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Pay down mortgage or keep investing?
Old 03-24-2017, 11:57 AM   #1
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Pay down mortgage or keep investing?

My wife and I currently owe $298,652 on our house with an interest rate of 4.625%. I'm 33 and she's 29. Household income at about 200k/year.

We have no other debt.
~91k cash
~118k retirement accounts

We do not get any employee matching at our current j*bs.

My question is, would you all recommend continuing to max out our retirement accounts or payoff the mortgage? I would love to not have a mortgage payment in about 3 years or so. We bought the house in 2014 for about 350k and I'm sick of paying the interest and not kicking down the principle.

Thanks for your advice.
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Old 03-24-2017, 12:02 PM   #2
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At that interest rate I'd be torn. It's high enough that I'd want to pay it down but low enough that aggressive investments (like you're probably in at your age) would likely outperform the interest rate. Given that, I'd say do whatever makes you "feel better" as the "numbers" don't suggest an obviously more advantageous choice to me.
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Old 03-24-2017, 12:03 PM   #3
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Sub-question...

Would you all suggest a re-fi? I'm pretty sure we're currently paying mortgage insurance. This is the first house we've bought.
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Old 03-24-2017, 12:09 PM   #4
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Sub-question...

Would you all suggest a re-fi? I'm pretty sure we're currently paying mortgage insurance. This is the first house we've bought.
I sure would look into it. That seems like a high rate. Bankrate gives me a 3.125 rate, no points, for a 300K 15 year fixed refi loan on a 350K property (credit scores above 740).

That tool was accurate when we refi'd last October.

(E.T.A.: 3.143 apr, monthly P&I 2090; and you have the cash to pay down to an 80% loan.)
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Old 03-24-2017, 12:13 PM   #5
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Our house has been paid off for seven years now. It has been wonderful and I wish I had done it earlier.
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Old 03-24-2017, 12:46 PM   #6
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There are some FA that preach don't tie your money up in a paid off house when you can invest that same money and get better returns and have a big tax write-off also. While there is some merit, high mortgages make me nervous in case of future unemployment, and it could by the FA are just being self-serving so they can get your money to invest.

Because I figure 'you have to live somewhere', and have never used the house equity for retirement planning, we actually sort of followed that concept our latest house purchase. We kept a very low house payment instead of dumping everything in the house and used the remaining funds for retirement investments.
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Old 03-24-2017, 01:07 PM   #7
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I paid my mortgage off at 32yo. That was as 9.5%. rates were higher in the early 90's.
2 questions.
1 - what is your effective rate on your mortgage after itemizing deductions? -- I'm assuming you do this.
2. What are you investment dollars invested in?

What are you going to do with the freed up income if you pay off your mortgage?
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Old 03-24-2017, 01:31 PM   #8
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I paid my mortgage off at 32yo. That was as 9.5%. rates were higher in the early 90's.
2 questions.
1 - what is your effective rate on your mortgage after itemizing deductions? -- I'm assuming you do this.
2. What are you investment dollars invested in?

What are you going to do with the freed up income if you pay off your mortgage?
1 - I don't know this number, I don't calculate it.

2 -
U.S. Stocks 73.97%
Intl Stocks 14.34%
U.S. Bonds 4.43%
Alternatives 3.41
Cash 2.47%
Intl Bonds 1.39%
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Old 03-24-2017, 01:32 PM   #9
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I would refi and get the equity low enough to avoid PMI. I'm in the "carry a mortgage" group. I think having all that equity locked into an illiquid possession is silly, as long as you have the capability to pay it off at will. It's a matter of choice, obviously, but I would at least run the numbers and see how much more manageable your payment would be at ~1% lower interest and no PMI. Make sure you save/invest the difference, as opposed to increasing your spending. If you don't have the discipline to do that, then pay off the mortgage.

Of course, if you do pay off the mortgage, you still need to save/invest the difference. Having a mortgage is a good way to learn to save if you don't already know.
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Old 03-24-2017, 03:05 PM   #10
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At your age, I would prioritize maxing out retirement savings over paying down the mortgage. As others have suggested, I'd refi down into the low 3% area and get rid of mortgage insurance. Then use the monthly savings to invest even more aggressively. If it makes you feel better, you could also make additional principal payments. This will accelerate your descent down the amortization schedule where more of your payments go toward principal instead of interest. But assuming you can get down to ~3.1%, plus the interest deduction, I'd still be leaning toward plowing money into stocks.
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Old 03-24-2017, 03:25 PM   #11
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I'd refinance to a shorter term to get the lowest rate you can and pay it off aggressively. After maximizing 401k etc maybe split any extra cash you have 50/50 between investments and extra principal payments. Think of the extra mortgage payment as a 3% guaranteed savings account.
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Old 03-24-2017, 03:29 PM   #12
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At your income level, you should maximize any tax deductible retirement accounts that are available to you. After that, pay off the mortgage.

