortgage unless I need to increase cash flow, but having the $$ in cash (like) and not subject to the whims of the market gives me the option to pay off the mortgage immediately if I need to increase cash flow due to a job loss. Now, by not paying off the mortage I lose the 3% return (closer to 2% with tax advantage). I could put it into penfed 5yr cd at 3% and it would be basically a wash. Haven't done it yet, and don't want to pay the tax on cashing out, but then that's the "tax tail wagging the investment dog" as one of our posters here likes to say.

So, after that long winded reply, I guess I'm saying maybe your best bet is not to actively pay it off, but if you are leaning this way, try to save enough in somewhat safe place to pay it off. That way if an opportunity presents itself (market crash, etc) you are liquid enough to take advantage. Disadvantage is you miss you out on guaranteed return of paying off your mortgage (minus whatever return you can get for cash) and you will miss out on market returns with this money. If you are sure that your job is *very* secure, I would just invest in the market with a reasonable asset allocation and forget about paying down the mortgage for the time being, or at most, pay a little extra on the mortage to mimic a 15 or 20 year term.
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Old 01-21-2014, 07:30 AM   #37
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One other factor to consider is your risk tolerance with your investment in real estate. Having a mortgaged property is essentially a leveraged RE investment. If it goes up in value, you have a substantial upside based on the value/debt ratio. I used this very effectively in the 1990's and early 2000's. The down side, however, is also leveraged so you can go to 0 equity (or negative) very quickly as many found out in 2008-2010.

My opinion, for the little it is probably worth, for someone at your age is to just keep paying your mortgage on schedule and invest the rest. I think we are at reasonable valuations on real estate in most areas so the upside benefit likely outweighs the the downside risk. If true you will get the leveraged benefit on the house as well as market returns on the other investments.
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Old 01-21-2014, 08:07 AM   #38
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Anytime you have debt, you are leveraged. What you are really asking is how best to apply that leverage. Thats a pretty easy decision to make.
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Old 01-21-2014, 08:12 AM   #39
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For us, paying off the mortgage in 12 years, so 18 years early, turned out to be a wise move. If you make extra principal payments and keep track of your progress, you have better view.

Once paid off, we used the extra cash flow for college and Real estate taxes.

Each individual has different circumstances.
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Old 01-21-2014, 08:19 AM   #40
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Assuming you have an emergency fund and have maxed all your advantaged accounts (roth?) I would go ahead take down the mortgage.

Alternatively, depending on your cashflow, I may look at a REFI, If you think you can pay it off in a 5 years, Penfed has a HEL @2.49% where the only closing cost is an appraisal ($300-$500). The payment would be $1,740 per month.
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