Pay down mortgage or keep investing?

[Hyperborea]

Personally, I'd max the 401k to reduce your effective tax rate and then I'd aggressively pay off your mortgage. There are very few people who regret paying off their mortgage, including me.

I think it's probably also true that there are very few people who regret consciously making the choice to not payoff the mortgage and invest instead, including me.

I think the OP needs to restructure his mortgage to get rid of the mortgage insurance and bring the rate down. That may mean refinancing if he has enough equity or bringing some cash and refinancing. Or at the very least putting down a lump sum to get rid of the insurance. He should do this whether or not he plans to invest or payoff the house.

 

[W2R]

I'd refinance to a shorter term to get the lowest rate you can and pay it off aggressively. After maximizing 401k etc maybe split any extra cash you have 50/50 between investments and extra principal payments. Think of the extra mortgage payment as a 3% guaranteed savings account.

+1

Paying off the mortgage or not, is one of our most contentious discussion topics with good, sound arguments to be found on both sides.

I'm one of the "yes, pay off the mortgage before you retire" folks. Not to say that I am guaranteed to be right! But to me, it's a matter of comparative risk. The risk that Chase Bank would come back at me to demand more money 12 years after I paid off my mortgage, is less than the risk of any investment I can think of right off the top of my head that would yield 3% to me.

*FOR ME*, going into retirement with a paid off mortgage has been wonderful and such an unimaginably huge stress reliever. I don't regret it one bit and honestly cannot even imagine having the psychology of actually wanting to owe a hefty payment every month in retirement, even when the market has tanked and other big irregular expenses have come up.

But do read all the alternate points of view, and make up your own mind because this is one of those "different strokes for different folks" questions.

 

[Toocold]

I think it's probably also true that there are very few people who regret consciously making the choice to not payoff the mortgage and invest instead, including me.

I don't disagree. That's why I started off my passage with "personally" which refers to my preference.

Now for my rental properties, my preference is to keep the mortgages on there because it's directly tied to an income producing asset. For my primary home, I don't want the payment tied to me as the income producing asset, and I see it as a reduction of living expenses.

 

[Markola]

Then there's the factor of whether you'd need to move. Growing family, layoffs and better job elsewhere, obnoxious neighbors, etc. We're on our 4th house now, none of which I'd have predicted. Moneywise, in 20-20 hindsight, the smart thing would have been to rent the space we needed according to our shifting needs, allowing us to crush our savings rate. The Missus wanted yards to garden in, though, and I assumed renting was just "throwing money away." Well, if we'd rented, we could be FIRED by now here in our early 50s.

 

[Hyperborea]

Personally, I'd max the 401k to reduce your effective tax rate and then I'd aggressively pay off your mortgage. There are very few people who regret paying off their mortgage, including me.

I think it's probably also true that there are very few people who regret consciously making the choice to not payoff the mortgage and invest instead, including me.

I don't disagree. That's why I started off my passage with "personally" which refers to my preference.

"Personally" covers the first sentence. The second sentence gives a very broad sweeping generalization that is not personal. Personally, 4 is bigger than 3.

Edit: Analogy might be better stated as, "Personally, I like pasta. There are very few people who regret getting the rigatoni, including me."

 

[GrayHare]

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).

 

[homestead]

We paid off our house first before starting any retirement savings. This also gave us no house payments in case I got laid off. Worked out well for us, retired 8 yrs now.

 

[Gotadimple]

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.

My question is, would you all recommend continuing to max out our retirement accounts or payoff the mortgage?

Thanks for your advice.

First of all, check on the current market value of your home. It is possible you are now at 80% LTV and can drop the PMI. Call the bank to discuss this option.

At a minimum you have savings in the cost of the PMI. You can apply it to the principal on the loan, or invest it.

Second, if you seriously want to pay less interest, refinance the loan, and if you can afford it go for a 15 year mortgage. The other alternative is selling your taxable investments to equal the cost of the mortgage payoff. Not a great idea, and it increases your income tax costs, and you lose the power of the investments over the next 30 years.

So Option 1 and Option 2. You can combine them if you want.

Not an option: it is not an option to discontinue funding your retirement accounts to the full amount. You will need that money later, and your time horizon is long enough that you can easily build a comfortable nest egg. That said, should there be a bump in the road, you have access to funds (paying no taxes on money deposited) to get you through the bump.

- Rita

 

[l8_apex]

When I was faced with a similar decision, I refi'd at 80% LTV and put all of that cash ($400k) into investments. The rate of return on those investments is much higher than the loan's rate. I didn't even have to include taxation consequences to see that was the right way to go.

