Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Pay off mortgage or savings acct?
Old 09-17-2020, 10:36 AM   #1
Dryer sheet wannabe
 
Join Date: Mar 2013
Posts: 16
Pay off mortgage or savings acct?

Assume you have $100,000 to either save (not invest) or pay off a mortgage for the same amount. Paying the mortgage does not necessarily keep you up at night.

So you have a couple choices available.

1. Put the money in a 1 yr CD, (currently earning .6 to .8 percent).

2. Pay off an existing mortgage balance (3 5/8%) of the same amount? (You're currently 15 years into the 30 year mortgage term)

Looking at historical S&P index fund performance, a low cost exchange fund may produce higher returns than the 3 5/8% mortgage, however putting this $100k might throw your allocation off too far for your comfort.

What would be a smarter move at this point in time?


Additional assumptions:
. . . 62 yrs old, preparing for retirement (between now and Jan 1)
. . . not in any hurry to take SS yet. . . you do not expect a need for this $100k in the next 12 to 24 months, or perhaps longer
. . . happy with current allocation of risk, so this money won't go into the market
Scarab is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 09-17-2020, 10:44 AM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 9,806
Depends on whether you might need that money for something else. If it's likely you will, keep the cash handy. If it's less likely, you could pay it off and get a HELOC just in case you need to tap the equity.
RunningBum is offline   Reply With Quote
Old 09-17-2020, 10:49 AM   #3
Thinks s/he gets paid by the post
 
Join Date: Jun 2003
Location: Historic Florida
Posts: 4,555
Seems like a no brainer to me. Plus you add your mortgage payments to you savings account every month.
__________________
"Never Argue With a Fool, Onlookers May Not Be Able To Tell the Difference." - Mark Twain
ShokWaveRider is offline   Reply With Quote
Old 09-17-2020, 10:51 AM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Sunset's Avatar
 
Join Date: Jul 2014
Location: Spending the Kids Inheritance and living in Chicago
Posts: 10,137
As long as you are not worried about losing your job, I'd pay the mortgage off in a heartbeat.

The mortgage at 3 5/8% is really like a savings account earning 4.16% since the mortgage has to be paid with after tax money. I feel it will be a long time before interest rates hit over 4%.
Not having that payment each month will feel good.
__________________
Fortune favors the prepared mind. ... Louis Pasteur
Sunset is offline   Reply With Quote
Old 09-17-2020, 10:54 AM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
ivinsfan's Avatar
 
Join Date: Feb 2007
Posts: 5,753
Do you have to put the 100K in one place? Look at your payment schedule for years 15 to 30 and pick a comfort spot as far as interest vs principle payments. Pay down to that number. Put the rest in the market. I personally expect higher inflation as a result of COVID so paying back mostly principle money for the duration of your mortgage could be a good thing.
ivinsfan is offline   Reply With Quote
Pay off mortgage or savings acct?
Old 09-17-2020, 10:58 AM   #6
Thinks s/he gets paid by the post
Markola's Avatar
 
Join Date: Nov 2013
Posts: 1,586
Pay off mortgage or savings acct?

Quote:
Originally Posted by Scarab View Post

What would be a smarter move at this point in time?

In terms of “this point in time,” one’s age might be a consideration. If I were 30ish, dropping the entire $100K in a stock index would surely crush all other alternatives over the next 50 years or so. If I were 60ish, I’d pay off the mortgage to free up cash flow and to ensure the house is protected should massive major medical bills in coming decades consume all other assets.
Markola is offline   Reply With Quote
Old 09-17-2020, 11:20 AM   #7
Thinks s/he gets paid by the post
 
Join Date: Mar 2012
Posts: 1,904
Pay off the mortgage - your future self will thank you for having done it.
njhowie is offline   Reply With Quote
Old 09-17-2020, 12:29 PM   #8
Recycles dryer sheets
Happyras's Avatar
 
Join Date: Jun 2015
Location: Redmond
Posts: 327
Oddly, I recently had the same thoughts and made a 100K principle payment toward our mortgage at 2.625%. It felt like a good alternative to the CD's available, but I did also bought twice as much in no-penalty CD's at 1.3% in 5 separate accounts. We have enough at risk in equities, and doing some toward the mortgage seemed reasonable, but not to pay it all off, I wanted to keep some free cash for opportunities or bank of Dad loans. BTW I am approaching 66 which tempers my risk tolerance.
Happyras is offline   Reply With Quote
Old 09-17-2020, 12:58 PM   #9
Thinks s/he gets paid by the post
 
Join Date: Jan 2013
Location: SoCal, SE Florida, Lausanne
Posts: 1,708
Pay off the mortgage and save the monthly payments.
Freedom56 is offline   Reply With Quote
Old 09-17-2020, 03:03 PM   #10
Thinks s/he gets paid by the post
 
Join Date: Aug 2014
Location: Chicago West Burbs
Posts: 1,540
Since "invest" is off the table, as long as you have the safety bucket full, or some other type of cash stored away, I would pay off the mortgage. Oh wait. I did that very thing 2 months ago.
CRLLS is offline   Reply With Quote
Old 09-17-2020, 03:10 PM   #11
Dryer sheet wannabe
 
Join Date: Mar 2013
Posts: 16
Thanks for the input. I added some assumptions for clarity, but the insight has been helpful so far.

