Paying off the mortgage early grows in popularity

[REWahoo]

However, I understand the logic of less bills/debts in RE. If you sleep better knowing you don't have a mortgage, drive on. That income stream to pay the mortgage has gotta be solid as steel.

+1

If I had a pension to go along with my SS check I might feel differently about having a mortgage in retirement. For me, doing away with the mortgage prior to pulling the w*rk plug (I delayed a year and plowed some serious cash into paying that sucker off) takes a lot of pressure off the return I have to get from my investments.

The ability to invest conservatively in retirement is better than Lunesta...

 

[Walt34]

For us paying off the mortgage was purely an emotional decision. There a plenty of valid, reasonable, logical reasons to carry one if doing so is not a strain.

But to us outstanding debt feels like a sword hanging overhead, or an unfulfilled obligation, or something like that and we dislike it intensely. And there is satisfaction of being able to say (to ourselves, we've found it best to keep quiet about it) "we don't owe nobody nuttin'.

 

[ratto]

I'm not sure that following the herd is the right thing to do here. Mortgage interest rates are at an all time low. If there was ever a better time to have mortgage, I don't know when it was. Folks should be out there maximizing their borrowing, then waiting for interest rates to go up while sitting on a nice sub-4% mortgage.

I guess some people do it because life is full of uncertainties. Possible loss of job/income, unfortunate illness, and sudden breadwinner death, etc. all could throw the maximized borrowing at low rate into a chaos. Plus it's (very) likely that mortgage interest tax reduction could be phased out in the near future if our government debt situation keeps deteriorating.

 

[Andre1969]

I was just talking about mortgages last night with my mother. She mentioned that she and my stepdad going to refinance their house here in Maryland, and use the money to pay off their second home in Florida. They're going to take out a 30 year mortgage, but then try to pay it down ahead of schedule.

I told her that, as low as rates are, she might as well just let it go the 30 year route. There's a good chance that mortgage will outlive them, as she's 63 and my stepdad's 59. The monthly payment is only going to be around $750-800 per month (plus property taxes, as they pay that separately rather than from an escrow account).

She's been whining a bit lately about being bored and lonely in retirement, so I told her that she and my stepdad need to get out there and live, have fun, and enjoy the retirement. They don't need to save anything for me, and when they pass on, it makes no difference whether I inherit a house with a mortgage, a house free-and-clear, or no house at all!

As for me, I keep thinking about paying my mortgage off early, but with the interest rate so low, at 3.5%, it's hard to do. Mine is adjustable, as it's a HELOC, so it can go up. I should be taking advantage of the low rates and pay it down now, but I've just been finding better things to do with the money. If rates start to rise too much though, I'll try to pay it down enough so that the monthly payment stays about the same.

I had thought about refinancing to a 30 year fixed back in late 2010, but the credit union wanted something like $8,000 in closing costs. Which I thought was just too much for a $160,000 (at the time) mortgage. I figured that I'd be better served just taking that $8,000 and paying down the existing HELOC, which is what I ended up doing. Between that and other extra payments, I've managed to get it down to around $147,800, which ain't bad for a year and a half, I guess. So, despite my thoughts against paying it down early, looks like I've been managing to do that, anyway!

 

[pb4uski]

Agreed, 48k of refi closing costs on a $160k loan makes the numbers hard to work unless interest rates spike.


Edit: Oops, I meant $8k. That darn shift key!!!

 

[farmerEd]

Paying of our mortgage was one of the very best financial decisions I've ever made. I don't care if it goes against what the experts say- debt free is debt free!

I'll second that...nothing makes me feel free'er and richer than not owing anyone a penny....no matter how many spreadsheets folks can show me why its good to have a mortgage.

I paid my 30 year mortgage off in 3 years (10 years ago), and I didn't say "oh good, now I can save that money instead (about $3500/month), I said "thats $3500 a month I no longer need to earn every month for the next 27 years...hey, wait a minute, why am I working so much?"...and thus my slide into ER at a young age.

 

[ERD50]

I guess some people do it because life is full of uncertainties. Possible loss of job/income, unfortunate illness, and sudden breadwinner death, etc. all could throw the maximized borrowing at low rate into a chaos. ...

Wouldn't it be just the opposite? Rough numbers:

Say you've got a $100K mortgage, and P&I payments ~ $500/month. The $100,000 you have in the bank can pay that mortgage for over 16 years, even with zero growth. That should be plenty to get you over any bad patch.

As is often said, you can't eat your house.

If the bread winner dies, what is the difference (financially)? Pay off the mortgage or not does not affect your net worth. The family may need that liquid cash more than they need that money locked up in the house. If things are tight, they are probably going to downsize anyway. Mortgage or no mortgage seems like a minor issue.

-ERD50

 

[ERD50]

emph mine:

Paying of our mortgage was one of the very best financial decisions I've ever made. I don't care if it goes against what the experts say- debt free is debt free!

I'll second that...nothing makes me feel free'er and richer than not owing anyone a penny....no matter how many spreadsheets folks can show me why its good to have a mortgage. ....

