Pay mortgage or invest in today's (Jun'19) market

[nash031]

And some of us feel like we've conquered the world by freeing up that dead house money, investing it, and making huge sums of money. We have no idea which camp the OP , or anyone else reading, would be in.

We freed up about $250K in equity in our prior home when we moved. We considered rolling all $470K of equity into our new home to reduce our debt burden, but once I ran the numbers, that made little sense to me. Instead, $250K of that went into investments, the rest to the downpayment on our current home.

With a 30-yr fixed rate, I'm letting that bad boy ride until it's done or I have more money than I know what to do with. I can't justify paying the mortgage off in today's dollars.

It's a tug of war: the bank has a steady team of little guys pulling one direction, and me? Well, I normally have a bunch of linebackers working on my side, but they take a lot of water breaks... but every so often one of them ties the line up to the back of his pickup truck, takes a pull and eventually the bank kids end up all muddy.


I'm 42... I don't get the need to feel debt-free at 43/44 with a long investing horizon ahead of you. I understand the emotion behind it, but from a financial standpoint it doesn't make sense.

 

[corn18]

I ask this question because I am curious: Does anyone regret paying off their mortgage?

 

[ERD50]

I ask this question because I am curious: Does anyone regret paying off their mortgage?

Yes. In the 80's I had a monstrously high interest rate mortgage, so I was determined to pre-pay it as much as I could. One of the worst financial decisions I've made.

The kicker was, it was an adjustable rate loan that maintained a delta to the reference/benchmark interest rate that was used. From about the second payment on, that rate kept dropping, dropping, dropping, until they were almost paying me to keep that mortgage. Then the big bull run of the 90's hit. Double whammy.

The funny thing is, your post is worded in such a way that you do not appear to be seeking information (curious), only confirmation of your decision. Most people who decide to pay off the mortgage do it for reasons that they consider good, so few are going to regret it. Few will ever look back and do the analysis. Admit they made a mistake?! Some (most?) people don't like to do that.

It's kind of like the threads on Electric cars - the pro EV people say that no one they know is troubled by the range limitations of an EV, it's all over-blown! Well of course, they bought the EV knowing what the range was, and their driving habits, so it's not surprising they would not be bothered by it. That doesn't mean it isn't a problem for many people.


-ERD50

 

[Unpaintedhuffhines]

I wouldn't think that mortgage vs not would make that much difference in FIRECalc. In fact, if anything having a mortgage should be beneficial since a balanced portfolio's investment returns typically exceed mortgage interest.

How are you incorporating your mortgage payments in FIRECalc?

If the spending on the Start Here tab includes your mortgage payments then you are getting bad success numbers because FIRECalc will increase withdrawals annually for inflation but your mortgage payments are fixed and the mortgage payments will never end if included in spending.

Actually, that's a very good question (about incorporating my mortgage payments in FIRECalc). Short answer is: I guess I'm not. Well, I am - I just lump it in with my annual spend, which you are right - factors in inflation that will not be there and also doesn't stop my mortgage payments. I'll have to fine tune, but it should yield better results for sure. Thanks for that call-out. Seems obvious, but I had overlooked it.

 

[Unpaintedhuffhines]

Because presumably there is a reason you have two mortgages, and those reasons still apply?

Because you feel good about getting more than 3.5% and 5% returns on the money you have invested?

Because having a mortgage doesn't keep you up at night, and you don't run your life by FireCalc numbers?

Because you don't consider the difference between 97.5% and 100% important enough to be bothered with?

I got a second b/c I built an apartment out back and didn't want to part with my 3.5% main mortgage by combining.

Other points are valid, and probably exactly why I haven't paid them off yet.

Still, I'm going to pay off the 5% one simply for peace of mind. I think.

 

[pb4uski]

Actually, that's a very good question (about incorporating my mortgage payments in FIRECalc). Short answer is: I guess I'm not. Well, I am - I just lump it in with my annual spend, which you are right - factors in inflation that will not be there and also doesn't stop my mortgage payments. I'll have to fine tune, but it should yield better results for sure. Thanks for that call-out. Seems obvious, but I had overlooked it.

