Continue to Invest or Pay Down Mortgage Question

[Vacation4us]

Ah, I told him to refi to a 15 year mortgage and continue to fund his Roth and 401 k, balance dear. Markets go up, markets go down everyone needs a roof over their head. For me a paid off house means I only need half my current income to retire.

I would never cash out my investments to pay off a mortgage. Options, I chose to live below my means pay extra towards the house and fund my retirement accounts to the legal limit. No regrets, I am just fine. Now if I could just get my husband to retire......

 

[ERD50]

... For me a paid off house means I only need half my current income to retire. .....

Can you show us the math on that? Again, considering someone with the funds available to pay off the mortgage, and include the income from those funds.

You appear to be another one of those people who only look at half the equation.

-ERD50

 

[Vacation4us]

My personal situation, prior to marriage #2 a year ago.....

Earnings 132k after fully funding 401k and Roth (24500 and 6500) and paying all taxes fed,state,sdi,SS my take home pay averaged 5k to 5.5 k per month.

I am an hourly employee

House payment $2550 Not including property taxes or insurance equals house payment is = to 50% of my take home pay. I will need $2550 less after taxes in 2 years to live exactly the same as I did before.

As a side note my grandfather paid off his house early in life, worked for the VA his whole career got a 3k a month pension died with 4 million in investment accounts. He had money to invest not because he was a high earner but because he didn't have a house payment and he lived below his means.

PS I wonder what 1 line you will extract from this post, sigh ��

 

[Montecfo]

You should also realize, that for some of us, there is no better peace of mind than having the money that could be used to pay the mortgage, in an account working for us.

That money is available in case of an emergency, instead of being locked up in an illiquid home. If you lose your job, $200,000 will pay a mortgage, taxes, insurance, utilities, maintenance, and put food on the table and other expenses for many many months. If you put $200,000 in the house, and lose your job, you still need to pay taxes, insurance, utilities, maintenance, and put food on the table and other expenses.

For me, that liquid $200,000 would provide a lot of peace of mind.



I am just dumbstruck (well, for a moment, since I am typing this now!) when I read this. It is mentioned from time to time. Do posters not see the circular logic in this? I can only guess that they are so strongly in the 'pay off' camp, that they are blinded to common sense.

If you are in a position to pay off the mortgage (the only case where this discussion makes any sense at all), then you already have the money to invest!

You are actually suggesting that we pull out our investment (I thought an invested portfolio was the goal?), and apply it to the mortgage so we can now refill that investment a little each month (with the reduced cash flow). It was already full!

Do what you want, but if you want to be taken seriously, I suggest you do not use that argument. And I hope you don't actually believe it!

-ERD50

Get a standby HELOC and you can have the best of both worlds. I kind of doubt equity gains over the next 5-10 years will exceed 4.6% by a large enough margin to make the risk worth taking.

 

[pb4uski]

You should also realize, that for some of us, there is no better peace of mind than having the money that could be used to pay the mortgage, in an account working for us.

That money is available in case of an emergency, instead of being locked up in an illiquid home. If you lose your job, $200,000 will pay a mortgage, taxes, insurance, utilities, maintenance, and put food on the table and other expenses for many many months. If you put $200,000 in the house, and lose your job, you still need to pay taxes, insurance, utilities, maintenance, and put food on the table and other expenses.

For me, that liquid $200,000 would provide a lot of peace of mind. ....

+1 especially in this case where the OP has some money availavble but not enought to payoff the mortgage... his mortgage payment will still be due each month... so if he loses his job having a paid DOWN mortgage does him NO good at all... but if he has investments then he can use those for living expenses and the mortgage.

 

[pb4uski]

.... I kind of doubt equity gains over the next 5-10 years will exceed 4.6% by a large enough margin to make the risk worth taking.

Many probably would have said the same thing 3 years ago... and been very wrong... but who knows... you take your chances.

 

[Montecfo]

Many probably would have said the same thing 3 years ago... and been very wrong... but who knows... you take your chances.

We won't know that for another 2-7 years, but I understand your point. Having said that, market PE is a key indicator statistically of future returns, and I think the logical case suggests paying down a 4.6% mortgage may be a very wise "investment" decision over that time frame.

Of course your results may vary, package sold by weight not volume and objects in the rear view mirror may appear closer than they are.

 

[ERD50]

My personal situation, prior to marriage #2 a year ago.....

Earnings 132k after fully funding 401k and Roth (24500 and 6500) and paying all taxes fed,state,sdi,SS my take home pay averaged 5k to 5.5 k per month.

I am an hourly employee

House payment $2550 Not including property taxes or insurance equals house payment is = to 50% of my take home pay. I will need $2550 less after taxes in 2 years to live exactly the same as I did before.

As a side note my grandfather paid off his house early in life, worked for the VA his whole career got a 3k a month pension died with 4 million in investment accounts. He had money to invest not because he was a high earner but because he didn't have a house payment and he lived below his means.

