Pay down mortgage or keep investing?

[Badger]

Every one has their favorite plan based on their particular circumstances. In our case we were both in low income careers putting us in the 15% tax bracket. Our home was modest but had a 8.75% mortgage years ago when we were 40 yrs old. Since we were at a point where any interest was not enough to help us itemize our tax we decided to hold off on retirement savings and make double payments with the second payment to reduce the principal. Neither of us had a 403b that had matching funds so no advantage there. If we did we would probably put away up to the matching amount. After a few years of peanut butter sandwiches the house was paid off and the feeling was great. I really hate making payments and now refuse to pay for anything on time. Once the house was ours we continued with the amount we had been making on the mortgage and plugged it all into maxing our both our 403b and Roth IRAs until we retired. The last few years of working we even converted some of the IRA money to Roth. Probably not the best plan but it was what we could understand. We now have 0 debt of any kind with retirement investments that will take care of us until the bucket is kicked and then there will be enough (if they have planned and managed carefully) for the kids to have a nice retirement.

Cheers!

 

[Markola]

Every one has their favorite plan based on their particular circumstances. In our case we were both in low income careers putting us in the 15% tax bracket. Our home was modest but had a 8.75% mortgage years ago when we were 40 yrs old. Since we were at a point where any interest was not enough to help us itemize our tax we decided to hold off on retirement savings and make double payments with the second payment to reduce the principal. Neither of us had a 403b that had matching funds so no advantage there. If we did we would probably put away up to the matching amount. After a few years of peanut butter sandwiches the house was paid off and the feeling was great. I really hate making payments and now refuse to pay for anything on time. Once the house was ours we continued with the amount we had been making on the mortgage and plugged it all into maxing our both our 403b and Roth IRAs until we retired. The last few years of working we even converted some of the IRA money to Roth. Probably not the best plan but it was what we could understand. We now have 0 debt of any kind with retirement investments that will take care of us until the bucket is kicked and then there will be enough (if they have planned and managed carefully) for the kids to have a nice retirement.

Cheers!

That's the way it's done. Great story.

 

[COcheesehead]

That's a common misconception. You actually get a return of (mortgage rate) - (inflation rate).

Minus tax benefit too?

 

[Freedom56]

My wife and I currently owe $298,652 on our house with an interest rate of 4.625%. I'm 33 and she's 29. Household income at about 200k/year.

We have no other debt.
~91k cash
~118k retirement accounts

We do not get any employee matching at our current j*bs.

My question is, would you all recommend continuing to max out our retirement accounts or payoff the mortgage? I would love to not have a mortgage payment in about 3 years or so. We bought the house in 2014 for about 350k and I'm sick of paying the interest and not kicking down the principle.

Thanks for your advice.

Pay down the mortgage and your savings will grow much faster. We paid our first home off while I was in my 40's. If you can do it in your 30's, that's even better. Your savings will grow much faster there after. We bought our second home after the last financial crisis and have more than tripled our investment in that property after five years. Being completely debt free will lead to an early retirement. It costs us just $980 (average) per month (property tax, insurance, utilities, maintenance, TV, Phone, etc..) for our Southern California home now. Rentals of the same type of property are over $4500 per month in our neighborhood.

 

[ERD50]

Pay down the mortgage and your savings will grow much faster. ...

Isn't that ignoring the money it took to pay down the mortgage (which would have come from, or gone into 'savings')?

Anything can be made to sound good with fuzzy accounting!

Let's see - I could pay off my remaining mortgage balance of ~ $83K, and then I could 'save' $568/month. Hey, it would take me over 12 years just to get my 'savings' back to where it was. That's "fast"? No, it's behind for 12 years!

And that ignores opportunity cost of the money (and any tax savings, minor at this point, but still some $). If I had followed this same commonly offered 'pay it off' advice 10 years ago, that pay-off money would have missed an approximate doubling in value (SPY over 2x, Wellesley up ~ 1.92x) of that money.

My home value went up the same amount, whether it was mortgaged or not.

