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

[Camas Lilly]

Assuming you have funds set aside to fund your retirement expenses, if you had an additional $411,618 in savings you could set aside, invest and use solely for the purpose of paying a $432,225 mortgage, what would you do?

Assuming the interest rate you will get for a 30 year loan is 3.5%. I am trying to figure out if I should just pay the mortgage off or set it and forget it for however long makes sense.

1) Would you pay it off and not worry about a mortgage?
2) Would you pay chunks? If so how many?
3) If you financed, how long a term would you do?
4) What would you invest in to make it worth the risk?
5) What rate of return would you expect on these funds?
6) What about the “what ifs”? What is the worst that could happen? What if the market falls and a set it and forget method it backfires?

I am struggling with this one. I hate debt, but I also understand the benefit arbitrage. This is a pretty good chunk of money to take on much of any risk, so then you wouldn’t really earn that much over 3.5% the cost of the mortgage, right?

The other thing is if you pay in chunks, your minimum payments never change unless you refinance, and that costs as well, so you are still stuck with a large payment in the event of an emergency, not that this even matters.

We have separate funds and a comfortable retirement budget set up, so this money is solely for this debt.

Thoughts?

 

[Ready]

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.

 

[W2R]

What we would do doesn’t really matter. You have to decide what you are comfortable doing.

+1

What I chose to do was pay off the mortgage, because I felt that was simpler and also because I am a worrywart, and this helps me to not stay awake at night worrying about "what if"s.

But you should do what appeals to you the most!

 

[Mr. Tightwad]

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

No regrets.

 

[harley]

Personally I'd get the mortgage, set up a bank account to auto-pay from, put a year's worth of payments in the account, and deposit the rest of the funds into a 1 year CD. Refill the account every year then redo the CD for another year. You'll be behind on rates to start with, but I'd be willing to bet I'd come out ahead in the long run.

Also, try to get a lower rate if you can. I believe rates are lower than 3.5% currently. I refi'd last year at 2.85% for 30 years.

As far as the rest of the worries, I'd stick with CDs, and not invest it in equities. That decreases the possibility of a market collapse causing you problems. If we enter an extended period of deflation just pay it off. It's a gamble, but IMO not much of one. And I'd hate to have all that money locked into a non liquid asset like a house. I know many people here who sleep better with a paid off house, but I sleep just fine with 2 mortgages.

When I got my previous mortgage I used the money to buy two rental properties. That's been a huge investing success for me. With home prices being what they are now I wouldn't go that route. But I'd still make the CD bet.

 

[CardsFan]

OP:

We don't know your ages. Don't know if you are still working. Don't know any of your finances (except you think you are FI without this money).

While I am an advocate of having a paid off home, I also am an advocate for doing it slowly.

 

[Camas Lilly]

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.

 

[JDARNELL]

The other thing is if you pay in chunks, your minimum payments never change unless you refinance, and that costs as well, so you are still stuck with a large payment in the event of an emergency, not that this



Thoughts?

Not true. You should be able to recast the remaining balance over the remaining time at a nominal fee. My mortgage holder will do this for $250

 

[BlueberryPie]

One thought is that anything you would invest in that returns less than 3.5% should instead be put into the mortgage.

Are you able to itemize and get a tax break for your mortgage? If so you need to earn even more from your investments to break even

Are you worried about liquidity? Easier to sell some investments in a pinch (even in a down market) than sell the house, although if you have enough equity you might be able to use a line of credit againt the houe (HELOC)

What will you do wih the money that would have gone to the mortgage after you pay it off? invest it? buy a nicer car?

One interesting thing about mortgages is that most are "inflation protected": the higher the inflation the smaller your mortgage payment feels.

There is definitely something to be said for not having a mortgage over your head

Just random thoughts that have been going through my head as I considered my own similar dilemna. Right this moment I chose to continue paying my mortgage, but I reserve the right to change my mind

 

[Out-to-Lunch]

I thought about this recently. You could stick the lump sum into a separate account in a balanced fund, and autopay your mortgage payment. (Google the term "defeasement.")

