This is a big decision. Help me make the right one!

[Chris918]

Hello,

I'm very close to having no debt besides my mortgage. Hooray! Still no time to take my foot off the gas. Let's keep going.

When I pay off this last debt, I will be maxing out my ROTH IRA every year and I will be contributing 15% of my income to a 401k. However, at this point I'll have a decision to make and I really don't know what is best.

I did the math and I can pay off my house in around 6-7 years. It seems like a long time, but compared to 30 years it isn't much. Do I continue to max out my ROTH, slowly increase my 401k contribution and then throw every single dollar I can at the mortgage or do I ignore the mortgage and just invest everything?

I'm really stuck because I think the idea of having no mortgage and being totally debt free is very alluring. Still I think it makes more mathematical sense to just invest everything. Of course life throws plenty of curve balls and having no mortgage means you need way less money for necessities if something goes wrong. Still I'm one to want to do what's best for my financials in the long run. What would you do in my situation? I'm very interested in hearing from as many people as I can because the more explanations on which one is best the better.

I hope you're all enjoying your 2020 and so far.

Take care and I hope to hear from you.

 

[pb4uski]

When you say investing, I presume that you are talking about investing in equities, or mostly equities. Also, what your mortgage interest rate is would be relevant to know.

However, over a 6-7 year time frame I think it is likely that equity returns will exceed your mortgage interest rate, so I would invest in taxable accounts.

OTOH, if the investment will be in bonds, then paying off the mortgage might be preferable.

Now all of that said, I did pay off my 3.375% mortgage recently... but I did it with cash that was earning 1.7%.

Being debt-free wasn't alluring to me.

 

[Cassius King]

I too have these thoughts occasionally. I'm very adverse to debt and like to eliminate it ASAP or not get into it at all.
Except when it makes financial sense. I decided to contribute to investments instead of paying off the mortgage. What is a great reminder, is that the gains on one of my investments is enough to pay off my mortgage. It stares me right in the face when I login to my account and see that reminder that the money has been better invested rather than paying off the mortgage.
YMMV, it is a financial vs mental/emotional decision.

 

[RobbieB]

And you can always send in extra principal from time to time to accelerate the payback.

 

[Aerides]

this topic (should I pay my mortgage it or not) is literally the 2nd most debated on ER.org (right behind when to take SS).

tl;dr version:
If the rate is super low, and you have plenty of other savings, coin flip
If you are able to take a mortgage deduction on your taxes, lean towards keep
If you would really value the sleep at night factor, lean towards pay
Split the difference and pay extra (pay a 30 like it's a 15, etc.)

So for your case, if you'd like to post the approx amount and rate, that will help the arguing along a bit.

 

[Chris918]

this topic (should I pay my mortgage it or not) is literally the 2nd most debated on ER.org (right behind when to take SS).

tl;dr version:
If the rate is super low, and you have plenty of other savings, coin flip
If you are able to take a mortgage deduction on your taxes, lean towards keep
If you would really value the sleep at night factor, lean towards pay
Split the difference and pay extra (pay a 30 like it's a 15, etc.)

So for your case, if you'd like to post the approx amount and rate, that will help the arguing along a bit.

I think this is a great way of breaking it down and it will allow me to give you guys the additional information.

1.My rate is 4.25%.
2. I am not able to take the mortgage deduction on my taxes. I take the standard deduction since it's more than what I would gain from itemizing.
3. I would value not having the mortgage but that all depends on "what ifs." What if I lose my job, what if there is a medical emergency, what if I can't pay the mortgage, etc. If my situation didn't change or only slightly improved then I wouldn't worry because I can easily pay my mortgage now.
4. Amount remaining on mortgage is $140,000.

Thank you all so much for the fast replies and trying to help.

 

[Chris918]

When you say investing, I presume that you are talking about investing in equities, or mostly equities. Also, what your mortgage interest rate is would be relevant to know.

However, over a 6-7 year time frame I think it is likely that equity returns will exceed your mortgage interest rate, so I would invest in taxable accounts.

OTOH, if the investment will be in bonds, then paying off the mortgage might be preferable.

Now all of that said, I did pay off my 3.375% mortgage recently... but I did it with cash that was earning 1.7%.

Being debt-free wasn't alluring to me.

Investments would be in index funds via Vanguard. Thank you for your insight. Looking at the 3 fund portfolio. 70% US Equities, 20% international, 10% bonds.

 

[Odiedog]

Having read most of the back and forth from previous posts, the math usually leans towards invest rather than pay off (using the criteria above to help decide.)