Assuming you are in the 25% marginal tax bracket, you get a $25 tax reduction for every $100 that you contribute, and in my opinion it would be foolish to leave that money on the table.
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Old 03-24-2017, 03:34 PM   #13
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Originally Posted by Cobra9777 View Post
At your age, I would prioritize maxing out retirement savings over paying down the mortgage. As others have suggested, I'd refi down into the low 3% area and get rid of mortgage insurance. Then use the monthly savings to invest even more aggressively. If it makes you feel better, you could also make additional principal payments.
What he said. Since you have perhaps at least 20-25 working years ahead of you, maybe 30 or more if you like your jobs, the investment gains will almost certainly be worth more in the long run than paying down the mortgage. And as mentioned you could do some of both and start making less aggressive additional principle payments to lessen the amount of interest over the life of the loan.
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Old 03-24-2017, 03:42 PM   #14
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Your mortgage rate is a little high, so refinancing may be a good idea. You should check comps beforehand to see if you have exceeded 80% LTV so you can dump your PMI. If not below 80% LTV, the benefits will be fewer. And look for a no-fee refi, my credit union (Logix CU) offers these if you stay with the mortgage for at least 3 years.

When considering where you should invest new funds (paying down mortgage or maxing out retirement accounts) you have to think about the time value of money. A fixed rate mortgage will be cheaper in the future than it is now. Inflation will devalue the money, so you are effectively paying less in future dollars than you are now. This means keep the mortgage.

Conversely, your investments will also be worth less, but they have the benefit of compounding by dividend reinvestment and/or capital gains. This compounded growth can be substantial and the earlier you start, the greater it grows. This also means keep the mortgage.

Regardless of which you choose, you should put enough in your retirement accounts to get the entire company match. That's free money right there.

You could also consider putting funds in a Roth IRA and a taxable account to give you the greatest versatility when you eventually start drawing from these accounts. Having everything in a tax-deferred account really limits you tax-wise.
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Old 03-24-2017, 08:26 PM   #15
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~91k cash
//snip

Make that cash work for you - invest it.
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Old 03-24-2017, 08:28 PM   #16
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you should put enough in your retirement accounts to get the entire company match. That's free money right there
Awesome advice, especially after the OP clearly stated that no employer match is being offered.
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Old 03-24-2017, 08:53 PM   #17
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Unless you have enough cash to pay it off, then maybe you can pay it off, but in your case you don't really. You will still have a mortgage.
I have a very low mortgage and I have no intention of paying it off. I also just read recently that Warren Buffet bought a house in my area back in 1970 and he had a mortgage. The money he gained from investing that money grew to an enormous amount, outweighs his original mortgage. Wise man.
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Old 03-25-2017, 03:00 AM   #18
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Lots of pro-"carry the mortgage" posts...
on the other hand, where else can you get a "guaranteed" return of 4.625% (what you get when you pay down your mortgage). Where can you get the peace of mind that outright ownership gives you?

The question really is, what are interest rates going to look like for the next 20 years (however long your mortgage is). Way above 4.65? (Where you would look brilliant for keeping the mortgage?) or lower than today (Where refinancing makes sense)?
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Old 03-25-2017, 04:54 AM   #19
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We took a long term view and decided to keep our home mortgage into retirement because the interest rate was below both the rate of inflation and the yield on other investments. One of our motivations was that debt acts as a somewhat effective hedge against inflation which, over the longer term, worries us more than market volatility. It's worked well for us. The last payment on on our home is about 3.5 years away. Depending on interest rates at the time and available investments, our current thinking is to borrow against our home and buy another investment property.

YMMV.
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Old 03-25-2017, 05:09 AM   #20
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Originally Posted by dsp0725 View Post
My wife and I currently owe $298,652 on our house with an interest rate of 4.625%. I'm 33 and she's 29. Household income at about 200k/year.

We have no other debt.
~91k cash
~118k retirement accounts

We do not get any employee matching at our current j*bs.

My question is, would you all recommend continuing to max out our retirement accounts or payoff the mortgage? I would love to not have a mortgage payment in about 3 years or so. We bought the house in 2014 for about 350k and I'm sick of paying the interest and not kicking down the principle.

Thanks for your advice.
One advantage to paying off mortgage is that you don't have to think about whether it makes sense to do so.


How much tax benefit do you get from the mortgage interest?

Simple solution is to pay next month's principal with this month's payment. you'd get done twice as fast.

You can always stop doing this, or make two additional principal payments to speed up the process of paying down. This is what we did.
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