Question about paying house off early

[Rickt]

Feeling of Freedom can't be beat!

We paid off our mortgage($1500/M) last month. The interest rate was 4.25%. It was my wife's idea to pay off the mortgage and initially I was against paying if off early, but now that it is paid off it is a big relief and feels nice to have no mortgage payment. We intend to invest $1500/m(extra money) to grow our nest egg at a faster rate. In my opinion, with no debt we can be more aggressive in investing with the extra investment and hopefully achieve our dream of early retirement (we are 53 years old).

IMHO, the feeling of freedom is worth it. Best Wishes to you!

 

[Ally]

We paid off our home about 3-4 years ago. The feeling is wonderful. NO debt!

 

[Rickt]

Debt Free feels great!

We paid off our home about 3-4 years ago. The feeling is wonderful. NO debt!

You bet!

 

[Mulligan]

Next year, I will have enough cash to pay off my mortgage if I want to. I have decided not to. The reason why is I dont trust myself to pay back the money. I am on a good retirement budget and am comfortable, but Im afraid I would expand my budget because the house payment is gone and not repay my depleted funds in a timely manner. So to me it is more of a discipline issue than investment issue because I live on a nice pension, and do not have much of an investment portfolio.

 

[seraphim]

Paid it off last Thursday. With the mortgage gone, DW and I can survive on just our pensions and not NEED to draw from our portfolio. But since we plan to travel, we will probably draw a bit to pay for gas lol.

It feels good!

 

[Animorph]

Man, I was just thinking I should refi again at 3.375%.

 

[Lagniappe]

Paid it off last Thursday. With the mortgage gone, DW and I can survive on just our pensions and not NEED to draw from our portfolio. But since we plan to travel, we will probably draw a bit to pay for gas lol.

It feels good!

I paid mine off last Thursday as well. It added to my confidence going into early retirement to know that my biggest monthly commitment was eliminated, even though logically a 3.75% interest rate for another 29 years was appealing. I was supervised at how relieved I felt to eliminate the debt.

 

[ERD50]

Paid it off last Thursday. With the mortgage gone, DW and I can survive on just our pensions and not NEED to draw from our portfolio.

Didn't you draw from your portfolio to pay it off? Or did you hold up a liquor store?

-ERD50

 

[Nords]

Paid it off last Thursday.

I paid mine off last Thursday as well.

What happened last Thursday? Did I miss some sort of anniversary or holiday or bulk-discount deal?

 

[Lagniappe]

What happened last Thursday? Did I miss some sort of anniversary or holiday or bulk-discount deal?

Didn't you get the memo? It was Pay Off The Mortgage Day!

 

[Ally]

We paid ours off by first having a 15 yr mortgage and then near the end, we used a small inheritance to finish it earlier than expected. We didn't have to get into savings to do it.

 

[G-95]

I have refinanced my mortgage last month and I'm down to $80k @ 3.375% for 15 years. My house appraised at $139k. The actual loan part of the payment is about $600 per month with taxes and insurance consisting of an additional $300 per month.

I read these stories about how it's such a great feeling not having to make the house payment every month, how it frees up income, etc. But does $600 per month really make that much of a difference? Taxes and insurance still cost $300 per month. You still have to pay the same utilities @ $200 per month.

$600 a month doesn't seem like a big weight to be taken off my shoulders. What am I missing here?

Young Saver,
It really depends on how comfortable you are with having debts in life. I'm personally don't agree with the idea of paying off mortgage early because I could use those extra cash to purchase another assets instead of let those extra cash sitting in one property. For example, I could re-fi $139k house and cash out. Let's keep 20% equity on the house which is $28.7k and I'll have $111.2k @ 3.75% for 30 years, monthly will be about $870. I can purchase another property with $20.3k extra cash from the refi, and rent it out for a $100-$200 positive cash flow every month. In the end, there will be not much difference in monthly expense because of the positive cash flow BUT leveraging power will be the big difference here. I will 2 properties that can increase in value instead of one, this makes money work for me. Also, I will get a tax deduction benefit (depreciation) from rental property. I understand that it's easy to find a rental property, it's a lot of work because we need to know the jobs growth n economy of one city unless we already know the neighborhood and we live there. It'll be a lot of work but I think it's worth it.

 

[myself]

Man, I was just thinking I should refi again at 3.375%.

I keep going back/forth with this in my head.

I just have to keep reminding myself that when we refinanced the last time (15 yr @ 4.625% ... 18 months ago), it would take 6.5-7 years in order to offset the cost of the refinancing. So, I'm stickin' with the current one until it's paid for if it kills me.

