Pay off the mortgage or set it and forget it, what would you do?

[Camas Lilly]

With nearly 70 messages, to summarize the responses:
1. Go ahead and pay off your mortgage
2. Go ahead and keep your mortgage, invest the funds and pocket a hopeful spread (arbitrage)

Do what makes you happy - no right or wrong answer, actual results won't be known until 10-30 years down the road.

You are funny! Sometimes it isn't all about the money, it is what you are most comfortable with. I have figured, refigured and refigured several ways of putting some down and investing the rest, and I don' t come out far enough ahead, for length of time between the cost of the mortgage and the cost of financing to really make it worthwhile. This is not my retirement money so I will do what lets me sleep at night.

If I were younger, yes, I would probably invest the money because it would have a longer period of time to grow, but at the end of the day, I won't be worried about it next year either.

 

[W2R]

[...] just so much more to do to get our new home set up as I want it, less time for computer gazing.
-ERD50

I haven't been reading as many threads as I once did. Somehow I missed that you bought a NEW HOME!!!!! Are you still living in the same area, or did you move to another state? Do you love your new home as much as I love my Dream Home?

Enjoy! I am happy for you and wish you the best in your new home!

 

[Romer]

You are funny! Sometimes it isn't all about the money, it is what you are most comfortable with. I have figured, refigured and refigured several ways of putting some down and investing the rest, and I don' t come out far enough ahead, for length of time between the cost of the mortgage and the cost of financing to really make it worthwhile. This is not my retirement money so I will do what lets me sleep at night.

If I were younger, yes, I would probably invest the money because it would have a longer period of time to grow, but at the end of the day, I won't be worried about it next year either.

That is where I was the end of last year

Logically, keep the money invested will provide a greater financial picture

Emotionally, I saw it as a way to be one step closer to being free of debt and moving towards retirement

I could still retire if I had not paid off the mortgage. It was a 15 year with 5 years left. It would have been paid off at 65 and the 2.75% interest would have been fine and I would have made more with the investments over the past year.

Sometimes you have to do what feels right. It felt more important to me to be free of debt as I moved into this next phase than the investment reduction I took to make it happen

It would have been just as right to not pay it off and some probably think I did the wrong thing. BUT, that feeling of paying off the house that I plan on living in for the foreseeable future is "Priceless" Maybe not smart, but I wouldn't change what I did.

 

[ERD50]

Originally Posted by ERD50 View Post
[...] just so much more to do to get our new home set up as I want it, less time for computer gazing.
-ERD50

I haven't been reading as many threads as I once did. Somehow I missed that you bought a NEW HOME!!!!! Are you still living in the same area, or did you move to another state? Do you love your new home as much as I love my Dream Home?

Enjoy! I am happy for you and wish you the best in your new home!

Thanks. Yes, we are very happy, and (if this makes sense) happy that we are happy! I guess what I mean is, even if you think you've found the right place, there could be any number of things that might make you turn sour on it and regret it (there was a thread about all the things to look for in a new area, but so many are unpredictable). I kept thinking there was at least a reasonable chance that would happen, and we'd have buyer's remorse. So far so good!

I would have liked to have moved out of IL and its crooked government and bad financial outlook (but to a similar 4 season climate I hate heat/humidity!), but the kids and grandkids are here, so we will stay. They had ended up in the SW 'burbs of Chicago, we were in the NW 'burbs/rural. The kids/grandkids are now all 15 to 25 minute easy, casual drive, so it's much easier to just see each other at the drop of a hat. From our previous home, it was ~ 1:15, sometimes hectic expressway drive, not something we looked forward to. DD was pretty instrumental in searching out homes, as she wanted another available baby-sitter, and that works for us too!

Big change for us, from one acre, large-ish 2 story, 4 large bedroom home with family room, living room, dining room, a large room for my music and computer/electronics hobbies, and a full, large unfinished basement (my workshop and tons of space for hobby collections), to a smaller combined family-living room, smaller 3 bedrooms, finished basement with smaller area for workshop/storage and 1/4 acre.

So there is a lot of adapting to do, but it's going well. The large finished basement (with high ceilings and lots of lighting, so it feels 'nice') just means we have to rethink how we arrange things. DW has one bedroom as her craft room (smaller than what she had, but some stuff is stored in the basement, so it works), I'm barely started on arranging my music room in the 3rd bedroom, but some of that will be set up in the finished part of the basement, so it should all work out.

