Should I go against the math and pay off the mortgage early?

[Hardatit]

So I've been doing a lot of reading on paying off your mortgage vs keeping those dollars invested. I get it that in almost all situations the math makes sense to continue to pay on the mortgage and keep your money in your investments. On the other hand, the feeling of being debt free and having a paid off house must be a wonderful one.

Lets hear from those that have paid off their house early despite the math. Why did you do it? Why not?

I'm leaning towards paying off mine before I FIRE in 2 years but would love to hear thoughts from other FIRE minded people.

My situation, 37 years old, single no kids, debt free beside mortgage, 2 years from 20 year military retirement. Planning to continue my self employment/side hustles after that. The plan is not to work for anyone else just myself, travel some and visit family after 20 years in service.

In two years I'll have a cola adjusted mil retirement around $2700 a month.
Medical benefits
Rental income and self employment income which I live off of now.
My entire military paycheck is put into investments and will continue until retirement. After retirement, my investment contributions will be significantly reduced from what they are now.
Right now I max a Roth IRA with VG.
I have been maxing TSP for 10 years or so but recently last month cut that in half to put more into taxable accounts for the retirement bridge if needed (39-59 years old or when I can draw from TSP)and possibly paying off the mortgage before I retire.
I put $4K a month in a VG taxable account.
Expenses now with mortgage are $3200 a month.
I have an emergency fund.

I've rented cheaply and invested for many years and just bought my first home/rental all in one. Ended up getting 6 acres, a 3 bedroom house which is a rental (occupied for the last 13 years, so I inherited a good tenant also)and a barndominium/shop house where I live on the backside of the property all for $215K. I put 25% down and was able to get a 15 yr mortgage for 3%.

Right now I'm paying $375 extra a month towards principle with the capability to put $1175 extra toward principle.

I've never been in debt and despise it, so I'm leaning towards contributing another $100K to my taxable account over the next two years and paying off the mortgage before I retire from the military.

The mortgage balance in 2 years with the $375 extra a month will be $133K.
With the $1175 extra a month in 2 years it will be $115K.

I could pay both of these amounts off free and clear and have around estimated $140K left in taxable.

With a paid off mortgage, I could easily live off just my military retirement and any self employment/side hustle money would be extra and be FIRE'd.

Now I know the math probably says my total net worth will be more in the long run if I just keep paying on the mortgage and if the market tanks right before I pay it off and my taxable account balance goes down to nothing this will be a problem and I will just continue paying monthly on the mortgage at that point.

I would love to hear thoughts on my plan/situation and hear what would you do in my shoes? If I left any vital information off please let me know. Thank you for your replies.

 

[davismills]

As you said, the math will lead you to continue the mortgage. I ignored the math and paid off my house early about 12 years ago. We pretty much funneled this new found "income" into investments and it has worked out to be about the same given the elapsed time IMHO.

I like the feeling of a paid off house. As Forest Gump said "It's once less thing"

Thanks for your service. 21 years of USAF for me

 

[Mdlerth]

Thoreau said "Simplify"

I have two houses at the moment because I'm in transition until DW retires at the end of this year. The main house has no mortgage, but we took one out to buy the retirement house. Once DW clocks out, we'll sell the main house and move to the lake permanently. The proceeds of the main house sale will pay off the note on the lake house and we'll be mortgage free.

I suppose we could invest the proceeds and keep the mortgage, but we're 61/62 instead of 37, so our time horizon is totally different. Also, the less debt we need to service the lower our income requirements, so that when we reach Medicare the lower our IRMAA surcharge will be. Since you've got military health care coverage, that won't be relevant to you, but it's part of our calculation. However, it might be analogous for you from a tax perspective, such that if by eliminating your mortgage you can live off an apparent income low enough that capital gains in your taxable account escape being taxed you could come out ahead.

I've re-read this reply a couple of times and I'm not sure I've explained myself clearly but it's the best I can do this early in the morning.

 

[iloveyoga]

We paid off ours early in 2010. I have never been sorry, I love the peace of mind. It gave me the confidence to retire early (no mortgage payment).

 

[NotYourAverageJones]

Personally, I would pay it off. What's the benefit of keeping the debt? You can always take out a HELOC if you need the cash down the road.. But having no debt is a really awesome feeling! Plus you have a stable tenant there (for now) so that's more money in the bank, which will further allow you to expand your "side hustle" if you so choose. And of course there is no tax advantage to have a mortgage anymore, so I vote ditch it and invest the savings. Build up your nest egg and enjoy the thought of being debt free! Congrats on upcoming retirement and Thank You for your service!

 

[Aerides]

The balance is almost half your taxable savings, so I'd lean toward..."recalculate in 2 years when you're ready to retire, but probably yes."

 

[BoodaGazelle]

We paid off our mortgage by the time we were in our early 40’s. That meant that during our peak earning years, we were able to put away the money that helped me retire at 61.

