Paying off mortgage vs leveraging $

[pb4uski]

I just happened to be looking at this exact issue, since I've been making triple principle payments every month in order to pay down a newly refinanced 15-year mortgage to pay it off in about 5-years (Which is when I want to retire). I have a $300K, 15-year at 3%.

So, I started to question if it would be better to invest the money that is now going to extra principle payments. I set up an Excel program to calculate the growth of said investment for various average yearly RORs (3%-12%). I also added in the difference in taxes due to the mortgage interest payments. I made the assumption that at retirement (5-years) I would either have paid my mortgage off through accelerating the payments, or I would use the funds gained from investing to payoff the mortgage so that I didn't have to worry about it after retirement.

Results at 5 years:
If the investment ROR averages 5% over five years, I'd have an additional $18K from making investments vice paying down the mortgage. At an average 8% ROR over five years, that number would be $38K. At 10% it would be $53K. That said, if the average ROR is only 3% then the number is about $6K.

The difference in taxes by investing vice paying down was about $5.4K over 5 years (advantage to keeping mortgage and investing the "extra")

Frankly, I still don't know which way I want to go.
Dan

Why wasn't it a push at 3% since that is your mortgage rate if you earn 3% that is taxable and pay 3% that is tax deductible? Might have to do with compounding of the investment earnings given your 5 year time horizon?

 

[Steelart99]

With 3% invested in stocks, while still paying the mortgage off over the 15 year note, I would be paying more interest on the mortgage each year and thus gettting a "greater" tax writeoff. If I pay down the mortgage faster, the mortgage interest paid yearly becomse less and the resultant tax writeoff is less.

As I noted "The difference in taxes by investing vice paying down was about $5.4K over 5 years (advantage to keeping mortgage and investing the "extra") ". That is the primary driver.

 

[Mulligan]

I never thought I would do this, but I went to "the dark side" and decided to refi my mortgage and extended it to a 30 year and reduce my interest rate by 1.25%. My first plan was to just pay it down faster, then I thought refi to a lower 15 year. Now I have done a total 180 and just decided to cut my payment and save/hoard more cash instead. I have just always thought of needing to pay things off, but now Im thinking I can easily make my mortgage payment for the rest of my life, so I should focus on increasing cash reserves for other financial issues that may come down the road. In about 5 years, I could probably just pay it off, but I like the idea of having more cash at my disposal. I wrote this because usually this is a philosophical thing and everyone is usually set in their way one way or the other. I have read so many discussions on this matter through the years I actually changed my mind on the matter. I would rather have my cash in the bank than in my house, even if Im losing a little on interest spread between CDs and the loan rate.

 

[kcowan]

I would rather have my cash in the bank than in my house, even if Im losing a little on interest spread between CDs and the loan rate.

Do you have a budget for paying that spread now and as it grows?

 

[ChiliPepr]

I wrote this because usually this is a philosophical thing and everyone is usually set in their way one way or the other. I have read so many discussions on this matter through the years I actually changed my mind on the matter. I would rather have my cash in the bank than in my house, even if Im losing a little on interest spread between CDs and the loan rate.

I always go back and forth... do a want a 15 yr 3.125%, a 30 yr 3.625, or to pay off the mortgage?

Right now I am leaning towards getting the 30 year mortgage and pay at the 15 year rate until yields are greater than 3%.

Do you have a budget for paying that spread now and as it grows?

The only way the spread would grow is if rates on CD go down (can they go negative? ) or taking out a floating rate loan, which in my case I would not do.

 

[eytonxav]

To me it would depend on whether I could be comfortable with my after-tax cash flow in retirement holding a big mortgage. Personally, I prefer the debt free approach to living.

 

[Mulligan]

Do you have a budget for paying that spread now and as it grows?

Being fortunate enough to have a nice pension with a 2% annual COLA, I consider myself monthly cash flow " rich" (relative term) and net worth "poor" ( that is not relative). I have over $1000 left over each month, so I changed my mind by reading the many threads we have had and decided to refinance out to 30 yrs., and reduce the interest rate from 5% to 3.75% and build my cash stash. In fact, I just did it this morning at the mortgage company. I could have been more aggressive to get a better deal, but I hate paperwork and they already had my info from my mortgage. I just drove up and gave them my W2 and bank statements, signed a few forms, and they will come to my house to sign closing papers, took maybe 10 minutes, plus a 5 minute phone call yesterday. As a useless side note he told me my credit score was 815. I never knew what it ever was. Hopefully I never will need to know again.