For those who say it is an emotional decision, I can't tell you how emotional I'd be, knowing I lost out on over $80,000 worth of market gains! I'd be crying in my beer!

-ERD50

 

[exnavynuke]

Isn't that ignoring the money it took to pay down the mortgage (which would have come from, or gone into 'savings')?

Anything can be made to sound good with fuzzy accounting!

Let's see - I could pay off my remaining mortgage balance of ~ $83K, and then I could 'save' $568/month. Hey, it would take me over 12 years just to get my 'savings' back to where it was. That's "fast"? No, it's behind for 12 years!

And that ignores opportunity cost of the money (and any tax savings, minor at this point, but still some $). If I had followed this same commonly offered 'pay it off' advice 10 years ago, that pay-off money would have missed an approximate doubling in value (SPY over 2x, Wellesley up ~ 1.92x) of that money.

My home value went up the same amount, whether it was mortgaged or not.

For those who say it is an emotional decision, I can't tell you how emotional I'd be, knowing I lost out on over $80,000 worth of market gains! I'd be crying in my beer!

-ERD50

Why have you been spending money on beer?? You could be saving that for retirement!

Most spending is a choice that could go elsewhere. Pay the mortgage down faster or eat out more. Eat out more or invest more money. Buy a $10k car or put $5k in investments and buy a $5k car. Have steak and save less or eat ramen noodles and invest more.

Most of the choices we make come down to emotions. Will we feel better investing more or having a more comfortable quality of life. For some, being debt free is a much larger emotional "asset" than eating steak instead ramen noodles would be.

 

[ERD50]

... For some, being debt free is a much larger emotional "asset" than eating steak instead ramen noodles would be.

And I'm pointing out there are two side to that emotional "asset" - I'd feel bad emotionally not having that low-cost mortgage money working for me, and to state it positively, I feel good emotionally having that low-cost mortgage money working for me. And that emotion has also greatly benefited me financially. Win-Win.

-ERD50

 

[harley]

Most of the choices we make come down to emotions. Will we feel better investing more or having a more comfortable quality of life. For some, being debt free is a much larger emotional "asset" than eating steak instead ramen noodles would be.

I don't think anybody really argues with that. It's only when someone posts something saying

Pay down the mortgage and your savings will grow much faster

that we attempt to show the other side of the equation. Of course having a mortgage or not is a personal choice, with great reasons for the person making the decision. But it's not a cut and dried mathematical certainty either way. At least not until years later when you can come up with solid numbers.

 

[Fedup]

Isn't that ignoring the money it took to pay down the mortgage (which would have come from, or gone into 'savings')?

Anything can be made to sound good with fuzzy accounting!

Let's see - I could pay off my remaining mortgage balance of ~ $83K, and then I could 'save' $568/month. Hey, it would take me over 12 years just to get my 'savings' back to where it was. That's "fast"? No, it's behind for 12 years!

And that ignores opportunity cost of the money (and any tax savings, minor at this point, but still some $). If I had followed this same commonly offered 'pay it off' advice 10 years ago, that pay-off money would have missed an approximate doubling in value (SPY over 2x, Wellesley up ~ 1.92x) of that money.

My home value went up the same amount, whether it was mortgaged or not.

For those who say it is an emotional decision, I can't tell you how emotional I'd be, knowing I lost out on over $80,000 worth of market gains! I'd be crying in my beer!

-ERD50

Exactly, I did this for one of my rentals in the early 90s. Guess what? That's the period one should not miss in investing history. Of course, I had my house and contribution to 401k, and savings. I had a 15 year mortgage because I was at home with my first kid and thought that was a good idea. That was not my first 15-year mortgage mistake. I did the same with my residence at the time. Always paid down every time I refinanced. I finally learned when I refinanced in 2003 to 30 year mortgage. Best decision I've made. Otherwise I would come here and bragged about paying my mortgage early.