Remember that the difference between owning your house outright vs with a mortgage could be the difference between keeping it and being forced to sell in the case of an unexpected inability to work.

 

[euro]

You are correct that the math “probably” suggests keeping the mortgage and investing the cash ( you have a very low interest rate, so beating that with a good stock portfolio should be relatively easy - alas, it is not risk-free. Based on what you share in your post, if I were in your shoes, I’d pay it off anyway. But this is strictly a math vs emotion decision, so in the end you have to do what feels right for you.

PS: someone above implied that you don’t get to deduct your interest payments any more with the new tax law. That is incorrect - minimally, the portion allocated to the rental will always be deductible

 

[devans0]

I will throw in an alternate opinion. We sold one home and did buy our current home outright shortly before retirement. Emotionally, it felt reassuring, but in hindsight, we would have been money ahead by waiting. Math over emotions is how I would approach it if there were a do-over.

 

[JDARNELL]

I paid off my mortgage early and several rentals. Main reason is I don’t like people having control over me. 21 years in the military plus a 3.5 yr bridge career was enough. And being able to walk away at 45 was good for me. I may leverage one more time for a multi unit using my VA entitlement having no money of my own in it. A pure additional inflation hedge for my estate but only if I have an exit plan to oversee it within the first 1000 days.

 

[grasshopper]

I haven't had a mortgage for 25+ years when interest rates were a lot higher. I paid my mortgage off when I had REIT's in the portfolio equal to my loan payoff. At the time it was a draw but investing for me instead of the bank I know paid off.

 

[candrew]

We paid our mortgage off early. Instead of the bank owning it, that means we now "rent" our home from Maricopa County.

 

[pb4uski]

.... On the other hand, the feeling of being debt free and having a paid off house must be a wonderful one. ...

.... but recently last month cut that in half to put more into taxable accounts for the retirement bridge if needed (39-59 years old or when I can draw from TSP)...

.... I've never been in debt and despise it, so I'm leaning towards contributing another $100K to my taxable account over the next two years and paying off the mortgage before I retire from the military. .... I could pay both of these amounts off free and clear and have around estimated $140K left in taxable. ...
...if the market tanks right before I pay it off and my taxable account balance goes down to nothing...

I wouldn't be in a hurry to pay off a 3% mortgage, especially in your situation where once you retire you will not have ready access to your TSP without penalty for 20 years. The flexibility of having ready access to $240k rather than $140k would exceed the benefit and peace of mind of a paid off house IMO.

I've had a mortgage and been mortgage-free and to be honest it doesn't make a difference... even if you don't pay off the mortgage the knowledge that you have enough in taxable funds to pay it off with the stroke of a pen or a few taps is satisfying enough. When we had a mortgage it was on autopay so I hardly noticed it.

The answer might be different depending on what you will be redeeming to pay off the mortgage. For example, I recently paid off my 3.375% mortgage that I had for about 8 years with 7 years to go, but the payoff was coupled with a decision to change my AA and eliminate my allocation to cash... so in effect I traded earning 1.7% interest that was taxable to avoiding paying 3.375% that was not deductible (we use the standard deduction). But if I had sold some of our taxable equities to pay it off early, which is more typical, then that would have been a poor decision.

It is irrational to think that if the market tanks that your taxable account will go down to nothing... the recent great recession in 2008/2009 saw a decline of ~50% and that is the worst in recent history and had fully recovered by 2012. If the investments that you would be selling to pay off the $100k mortagage are equities or highly equities, then beating 3% over 10 or 15 years isn't a very high bar. If your investments earn a conservative 6% over the next 12 years and your average mortgage balance would have been $50k during that period of time then you're forgoing $18k ($50K *(6%-3%)*12 years)... not chump change.

P.S. It is principal, not principle.

 

[USGrant1962]

Financially it looks like it doesn't matter and you can do what you want. If I read it right you are living off rental/side income and will continue to do so - so your military retirement date is kind of irrelevant. Obviously it is a great backup in case you lose a tenant.

What is missing from your description is the Asset Allocation of your investments. If, for example, you are 30% in bonds and/or cash the payoff math may not show that it "makes sense to continue to pay...". Intermediate bonds have an expected return of ~2% over the next 10 years. And if you are 100% equities the the math needs to be risk adjusted. Also, as others have mentioned, this mortgage is partly on a rental property so there are those tax considerations.

In your case, with your income streams and real estate, I could see you paying off the mortgage and keeping your AA at close to 100% equities.

 

[golfnut]

Pay of a 1/3 of it now, another 1/3 in one year and final 3rd when retire from military.


Just an idea.

Appreciate your service

 

[Which Roger]

Now I know the math probably says my total net worth will be more in the long run if I just keep paying on the mortgage

The word "probably" answers your question. What if it's not? Market tanks, you lose your job, etc. Those are other legs of the decision that need to be explored.

 

[pb4uski]

The word "probably" answers your question. What if it's not? Market tanks, you lose your job, etc. Those are other legs of the decision that need to be explored.

