Only debt is mortgage

[kikechico]

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.

GL

 

[nash031]

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 People here understand that Roth contributions can be withdrawn without penalty in times of extreme need.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.

 

[nun]

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 People here understand that Roth contributions can be withdrawn without penalty in times of extreme need.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.

 

[kikechico]

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....

 

[ERD50]

...
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

 

[nun]

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.

 

[ERD50]

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.

What if you buy an investment that loses.

How is this any different from any other equity investment?

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.

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

 

[FIREontheMountain]

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.

 

[Fishingmn]

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%.

 

[kikechico]

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.

 

[panhead]

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.

 

[Willers]

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.

 

[Gatordoc50]

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.

 

[target2019]

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.

 

[Sesq]

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.

 

[Bestwifeever]

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)

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.

 

[Willers]

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.

 

[nun]

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!!

 

[Gatordoc50]

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.

 

[NW-Bound]

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.

 

[ERD50]

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. ...

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.

-ERD50

 

[arky]

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

 

[Mulligan]

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.

 

[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

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

 

[nun]

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.