Only debt is mortgage

[trustee]

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?

 

[Tortoise]

Good for you, Trustee. It appears you have gotten yourself in a good financial position. My wife and I used additional money after maxing tax advantaged savings to pay off our mortgage early (in 9 years), but we also saved some money and invested in a taxable account. You may be able to make more than 4% with investments, but no one knows going forward. It comes down to whatever makes you feel good. We sleep well not having any debt.

 

[Meadbh]

It depends on your perspective. On the one hand, it's a great feeling to be debt free. Putting your spare cash against the mortgage in 2014 will get you a guaranteed return of 4%, which is more than you can get by investing it in fixed income and will shorten the life of your mortgage. The reward of no mortgage payment is far in the future. On the other hand, I have seen projections that market returns on US equities will likely be in the 7% ballpark in 2014. If that is true, investing in equities might be a good way to go, especially at a young age. Or you could do a bit of both. Either way, saving is a good thing.

 

[Coffee Mavin]

I would invest in index funds and keep the lowest rate loan money you will ever see. I do not advocate pre-paying tiny portions of mortgages at all. I recommend putting extra funds into investments & when the investments exceed the remaining value of the mortgage, make a decision on whether you want to pay it all off or not.

 

[nun]

Pay down mortgage vs invest is an age old argument. I could never decide between the two so I used half my investable cash to pay down the mortgage and half to invest in low cost index funds. The result is I now have no mortgage and a nice after tax investment portfolio. Paying down the mortgage is a 4% guaranteed return....you'd be hard pressed to find anything better in fixed income today and the rest of your money can go into equities.

 

[Bestwifeever]

Really nice, trustee. At your age I would definitely keep the mortgage and add to the nest egg. When you look at your net worth, the house and the mortgage might cancel each other out at worst (of course the equity in the house beyond the mortgage is a positive), but your portfolio will most likely increase much faster than your house will appreciate. And you could easily pull $$ out to put toward the mortgage any time.

Conventional wisdom has been to not have a mortgage in retirement (many here disagree even with that strategy), but at your age? Keep it IMO.

DS, a couple years older than you, just bought his first house and told me they went with the 30 yr fixed at 4.5 percent and that paying it off isn't in their mind for quite a while.

 

[trustee]

Thanks for the tips guys! I have always hated carrying any debt so that's why I was thinking about this. But at the same time, a 4% rate isn't all too bad.

 

[JDARNELL]

I assume if your only debt is your house at your age you also have or have the ability to get quick cash if needed. If you could positive cashflow your house in the event you decided to rent it while say you took a sabbatical, change of careers, priorities, etc in the next few years I would say let the mortgage ride for now. Now having said that I am in the pay off camp in general however having some extra pocket money when opportunities a rise is a good thing. Congrats on where you are before 30.

JDARNELL

 

[HawkeyeNFO]

Imagine if you had extra money a year ago, and put it all into the house to get it paid off. You'd be now kicking yourself because you lost out on gains that the market has provided to investors. Historically, 4% is far below what the market has returned in the long term, and for that reason, I say pay the minimum, and invest for the long term.

At your age, you should be investing aggressively, and the other thing to consider is that you may not be in this house forever, and might need to sell the house. Keep your money flexible. Once you pay into the house, that money is locked up.

 

[JOHNNIE36]

Bestwifeever, I love that avatar! "Is this the party to whom I'm speaking?" Sometime back on TV, I some reruns of Laugh In. That show was really funny.

 

[trouthog]

ok from a different camp, this might change minds if it applies. Example: $100k balance mortgage @ 3.85-4.0% int. @ $1700. Per Month. Pay off the 100k if you have the money and every month you pocket $1700. Per month. I look at this $1700.00 as monthly income... if paid off. Am I fooling myself? Vs. $7-10K gain per yr in the market (taxable or not) ...possibly at risk?
$1700.00 per month = $20,400 per yr. pretty descent income for some. Reinventing an asset. Look forward to anyone's thoughts.
Take care

 

[ERD50]

ok from a different camp, this might change minds if it applies. Example: $100k balance mortgage @ 3.85-4.0% int. @ $1700. Per Month. Pay off the 100k if you have the money and every month you pocket $1700. Per month. I look at this $1700.00 as monthly income... if paid off. Am I fooling myself? Vs. $7-10K gain per yr in the market (taxable or not) ...possibly at risk?
$1700.00 per month = $20,400 per yr. pretty descent income for some. Reinventing an asset. Look forward to anyone's thoughts.
Take care

Seems like it.

