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Old 01-21-2014, 08:24 AM   #41
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Interesting, from 3 Easy Ways to Pay Off Your Mortgage Early - daveramsey.com (I quote here only the first way, which is to pay extra; the second is to refinance and the third is to downsize)

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Each time you pay extra on your mortgage, more of each payment after that is applied to your principal balance. Here are some options for paying extra and examples of how extra payments will affect the average $220,000, 30-year mortgage with a 4% interest rate:

Make an extra house payment each quarter, and you’ll save $65,000 in interest and pay off your loan 11 years early.
Divide your payment by 12 and add that amount to each monthly payment, or pay half of your payment every two weeks, also known as bi-weekly payments. You’ll make one extra payment each year, saving you $24,000 and shaving four years off your mortgage.
If the OP has extra cash he might do one of the above strategies, as the savings in interest might be more than the extra payments would return if they were invested elsewhere. And the above is for a 4 percent rate--saving would be more if rate were higher, of course.
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Old 01-21-2014, 10:40 AM   #42
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Originally Posted by Gatordoc50 View Post
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.
Very true that debt means leverage. It may be an easy decision for you, but that might not be true of others.
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Old 01-21-2014, 10:53 AM   #43
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Very true that debt means leverage. It may be an easy decision for you, but that might not be true of others.
I could never make that decision so I just did both. I now find myself with no mortgage on my house and income property and enough available investments to ER at 52. Would I be better off if all those extra mortgage payments had gone into the market......I'll never know because so much depends on timing and where I'd have invested. Am I happy to be ERing with no mortgage, Hell yes!!
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Old 01-21-2014, 11:31 AM   #44
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Originally Posted by Willers

Very true that debt means leverage. It may be an easy decision for you, but that might not be true of others.
Sorry, but this OP's question is a simple one.
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Old 01-21-2014, 11:47 AM   #45
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The OP does not say how much savings he's having right now, but volunteered that the mortgage is $98K.

If he has less than $100K in savings, it is better to build that up some more rather than to pay off the mortgage. The reason is that investments not tied up in the house are a lot easier to tap in case of unemployment or financial difficulty scenarios, due to illness or auto accidents, etc...

On the other hand, if the OP has, say $500K saved up, then he can ponder the return of additional savings vs. the 4% mortgage rate.
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Old 01-21-2014, 12:11 PM   #46
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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. ...
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Yeah you can still loose your house even if is paid off. But usually the largest expense on someones budget is the mortgage; is usually way higher then someones bill, taxes and maintenance. Having no mortgage 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.

...
You are framing the situation as so many 'pro-pay-off' people do - they totally ignore that if you didn't pre-pay, you have the money in a liquid account.

So just like my earlier example - a $200K mortgage is < $1K monthly payment, that $200K will make lots of emergency payments of more than just the mortgage. Then you recover later. So please give me a realistic example where paying off a reasonable sized/leveraged mortgage would decrease the risk of losing your home.

If someone decided that a pre-pay is the right thing for them, I think the way to do it is to save up the balance, and pay it off all at once. The problem with paying a little each month is that you no longer have that liquidity available, and you have not reduced your cash flow - that won't happen until the very last payment.

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Old 01-21-2014, 01:00 PM   #47
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You are framing the situation as so many 'pro-pay-off' people do - they totally ignore that if you didn't pre-pay, you have the money in a liquid account.

So just like my earlier example - a $200K mortgage is < $1K monthly payment, that $200K will make lots of emergency payments of more than just the mortgage. Then you recover later. So please give me a realistic example where paying off a reasonable sized/leveraged mortgage would decrease the risk of losing your home.

If someone decided that a pre-pay is the right thing for them, I think the way to do it is to save up the balance, and pay it off all at once. The problem with paying a little each month is that you no longer have that liquidity available, and you have not reduced your cash flow - that won't happen until the very last payment.

-ERD50
What a bunch we have on this forum !

We can not only argue "payoff the mortgage versus invest" scenario, we can even argue the best way to payoff a mortgage and the best way to invest
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Old 01-21-2014, 01:11 PM   #48
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What a bunch we have on this forum ! We can not only argue "payoff the mortgage versus invest" scenario, we can even argue the best way to payoff a mortgage and the best way to invest
Very few have been converted to the other side on this discussed topic. I am probably one of the few that was converted. I don't recognize my home equity as an asset, and just view the house as a monthly bill like the cable. Creative mental accounting maybe, but it works for me, and with a principle payment of $500 a month we are not talking about a budget buster either.
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Old 01-21-2014, 02:03 PM   #49
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What a bunch we have on this forum !

We can not only argue "payoff the mortgage versus invest" scenario, we can even argue the best way to payoff a mortgage and the best way to invest


Was I 'arguing'? I presented some information - do you have something to add? Was something I said misleading?

Geez, if we don't discuss stuff, how do we learn? I have had my mind changed by things I've read here and elsewhere. That's the value to me.

-ERD50
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Old 01-21-2014, 02:04 PM   #50
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I see extra mortgage payments as diversification away from the stock market. I don't need the liquidity of the money I put towards the mortgage, if I did I wouldn't make the payments. A prolonged market down turn is a scenario when money put towards paying off the mortgage looks pretty good. Is that probably or just possible. Who knows. Money put towards the mortgage satisfies the pessimist in me and the money I put into equities satisfies the optimist.
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Old 01-22-2014, 02:20 AM   #51
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We just went through this and decided to pay ours off last week.

