What should we do with money we want to pay off our mortgage with?

[wingfooted]

I have to admit to being in the peace of mind camp and it is true - you feel much better owing nothing to no one.

But why make this a digital decision ?

The impact of paying even $50 or $100 per month extra towards principal reduction on a typical 30 year mortgage is SIGNIFICANT, even at a low interest rate. That would leave the remaining funds for investment.

 

[chinaco]

We had a goal to be totally debt free by the time we fired.

We a paid extra principle payments to accelerate the payoff from the beginning. Refi'd along the way to lower the interest when it made sense to do it.

When the meltdown happened, we were about 2.5 years from fire. We had a rate of about 6%. While rates were dropping, so were the returns on fixed investments. I decided to just payoff the house rather than refi.

Goal met! Don't regret it for a minute!!! Matter of fact... I am quite pleased.

 

[rayvt]

I have to admit to being in the peace of mind camp and it is true - you feel much better owing nothing to no one.

Everybody has a different point of view.

We feel much better knowing that we have enough money in our "bond & preferred-stock" portfolio to pay off the mortgage and both cars anytime we want to. But the mortgage is 4.00% and the cars are 2.75% and 3.25%, and the portfolio earns 7.5%, so why would we want to?

Peace of mine = knowing that you can pay off the mortgage out of petty cash.

 

[RunningBum]

You seem to be fairly confident that your money (which could go to paying off the mortgage right away) will earn more than the mortgage by being invested in equities.

So why would you want to pay off the mortgage a minute earlier than necessary?

We've had this perpetual debate running since practically the first post on this board, and I'm in the "don't pay off the mortgage" camp. My advice would be to figure out why you're feeling so compelled to pay off the mortgage early. The way you frame the question, it does not make financial sense.

I see your point, but since he's only putting aside money to pay the mortgage, and isn't doing anything active about it yet (aside from bi-weekly payments), I don't see the harm. Unless you think the 20 year target makes the investing too conservative.

I'm actually in both camps. I paid cash for my current house with pre-bubble burst money, and came out way ahead.

In 2003 I bought a smaller house with a 5 year time frame, and I think I had a 4 1/8% balloon rate. Did pretty well with that too.

So obviously I should have final say on this eternal question.

< drum roll >

Do whichever you are comfortable with, as long as you will really invest the money and not buy a new boat. Keeping a mortgage and investing is higher risk/ higher reward.

 

[steelyman]

This board attracts 100-200 fresh members every month, nearly all of whom are fascinated to rediscover this brand-new, never-before-discussed topic.

I don't know if I'm "fascinated", but I still consider myself a fresh member, and am finding the discussion in this thread with the varying points of view interesting and appreciate the input of those who are willing to comment on the topic, even if it has been visited before. Always learn something around here!

 

[Gumby]

I am constantly re-evaluating my decision on the mortgage question in light of things posted on this board.

 

[LightningDawg]

+1 for mortgage free and debt free.

The feeling of relief was/is better than anticipated.

 

[Nords]

Nords. OK your right but once is enough for this guy " who paid the mortgage off for piece of mind, etc"

I don't know if I'm "fascinated", but I still consider myself a fresh member, and am finding the discussion in this thread with the varying points of view interesting and appreciate the input of those who are willing to comment on the topic, even if it has been visited before. Always learn something around here!

I am constantly re-evaluating my decision on the mortgage question in light of things posted on this board.

As the proud owner of two mortgages, I'm going to keep pondering this question until I'm 80 years old... just before we make the final payment on the second one.

By that point I hope all us discussion-board members are sitting around the broadband holodeck with frosty beverages having this same conversation all over again.

 

[WestLake]

Still you are paying mostly interest and very little principal for most of the mortgage. How long you are staying can be a deciding factor.
Better to get a smaller home and mortgage so you can also max out 401k and Roth

 

[brewer12345]

Well, I would imagine that the prudent person would have lots of life insurance ltd insurance and a fat e fund. So presumably these risks are heavily blunted and this is mostly a financial and risk tolerance question

You narrowed the general discussion a little. Money to back the debt... of course to reduce the risk that way, that money would need to be invested in fairly low risk assets... which would narrow any spread... maybe close to nil.

