Only debt is mortgage

[Sarpy]

We just went through this and decided to pay ours off last week.

We had refinanced a couple of times but each time we went for a 30-year mortgage, and with the plan to invest the difference between a 15- and 30-year mortgage payment into an Index fund. (We were tempted to take the 15-year but thought we'd risk market payback.) Took us longer than we thought, but we still managed to pay off a 30-year mortgage in ~20 years.

We have adequate liquidity or we probably wouldn't have considered this.

 

[nash031]

The problem is that you are assuming that he has significant Roth contributions or taxable investment to use in case of emergency. I am not saying he doesn't but he is only 28.

I agree with "nun" diversification is important in case of adversity. Also someone can argue that since we had an amazing 2013 and if he is putting all his money on the market he will be buying inflated assets. We might be do for a correction....

I didn't assume anything, you apparently did though. You said you thought everyone here was essentially overly risky in that they didn't account for job loss, and then made blanket statements that don't apply to everyone. I was only pointing out the fallacy of your statement because not everyone here doesn't think about job loss, they just compensate for it in ways other than paying down a mortgage aggressively.

 

[nash031]

And some of us decide to use some money to pay down the mortgage because 4% guaranteed return fits in with our investment plan as a fixed income analogue and we own a rental property. Then use the rest of the investable income to invest in the market. I like diversification.

Being mortgage free is an enormous psychological and financial asset going into ER. Could I have done better by investing in mutual funds.....well given the ups and downs since 2000 that's debatable. Being mortgage free since 2009 allowed me to put lots of money into a rising market.

Absolutely. Kike just made it sound like anyone who doesn't choose that path hasn't thought about the downside risk of not paying it down. I and many others HAVE thought about it and determined there were better ways (for us) to benefit from our mortgages.

People make their own decisions. Just because they don't make the same one you do doesn't mean they haven't thought it through, or are taking too much risk.

 

[chris66]

You're doing great for 28! I'm not sure how much you're investing for retirement (is it a 401K? Generous match? Self - employed? etc..). I saw in another thread that you have hit 200K NW, but I'm not sure if that includes your home equity. Some things for you to consider. Do you have an adequate emergency fund? How secure is your job, and how likely to need to relocate in the future? How long do you plan to stay in the house? Would it make a good rental if you decide to move and/or how's the housing market?

Generally, I'd say a small mortgage isn't the biggest concern of a person of your age. It would seem better to invest, after saving adequate emergency funds, especially with a low rate and tax deductible interest. But, if being totally debt free is very important to you, then you should do that.

I just paid off a low interest mortgage, but I did this with the proceeds of another house that had been my primary residence. I'm also very close to retirement (this year or next), so I won't have as much taxable income soon. And, getting rid of all debt before retiring was important to me.

Whatever you decide, it sounds like you're off to a great start!

 

[Homebrew]

If someone decided that a pre-pay is the right thing for them, I think the way to do it is to save up the balance, and pay it off all at once. The problem with paying a little each month is that you no longer have that liquidity available, and you have not reduced your cash flow - that won't happen until the very last payment.
-ERD50

I agree with this line of thinking. I recently refinanced from a 15 year mortgage to a low rate 30 year mortgage. I've basically been investing the difference in payments. I think of those investments as my mortgage payoff fund, but it also serves as an emergency fund. So I really don't have to make the mortgage payoff decision for several years when that account is larger than the balance of my mortgage. I like the flexibility.

The only thing I'd add, is that this method does require discipline. At this point, I COULD decide that those funds are now useful for going and buying a new car that I don't need. I think some folks make extra payments for that exact reason....it's permanent "savings" that they can no longer (easily) get their hands on that money.

 

[Sanbenito1]

Invest it while you have time on your side. That 4% interest mortgage will seem like a steal in 10 years, let alone 30 years. If you're still itching to get rid of it (and the tax write-off that comes with a mortgage) you can always pay it down when you're older and earning a higher salary. When it comes to investing it's hard to make up for lost time in the markets.