With one mortgage, an easy solution would be to exclude mortgage payments from spending and include them as a non inflation-adjusted off-chart spending item starting in 2019 on the spending tab and then input an offsetting non-inflation adjusted "pension" starting in the year that your mortgage is paid off.

Since you have two mortgages you may need to fudge the entries a bit.

Or just reduce your initial balance and spending as if you paid off you mortgage just before retiring and that should give you a more valid success ratio than including your mortgage payments in spending.

 

[corn18]

Yes. In the 80's I had a monstrously high interest rate mortgage, so I was determined to pre-pay it as much as I could. One of the worst financial decisions I've made.

The kicker was, it was an adjustable rate loan that maintained a delta to the reference/benchmark interest rate that was used. From about the second payment on, that rate kept dropping, dropping, dropping, until they were almost paying me to keep that mortgage. Then the big bull run of the 90's hit. Double whammy.

The funny thing is, your post is worded in such a way that you do not appear to be seeking information (curious), only confirmation of your decision. Most people who decide to pay off the mortgage do it for reasons that they consider good, so few are going to regret it. Few will ever look back and do the analysis. Admit they made a mistake?! Some (most?) people don't like to do that.

It's kind of like the threads on Electric cars - the pro EV people say that no one they know is troubled by the range limitations of an EV, it's all over-blown! Well of course, they bought the EV knowing what the range was, and their driving habits, so it's not surprising they would not be bothered by it. That doesn't mean it isn't a problem for many people.


-ERD50

I am curious because I haven't paid mine off. We will have enough to pay it off in 10 days. I want to. Wife does not. It's big @ $575k balance, so it is a non trivial decision.

 

[ERD50]

I am curious because I haven't paid mine off. We will have enough to pay it off in 10 days. I want to. Wife does not. It's big @ $575k balance, so it is a non trivial decision.

Well, if you are truly curious and undecided, then provide some additional info. Interest rate, years remaining, portfolio size relative to the mortgage, AA, cash flow issues, etc.

Why do you want to pay it off? Why does your wife not want to pay it off?

And it actually may be fairly trivial. Many posters blow this way out of proportion, some claiming that you can't/shouldn't retire with a mortgage, or that it was the most important decision of their financial life. In many cases, it isn't such a big deal. With a low interest rate and a tolerance for some market volatility, history is on the side of keeping the mortgage. But it's no guarantee. It's not unreasonable for someone to decide they don't want to place that bet, but they should do it with eyes wide open, IMO.

-ERD50

 

[corn18]

Well, if you are truly curious and undecided, then provide some additional info. Interest rate, years remaining, portfolio size relative to the mortgage, AA, cash flow issues, etc.

Why do you want to pay it off? Why does your wife not want to pay it off?

And it actually may be fairly trivial. Many posters blow this way out of proportion, some claiming that you can't/shouldn't retire with a mortgage, or that it was the most important decision of their financial life. In many cases, it isn't such a big deal. With a low interest rate and a tolerance for some market volatility, history is on the side of keeping the mortgage. But it's no guarantee. It's not unreasonable for someone to decide they don't want to place that bet, but they should do it with eyes wide open, IMO.

-ERD50

30 year @ 3.875% with a balance of $575k. Just got it in Jan of this year. Home value is $750k.

Portfolio is $1M with $350k in taxable. 60/40 with 25% international all index funds. Will have $630k in a MM fund once I sell the RSU's and paying taxes.

We have an extra $7k/mo with the mortgage. That will be $9.7k / mo if we pay off the mortgage. This goes into taxable.

Age 53.

I want to pay it off because I would have never imagined that would even be possible for us considering 6 years ago our net worth was zero with a lot of debt.

Wife thinks we should sit on the cash in a MM earning 2.28% while we see what next couple of years holds for us. If I can keep my $700k / year job, we may be able to retire @55.

That's our story. I don't think either answer is wrong. What we will do if rates stay low is refi the loan to 15 yrs @ 3% and pay $92k against the balance to get out of jumbo territory.

 

[pb4uski]

I am curious because I haven't paid mine off. We will have enough to pay it off in 10 days. I want to. Wife does not. It's big @ $575k balance, so it is a non trivial decision.