In my case it was strictly a case of reducing my monthly out of pocket expenses and my annual spend (and therefor my 3 % SWR) so I could reach my target savings quicker. I also hate debt. A paid off mortgage is a certainty, future market returns, not so much. I know the math says I could have a larger nest egg potentially if I invested to cover the higher spend needs but I'm not wired that way.

YMMV

 

[pb4uski]

While there are no guarantees, it is more likely that not that the portfolio that you describe above will exceed 4.5% over the next 6-7 years.... so I would vote to invest.

An investment portfolio gives you more flexibility if you lose your job or have a medical emergency in that you can tap into it for expenses or mortgage payments.. you can't tap into your home equity as easily to pay expenses.

 

[Chris918]

While there are no guarantees, it is more likely that not that the portfolio that you describe above will exceed 4.5% over the next 6-7 years.... so I would vote to invest.

An investment portfolio gives you more flexibility if you lose your job or have a medical emergency in that you can tap into it for expenses or mortgage payments.. you can't tap into your home equity as easily to pay expenses.

Thank for your view on my situation. I appreciate it.

 

[Vacation4us]

So for the last 8 years I have sent an extra 1k to my mortgage.

I now owe 23k and it will be payed for this year.

My rate was 2.875%

I would have made much more if I had invested.

My 401k has grown but my Roth has treaded water. ( clearly I am a terrible stock picker )

I maxed out my 401k every year and while I was single I maxed my Roth.

In hindsight I am happy with the decision that I made. We are retiring at the end of 2020 with no mortgage. No one knows what the market will do over the next 7 years. You might win or lose. I hedged my bets and I am ok with the results.

YMMV

 

[Chris918]

So for the last 8 years I have sent an extra 1k to my mortgage.

I now owe 23k and it will be payed for this year.

My rate was 2.875%

I would have made much more if I had invested.

My 401k has grown but my Roth has treaded water. ( clearly I am a terrible stock picker )

I maxed out my 401k every year and while I was single I maxed my Roth.

In hindsight I am happy with the decision that I made. We are retiring at the end of 2020 with no mortgage. No one knows what the market will do over the next 7 years. You might win or lose. I hedged my bets and I am ok with the results.

YMMV

I think that's really what it boils down to. Most people seem to understand that the market normally would return better results, but we don't know for sure. The mortgage is a guaranteed return and while it may come up short it provides some emotional peace and stability.

 

[carnivalday]

I retired last year. Before I did, I debated long and hard on whether to pay off my mortgage. I would have to sell dividend paying stocks to do so. I decided to do it, and I cant even tell you the relief it gave me. That was the largest bill I had to pay every month, and with it gone, my hard expenses each month nearly dropped 50%. Had I to do it all over again, I wouldnt hesitate.

 

[Chris918]

I retired last year. Before I did, I debated long and hard on whether to pay off my mortgage. I would have to sell dividend paying stocks to do so. I decided to do it, and I cant even tell you the relief it gave me. That was the largest bill I had to pay every month, and with it gone, my hard expenses each month nearly dropped 50%. Had I to do it all over again, I wouldnt hesitate.

Congrats on retiring! How early did you pay off the house?

 

[teetee]

I would pay off debt first before doing any investing, house included. From risk management perspective, when the economy goes down, you lock in your loss if you sell stocks/funds and you may not have a choice if you lose the job/income at the recession and need money monthly to pay for living and avoid being homeless. Not to mention the penalty if the money need to be drawn from your retirement accounts before you retire.

If you choose investing while keeping the minimum mortgage payment, basically you are risking your house and long term retirement for the investment gain of 6-7 years. It works only when it works. I would rather have a house that I own that is not going to have a chance to be short sale or foreclosed.

 

[JDARNELL]

I would be in the pay off mortgage camp depending on how much liquidity I had in the event of a what if.

 

[DrRoy]

1.My rate is 4.25%.
2. I am not able to take the mortgage deduction on my taxes. I take the standard deduction since it's more than what I would gain from itemizing.
3. I would value not having the mortgage but that all depends on "what ifs." What if I lose my job, what if there is a medical emergency, what if I can't pay the mortgage, etc. If my situation didn't change or only slightly improved then I wouldn't worry because I can easily pay my mortgage now.
4. Amount remaining on mortgage is $140,000.

I think that's really what it boils down to. Most people seem to understand that the market normally would return better results, but we don't know for sure. The mortgage is a guaranteed return and while it may come up short it provides some emotional peace and stability.

I would say that given how you are torn between the two options, it would be reasonable to split 50:50 between the two. That way you are covering both bases, and you can always change later if you want to.