 

[2B]

I was mortgage free for awhile. We sold our house as I feared the bust was going to hit Houston in 2008. Houston got hit but it was more of a "glancing blow."

We've now bought a house and I took out a 30 yr 3.875% mortgage. The payment is around $1,000. I have a collection of small, non-COLA'd pensions that will amount to about $1,500/month. I figure that I can commit my fixed pension against the fixed mortgage and not have to worry very much about inflation reducing the value of my pension.

The peace of mind I got by not having a mortgage was not very great. I think I prefer having the extra couple hundred thou in my after-tax account. Without this cash, my assets are very heavily weighted towards IRA and 401k accounts. This after-tax cash will let me do a better job of tax rate balancing.

 

[EvrClrx311]

I keep going back/forth with this in my head.

I just have to keep reminding myself that when we refinanced the last time (15 yr @ 4.25% ... 18 months ago), it would take 6.5-7 years in order to offset the cost of the refinancing. So, I'm stickin' with the current one until it's paid for if it kills me.

You may want to consider a no cost refinance where all of the cost is rolled into the interest rate... then you could get maybe a 3.625-3.875 but it won't cost anything or add anything to your balance. Essentially, all that happens is your rate drops another half a point or so.

 

[myself]

You may want to consider a no cost refinance where all of the cost is rolled into the interest rate... then you could get maybe a 3.625-3.875 but it won't cost anything or add anything to your balance. Essentially, all that happens is your rate drops another half a point or so.

Well, that's something to check out. But there is also the addition that I'd be extending the term of the mortgage another 18 months, which I don't want to have when I retire (personal choice).

Of course, it could be paid down early (so in the same timeframe we are set to now), but if we kept the payment the same, it would amount to cutting the mortgage term by only 5 months, and the total interest paid by slightly more than $9,310 (which equates to about $57/month). While that doesn't sound too bad, I'd still wonder if it's really worth that.

 

[EvrClrx311]

Well, that's something to check out. But there is also the addition that I'd be extending the term of the mortgage another 18 months, which I don't want to have when I retire (personal choice).

You could set aside the difference into an index fund (which ideally would be making more than twice what the 3% loan is) and apply it to the final balance when it surpasses what is left on the mortgage.

I'm sure if you plugged the numbers into Excel that would allow you to refinance and also have the house paid off 2-3 years earlier depending on what rate of return you assume for the fund (6-7% would be a conservative guess)

 

[myself]

You could set aside the difference into an index fund (which ideally would be making more than twice what the 3% loan is) and apply it to the final balance when it surpasses what is left on the mortgage.

I'm sure if you plugged the numbers into Excel that would allow you to refinance and also have the house paid off 2-3 years earlier depending on what rate of return you assume for the fund (6-7% would be a conservative guess)

Very true, although 3.6%+ is leaning more towards 4% than 3%.
And there is one thing you're overlooking ... taxes. 25% tax bracket and taking the middle ground of 6.5%, really makes the interest earned @ 4.875%. 4.875% is just about what our current rate is now (4.625%), and a mere 1% higher than what the mortgage rate you mentioned was possible by wrapping the closing costs into the rate.

That's not to say it can't be worth it, and I will put it to more thorough analysis, once I get a true rate that I'd be given (even with FICO scores in the 810+ range).

 

[EvrClrx311]

Very true, although 3.6%+ is leaning more towards 4% than 3%.
And there is one thing you're overlooking ... taxes. 25% tax bracket and taking the middle ground of 6.5%, really makes the interest earned @ 4.875%. 4.875% is just about what our current rate is now (4.625%), and a mere 1% higher than what the mortgage rate you mentioned was possible by wrapping the closing costs into the rate.

That's not to say it can't be worth it, and I will put it to more thorough analysis, once I get a true rate that I'd be given (even with FICO scores in the 810+ range).

If you're going to include taxes you'd want to also factor in that the 3.6% "automatic" return on money put into the mortgage is also diminishing the tax you can write off each year because the interest you're paying is decreasing.

Here is the math:
If I were to pay $100 down in principle on my mortgage that is 3.6%... that means every year I'm paying $3.60 less in interest. It also means that I write off $3.60 less in my taxes... which translates to $0.90 less in a tax refund. So the net gain for the year by paying down $100 on my mortgage is $2.70... or a 2.7% return on the $100 invested in the house at a 3.6% rate.