How it makes you feel is up to you. But that does not change the math. If 'feelings' changed the financial aspect of a transaction, I'd make millions on individual stocks, because I always buy them with the 'feeling' that they are going to go up. If only.

-ERD50

 

[farmerEd]

emph mine:



How it makes you feel is up to you. But that does not change the math. If 'feelings' changed the financial aspect of a transaction, I'd make millions on individual stocks, because I always buy them with the 'feeling' that they are going to go up. If only.

-ERD50

I guess by your logic, nobody should ever retire early, or at all, either. After all, mathematically, it can be proven that you will be better off financially if you continue to work until you die.

 

[ChiliPepr]

nothing makes me feel free'er and richer than not owing anyone a penny....

Really? See how long you keep the house after you stop paying your taxes!

I always struggle with whether or not to pay off the mortgage and what to refi to. I am currently on a 30yr at 4.125, paying it off in 13 years. I am probably going to refi to a 15yr @ 3% and try to pay it off in 10-13 years.

Reason i struggle is I have been averaging between 6% and 10% in my investments over the last 7 years. So, basically, the interest/appreciation of my portfolio is paying my mortgage, taxes and a bit more. It is the "bit more", I would lose if I took my portfolio and used it to pay off the mortgage. Plus, by not paying it off I have all that liquidity sitting in the bank if I need it. I always ask myself how much is that liquidity worth to me.

 

[ERD50]

I guess by your logic, nobody should ever retire early, or at all, either. After all, mathematically, it can be proven that you will be better off financially if you continue to work until you die.

No. There is no connection between the two. None at all.

I've never claimed that ER 'was one of the very best financial decisions I've ever made' - I did it for other reasons.

And if you paid off your mortgage for other reasons, that is all well and good. But you can't turn around and say it was a great financial decision, based solely on how it made you feel.

-ERD50

 

[farmerEd]

No. There is no connection between the two. None at all.

I've never claimed that ER 'was one of the very best financial decisions I've ever made' - I did it for other reasons.

And if you paid off your mortgage for other reasons, that is all well and good. But you can't turn around and say it was a great financial decision, based solely on how it made you feel.

-ERD50

Never said it was base 'solely' on the way I made me feel - those were your words you are trying to put in my mouth to make a point.

It was, without a doubt, the best financial decision I ever made - I stand by that statement - go ahead and prove I am wrong.

 

[RetireBy90]

I guess by your logic, nobody should ever retire early, or at all, either. After all, mathematically, it can be proven that you will be better off financially if you continue to work until you die.

Not at all, in my case it is just about how do I maximize the assets I have. For me, retirement is all about when retirement income meets expenses with some extra to provide assurances for un-forseen. I don't plan to work for $$ past that point, although I may do other work for other reasons, altruistic, enjoyment, keeping me busy and off DW back.

This seems to be a religous and personal decision. As a country we went overboard with spending and borrowing and living beyond our means for many years. Now common sense is to LBYM. While this is a good no, great, no awsome idea, it like all things can be taken too far. For me, no debt at all is too far. However, I really respect the view of many that want to pay off the mortgage. No matter what I say I wouldn't change many minds, and those that pay off early, would be hard pressed to change my mind. Different goals come off with different decisions.

 

[Andre1969]

I have a friend who's slightly upside down on his mortgage. I think he owes about $370K on his mortgage, and is currently around 4.25%. He wants to refinance because he thinks he can get around 3.5% on another 30 year fixed. He's been in the house almost 7 years, and refinanced once already a few years ago. The first time he refinanced, he said the savings were pretty big, but he also went from something like 5.75% to 4.25%, which is a fairly big jump. And, he owed more back then as well. He's been paying extra on the mortgage, so the principal came down quicker than it normally would.

I told him that I don't think refinancing a second time would save much money. Maybe $230-250 per month, I'd guess. Plus, he's in a fairly high tax bracket. Not sure how high, but I'd guess the 28%. So, if closing costs are too high, I told him he might be better off just keeping the current mortgage, and upping the extra amount he pays on it.

 

[ChiliPepr]

I told him that I don't think refinancing a second time would save much money. Maybe $230-250 per month, I'd guess.

good guess!!! $370k * (4.25%-3.5%) = $2,775 /12 = $231.25

Not sure how much luck he would have getting 3.5% when he is upside down without paying a high fee.

 

[Andre1969]

good guess!!! $370k * (4.25%-3.5%) = $2,775 /12 = $231.25

Not sure how much luck he would have getting 3.5% when he is upside down without paying a high fee.

That's just it...right now he's having no luck whatsoever getting refinanced, because of the upside-down factor. So he'd probably have to come to closing with some major cash to pay the existing mortgage down.

Personally, I think it's annoying that the banks will do that. I think that if you're in good financial standing and show the ability to pay, why shouldn't they refinance you even if you're upside-down? If my friend can afford the payments at 4.25%, it's obvious he should be able to afford them at 3.5%, so there's little danger of him defaulting.

Now, I can see the rationale of not writing a new mortgage, for more than a house is worth. But in this case, the mortgage already exists! Only reason I can see, is that the bank stands to lose money if they let him refinance his current amount. But, if he pays it down and refinances, don't they lose even more?