 

[Ready]

Invest it while you have time on your side. That 4% interest mortgage will seem like a steal in 10 years, let alone 30 years. If you're still itching to get rid of it (and the tax write-off that comes with a mortgage) you can always pay it down when you're older and earning a higher salary. When it comes to investing it's hard to make up for lost time in the markets.

The tax write-off is a good point to consider. I no longer have the write off, and I find it sorely missing when it comes time to calculate my tax bill each year. I still enjoy sleeping well at night not having a mortgage, but I also keep thinking about what I can do to reduce my taxes. The net cost after taxes of the interest expense on a mortgage is pretty darn cheap, so unless the stock market really tanks over the next couple of decades, it will prove to be a wise investment to take the extra money and invest it in the markets.

Of course, as the familiar saying goes: "past performance is no guarantee of future performance..."

 

[Dash man]

Discussing leverage, Warren Buffett once said "if you're smart you don't need it, and if you're dumb you shouldn't be using it."
If a person is borrowing money against their home for the purpose of investing in the stock market, I think they'd be wise to follow Mr. Buffett's advice. There are no guarantees in the market and with the government and Fed keeping rates artificially low, no one can predict what the future holds for the stock or bond markets with any certainty.
As far as the tax savings are concerned, paying $1.00 in interest to hopefully save $0.28 in taxes just doesn't make sense. Once a mortgage is paid off, the payment can then be used to feed the investment portfolio each month.
Of course for the younger folks who don't have the funds to pay off the mortgage, paying ahead can save thousands over the life of the loan, but they should also fund an emergency fund and retirement accounts where they can. Someone living below their means should be able to add funds to each.

 

[kikechico]

great post.

 

[youbet]

It's always entertaining to read the pro and con opinions relating to mortgages.
So many folks are so strongly attached to one view or the other!

The fact is, at today's low interest rates, it's unlikely to matter whether someone pays off a mortgage early or not in terms of the road to FIRE given that either scenario is handled prudently.

It's hard to understand why there are such strong feelings one way or the other when the results of either path have similar outcomes over the long term. Again, assuming either scenario is handled prudently.

 

[Dash man]

It's always entertaining to read the pro and con opinions relating to mortgages.
So many folks are so strongly attached to one view or the other!

The fact is, at today's low interest rates, it's unlikely to matter whether someone pays off a mortgage early or not in terms of the road to FIRE given that either scenario is handled prudently.

It's hard to understand why there are such strong feelings one way or the other when the results of either path have similar outcomes over the long term. Again, assuming either scenario is handled prudently.

People typically assume if one thing goes wrong, they can recover. They rarely think through the consequences if more than one thing goes wrong. Many learned the hard way in the last financial crisis. My SIL bought a home in 2006 using a mortgage with a low down payment because they wanted to keep their investments in stocks. We bought a home nearby for cash. When the financial crisis hit the value of their home dropped in half and my SIL's DH lost his job. The stock market also crashed and they were forced to sell at market lows to pay the mortgage and other living expenses. Their son also required hospitalization, but fortunately they still had insurance through my SIL's job. The money eventually ran out and they lost their home.
I'm not saying people should liquidate savings to pay a mortgage, but it should be a priority to keep the mortgage balance as low as possible and to pay it off ahead of schedule. Being able to sleep at might is worth a fortune.

 

[Louis2]

I love how the mortgage topic really brings out the diversity in the group! I personally choose to invest rather that pay down the mortgage (with significant cash reserves as mentioned above.) With the tax deduction I know I have come out ahead over time. But that is just one personal situation.

I think the answer for someone in their 20's is could well be different. The best place for extra cash may be dictated more by psychology that by rate of return. Will buying down the mortgage make the money seems more "locked up" and less tempting to tap for near term splurges or "lifestyle creep?" Will the psychological advantage of owning the home make you more comfortable taking measured risks in other decisions?

I'm just impressed that you are thinking this clearly at your age! Stay disciplined an you will be ok either way.

 

[nun]

It's always entertaining to read the pro and con opinions relating to mortgages.
So many folks are so strongly attached to one view or the other!

The fact is, at today's low interest rates, it's unlikely to matter whether someone pays off a mortgage early or not in terms of the road to FIRE given that either scenario is handled prudently.