The concept could be flawed, but paying the mortgage off means the end of paying interest, the elimination of debt, and perhaps some peace of mind. While otherwise, the $100k in a CD/MM/Saving account is only earning $500 over the next 12 months (assuming .5% interest), maybe less, maybe for more than a year or two.

Additional assumptions:
. . . 62 yrs old, preparing for retirement (between now and Jan 1)
. . . not in any hurry to take SS yet. . . you do not expect a need for this $100k in the next 12 to 24 months
. . . happy with current allocation of risk, so this money won't go into the market
Scarab is offline   Reply With Quote
Old 09-17-2020, 03:28 PM   #12
Moderator
rodi's Avatar
 
Join Date: Apr 2012
Location: San Diego
Posts: 11,331
I paid off the mortgage... And applied for a HELOC immediately. HELOC is free unless you borrow from it. (At least it was for me.... No fees.) We've tapped the HELOC once, and had it paid to zero in 3 months. It provides the emergency or cash flow cushion we might (rarely) need.

Apply for the HELOC before you retire... so it's in place. (Although I blew it with this - and still qualified after retiring.)
__________________
Retired June 2014. No longer an enginerd - now I'm just a nerd.
micro pensions 7%, rental income 18%
rodi is offline   Reply With Quote
Old 09-17-2020, 03:56 PM   #13
Recycles dryer sheets
fosterscik's Avatar
 
Join Date: Jun 2013
Posts: 328
At the very least I'd refinance the mortgage to a 15 year term. My DD just locked a 15 year loan at 2.5 % with 0.5 points.
__________________
"Success = talent + luck, while great success = a little more talent + a lot of luck"
Thinking, Fast and Slow, Daniel Kahneman
fosterscik is offline   Reply With Quote
Old 09-17-2020, 04:44 PM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
ivinsfan's Avatar
 
Join Date: Feb 2007
Posts: 5,753
Quote:
Originally Posted by Scarab View Post
Thanks for the input. I added some assumptions for clarity, but the insight has been helpful so far.

The concept could be flawed, but paying the mortgage off means the end of paying interest, the elimination of debt, and perhaps some peace of mind. While otherwise, the $100k in a CD/MM/Saving account is only earning $500 over the next 12 months (assuming .5% interest), maybe less, maybe for more than a year or two.

Additional assumptions:
. . . 62 yrs old, preparing for retirement (between now and Jan 1)
. . . not in any hurry to take SS yet. . . you do not expect a need for this $100k in the next 12 to 24 months
. . . happy with current allocation of risk, so this money won't go into the market
You need the money after 2 years? Why pay off the mortgage? What is this, a thought exercise? You clearly talked about the S and P index in your first post. Do whatever you want....I don't know why you are asking for advice.
ivinsfan is offline   Reply With Quote
Old 09-17-2020, 08:16 PM   #15
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 27,120
For a number of years prior to 2020, our AA was 60/35/5... with the 5% being cash in an online savings account that was earning 1.7% in December 2019. Meanwhile, we had a 3.375% mortgage.

Towards the end of 2019 I decided to use the cash to pay off the mortgage... so I figure that I am ahead by avoiding paying 3.375% but forgoing 1.7% (which has since declined further to 0.6% last time that I looked).

In my case I changed my AA from 60/35/5 to 65/35/0 so it was clear that I was trading off 1.75% for 3.375%.... if I hadn't changed my AA I'm not sure it would have been the right move.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...target 65/35/0 AA TBD
pb4uski is offline   Reply With Quote
Old 09-18-2020, 06:18 AM   #16
Thinks s/he gets paid by the post
 
Join Date: Jul 2013
Posts: 1,000
I'd pay off the mortgage in a heartbeat.
mrfeh is offline   Reply With Quote
Old 09-18-2020, 06:28 AM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 27,120
Quote:
Originally Posted by mrfeh View Post
I'd pay off the mortgage in a heartbeat.
Why?
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...target 65/35/0 AA TBD
pb4uski is offline   Reply With Quote
Old 09-18-2020, 07:34 AM   #18
Thinks s/he gets paid by the post
jollystomper's Avatar
 
Join Date: Apr 2012
Posts: 2,977
Quote:
Originally Posted by Scarab View Post
Assume you have $100,000 to either save (not invest) or pay off a mortgage for the same amount. Paying the mortgage does not necessarily keep you up at night.

So you have a couple choices available.

1. Put the money in a 1 yr CD, (currently earning .6 to .8 percent).

2. Pay off an existing mortgage balance (3 5/8%) of the same amount? (You're currently 15 years into the 30 year mortgage term)

Looking at historical S&P index fund performance, a low cost exchange fund may produce higher returns than the 3 5/8% mortgage, however putting this $100k might throw your allocation off too far for your comfort.