 

[Scuba]

I would refi and get the equity low enough to avoid PMI. I'm in the "carry a mortgage" group. I think having all that equity locked into an illiquid possession is silly, as long as you have the capability to pay it off at will. It's a matter of choice, obviously, but I would at least run the numbers and see how much more manageable your payment would be at ~1% lower interest and no PMI. Make sure you save/invest the difference, as opposed to increasing your spending. If you don't have the discipline to do that, then pay off the mortgage.

Of course, if you do pay off the mortgage, you still need to save/invest the difference. Having a mortgage is a good way to learn to save if you don't already know.

+1

 

[Retireatee1]

I've maxed out my retirement account savings, and have been putting a substantial amount towards mortgage principal curtailment over the past few years. I'm probably 10 years from the retirement party, but I can pay off the mortgage if I continue my aggressive pace in less than 2 years. So I'll have a mortgage payoff party to look forward to in the near future, which makes it exciting and keeps my level of commitment up!

 

[rayvt]

Originally Posted by brucethebroker
where else can you get a "guaranteed" return of 4.625% (what you get when you pay down your mortgage).

That's a common misconception. You actually get a return of (mortgage rate) - (inflation rate).

It's a common misconception, but not the one you said.

Paying off a 4.625% mortgage does not give you a 4.625% return, any more than paying off your 22.5% credit card every month gives you a 22.5% return.

All it is, is eliminating an expense. Just like getting your coffee from a gas station for $1 instead of paying $5 at Starbucks. And nobody brags that they are getting a 400% return on their gas-station coffee.

And none of that compares to the "guaranteed" return you get by not using a payday loan service.

 

[Blue Collar Guy]

i faced this situation a few years ago, i heard one popular financial guru say carry a large mortgage and invest your money, another one said pay of the mortgage as they never foreclosed on a paid off home.. I opted to pay off my home , i would have made a lot more if i invested the money and kept the mortgage, but im not a gambler and i have HUGE peace of mind that the house is paid in full, when i do my imaginary budget, i no longer have that mortgage nut to figure in thus lots of extra free case to use .save , invst etc.

 

[Markola]

Do any FIRED folks here rent? That's what I'm dreaming about. DW and I rented a nice apartment for six months a few years ago and saved a ton each month while we did it, plus it was nice having a larger savings nut due to the sale of our previous house, not to mention that maintenance and repair hassles consisted of calling the front desk.

 

[mrWinter]

You and I are in a remarkably similar situation (also 33, have 260k left on my mortgage, similar income range), I have also wondered the same as you as where to best put my money. I can share my considerations, those more knowledgeable please correct me if my logic is wrong anywhere:

Pro for putting money into retirement accounts:

• If the market keeps ticking along for the next 50 years as it has for the last, money put into aggressive investments in equities should solidly outperform money put into your mortgage.
• The government is subsidizing your mortgage interest (through everyone's favorite wellfare for the rich), so the rate you are ultimately paying in interest is lower than 4.625%. What that effective rate really is would depend on your effective tax rate. Maybe someone smarter than me can do the math, but ballpark like 3.5% right? That makes retirement equities even better comparably. (I believe this is what bingybear was referencing when he asked what the effective rate of your mortgage was after itemizing your deductions)
• Your mortgage payments don't rise with inflation, over a long run of inflation that 260k loan shrinks. Owned equities in theory should better track with inflation (right?).
• If you are putting money into Roth IRA's you can access that money (not the earned interest) penalty free fairly easily I believe. Once you put that money into paying down your mortgage you have to get a home equity loan if for whatever reason you want to get some back. (You make too much money to put into a ROTH IRA don't you though? At least without doing a backdoor conversion. So unless you are willing to go through that hoop, moot point)

Pros for putting money into paying off mortgage

• Return is guaranteed, so comparing to expected returns in aggressive equities isn't fair, more like comparing to CD returns or the like. The risk for return looks pretty great actually.
• Once you pay it off you actually own something real, as opposed to ephemeral equities that I fear could disappear at any time. That said, of course the real estate market can nose-dive as well, but if it does at least you can still live in a devalued house, can't say that for stocks. The first pro for putting the money in retirement accounts "If the market keeps ticking along for the next 50 years" is a big "if". I could sleep better knowing I actually owned the roof over my head.