I won't go as far as calling it our "dream home', but we are liking it. When we were searching, I kept telling DW "We can afford more $ than this if we have to, why are you only showing me places below this certain price range? Let's expand our search." But she was right, spending more just gets you a BIGGER house, not necessarily a better quality house. There are exceptions, and of course nicer appointed homes go for more, but unless you find the rare perfect match (and we had a fairly specific set of "must haves"), the price range matches the size, with roughly similar quality.

About a month after the move, DW said a friend asked if we missed our old place. We both agreed, not really! Although there was a lot we liked (and I hope the new owners are happy!), it has been pretty much a "been there, done that". So we had the big house, big yard, lots of space for the kids and entertaining, great place to raise the kids, etc. Now we have moved on.

Moving is also brings a sort of "cut the cord" attitude for lifestyle changes. I had decided to get a lawn service from the get go. I cut the one acre lawn for 29 years, and I was done. Of course, I could have hired someone at the old place, but I had the mower, it was just inertia. So this was a clean slate, I decided if I don't buy a mower, I won't get into that trap. It's nice to see the lawn professionally maintained, everything edged every time, I was a bit too lazy to do it as nice as they do.

We also got lucky with the sale. I has a long long list of things to update to get it ready to sell, but there was a very anxious buyer for something in that neighborhood, and he was an "as is" buyer. He begged us for a showing before we were ready, and we were hesitant, but everything I pointed out that I planned to update he said, "that's fine I'll take it". Saved me a ton of work/grief.

So yes, we are happy to be happy! Thanks for asking.

Oh, back on topic. I do plan to get a mortgage. We went in on "cash" with a Line of Credit against my brokerage account as collateral. Going cash gave us an advantage with the sellers, and made the closing simpler. Interest rate on the LOC is ~ 2.9%, but not fixed. I will check, but I've heard that no one will touch a mortgage application with 6 months of the sale, I guess they want to see things settle out? But yes, I want to lock in these historic low rates.

-ERD50

 

[Bogie]

I paid off my mortgage 20 years ago while I was working. The way I looked at it, it was like having an investment that paid back at the mortgage interest rate I would have had that was tax-free income. In other words if the mortgage interest rate was 4% and I invested the money I had that could pay the mortgage off at the same interest rate, I would have to pay income tax on the invested funds. So actually I would need to earn 4% * (1 + tax rate) to break even. Plus, I would be taking risk with the invested money that I'm not taking by paying off the insurance.

 

[Markola]

With nearly 70 messages, to summarize the responses:
1. Go ahead and pay off your mortgage
2. Go ahead and keep your mortgage, invest the funds and pocket a hopeful spread (arbitrage)

Do what makes you happy - no right or wrong answer, actual results won't be known until 10-30 years down the road.

+1,000. “Do what makes you happy” is where every single one of these “Pay off the mortgage?” threads eventually deadlocks.

 

[imnontrad]

It's not a math thing, it's an emotional thing. It can reduce stress a LOT by not having that mortgage payment anymore even though theoretically you might make more by investing in the stock market.
I decided to pay off my place and still glad I did. It dropped my "base" expenses each month really low and gave me the confidence to retire.

 

[Karloff]

My first quote from the bank for financing this house that is 12 months out on build time includes appraisal fees (2) construction inspections, construction management fee, title insurance fee of $3,000 alone!, origination fee $4000, and yea, I can buy the loan down to 3.65% for $5745. Total cost from the bank $16,957 and this lender works with the manufacturer on a regular basis, so knows the routine.

We are facing a similar situation and the above is 100% true and rarely mentioned. This is one of the main reasons why we may just pay cash and be done with it. In our case, the difference in closing costs alone between paying cash or getting a mortgage was about $15/20K. This does not include, of course, interest charged by the bank which, even at -/+ 3% is still about 2.99% more than what they pay me to hold my cash, so why would I throw more money at them? And with the market at an all-time high, I simply do not feel like taking a chance.

 

[tizod]

DH is retired. I am still working. Probably retire next year. We have to order the new house, sell existing home and get moved next spring-fall, so no real reason to retire yet with expenses we are having. DH is almost 70, I just turned 63.

Really leaning to just paying it off and not having anything hanging over my head.

Its not hanging over your head if you have the money beside it (like in the CD mentioned above). Just remember, banks never give you money when you need it. Have a fire? some other issue occurs weather is crazy we had a microburst put a tree into the house nearby). Have the bank on your side.

A mortage is an asset to use and is only a concern if you cannot pay it off. So keep that money (or a large % of it) tucked away but under your command when you want it to be.