If you run Firecalc on this situation, (and remembering that mortage payments are not inflation-adjusted), you come out ahead about 80% of the time. The question becomes, "Do you feel lucky?"

 

[ERD50]

...

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

What's "hanging over your head"? If you have the funds to pay it off, you should be fine. You still have property tax, utilities, maintenance, etc "hanging over your head". All of those can be paid from the money you have available to you. If you pay it off that money is sunk in the house, and not as easily available.

Pay it off if you want, it's not such a big deal either way in most cases. But I cringe a bit at some of the "reasoning" for doing so.

-ERD50

 

[cyber888]

I did a 2.24% first-lien Heloc (zero closing cost).. works great. I paid off my mortgage and a smaller chunk of my mortgage is now transferred to a Heloc, and the minimum payment for the heloc is $300/month. If ever I need cash for emergencies, I can just issue a Heloc check, but so far don't need it.

 

[daylatedollarshort]

Assuming you have funds set aside to fund your retirement expenses, if you had an additional $411,618 in savings you could set aside, invest and use solely for the purpose of paying a $432,225 mortgage, what would you do?

Costco program rates are around 2.75 - 2.85% for 30 year loans as of this writing. If you go with the mortgage, the principal payments won't change your net worth, so the only expense really is the interest. Do you think you can do better over 30 years with investments than 2.75%? If rates go up, you've locked in a good rate and if they go down you can always refinance. Or pay off the loan. But if debt bothers you then prioritize peace of mind over making money off the potential investment vs mortgage interest difference.

 

[Scuba]

I am a big fan of low interest mortgage debt, as long as you can afford the payments. We have a reasonably high risk tolerance and therefore invest most of our portfolio (75%) in equities. I value liquidity more than being debt free.

However, it depends on your other assets, your risk tolerance, what if any income streams you have, etc. In our case, our mortgage debt on both of our properties combined is around 15% of the value of our financial assets. We have significant equity in both of the properties we own. I’m sure I’d feel a lot differently if we were highly leveraged and wouldn’t be able to cover our mortgage payment if our asset value declined by 20%.

 

[Nick12]

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

No regrets.

+1, 15 years mortgage free and what would have been my monthly payments, I poured it back into the market. No regrets from me too!

 

[Camas Lilly]

Not true. You should be able to recast the remaining balance over the remaining time at a nominal fee. My mortgage holder will do this for $250

Really! Thanks, I did not know that.

 

[Camas Lilly]

One thought is that anything you would invest in that returns less than 3.5% should instead be put into the mortgage.

Are you able to itemize and get a tax break for your mortgage? If so you need to earn even more from your investments to break even

I do put that on my return, but I think the software usually defaults to the standard deduction because we don't have much else to deduct.

Are you worried about liquidity? Easier to sell some investments in a pinch (even in a down market) than sell the house, although if you have enough equity you might be able to use a line of credit againt the houe (HELOC)
I think I am worried more about losing investment value in the market.

What will you do wih the money that would have gone to the mortgage after you pay it off? invest it? buy a nicer car?
Would love a nice car, but I would be too old to drive by the time the mortgage was paid off

One interesting thing about mortgages is that most are "inflation protected": the higher the inflation the smaller your mortgage payment feels.

There is definitely something to be said for not having a mortgage over your head
How do you spell relief!

Just random thoughts that have been going through my head as I considered my own similar dilemna. Right this moment I chose to continue paying my mortgage, but I reserve the right to change my mind

Thanks for the input.

 

[Camas Lilly]

I thought about this recently. You could stick the lump sum into a separate account in a balanced fund, and autopay your mortgage payment. (Google the term "defeasement.")

If you run Firecalc on this situation, (and remembering that mortage payments are not inflation-adjusted), you come out ahead about 80% of the time. The question becomes, "Do you feel lucky?"

Well isn't that the million dollar question. I will look into this further.