To all of those who question whether to be in a house that's paid off if the economy tanks - one thing you're not considering is that if the bank owns the house (and you've got the cash in other investments) - you can always just walk away from the home and live somewhere else. Sure, some will say that's not the right thing to do, but it's still an option.

 

[Closet_Gamer]

Many years ago DW and I discovered that we owed the world 3 things:

1) college loans
2) good education for our kids
3) mortgage debt

We decided to wipe out all 3 at which point we were just playing for beer money and ER.

Never failed to get a 401k match and we worked the mortgage, savings, and college savings in parallel after the student debt was paid off. After we had made some progress on all 3, we turned our guns fully on the mortgage. It felt great to be totally out of debt for the first time since I was 19.

Then we pounded out the college savings. As DD#1 looks for college, it's really nice to have that ready to roll.

All guns firing on FIRE for last several years at this point. Starting to see the finish line on that firm up as well

 

[CardsFan]

While I am a fan of paying off the house before retirement, at your ages you have plenty of time for that. And in your income range, I think it is best to maximize tax deferred investments, with or with out a match. So, as several here have said:
1. re-fi for a better rate and get rid of the PMI (even if that requires adding a few Thou)
2. Max out all tax deferred accounts
3. If there is extra available for investment I would invest 1/2 after tax, and pre-pay the loan with the other half. Best of both worlds. It is not black or white. There is a lot of grey in between.

In my case, we did not have this as a plan, per se, but it is basically what we did.

Retired a year ago at 60 with more than we need.

 

[Paracelsus]

I paid off my mortgage as quickly as possible when I was about 42 (my lending interest rate at that time was 8.75% on my mortgage). I always was able to max out my 401K donation through work, but after paying off the mortgage, I applied the money I used to spend on mortgage to other investments (not limited for retirement age restrictions on withdrawal). I'm now using those funds to supplement my early retirement before the 59.5 cutoff to start getting to the IRA.

I also felt much more secure in case anything happened to my job and I'd need to live off less money - the mortgage payment used to be about 30% of my income, but lots easier to live off 70% of my income than needing to pay the mortgage if I lost my job (never happened).

 

[Travelfreek]

I vote for refinancing to a 15 year or 10 year no fee mortgage at the minimum and get rid of PMI. We did this in November and got a 2.75% rate for the 10 year note (a little less APR than the 15 year note). We also put a bunch of cash into our current home to reduce our mortgage from $356k owed to $218k owed. We plan to pay it off in about 6 years. We used an internet firm called US Wide Financial and had awesome results. Their rate was .25 % lower than others and they are very competent and are highly ranked on Zillow and Bankrate. Based out of Kansas City I believe.

You are very young to be in this amazing position! Congratulations to you and your wife! How many years do you have left on your current mortgage? The difference in overall interest paid is pretty significant to go from a 30 year to a 15 at least if not a 10. Then, you can bank your income and become wealthy much much faster! Do you have kids with college in the future?

What's nice about a short mortgage and eventually no mortgage is that you have more peace of mind and a simplified financial life. You can still invest 15% of your total gross income on your salaries, right? Doing that while paying your house down sooner would be the perfect recipe for financial independence!

 

[Markola]

You only have one shot at saving for retirement early while you are young enough for it to compound strongly, which is now. Plus there's the income tax savings. However, there are other ways to pay off a mortgage later, such as downsize and harvest the equity, rent it out and let a tenant pay your mortgage, move to a lower cost of living area or country, sell and become a renter, etc. That's how I approached it at your age and now, at 51, have both an affordable mortgage and seven figure portfolio. I wish I'd rented the whole time, in hindsight, for an even higher savings/investing rate due to avoiding a lot of the costs of home ownership but am reasonably satisfied with my choice.

 

[Fedup]

I would keep an eye for cash flow analysis when exchanging 30 year to 10 or 15 year mortgage. Everything is ok until you lose your job, that's when you want minimum payment to keep afloat. Otherwise, the bank will take back the house regardless of whether you have 50% equity or 70% equity. In the housing bubble burst, people who didn't pay for HOAs get their house repossessed. That's just HOA fees. Same with property taxes. Even if you have zero mortgage, if you are delinquent in paying property taxes, your house will also have a lien. Make sure you have enough cash/cash flow to cover for these situations.
This advice is from somebody who converted a 15 year mortgage back to 30 year mortgage. Luckily, I locked in at the lowest rate for the 30 year.