What would be a smarter move at this point in time?


Additional assumptions:
. . . 62 yrs old, preparing for retirement (between now and Jan 1)
. . . not in any hurry to take SS yet. . . you do not expect a need for this $100k in the next 12 to 24 months, or perhaps longer
. . . happy with current allocation of risk, so this money won't go into the market

Hi OP, this is as much a emotional as a financial decision, so I do not believe there is one "right" answer. Let me share my situation to show you my thought process, which you may or may not agree with.

I retired end of June 2018, age 60. At the time, I was 5 years into a 15 year refinanced mortgage. The interest rate was 2.875%. The monthly payments were a little more that $600/month.

I have a very good non-cola pension that is above the U.S. median household income. In addition to my stock/bonds AA, I had 5 years of cash to cover the gap between pension + spending investment/interest income and our planned expenses. My target SWR was just over 2%. I was in no hurry to payoff my mortgage, the payments were not an issue.

Two years into retirement, our expenses have been much lower even though we have been doing everything we wanted. Our investments grew (even with the March plunge) to be greater than when I retired. Lower spending plus some unexpected cash inflows left us with more cash than when I retired, and our cash could now potentially cover us for 10 years.

I still have not taken SS. DW took her SS this year as it is much lower than what she will get as a spouse when I take my SS, and we figured why not. Her monthly SS is about 81% of the monthly mortgage payment. It is just adding to our cash.

Add to that the pandemic, which left us with over $20K allocated for travel this year that we will not be spending.

I was tempted, with all of this "excess" cash, to invest some of it. Since the mortgage had another 7 years, why not invest the equivalent of the balance, I might likely earn more that 2.875% on average annually over that time. But in truth, I do not need to. The biggest benefit of investing it would be to our heirs - who already stand to get plenty- and not so much to us. I already have an AA that lets me sleep at night. Some may consider this "winning the game", I do not know.

So my thought was, rather than increase our investments and, in a sense, complicate our financial picture, why not simplify it? The biggest item that stood out to simplify was eliminating our mortgage.

Now, we owed less than you - about $50K. Given the amount of cash we had, and being halfway into the 15 year mortgage at this point, I thought that it was time to focus less on maximizing how much money I can earn - and the risks associated with doing that - and more on having less financial things for us to deal with.

So, in July we paid off our mortgage. We have no regrets. It is a nice feeling dong the monthly bills and not having that on the list. We still have plenty of cash on hand and no financial need for me to take my SS - at which point our planned expenses will be completely covered by pension + SS + interest/dividend income.

So... I just wanted to share with you my thought process. Our situation may not be applicable to yours, but perhaps you can use it to compare and contrast. Good luck with whatever decision you make.
__________________
FIREd date: June 26, 2018 - wwwwwwhat a rush!
jollystomper is offline   Reply With Quote
Old 09-18-2020, 07:59 AM   #19
Thinks s/he gets paid by the post
 
Join Date: Jun 2003
Location: Historic Florida
Posts: 4,555
Quote:
Originally Posted by pb4uski View Post
Why?
Because for "Most" retired folks it is the right thing to do. The best thing we ever did was put $4k a month back in our nest egg account. Stops paying high(er) interest in a low interest environment.
__________________
"Never Argue With a Fool, Onlookers May Not Be Able To Tell the Difference." - Mark Twain
ShokWaveRider is offline   Reply With Quote
Old 09-18-2020, 08:14 AM   #20
Full time employment: Posting here.
 
Join Date: Jun 2014
Posts: 947
Quote:
Originally Posted by Markola View Post
In terms of “this point in time,” one’s age might be a consideration. If I were 30ish, dropping the entire $100K in a stock index would surely crush all other alternatives over the next 50 years or so. If I were 60ish, I’d pay off the mortgage to free up cash flow and to ensure the house is protected should massive major medical bills in coming decades consume all other assets.
I think this is the biggest thing, given the age of OP, I'd be putting it into a safe investment which isn't going to earn them even what they are paying on the mortgage thus paying it off is really the best answer IMO.

I'm trying to preserve cash until 59.5 so we will be paying our mortgage until then with the plan to then pay it in full as we gain full access to all our investments without any restrictions.
karen1972 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Pay off or not to pay off? brownred FIRE and Money 16 03-13-2017 05:28 PM
USAA savings acct hacked for 5 figures davismills FIRE and Money 64 04-26-2016 09:59 PM
Just paid off the mortgage. Putting the pay off the mortgage question to rest. FUEGO FIRE and Money 65 06-08-2015 05:08 PM
What would you do - pay off student loan or pay down mortgage? bank5 FIRE and Money 27 07-27-2009 05:30 PM
Shifting $ To Another Online Savings Acct Marcretire FIRE and Money 17 09-03-2008 01:43 PM

» Quick Links

 
All times are GMT -6. The time now is 03:20 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2020, vBulletin Solutions, Inc.