 

[daylatedollarshort]

Its not hanging over your head if you have the money beside it (like in the CD mentioned above). Just remember, banks never give you money when you need it. Have a fire? some other issue occurs weather is crazy we had a microburst put a tree into the house nearby). Have the bank on your side.

A mortage is an asset to use and is only a concern if you cannot pay it off. So keep that money (or a large % of it) tucked away but under your command when you want it to be.

I see people posting that not having a mortgage reduces expenses, which is true, but not having the money invested reduces income. Someone could just as easily say I could never retire without a mortgage because my income would be too low instead of saying I could never retire with a mortgage because my expenses would be too high.

 

[FIREarly]

What we would do doesn’t really matter. You have to decide what you are comfortable doing. First ask yourself what you would do with the $432K if you don’t pay off the mortgage. Would you keep it in the bank, buy bonds, buy equities, etc? What is your risk tolerance? Once you have those answers we can give you a more thoughtful response.

+1

Second forum thread in a row to +1 Ready's post. He's/She's right on. There is a lot of personality variables that play into affect here.. always get confused on affect/effect.

Maybe diversify it a little so it's not "all your eggs in one basket"

Unless that basket is the winning lotto ticket!....
JK JK JK JK

 

[Retired Expat]

What we would do doesn’t really matter. You have to decide what you are comfortable doing. First ask yourself what you would do with the $432K if you don’t pay off the mortgage. Would you keep it in the bank, buy bonds, buy equities, etc? What is your risk tolerance? Once you have those answers we can give you a more thoughtful response.

Instead of going the mortgage route with related fees I left my cash invested in my diversified portfolio and borrowed against that portfolio with an interest only loan at under 2% at the time. Blended Return on my investments is regularly 8% or more so rather a no brainer. When those numbers change I will pay off the mortgage but until then?…….why not make money on that money?

 

[Retired Expat]

Emotional response: pay it all off, what great peace of mind!
Analytical response: get that rate as low as you can find and invest all of said money since it's going to gain at a higher rate than the loan's rate.

Your choice.

I ER'd with 5 mortgages, but hey, I seem to like to do things different.

There is a big difference if you need to borrow or have to borrow to buy or build your house versus choose to borrow. If one has to borrow than that is one set of criteria. If one is fortunate to have the liquid funds to pay cash then it is just the emotional or analytical question of what is best for you the borrower, what value you place on that piece of mind knowing you are debt free. Of course finding a way to fund that purchase without fees, insurance, points, appraisals was the deciding factor for me

 

[piccolopat]

Will you be financing the new build before you retire or after? Many banks won't approve a mortgage for someone that no longer has adequate income, even if they have the assets. For that reason and the fact that you are looking to retire shortly, I would hold on to the cash so it's available for the new build in case the bank declines to finance you.

 

[Gary 1958]

Cash is king. Zero debt is freedom. You need to decide which fits your needs the best.

 

[Markola]

Cash is king. Zero debt is freedom.

This is exactly the eternal rub regarding mortgage or no mortgage. Which provides more freedom: Zero debt or liquidity?

 

[beernutzbob]

One benefit I got from paying off a mortgage was more flexibility with homeowners insurance. The mortgage company demanded that I buy flood insurance which I otherwise wouldn't have purchased and they also mandated that my homeowners insurance had to use a 5% deductible amount and not the 10% that I wanted to use resulting in higher premiums.

Once I paid the 4.5% mortgage off (using bond mutual funds earning about 2.5% I liquidated) I figuratively told the mortgage company to go pound sand regarding insurance decisions on the property.

 

[Mike999]

Debt Free is freedom for me

By the time I turned 50, I had 2 homes and was completely mortgage and debt free. For me, it was part of my plan to walk away at 50, not sure I would have been able to pull the trigger with mortgages even though I could on paper. I carry a home equity line on one of them with enough cash to cover expenses for 3 year but I never have used it. It’s a security blanket left over from when I was working. 5 years into Fire, no regrets about living debt free, I doubt if anyone ever really does. If I was chasing bigger returns, I would raise my equity investment from 70% to 80% instead of getting a mortgage. As a finance person, I get the math, but to me debt free makes me happy and I can get the returns I want with my allocation. I’ve been told I was doing this wrong many times, usually from well intentioned people still working. I’m sure their are very successful Financially independent people that carry debt, just not this one. So, I guess it’s your call but when you say “hanging over my head” I think you will enjoy being debt free, maybe with a security blanket.

 

[Nick12]

One benefit I got from paying off a mortgage was more flexibility with homeowners insurance. The mortgage company demanded that I buy flood insurance which I otherwise wouldn't have purchased and they also mandated that my homeowners insurance had to use a 5% deductible amount and not the 10% that I wanted to use resulting in higher premiums.