 

[Camas Lilly]

What's "hanging over your head"? If you have the funds to pay it off, you should be fine. You still have property tax, utilities, maintenance, etc "hanging over your head". All of those can be paid from the money you have available to you. If you pay it off that money is sunk in the house, and not as easily available.

Pay it off if you want, it's not such a big deal either way in most cases. But I cringe a bit at some of the "reasoning" for doing so.

-ERD50

You have a great point.

 

[Camas Lilly]

Costco program rates are around 2.75 - 2.85% for 30 year loans as of this writing. If you go with the mortgage, the principal payments won't change your net worth, so the only expense really is the interest. Do you think you can do better over 30 years with investments than 2.75%? If rates go up, you've locked in a good rate and if they go down you can always refinance. Or pay off the loan. But if debt bothers you then prioritize peace of mind over making money off the potential investment vs mortgage interest difference.

We are ordering a Manufactured home in Idaho. From what I know, interest rates for those are a little higher, although I don't have any quotes yet. One CU did tell me 3.5%. I haven't checked with the lenders who normally deal with these types of loans yet. Next on my list of things to do. 2.75% would certainly change the picture.

 

[Camas Lilly]

I am a big fan of low interest mortgage debt, as long as you can afford the payments. We have a reasonably high risk tolerance and therefore invest most of our portfolio (75%) in equities. I value liquidity more than being debt free.

However, it depends on your other assets, your risk tolerance, what if any income streams you have, etc. In our case, our mortgage debt on both of our properties combined is around 15% of the value of our financial assets. We have significant equity in both of the properties we own. I’m sure I’d feel a lot differently if we were highly leveraged and wouldn’t be able to cover our mortgage payment if our asset value declined by 20%.

I normally have a high risk tolerance but I think that is what is kind of bothering me is the fact the funding and loan amount are so close, with little equity.

 

[Camas Lilly]

I thought about this recently. You could stick the lump sum into a separate account in a balanced fund, and autopay your mortgage payment. (Google the term "defeasement.")

If you run Firecalc on this situation, (and remembering that mortage payments are not inflation-adjusted), you come out ahead about 80% of the time. The question becomes, "Do you feel lucky?"

I normally wouldn't hesitate on going the balanced fund route or a traditionally more stable investment than I normally do (75/25) but when you look at the chart for even VBINX for the last 20 years, it has been run up so much, I can see it falling just like anything else. I think that is the unsettling part of this whole thing.

 

[latexman]

We have to order the new house, sell existing home and get moved next spring-fall.

We are ordering a Manufactured home in Idaho.

Do you have any equity in the existing home and land? Once closed on the existing home, pay those proceeds towards the new mortgage and have the mortgage recast.

Do you own the land for the new home already, or need to buy it? My Dad bought a Manufactured home and had it installed on his farm. A $432,225 mortgage for a Manufactured home and a lot sounds high to me, but I have no idea how much land you are buying. How much land do you want? Is the new location nearby or far away?

Just trying to understand the parts of the puzzle.

 

[ERD50]

+1, 15 years mortgage free and what would have been my monthly payments, I poured it back into the market. No regrets from me too!

Here's a (pretty common) example of the kind of "reasoning" that drives me nuts on these threads.

If you didn't pay off your mortgage, you would have already been in the market. A person has to take money out to pay off the mortgage, so then the lack of monthly payments is just rebuilding what they already had. Playing "catch up" is not an advantage!

As I said below: "Pay it off if you want, it's not such a big deal either way in most cases. But I cringe a bit at some of the "reasoning" for doing so."

It's extremely likely that a portfolio will outperform these historically low rates over the long term. If you don't want to take advantage of such an opportunity (which of course, is not guaranteed), that's fine, your choice. But let's use good reasoning behind the choice.

-ERD50

 

[bobandsherry]

I was/am in this position. I went with mortgage @2.7% fixed while my money sits in my pension account at my company growing at 4.5% minimum (tied to 1yr treasury so it's not going up anytime soon). No risk of loss of capital. It's there if a sudden emergency should arise. I'm in no hurry to pay off the mortgage.