IF you paid it off, you change your overall AA?

If you have $575k sitting in a MM account earning 2% and have a 3.875% mortgage then it is a whole different decision to if the $575k that will be used to pay it off is invested in a balanced or equity fund.

 

[Floridaman10]

30 year @ 3.875% with a balance of $575k. Just got it in Jan of this year. Home value is $750k.

Portfolio is $1M with $350k in taxable. 60/40 with 25% international all index funds. Will have $630k in a MM fund once I sell the RSU's and paying taxes.

We have an extra $7k/mo with the mortgage. That will be $9.7k / mo if we pay off the mortgage. This goes into taxable.

Age 53.

I want to pay it off because I would have never imagined that would even be possible for us considering 6 years ago our net worth was zero with a lot of debt.

Wife thinks we should sit on the cash in a MM earning 2.28% while we see what next couple of years holds for us. If I can keep my $700k / year job, we may be able to retire @55.

That's our story. I don't think either answer is wrong. What we will do if rates stay low is refi the loan to 15 yrs @ 3% and pay $92k against the balance to get out of jumbo territory.

Just leaving the funds in a MM is not an optimal outcome. You have a negative interest spread between the two of about 1.6% meaning you are paying about $10k a year more in interest than you are making.

 

[ERD50]

Agree with the two previous posts. Though when you say: "Wife thinks we should sit on the cash in a MM earning 2.28% while we see what next couple of years holds for us.", fine, but I think it's worth thinking about what those possibilities would be. In a way, it just seems like putting off a decision. Which is understandable with a 'windfall', but not really helpful, unless you really have no idea what to do, and need to study up.

But you have an AA now, and moving that RSU money to your AA seems likely to be way less risky than where it was (in one stock - I assume that's how an RSU works, I have not read up on them much). I just don't see a good reason to put it in a MM. You could always pull from your fixed side if you did decide on some large purchase in a couple years.

-ERD50

 

[ziggy29]

I ask this question because I am curious: Does anyone regret paying off their mortgage?

It can happen. But it is unusual and situational.

We have a mortgage on the house we bought last September -- loan balance is about $98K. We have the ability to pay it off, indeed the ability to pay 100% cash for it when we bought it. But sometimes there can be special circumstances.

In our case, DW is clergy, which leads to a lot of screwy tax laws, both favorable AND unfavorable. The most favorable is that we can take advantage of the clergy housing allowance which makes reasonable expenses for housing (mortgage/rent, utilities, insurance, maintenance et cetera) exempt from state and federal income tax (but it is still subject to self-employment taxes, since clergy are considered self-employed for Social Security purposes -- that's the big negative). But the allowance is limited to fair market value OR actual expenses, whichever is less. So if we had NO mortgage, our tax-exempt portion of her income would be a LOT lower. So we took out a manageable mortgage for only 10 years (she is eligible for retirement in 2028 at age 60 right when the mortgage would be paid off, so the timing works) at 3.875%, with payments of about $1,050 a month which count toward our housing allowance. Without the mortgage that $1,050 per month would be taxable income. And we keep enough reserves aside to be able to pay it off on a moment's notice if her situation (or tax laws) changed.

So yes, there are situations where keeping a mortgage is better than paying it off even if you can afford payoff.

 

[corn18]

Thanks everyone. I agree that leaving it in a MM account is not optimal, so that won't last long. We have 3 options:

1. Put all $630k into the 60/40 portfolio and keep the mortgage
2. Pay off the mortgage
3. A combination of 1 & 2 (maybe with a refi)

Leaving it in a MM is not an option, but won't kill us as we decide what to do.

 

[CardsFan]

Thanks everyone. I agree that leaving it in a MM account is not optimal, so that won't last long. We have 3 options:

1. Put all $630k into the 60/40 portfolio and keep the mortgage
2. Pay off the mortgage
3. A combination of 1 & 2 (maybe with a refi)

Leaving it in a MM is not an option, but won't kill us as we decide what to do.

I vote for #3.