I made the decision to put my money into retirement equities, rather than into my house. Ultimately I think the decision comes down to a risk tolerance, investing in aggressive retirement funds being the risky choice and paying down the mortgage being the safe one. I'm currently pumping all my savings into retirement accounts, but I could change my tune a bit in the future, as I'm starting to get pessimistic about the market currently. Equities are expensive right now, maybe I should be buying my house instead.


Regarding refi:

• I assume you have a 30 year mortgage because most people do, those 3.125 rates people are quoting you are for a 15 year loan which will have a lower rate than a 30 year loan.
• You can drop the PMI if/when you refi if you have at least 20% in equity.
• A mortgage broker can explain the exact payoff period of a refi given a particular rate, you will pay up front for the refi, but after time the reduced rate will pay you back. After that break even point you are saving money, but if you sell before then, you've wasted money by doing a refi.

 

[mickeyd]

I have always thought that paying off my last mortgage was one of the best financial decisions that I made 20 years ago or so. Many financial decisions that I have made since that time are related to that decision to eliminate that monthly payment.

 

[Scuba]

My ER was enabled by not only maxing out IRA/401K contributions but also setting aside significant taxable investments. As others have said, you'll need money to fund your ER pre-59.5. When we ER'd, about 60% of our financial assets were in taxable accounts. This will also help us minimize our tax burden in retirement.

 

[Scuba]

PS - we still have a mortgage (3.375% 30-year fixed) and it is not our goal to ever pay it off. We have no kids and like the idea of using a modest amount of leverage to help our money make more money for us.

 

[Fedup]

I feel like the TDAmeritrade ad. There is no put option on winning. That's effectively is when you pay down your mortgage.

 

[kaudrey]

I would recommend what I have actually done - refinance into a 15 year (with no PMI), and keep investing.

 

[Blue Collar Guy]

i heard a guy on the radio say if you think keeping a mortgage is a great idea, mortgage ur house to the hilt and invest, . my risk tolerance told me to pay off the house, and thats what i did, seems for our life style we have more than enough for 2 lifetimes making more was too much of a risk for us

 

[imoldernu]

While most members will have enough to make this kind of planning unnecessary, we decided to own, as a matter of protecting the surviving spouse in the event that long term healthcare costs might deplete other assets.

Here's a link to my rationale... to be able to keep the home if other assets are depleted and medicaid takes over.

http://www.early-retirement.org/forums/f27/sharing-23-years-of-frugal-retirement-62251.html#post1214332

Post #34

 

[timo2]

i heard a guy on the radio say if you think keeping a mortgage is a great idea, mortgage ur house to the hilt and invest, . my risk tolerance told me to pay off the house, and thats what i did, seems for our life style we have more than enough for 2 lifetimes making more was too much of a risk for us

On our new mortgage, our FA wanted us to put 20% down and invest the rest but our original idea was to put 50% down, so DW and I split the difference. WE put 40% down to kept the payment under $1000/mo (DW was comfortable with that if she is a widow) and the remaining funds that we could have put in the house we are putting in an investment for DW should I die first.

edit, we also did the 30 yr instead of 15, even though we only plan on living there 15 years (I'm 64).

 

[Woodsrider]

At your age, I would prioritize maxing out retirement savings over paying down the mortgage. As others have suggested, I'd refi down into the low 3% area and get rid of mortgage insurance. Then use the monthly savings to invest even more aggressively. If it makes you feel better, you could also make additional principal payments. This will accelerate your descent down the amortization schedule where more of your payments go toward principal instead of interest. But assuming you can get down to ~3.1%, plus the interest deduction, I'd still be leaning toward plowing money into stocks.

This is what we did and it worked out very well.

 

[Terryjm51]

Some best advice I got, always put 15% in retirement fund and throw the rest at the house. Once house is paid throw extra at retirement. That 15% is compounding while paying the house off.


Sent from my iPhone using Early Retirement Forum