It's hard to understand why there are such strong feelings one way or the other when the results of either path have similar outcomes over the long term. Again, assuming either scenario is handled prudently.

The proponents of either approach will probably argue with your assertion that they produce similar results.

IMHO those that favor paying off the mortgage are pessimists and those that want to keep a mortgage and invest the money are optimists. Still, I could never choose between the two as I often flip between pessimism and optimism and so split my money between the two approaches.

 

[nash031]

IMHO those that favor paying off the mortgage are pessimists and those that want to keep a mortgage and invest the money are optimists. Still, I could never choose between the two as I often flip between pessimism and optimism and so split my money between the two approaches.

I think this is true. Guess I'm all sunshine!!

 

[Dash man]

The proponents of either approach will probably argue with your assertion that they produce similar results.

IMHO those that favor paying off the mortgage are pessimists and those that want to keep a mortgage and invest the money are optimists. Still, I could never choose between the two as I often flip between pessimism and optimism and so split my money between the two approaches.

I don't think it's as simple as putting a label on someone. Preparing for the volatility that is likely because of the excessive debt our government and the Fed have taken on and the financial repression of keeping interest rates below inflation rates is in my opinion wise planning.

 

[target2019]

It's always entertaining to read the pro and con opinions relating to mortgages.
So many folks are so strongly attached to one view or the other!

The fact is, at today's low interest rates, it's unlikely to matter whether someone pays off a mortgage early or not in terms of the road to FIRE given that either scenario is handled prudently.

It's hard to understand why there are such strong feelings one way or the other when the results of either path have similar outcomes over the long term. Again, assuming either scenario is handled prudently.

I think there is a lot of knowledge in such discussions. For example, the interest payments on a 30-year, $150K loan, at 4.5% is $123K. We borrowed only 100K to live in palatial splendor, and it was swell to ditch that payment.

Can't say I'm strongly attached to the point of view, but I feel we achieved something major. The timing is important, and for us it is a tremendous thing to just have a tax payment now. And the tax payment has ballooned to nearly 200% of what it was in '95.

If your salaries are increasing, then the continued payments are no problem, and you probably have transitioned to higher tax bracket, so the interest write-off is more valuable.

I'm glad we paid off sooner than later. And I'm happy that others pay off on time.

 

[trouthog]

Great wisdom well said
Discussing leverage, Warren Buffett once said "if you're smart you don't need it, and if you're dumb you shouldn't be using it."

 

[Sarpy]

We just went through this and decided to pay ours off last week.

We had refinanced a couple of times but each time we went for a 30-year mortgage, and with the plan to invest the difference between a 15- and 30-year mortgage payment into an Index fund. (We were tempted to take the 15-year but thought we'd risk market payback.) Took us longer than we thought, but we still managed to pay off a 30-year mortgage in ~20 years.

We have adequate liquidity or we probably wouldn't have considered this.

...I recently refinanced from a 15 year mortgage to a low rate 30 year mortgage. I've basically been investing the difference in payments. I think of those investments as my mortgage payoff fund, but it also serves as an emergency fund. So I really don't have to make the mortgage payoff decision for several years when that account is larger than the balance of my mortgage. I like the flexibility.

The only thing I'd add, is that this method does require discipline. At this point, I COULD decide that those funds are now useful for going and buying a new car that I don't need. I think some folks make extra payments for that exact reason....it's permanent "savings" that they can no longer (easily) get their hands on that money.

Just another dryer sheet. But we agree, and decided for ONCE, we would not get greedy and instead take the money and run. And after the past few days, we're thinking it was a good decision. (Although, hmmm, maybe we could be grabbing up some good buys now....oh, here we go again, too late, done deal.)

 

[ripper1]

Personally I would rather have the banks 250 some thousand dollars at 3.375%. Seeing that sure I could pay it off, but why. The real cost is less than 3% after itemizing on 1040. My investments yield at least as much even if there is no growth.

 

[youbet]

I feel we achieved something major.

That's great target. I'm glad paying off your mortgage made you feel so good! We all need that kind of emotional uplift in our lives from time to time.