.... and the sky is falling Chicken Little!

Sure there is risk involved and some probability that it may not work out to the OP's benefit... but the probability that it will be beneficial far outweigh the probability that it will not be beneficial.

 

[skipro33]

The purpose of having money is to use it any way you wish. If paying off the mortgage is how you would enjoy the funds, then I say go for it. I was able to pay down my mortgage, a 3.5% Cal-Vet loan, back in 2002 at age 45. I secured the loan in 1981 when interest rates were 18.5% (amazing!!) I was 25 years old, making $7 an hour, married with a kid. I bought the house for $45,000. Payments were $213 a month for 25 years. Folks thought I was nuts to pay down early, but the independence being mortgage free is a great feeling. Today I own a home that has a market value of well over $800,000. I never made a house payment after that final one in 2002. I had sold the original home and rolled the loan to a new one on 10 acres where I got real lucky with that purchase and the price increases here in California.

No better feeling, financially, than to reduce debt. The only debt I carry these days and have for the past 20 years is an auto loan and monthly credit cards paid in full every cycle. I shop when the manufacturers have low or zero interest rates. Current car a 2020 Subaru Ascent at .9% paid off in 48 months.

Keeping it simple by reducing outstanding debt is as much a financial goal as net worth in my opinion. It's all about how your finances make you feel. It's not just about numbers. Mortgage free is a great feeling.

 

[Markola]

Keeping it simple by reducing outstanding debt is as much a financial goal as net worth in my opinion. It's all about how your finances make you feel. It's not just about numbers. Mortgage free is a great feeling.

No doubt. I genuinely love the idea of being mortgage-free but I also know that, if I achieved it, my feeling would switch to “Crap! Look at all that locked up equity growing at just 3%/year if I’m lucky!” [emoji34]

 

[harley]

Personally, I would pay it off. What's the benefit of keeping the debt? You can always take out a HELOC if you need the cash down the road.

My feelings about having a mortgage are well documented, so I wasn't going to comment on this thread until I read the statement above. It's just not true. If you're retired with little income (living off investments) it's really really difficult to get a HELOC, or anther mortgage. It's super easy as long as you are working and making money, or even if you have a healthy pension, but it becomes very difficult without an income. So depending on your circumstances, if you decide to make the non-financial decision to get rid of your mortgage I'd suggest getting the HELOC in place before you retire.

Edit: Just read the OP in more detail, looks like they have a reasonable post-retirement income. So my post may not be correct for them, but I'll leave it just as a general word of warning. It's the old story, you can only get a loan if you don't need it.

 

[skipro33]

No doubt. I genuinely love the idea of being mortgage-free but I also know that, if I achieved it, my feeling would switch to “Crap! Look at all that locked up equity growing at just 3%/year if I’m lucky!” [emoji34]

The basis may only grow 3% a year, but the housing cost offset, rent, is like a dividend each month. My home would cost me north of $2,500 a month in rent. I'm 'saving' $2,500 every month with zero risk with an investment that is more than just paper but a hard asset. I think it's all part of my wealth portfolio to have a paid off home.

 

[RetiredAt55.5]

In general, I'm a proponent of considering a mortgage as just another expense, like property taxes. It's not necessarily a bad thing if the rate is low enough.

Not sure I'd ever pay off early a 3% loan.

If it's not just about making the best money decision but sleeping well at night, wouldn't it be even better to keep the money on the sidelines in a 2% money market or CD ladder? Then, you can always write a check to pay off the mortgage anytime or use it for any unexpected expense/emergency anytime? If the money is locked up in a paid off house, you lose this flexibility (aside from taking out a new loan).

 

[pb4uski]

.... Then, you can always write a check to pay off the mortgage anytime or use it for any unexpected expense/emergency anytime? If the money is locked up in a paid off house, you lose this flexibility (aside from taking out a new loan).

Exactly. Especially in the OP's case where he won't have penalty free access to tax-deferred funds for 20 years.... a lot can happen in 20 years where one might want more taxable funds. OP has a nice pension so he might be able to get a loan, but mortgage loans take time.

 

[wolf]

OP. You are way "over thinking" this. Just pay mortgage off. Be done. Talking to people who have paid off mortgage, they will all say. Great. The feeling is good. Life is good.

Talking to financial planners, bank lenders, etc.....who have something to gain...will
always recommend NO...

Again, just do it.......stop dwelling, I think you already have made up your mind.
Just want encouragement from us posters.....Good Luck....Thanks for your service!

 

[CRLLS]

Yes, pay it off. No, keep it. I have not got a clue. IMO, it is less about the simple math. It is more about your personal financial strategy. So, my real answer is "it depends". Maximize long term growth? = keep it (assuming that money is invested in equities). Minimize outstanding debt? = pay it off. Reduce monthly expenses = pay it off. Tax deduction? = Keep it (if you can itemize).

There can be so many "right" answers. Only you can determine what fits your style/plan.