 

[SonofCohoes]

I would say that given how you are torn between the two options, it would be reasonable to split 50:50 between the two. That way you are covering both bases, and you can always change later if you want to.

You beat me to my recommendation by a little bit. This method allows the best of both worlds.

 

[pb4uski]

If you are going to pay off the mortgage, make sure that you have a healthy emergency fund before doing so (or a HELOC) so if you have an emergency need for money you'll have access to it. If you have a paid-for home and need money fast you are SOL unless you have a HELOC or emergency fund.

 

[LiveBelowMeans]

I would and did pay off my mortgage early. Two reasons: the peace of mind of not owing any money, and the fact that the 4.25% return is definite/guaranteed. Any possible return or loss for that matter by investing that money is speculation. Jmho

 

[Chris918]

For someone like me going 50/50 may be best. I won't be able to pay off the house as fast, but I'll have an emergency fund and continue to max out my ROTH IRA and contribute to my 401k at work.

 

[mrfeh]

I think this is a great way of breaking it down and it will allow me to give you guys the additional information.

1.My rate is 4.25%.
2. I am not able to take the mortgage deduction on my taxes. I take the standard deduction since it's more than what I would gain from itemizing.
3. I would value not having the mortgage but that all depends on "what ifs." What if I lose my job, what if there is a medical emergency, what if I can't pay the mortgage, etc. If my situation didn't change or only slightly improved then I wouldn't worry because I can easily pay my mortgage now.
4. Amount remaining on mortgage is $140,000.

Thank you all so much for the fast replies and trying to help.

Don't know how much we can help you. Sounds like you have all the info you need.

In the end, it is a very personal decision.

 

[jollystomper]

I would say that given how you are torn between the two options, it would be reasonable to split 50:50 between the two. That way you are covering both bases, and you can always change later if you want to.

I am in a similar situation and am now leaning this way.

Mortgager balance a little over $50K. Interest rate of 2.875%. Current payment of just over $600/month has the payoff date in 2028, when I turn 70. The monthly payment are among our "regular" living expenses that are covered by my pension. The interest we pay pushes us just over the standard deduction, but not by much.

I have enough in cash to pay it off, not touch any investments, and, based on our retirement spending so far being half of we planned on, still have enough cash left to not have to touch investments before we choose to take SS - at which point pension + SS (for both of us) + investment income is looking like it will more than cover our expenses.

I mentally debate if I should invest some or all of this cash, as the monthly payment is not causing any issues. On the other hand, paying it off means one less payment to deal with, should. For DW, should I pass before her, it means one less financial issue to manage.

So I will likely take a middle ground... pay it down by a 3rd or a quarter this year, and see if our other spending stays below projection. Then re-evaluate at the beginning of next year.

One interesting thing: We bought the house in 1990, with a 30 year mortgage and a 10% interest rate. We refinanced 3 times over the years to the current mortgage. Paying it off this year would match the original mortgage term. An interesting thought for us.

 

[Aerides]

Since it doesn't sound like you are in a position "today" to pay it off, it's a decision you can (and should) kick down the road.

Continue to build your savings, and then when you have more than enough - plus an emergency fund - you can take the pulse of the market at that time.

And as far as "but maybe I'll make more in the market" - we paid ours off in December of 2008, with cash (ie, right around the low point). Had we invested that $100k-ish we'd have made leaps and bounds more back in the market. But that has never been a regret for one moment.

 

[RetiredAt55.5]

Hello,

I'm very close to having no debt besides my mortgage. Hooray! Still no time to take my foot off the gas. Let's keep going.

When I pay off this last debt, I will be maxing out my ROTH IRA every year and I will be contributing 15% of my income to a 401k. However, at this point I'll have a decision to make and I really don't know what is best.

I did the math and I can pay off my house in around 6-7 years. It seems like a long time, but compared to 30 years it isn't much. Do I continue to max out my ROTH, slowly increase my 401k contribution and then throw every single dollar I can at the mortgage or do I ignore the mortgage and just invest everything?

In this situation, I would be maxing out my 401k contribution (in addition to the ROTH), before paying down the mortgage. Why? Because you don't pay federal taxes on the 401k contributions, so that would likely save you a lot more than 4.25%. Even if this extra money was put in a money market fund at 1-2%, I would've come out way ahead.

But then I am in the camp that mortgage debt isn't necessarily a bad thing, and money is fungible.

Note, in case the sky falls in, the Roth contribution portion can always be used tax free for expenses. So over 6-7 years that's about 40k of emergency money.