 

[RunningBum]

We paid off our house first before starting any retirement savings. This also gave us no house payments in case I got laid off. Worked out well for us, retired 8 yrs now.

But you could also tap your savings to make your house payments in case you get laid off. I'm not saying that's the better strategy, or worse, but as long as you are saving rather than spending the excess you'd put toward paying off the house, it is available to you when you need it, and for whatever reason.

I'm mostly in the "doesn't matter much" camp. The one exception, if you are retiring before 59.5 and have most of your money in retirement accounts, a mortgage helps you float the gap until you can tap that money.

 

[Fedup]

It's not a good idea to pay off house first before starting retirement savings. You'll be paying high tax rate for all those years. I know it sounds cool but it's not. Maybe I'm in the tax avoidance camp.

 

[homestead]

But you could also tap your savings to make your house payments in case you get laid off. I'm not saying that's the better strategy, or worse, but as long as you are saving rather than spending the excess you'd put toward paying off the house, it is available to you when you need it, and for whatever reason.

I'm mostly in the "doesn't matter much" camp. The one exception, if you are retiring before 59.5 and have most of your money in retirement accounts, a mortgage helps you float the gap until you can tap that money.

Wouldn't have worked for us unless we wanted to take the tax hit. Everything went into 401K or Ira.

 

[homestead]

It's not a good idea to pay off house first before starting retirement savings. You'll be paying high tax rate for all those years. I know it sounds cool but it's not. Maybe I'm in the tax avoidance camp.

At the time (70's) we were paying 9.5% interest on house and low income with 3 kids so not much for taxes.

 

[target2019]

It's not a good idea to pay off house first before starting retirement savings. You'll be paying high tax rate for all those years. I know it sounds cool but it's not. Maybe I'm in the tax avoidance camp.

OP and spouse have 200k income, and substantial income. One or both have started retirement savings.

The 401k has no match. They have a large mortgage, and the original question was payoff note faster, perhaps in 3 years, or invest more.

A refi will help.
Paying more to the loan will help.
Investing more will help.
Spending less will help.

 

[Lawrencewendall]

I just re-field to a 30 year, 3 3/8 mortgage. There are plenty of places to make 8% in the market and pocket the difference. That 1k a month payment will be paltry 30 years from now due to inflation. Use someone else's (the banks) to earn money in the market today.

 

[Fedup]

OP and spouse have 200k income, and substantial income. One or both have started retirement savings.

The 401k has no match. They have a large mortgage, and the original question was payoff note faster, perhaps in 3 years, or invest more.

A refi will help.
Paying more to the loan will help.
Investing more will help.
Spending less will help.

My comment in that post is regarding homestead's post, not OP. But he since provided more information that his loan was 9.5 interest rate and he was not in high income tax bracket.

 

[LuckyDog]

You are young. Let your savings compound. I am of the opinion that you should:
1. refinance the mortgage
2. max out your retirement savings
3. invest the retirement saving aggressively
4. pay down the mortgage as fast as possible...

 

[target2019]

My comment in that post is regarding homestead's post, not OP. But he since provided more information that his loan was 9.5 interest rate and he was not in high income tax bracket.

Sorry. I was confused.
As we were paying down 8.125%, in the late 90's, interest rates probably warranted a refi. Each time I brought this up, spouse was paying extra principle. By the time we paid off with a lump sum (2004), it worked for us. We were in a middle bracket.

 

[orangehairfella]

Our situation was almost identical to yours in terms of age and income. What did we do? During the first few years of the mortgage we:

1. Maxed out a 401k, a 403b and a 457b. Two of those three have no matching.
2. Maxed out 2 ROTH IRAs
3. Maxed out an HSA.
4. Built up a large taxable account buffer.

We had also randomly paid extra payments on the mortgage: $1000 here, $3000 there. Just a few years of doing that had paid the note down 40%. After those few years, life felt stable and our taxable account had grown substantially. At that point we started talking about paying off the house in one big payment. We knew the biggest negative: Stocks are a better long term investment.

I read through dozens of threads on the topic, but one poster's comment stuck with me:

Would you take out a home equity loan to invest in the stock market?

No. No I would not. Maybe others would, but I decided I didn't want to continue leveraging the roof over my head for what didn't feel like an exceptional amount of gain in the future.

In the end, it was an emotional decision. I liked being debt free more than I liked the idea of maybe-more-money. We sold a chunk of our taxable account, rebalanced elsewhere, and wired the payoff amount. It took us 47 months total to pay off our house. It felt good, we're entirely debt free, and I'd do it again.