I (long ago) paid my 30 yr mortgage off about 18 yrs into it. When mortgage interest rates fell significantly below what I was paying, I knew I either had to refi or pay it off. No sense paying over current market rates.....

At the time, I was well positioned to pay it off and refi'ing looked like a bit of a hassle, so I just paid it off. But, unlike your situation, it didn't seem like a big deal then or now. My investments were performing OK and the mortgage payment was small potatoes. So, yawn, I paid it off and moved on.

I still stick by my original statement that having a low interest mortgage or having no mortgage, both cases handled prudently, seem to perform about the same in terms of reaching FIRE. All the interesting examples posters have given have implied unusual circumstances and/or behaviors far outside the bounds of "prudent."

I am surprised to hear how many folks have "trouble sleeping at night" from holding a low interest mortgage that is a low percentage of their total worth. But, no doubt, if someone has emotional issues with holding prudent debt, by all means pay it off and get a good night's sleep! Either way, it will matter little on your road to FIRE. It seems to be the emotion, rather than the numbers, that gets everyone worked up.

 

[youbet]

The proponents of either approach will probably argue with your assertion that they produce similar results.

Of course! That's why they're "fans" of whatever approach they're espousing. I'm just surprised by the level of support given to either methodology. It reminds me of Bears vs Packers games!

 

[Dash man]

Personally I would rather have the banks 250 some thousand dollars at 3.375%. Seeing that sure I could pay it off, but why. The real cost is less than 3% after itemizing on 1040. My investments yield at least as much even if there is no growth.

It's obviously a personal decision as long as you're aware of the risks. The next financial crisis may not happen for 10-15 years or it may happen next year. Nobody knows when, but it will happen at some point. A rise of 2% in interest rates will take 15% off the value of a 10 year bond and inflation is higher that what the bonds are paying. The stock market could take a major hit at the same time. Would you be forced to liquidate investments while they are down to pay the mortgage? The worst case would be if we ended up like Japan where the stock market remained stagnant for more than a decade. The Fed has trillions on its balance sheet that will eventually force inflation to rise that could hit bonds pretty hard. Now, I'm not saying to not invest in equities, but suggesting it may not be wise risking a home if a mortgage can be paid off. OTOH if you have the cash to pay off the mortgage, and still have income to live on, go for it. I just saw too many people hurt in the last crisis leveraging when they shouldn't have.

 

[fanmail]

...and the advantage is you don't entirely miss a stock market rally or participate in a crash. You get the safety of a guaranteed return and if things work out great for your investments you can still use them to pay off the mortgage. If the market crashes you can console yourself with you're lower mortgage principal.

Saying one approach is better than the other just gets us back to the same old pay off vs invest argument. Either one depends on circumstances and an unknown future, so hedge your bets and back both horses. I'm a strong advocate of averageness.

This spurred an idea for me. I've been of the mindset that my next house will be a cash purchase and zero debt. But following the notion of a 4% fixed return by paying mortgage down mixed with investing...maybe the rate at which one invests/pays down should be = one's AA.

 

[misty57]

Congrats on not having any debt besides your mortgage. That is almost unprecedented these days for someone your age.

Everybody's circumstances are different. We were in your exact same shoes at your age (almost 30 years ago) and chose to pay down our mortgage based on our own circumstances and the economic circumstances at the time:

We had no debt besides our mortgage (never have)
Mortgage interest rates were historically on the high side
We had $25K in a taxable account earning high interest
DH was banking vacation (personal UE insurance)
We both were maxing out our 401ks

It took 10 years of extra payments to pay off that mortgage. We used the same strategy to pay off the mortgage on the next home we purchased as well.

DH retired last spring at age 56. We are on our third home which we purchased 8 years ago specifically with retirement in mind. Our mortgage is large but the interest rate is historically low so we're keeping the mortgage as a hedge against inflation.

As you can see, we've been on both sides of the payoff your mortgage vs not pay off your mortgage fence. I'm the last person that I thought would have a mortgage in retirement, but right now we think it makes the most sense to keep it.