A $100K mortgage at 4% (your high end) is a $477 monthly payment, and even the first payment is $333.33 in interest, the principal is a payment to yourself. So roughly $3900 per year, not $20,400.

-ERD50

 

[Mulligan]

Seems like it. A $100K mortgage at 4% (your high end) is a $477 monthly payment, and even the first payment is $333.33 in interest, the principal is a payment to yourself. So roughly $3900 per year, not $20,400. -ERD50

My mortgage balance is a bit higher with a 3.875% rate when I refinanced about a year ago. I initially was making extra principal payments, but quickly stopped as being single I am able to cobble that interest money with other deductions to about double my tax deductions over filing standard. If I get this paid off too quickly, I would lose my ability to itemize. So now I just pay the minimum until it does me no good, then at that point I may pay it off.

 

[Brett_Cameron]

Do you have an emergency fund? I would establish that before mortgage pay down.

Consider saving and investing the money you would use to pay down the mortgage. Eventually you could earn enough to pay off the mortgage.

You set your priorities. Figure out if paying off the mortgage is more important than a faster rate of wealth building.

 

[woodguy00]

I like the 'split the difference' idea. Assuming a solid emergency fund and maxing out all tax advantaged investments, I'd split the monthly estimated excess between a larger automated mortgage payment and a monthly investment into a total market index fund.

 

[Dash man]

I agree you need to be sure you have an emergency fund before you pay off the mortgage or invest in stocks. Once that is set, consider the risk of your income. If you are in a career that has a substantial risk of layoffs, I'd sleep better with the house paid off. If you're pretty secure in your job, the numbers would be in your favor to invest. Just be sure to have a cash emergency fund of at least a year's expenses set aside.

 

[mistershankly]

Great job on the discipline and planning to put yourself in such an advantageous position. I grappled with this dilemma and currently sit with a paid off home, as I decided to pay it off rather than invest the money elsewhere. My driving philosophy that helped with the decision came from something I read (or heard, can't remember) by Dave Ramsey... if I had a home that was completely paid off, would I borrow against it to invest in the stock market? For me at the time, it was a resounding 'no'. The key factor that this question brings into play is the concept of risk. Where does your perceived risk reside based on your life circumsances... losing out on future gains in stocks/bonds or having the roof over your head be jeopardized by some unknown threat in the future? I think everyone is different in their perspective and approach to this decision and there is a valid argument to either sides of the decision depending on your life situation (e.g. family, job stability, years until retirement, etc). I don't think it's as cut and dry by the numbers, and you have to account for all the variables in your particular circumstance. Good luck to you!

 

[nun]

Great job on the discipline and planning to put yourself in such an advantageous position. I grappled with this dilemma and currently sit with a paid off home, as I decided to pay it off rather than invest the money elsewhere.

Why does this have to be an "either or" choice. Bet on both horses and split the money between paying down the mortgage and investing.

 

[ERD50]

Why does this have to be an "either or" choice. Bet on both horses and split the money between paying down the mortgage and investing.

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

 

[mistershankly]

Why does this have to be an "either or" choice. Bet on both horses and split the money between paying down the mortgage and investing.

Great point. I guess it all depends on the circumstances. In my case, I was caring for a parent whose health was deteriorating and wanted to ensure that moving places of residence would not be required. People living in a desired school district might also want to secure their location without worrying about having to relocate due to a turn in their income as related to paying their mortgage.

Nevertheless, I think your suggestion is definitely the third option here and a valid consideration.

 

[Ready]

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.

 

[nun]

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.

 

[trouthog]

Well Thanks for the great options. What they didn't teach us at Harvard.
This forums wisdom is amazing.

 

[howdidigetthisold]

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.

 

[RobLJ]

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.