 

[ChiliPepr]

Most re-fi's are a new mortgage. Banks HATE to re-fi their own mortgages unless they have too.

Look at it from the Banks/business side of the deal...

The bank has lent your friend $370k at 4.25% why would they want to refinance that down to 3.5%? To do that would cost them $2,775 a year in interest. Would you do that out of the goodness of your heart?

The other banks do not want to offer your friend a $370k mortgage on a house worth less than that.

They other reason is the banks you are paying your mortgage to, in all likelihood, do not hold the mortgage note, they are just servicers. The collect the payments and distribute the proceeds to the bondholders of the Mortgage Backed Securities that the mortgage (with thousands of others) are part of.

 

[Hamlet]

I'd rather pay down my 4% mortgage than buy 10 year treasuries yielding 2%.

Although currently I'm not doing either.

 

[ERD50]

Never said it was base 'solely' on the way I made me feel - those were your words you are trying to put in my mouth to make a point.

It was, without a doubt, the best financial decision I ever made - I stand by that statement - go ahead and prove I am wrong.

OK, drop 'solely' from my comment, sorry if I didn't phrase it correctly.

I've run many, many FIRECALC runs on this subject, you could search my old posts. Of course results vary depending upon your conditions (mortgage interest rate and term, etc), but for reasonable numbers, any differences were pretty marginal, and usually favored keeping the mortgage.

So yes, it's tough for me to reconcile what I've seen as possibly only a very marginal financial benefit (ignoring the emotional side for this) becoming 'without a doubt, the best financial decision I (you) ever made'. I sincerely hope other decisions you made were better, as this is most likely very marginal. That's my point, not whether you feel better for doing it or not.

-ERD50

 

[ejman]

Its always fun to read these pay it off early threads because they reflect 2 very different camps. The psychological feels great not to have any debt vs the analytical given these assumptions why pay it off camp. I am personally in the FarmerEd camp and a stack of spreadsheets from here to the moon wouldn't make me change my mind. I know that come hell or high water I 'll have a roof over my head value of this to me? - priceless. Come to think of it, its sort of like the SS discussions take it at 62 or 70? same two camps seem to emerge.

 

[Keim]

Paying off the mortgage last year as a 38yo was a purely number driven decision for me. I had recently changed to part time work due to a health issue. We wanted to ease the budget by refinancing our 6.5% to the 4% going rate. Loan officer told us our loan was under $50k, so we'd have to pay higher refi fees than standard-about $5k. We could pay the loan off without trouble out of our investments. In that years market we didn't see any of our other investments making a guaranteed 6.5%, so we paid it off. Have been putting the former mortgage money into investments ever since.

Guess you could say I ride the fence on both camps. I made the decision mathematically, but being debt free is an unbeatable feeling!

 

[scrabbler1]

Guess you could say I ride the fence on both camps. I made the decision mathematically, but being debt free is an unbeatable feeling!

This sums it up for me, too.

 

[ziggy29]

I'm sure some of this is due to an increase in debt-aversion in this economy, with a major assist from people tired of sitting on piles of cash earning 0.0000038% in the bank.

Some would say paying off a 4% mortgage is a bad idea, but with "safe" interest rates below 1% and probably will be for years, it's not so certain.

 

[rayvt]

I refi'd about 3 yrs ago at 4.5% for 30 yrs. Its the cheapest money I've gotten in years. I'm not paying it off as long as it's subsidized and I'm making 20% in equities with it.

We refi'd last December at 4.00% for 30 years. Cheapest money I've *even* gotten. I'm making 7.5% dividend yield in preferred stocks, and there's no way I'd even consider paying off the mortgage early.

 

[ratto]

Wouldn't it be just the opposite? Rough numbers:

Say you've got a $100K mortgage, and P&I payments ~ $500/month. The $100,000 you have in the bank can pay that mortgage for over 16 years, even with zero growth. That should be plenty to get you over any bad patch.

As is often said, you can't eat your house.

If the bread winner dies, what is the difference (financially)? Pay off the mortgage or not does not affect your net worth. The family may need that liquid cash more than they need that money locked up in the house. If things are tight, they are probably going to downsize anyway. Mortgage or no mortgage seems like a minor issue.

-ERD50

Quickly paying off mortgage doesn't suit everyone's need, that's for sure. But it does help to quickly build up principle and reduce your total mortgage interest payment to the lender over years. Once mortgage is fully paid off, it will be much quicker and easier to build cash reserve or other liquidity for any possible bad patch ahead. One of the main reasons for some homeowners who got into trouble is that they didn't have enough mortgage principle and cash cushion build up quickly enough, for various reasons, within or beyond their control.

If the breadwinner dies, the family probably will be better off to move on without a large percentage of mortgage balance left, emotionally, psychologically and financially.

Owning a house does have its downside, as the Italian word for "Real Estate" is "Immobiliare". Yes I have heard that you can't eat your house. May I also say that you can't live without a roof either. Also depending what kind of house/property it is, if it has a decent size patch of land, even if you live in a trailer on it, most likely you won't be starved to death if you can grow something on it (definitely not the grass ).