So essentially it does the same thing... the 3.6% rate of return you're receiving on money going towards principle is reducing the real growth rate of that cash flow down from 3.6% to 2.7%

So to compare apples to apples, it would be 4.875% (conservative estimate of index fund) vs. 2.7% (automatic return on money paying down house, through reduces interest)

Of course the real unknown is the market and how well its going to do over the next 15 years... historically you could assume something more like 8-10%... in all rolling 15 year periods over the last 100 years... 90% of them have returned 8% or more. 50% of them have returns 10% or more.

So 6-7% might be low balling... which is good for planning purposes as worst case is always best to assume

 

[myself]

If you're going to include taxes you'd want to also factor in that the 3.6% "automatic" return on money put into the mortgage is also diminishing the tax you can write off each year because the interest you're paying is decreasing.

So essentially it does the same thing... the 3.6% rate of return you're receiving on money going towards principle is reducing the real growth rate of that cash flow down from 3.6% to 2.7%

So to compare apples to apples, it would be 4.875% (conservative estimate of index fund) vs. 2.7% (automatic return on money paying down house, through reduces interest)

Of course the real unknown is the market and how well its going to do over the next 15 years... historically you could assume something more like 8-10%... in all rolling 15 year periods over the last 100 years... 90% of them have returned 8% or more. 50% of them have returns 10% or more.

So 6-7% might be low balling... which is good for planning purposes as worst case is always best to assume

We do currently take advantage of the mortgage interest writeoff. However, with the increase of the standard deduction, and paying less interest as the lien amortizes through the years, we'll only be able to take advantage of itemizing for another 7-8 years at the most. After that, it'll be standard deduction for us.

Besides, what good is paying 100% interest, just to get 25% back?

 

[EvrClrx311]

We do currently take advantage of the mortgage interest writeoff. However, with the increase of the standard deduction, and paying less interest as the lien amortizes through the years, we'll only be able to take advantage of itemizing for another 7-8 years at the most. After that, it'll be standard deduction for us.

Besides, what good is paying 100% interest, just to get 25% back?

That's one way to look at it... but see the edit I added in maroon color to my previous post to explain it more thoroughly. Really the point was that the return you're getting by removing the mortgage is not 3.6%... but its 25% less than that because you have less to write off... when you pay your mortgage every month on a 3.6% rate, because of the tax write-off you're really only paying 2.7% interest, in reality.

At the end of the day what matters is the net gain and risk tolerance... if carrying a higher mortgage and applying the money to something that gets a better return makes sense for you then sometimes yes... it does make sense to pay 100% interest (on a 3.6% rate) to get back 25% (or 0.9%) if you are making a better return (than 2.7%) somewhere else.

There are three categories of people who own homes...

A) People who have the funds to pay down the mortgage, so they do and that's that. No mortgage necessary.

B) People who have the funds to pay down some or all of the mortgage, and have a choice to either pay 2.7% in hopes they'll get a better return somewhere else or... pay it down and get the 2.7% automatic returned on their money by putting it into the house.

C) People who have no funds to pay down the mortgage, and have little to no choice... they are paying someone to carry a loan regardless (they are LUCKY we have such low rates today)

Most fall in Category B for the majority of their time as a homeowner (at some point they are faced with a decision to apply money to the house... or invest it else ware)... some like to pay off the mortgage, others like to leverage it and invest the difference thinking they can beat the 2.7% on their own.

The warm and fuzzy of removing the mortgage debt entirely is real... and for some worth it to remove ALL the risk.

For those who have the funds to pay off a house entirely... really a mortgage is just like someone coming up to you saying "Hey I'll give you $500,000 if you pay me 2.7% a year for 30 years?... want to?" Some will say "no thanks, I'm comfortable where I am and don't want that risk right now..." while others will say "I think I'll do a good job to beat that return and come out on top"

 

[Bimmerbill]

I am not going to pay mine off any faster. My rate is low and monthly payment is less than rent in most towns here. Plus, if things get really bad I have to option to walk away. If I plowed all the money into the mortgage I could still walk away but wouldn't have any money in savings.

 

[NYEXPAT]

I think that the Fed is propping up the economy so that companies can delever there balance sheets and If I was in the States, I would be using the opportunity to do so with my "personal balance sheet".

 

[Gumby]

B) People who have the funds to pay down some or all of the mortgage, and have a choice to either pay 2.7% in hopes they'll get a better return somewhere else or... pay it down and get the 2.7% automatic returned on their money by putting it into the house.

The young wife and I fall into this category. We could pay off the current mortgage right now, but we're refinancing this week with PenFed at 1.99% (5 yrs). I'm pretty sure we can beat that.

 

[YoungSaver]

I think that the Fed is propping up the economy so that companies can delever there balance sheets and If I was in the States, I would be using the opportunity to do so with my "personal balance sheet".

What do you mean by that? I don't understand