We had refinanced a couple of times but each time we went for a 30-year mortgage, and with the plan to invest the difference between a 15- and 30-year mortgage payment into an Index fund. (We were tempted to take the 15-year but thought we'd risk market payback.) Took us longer than we thought, but we still managed to pay off a 30-year mortgage in ~20 years.

We have adequate liquidity or we probably wouldn't have considered this.
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Old 01-22-2014, 10:31 PM   #52
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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....

I didn't assume anything, you apparently did though. You said you thought everyone here was essentially overly risky in that they didn't account for job loss, and then made blanket statements that don't apply to everyone. I was only pointing out the fallacy of your statement because not everyone here doesn't think about job loss, they just compensate for it in ways other than paying down a mortgage aggressively.
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Old 01-22-2014, 10:34 PM   #53
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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.

Absolutely. Kike just made it sound like anyone who doesn't choose that path hasn't thought about the downside risk of not paying it down. I and many others HAVE thought about it and determined there were better ways (for us) to benefit from our mortgages.

People make their own decisions. Just because they don't make the same one you do doesn't mean they haven't thought it through, or are taking too much risk.
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Old 01-23-2014, 07:13 AM   #54
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You're doing great for 28! I'm not sure how much you're investing for retirement (is it a 401K? Generous match? Self - employed? etc..). I saw in another thread that you have hit 200K NW, but I'm not sure if that includes your home equity. Some things for you to consider. Do you have an adequate emergency fund? How secure is your job, and how likely to need to relocate in the future? How long do you plan to stay in the house? Would it make a good rental if you decide to move and/or how's the housing market?

Generally, I'd say a small mortgage isn't the biggest concern of a person of your age. It would seem better to invest, after saving adequate emergency funds, especially with a low rate and tax deductible interest. But, if being totally debt free is very important to you, then you should do that.

I just paid off a low interest mortgage, but I did this with the proceeds of another house that had been my primary residence. I'm also very close to retirement (this year or next), so I won't have as much taxable income soon. And, getting rid of all debt before retiring was important to me.

Whatever you decide, it sounds like you're off to a great start!
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Old 01-23-2014, 08:41 AM   #55
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If someone decided that a pre-pay is the right thing for them, I think the way to do it is to save up the balance, and pay it off all at once. The problem with paying a little each month is that you no longer have that liquidity available, and you have not reduced your cash flow - that won't happen until the very last payment.
-ERD50
I agree with this line of thinking. I recently refinanced from a 15 year mortgage to a low rate 30 year mortgage. I've basically been investing the difference in payments. I think of those investments as my mortgage payoff fund, but it also serves as an emergency fund. So I really don't have to make the mortgage payoff decision for several years when that account is larger than the balance of my mortgage. I like the flexibility.

The only thing I'd add, is that this method does require discipline. At this point, I COULD decide that those funds are now useful for going and buying a new car that I don't need. I think some folks make extra payments for that exact reason....it's permanent "savings" that they can no longer (easily) get their hands on that money.
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Old 01-23-2014, 04:13 PM   #56
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Invest it while you have time on your side. That 4% interest mortgage will seem like a steal in 10 years, let alone 30 years. If you're still itching to get rid of it (and the tax write-off that comes with a mortgage) you can always pay it down when you're older and earning a higher salary. When it comes to investing it's hard to make up for lost time in the markets.
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Old 01-23-2014, 04:38 PM   #57
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Invest it while you have time on your side. That 4% interest mortgage will seem like a steal in 10 years, let alone 30 years. If you're still itching to get rid of it (and the tax write-off that comes with a mortgage) you can always pay it down when you're older and earning a higher salary. When it comes to investing it's hard to make up for lost time in the markets.
The tax write-off is a good point to consider. I no longer have the write off, and I find it sorely missing when it comes time to calculate my tax bill each year. I still enjoy sleeping well at night not having a mortgage, but I also keep thinking about what I can do to reduce my taxes. The net cost after taxes of the interest expense on a mortgage is pretty darn cheap, so unless the stock market really tanks over the next couple of decades, it will prove to be a wise investment to take the extra money and invest it in the markets.

Of course, as the familiar saying goes: "past performance is no guarantee of future performance..."
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Old 01-24-2014, 05:28 PM   #58
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Discussing leverage, Warren Buffett once said "if you're smart you don't need it, and if you're dumb you shouldn't be using it."
If a person is borrowing money against their home for the purpose of investing in the stock market, I think they'd be wise to follow Mr. Buffett's advice. There are no guarantees in the market and with the government and Fed keeping rates artificially low, no one can predict what the future holds for the stock or bond markets with any certainty.
As far as the tax savings are concerned, paying $1.00 in interest to hopefully save $0.28 in taxes just doesn't make sense. Once a mortgage is paid off, the payment can then be used to feed the investment portfolio each month.
Of course for the younger folks who don't have the funds to pay off the mortgage, paying ahead can save thousands over the life of the loan, but they should also fund an emergency fund and retirement accounts where they can. Someone living below their means should be able to add funds to each.
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Old 01-25-2014, 10:15 AM   #59
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great post.
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Old 01-25-2014, 11:44 AM   #60
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It's always entertaining to read the pro and con opinions relating to mortgages.
So many folks are so strongly attached to one view or the other!

The fact is, at today's low interest rates, it's unlikely to matter whether someone pays off a mortgage early or not in terms of the road to FIRE given that either scenario is handled prudently.

It's hard to understand why there are such strong feelings one way or the other when the results of either path have similar outcomes over the long term. Again, assuming either scenario is handled prudently.
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