But... for risks... life events.

Anything that could knock the wheels of your wagon cowboy (or your survivor(s))!


Job loss (you or spouse), Disability, death, on and on. Anything that might mess up the cashflow for a long time or permanently.

The point... the problem could be more than trying to ride out a temporary stock market down turn (using one's home mortgage as leverage)!

Now... maybe one has all the bases covered for all manner of personal crisis and contingencies in place.... but most do not.

 

[jkern]

The majority of financial experts will recommend investing your money instead of paying off your loan. They will quote long term average returns that are always higher than your mortgage rate. However, this doesn't take into account the different level of risk between investing and paying off your mortgage.

I was in this situation back in 04'. I just sold a rental property and had enough money to pay off my mortgage. I chose to pay off my mortgage ($178K). I have never regretted this decision. For me there is the intagble feeling of being debt free.

Another risk that isn't mentioned very often is that invested money might get spent. While most people here have financial dicipline, most folks do not.

 

[REWahoo]

The majority of financial experts will recommend investing your money instead of paying off your loan.

Interesting. Can you provide a source to verify this majority recommendation?

 

[Bestwifeever]

+1 for mortgage free and debt free.

The feeling of relief was/is better than anticipated.

(thread hijack--I love your signature--I just put three different versions of Moon River on an iPod, and still want to get Eric Clapton's.)

 

[jkern]

I don't have a specific source stating that financial experts recommend investing vs. paying off mortgage. This was my deduction after reading coutless articles, magizines, books etc.

 

[REWahoo]

I don't have a specific source stating that financial experts recommend investing vs. paying off mortgage. This was my deduction after reading coutless articles, magizines, books etc.

Heck. I was hoping we could finally settle this argument once and for all...

 

[panacea]

This is good stuff. I think the answer comes down to risk tolerance. If you don't like risk, pay off the mortgage as you go to get the guaranteed return and if you don't mind taking some risk, use the sinking fund approach. The lower your mortgage rate and the higher your tax bracket, the greater the argument for the sinking fund. Personally, I do a little of each.

 

[donheff]

Heck. I was hoping we could finally settle this argument once and for all...

That's easy REW, Suze Orman says:

Pay off your mortgage before you stop working. It’s not nearly as hard as you may think.
Once you are in a home you intend to stay in, I want you to accelerate your mortgage payments so you get the loan paid off well before you retire. Just think about this for a second. For most of us, the monthly mortgage is our biggest financial obligation. So if we can eliminate this cost we are going to need a whole lot less to “make ends meet” in retirement.

Question answered.

 

[REWahoo]

That's easy REW, Suze Orman says:

"Straight from the [-]horse's[/-] financial expert's mouth", is that what you're sayin'...?

 

[donheff]

"Straight from the [-]horse's[/-] financial expert's mouth", is that what you're sayin'...?

Yup. Now that her face is in front of me I can hear that awful voice in the quotes I posted.

 

[samclem]

I think the answer comes down to risk tolerance. If you don't like risk, pay off the mortgage as you go to get the guaranteed return and if you don't mind taking some risk, use the sinking fund approach.

There are, of course, different kinds of risk. I think you've addressed the conventional "standard deviation of my investment returns" risk. There are other risks/opportunities that can best be avoided/seized with a wad of readily available cash. When folks no longer have an income stream, it's hard to turn a house into that. When mortgage rates go up it will be expensive to turn a house into that for anyone. On the other hand, a wad of cash can always be used to pay off the house.

Do all these folks who breathe a sigh of relief at finally paying off the house ("now I'll have a home regardless of what happens") live in places without property taxes?

 

[rayvt]

When I took flying lessons, my instructor said to keep in mind, "It's better to be on the ground wishing you were up there, than to be up there and wishing you were on the ground."

Cash is king.
You can always turn cash into equity. You cannot always (or cheaply) turn equity into cash.