While I am a fan of getting the mortgage paid off before retirement, I would not use a large lump sum to do it. I would put together a plan of refi and (maybe) more aggressive payments. Carrying a mortgage into retirement is not the end of the world, particularly if you can turn that 30 year mortgage into 10 or 15.

 

[RobbieB]

If you pay down a big chunk of the loan you will pay off the balance much faster with regular payments. Yeah a combo approach. Invest half and reduce the loan by half.

 

[ziggy29]

Thanks everyone. I agree that leaving it in a MM account is not optimal, so that won't last long. We have 3 options:

1. Put all $630k into the 60/40 portfolio and keep the mortgage
2. Pay off the mortgage
3. A combination of 1 & 2 (maybe with a refi)

You could also accomplish #3 with extra principal payments, even if only an extra $100-200 a month. A refi could work, too, but sometimes it's painful with the effort involved and it might not save enough dollars that just paying a little bit more down each month couldn't handle, with a lot less hassle and pain.

 

[Fireby2030]

I think the answer depends on the original posters other current assets. I view my house/mortgage as another pile in our diversified portfolio. We currently have 1m invested in taxable,401k and roth accounts and have decided to pay off our current 530k mortgage in 3 years. My view is that we have plenty of exposure in the stock market currently and while we live in a smaller midwest city where real estate may or may not appreciate every year being mortgage free will give us 725k of equity( depending on real estate market).

Also its a defensive play if there is a crash/recession. At my age ,39, I am looking for a little more conservative moves. If your younger and have a more bullish outlook you could always cost average your 200k and put 25k chunks in every quarter into your preferred index fund.

I do agree that this question almost always does not have a correct answer but is really based on what will help you and your wife sleep at night and hindsight is always 20/20 so make your choice and dont look at what could have been.

 

[thefist]

What we will do if rates stay low is refi the loan to 15 yrs @ 3% and pay $92k against the balance to get out of jumbo territory.

I was going to suggest doing at least this to get a better interest rate.

One factor I'm mulling over is paying off the mortgage in order to qualify for ACA subsidy due to smaller expenses. While I lose about $5k in interest deduction, I get nearly that much in subsidy. Just need the confidence the ACA will last for a while.

 

[RetireBy90]

Hi everyone,

I have the same age old problem.... We have an incoming inheritance and after taxes, fees and everything we will have 200K in hand. Question is Invest a 200K in market today or pay off mortgage that has 3% interest rate. The mortgage is 15 years term with 10 years left on it and round about 200K balance. I get it that the interest rate is super low but my wife thinks the simple joys of being debt free at our age of 44/DW-43 is much important to her than making another few thousand dollars if investments were to go up. Then there is a risk with any investment that it can loose money (if not a CD).

What would this group suggest we do? Any examples from your life would help us get to this decision quick too.

From a purely financial analysis, I would have to assume a specific return from the the market. History has shown about 8% return over time, but with a risk. If you pay off the note, that is a guaranteed return on your $$. I would say financially you will be better to invest and continue your monthly payments.

However, these decisions are not just from a financial analysis. You also have to do what you can sleep with. If paying off the note makes you less anxious then I would pay it off. If it makes your wife happy, I would pay it off. If it was only me, I would invest the cash and continue with payments.

FWIW

 

[jimnjana]

In the pay down corner. Ten years into retirement still have mortgage. Will begin modest pay down next year after DW starts SS. Would like to be mortgage free before I'm 75, in about 20 years.

 

[Scots]

I’m probably in the pay off the house camp, but not staunchly, as I do think it comes down to preference and risk/emotion. That said, here’s the question.

If you lived in a paid for house... would you take out a mortgage on the house to invest the money in the market?

Most would say no - the reality is that if you have the cash sitting there and you don’t pay off the house, you’re essentially answering yes to that question. Every day you don’t pay it off you’re making the decision to take the mortgage out on the paid for house to invest it in the market instead. Just makes you think about it a little differently. Forces you to put the risk/emotion factors into the equation.

Of course, the big kicker if you pay the house off is you have to have the discipline to actually invest the freed up income in the market and not just elevate your spending/lifestyle. This to me is the biggest argument FOR investing the money instead of paying it off. It doesn’t allow for spending of the money instead of investing.