Pay down mortgage or keep investing?

[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]

Quote:

Originally Posted by GrayHare 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/foru...ml#post1214332

Post #34

[timo2]

Quote:

Originally Posted by 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

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]

Quote:

Originally Posted by Cobra9777 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.


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[rayvt]

Quote:

Originally Posted by Terryjm51 Some best advice I got, always put 15% in retirement fund and throw the rest at the house.

The problem is, as long as you have a mortgage, your house is 100% at risk. I have seen $100,000 houses go into foreclosure with as little as $5000 principal balance. Best to put the money into something else (call it a Mortgage Freedom Account) until it is large ehough to pay the mortgage completely off.

Of course, nobody expects to ever go into foreclosure, but s**t happens.