Once I paid the 4.5% mortgage off (using bond mutual funds earning about 2.5% I liquidated) I figuratively told the mortgage company to go pound sand regarding insurance decisions on the property.

Good for you. Debt free is a foreign language to some but mortgage and debt free is freedom to me.

 

[FIREarly]

I own 3 homes and have been mortgage free for 13 years.

No regrets.

Congratulations!

Currently, I own 1 home and saving towards more.

 

[jkern]

I paid off my mortgage in late 2004 with 9 years remaining on a fixed 4.75% loan. At the time I was well aware of the options to pay it off or try for a greater ROI by investing. I chose to pay it off mostly due to the intangible peace of mind you get from being debt free.

Just for fun, when 2013 rolled around I did an approximate calculation to determine if I would have been better off withdrawing monthly from the invested money (to pay the mortgage) over the last 9 years. In my particular case, due to sequence of return risk (big crash in 2009), I actually came out a little ahead by paying off the mortgage.

 

[FIREarly]

I paid off my mortgage in late 2004 with 9 years remaining on a fixed 4.75% loan. At the time I was well aware of the options to pay it off or try for a greater ROI by investing. I chose to pay it off mostly due to the intangible peace of mind you get from being debt free.

Just for fun, when 2013 rolled around I did an approximate calculation to determine if I would have been better off withdrawing monthly from the invested money (to pay the mortgage) over the last 9 years. In my particular case, due to sequence of return risk (big crash in 2009), I actually came out a little ahead by paying off the mortgage.

It worked out well for you!

 

[ERD50]

I paid off my mortgage in late 2004 with 9 years remaining on a fixed 4.75% loan. At the time I was well aware of the options to pay it off or try for a greater ROI by investing. I chose to pay it off mostly due to the intangible peace of mind you get from being debt free.

Just for fun, when 2013 rolled around I did an approximate calculation to determine if I would have been better off withdrawing monthly from the invested money (to pay the mortgage) over the last 9 years. In my particular case, due to sequence of return risk (big crash in 2009), I actually came out a little ahead by paying off the mortgage.

I'd be interested if you could give us some specific numbers on this.

I simulated it, based on an amortization schedule, and looking at a payoff with nine years left, versus 60/40 and 70/30 AA portfolio returns for those nine years. It does look like the investment would have been very slightly negative, compared to the payoff. Maybe a bit more so after taxes are factored in, but what were the taxes on the money used for the pay-off?

But that's not unexpected:

1st: There is of course no guarantee that investments will outpace mortgage rates.

2nd: Nine years is a short time, and there is more likely to be periods of under-performance over that time. History looks much better for 20-30 year periods.

3rd: You probably could have refinanced to a much lower rate and/or for a longer term, and come out way ahead since then.

But if a person doesn't want to take the small risk that their portfolio won't exceed these historically low mortgage rates, that's up to them. But a nine year snapshot really doesn't provide any meaningful insights. I could give many more nine year snapshots that would be way more positive than yours was negative, and that wouldn't really provide much insight either. But even at a relatively short nine year look-see, I'd bet the odds are generally in favor of the market.

It worked out well for you!

I doubt it worked out well enough for a bunch of hand claps. Probably a little better, but nothing exciting. OTOH, many of us are many tens of thousands of dollars ahead by holding a low rate mortgage. Now that's some real money.

-ERD50

 

[Nick12]

+1,000. “Do what makes you happy” is where every single one of these “Pay off the mortgage?” threads eventually deadlocks.

Agreed. There are opinions that some say being mortgage free is the way to go. Others have the complete opposite viewpoint. Bottom line it is what is better for that particular person in their mindset. Some try to attempt to say their way is better but that is strictly their viewpoint no more no less.

 

[Nick12]

I paid off my mortgage in late 2004 with 9 years remaining on a fixed 4.75% loan. At the time I was well aware of the options to pay it off or try for a greater ROI by investing. I chose to pay it off mostly due to the intangible peace of mind you get from being debt free.

Just for fun, when 2013 rolled around I did an approximate calculation to determine if I would have been better off withdrawing monthly from the invested money (to pay the mortgage) over the last 9 years. In my particular case, due to sequence of return risk (big crash in 2009), I actually came out a little ahead by paying off the mortgage.

Me too! I paid off my mortgage years before the 2009 recession and some of the ones who held a mortgage that I knew were hit hard, foreclosed, and had to start from the beginning again.