PS I wonder what 1 line you will extract from this post, sigh ��

I only do that to try to focus and not just take up screen space with the whole quote, but I'll put it all here if it bothers you, and then repeat the relevant parts:

House payment $2550 Not including property taxes or insurance equals house payment is = to 50% of my take home pay. I will need $2550 less after taxes in 2 years to live exactly the same as I did before.

OK, just as I said - you only look at 1/2 the equation. What about the money you used to pay off the mortgage? That didn't simply appear out of thin air.

Get a standby HELOC and you can have the best of both worlds. I kind of doubt equity gains over the next 5-10 years will exceed 4.6% by a large enough margin to make the risk worth taking.

We had some people report on this forum that the HELOC was not available when they needed it. It probably works in most cases, but not always - then what?

And sure, if you don't feel reasonably confident that returns will exceed the mortgage interest, you probably won't want to do it. That's a choice each person can make for themselves. But when people paint the pay-off as all good, and leave out 'little details' like the money it took to pay off the mortgage, like that money didn't actually exist, well, that bugs me, and I comment on it.

edit/add to the posts that just came in - I actually am not too thrilled with a 4.6% rate, and the likelihood that it won't be tax deductible. But back when you could lock in 3% for 15 or 30 years, and get a tax deduction, I thought it was a very good bet.

-ERD50

 

[pb4uski]

I'm not keen on 4.6% either.... if the OP had enough saved to totally pay OFF the mortgage rather than pay DOWN the mortgage then my advice might be different because if he had no mortgage then his financial risk would be lower and he could divert what would have otherwise gone to mortgage payments to rebuilding savings... but that opportunity is unavailable with a pay DOWN. IOW payng down the mortgage doesn't change his financial risk one iota... and actually increases it because he wouldn't have that money in the bank.

Now if he had enough saved to payoff the mortgage and have an emergency fund left then I think payoff would be a slam dunk at 4.6%.

 

[ERD50]

I'm not keen on 4.6% either.... if the OP had enough saved to totally pay OFF the mortgage rather than pay DOWN the mortgage then my advice might be different because if he had no mortgage then his financial risk would be lower and he could divert what would have otherwise gone to mortgage payments to rebuilding savings... but that opportunity is unavailable with a pay DOWN. IOW payng down the mortgage doesn't change his financial risk one iota... and actually increases it because he wouldn't have that money in the bank. ....

Yes, a partial pay-off seems like the worst of all worlds to me. No increased cash flow, and fewer $ in the account. Sounds awful.

-ERD50

 

[JDARNELL]

What about a partial pay off and recasting the remaining balance

 

[W2R]

I am not a very funny person, so bear that in mind but this is my feeble attempt at humor:

Guy-With-Mortgage during a bull market: "I'm so brilliant! I am making a fortune investing the extra money!!!"

Guy-With-Mortgage during a bear market: "I'm ruined. I wonder if I should sell everything, move to Mexico, or go back to work."

Guy-With-Paid-Off-Home during a bull market: "I may not have a fortune but it's wonderful to sleep as well as I do."

Guy-With-Paid-Off-Home during a bear market: "What's all the fuss about? Sure, I'm doing some belt tightening but it's wonderful to sleep as well as I do."

OK, I tried. If that wasn't very funny, then feel sorry for my poor brother who put up with my weird jokes for decades.

 

[pb4uski]

What about a partial pay off and recasting the remaining balance

What would that accomplish? Not much different from partial payoff and keeping current mortgage is it?

 

[JDARNELL]

What would that accomplish? Not much different from partial payoff and keeping current mortgage is it?

Would lower principal balance and also lower payment if it was a partial. Loan length would not change.

 

[pb4uski]

True, but refinancing costs probably would cause it to not make sense.

 

[JDARNELL]

True, but refinancing costs probably would cause it to not make sense.

My mortgage company will recast for $250. It’s not a refi it’s recasting.

 

[jazz4cash]

My mortgage company will recast for $250. It’s not a refi it’s recasting.

Never heard of this before. Always learning new things here. Thanks.

 

[pb4uski]

+1. I've never heard of that either
IF that is a possibility it might make more sense than just a paydown. OP could then replenish savings with difference between old and new mortgage payments.

 

[Chuckanut]

Recasting has been around for a while. IIRC, it preserves as much interest income as possible for the lender compared to simply paying off a big chunk of principle early and keeping the payment the same.

 

[street]

I am not a very funny person, so bear that in mind but this is my feeble attempt at humor:

Guy-With-Mortgage during a bull market: "I'm so brilliant! I am making a fortune investing the extra money!!!"

Guy-With-Mortgage during a bear market: "I'm ruined. I wonder if I should sell everything, move to Mexico, or go back to work."

Guy-With-Paid-Off-Home during a bull market: "I may not have a fortune but it's wonderful to sleep as well as I do."

Guy-With-Paid-Off-Home during a bear market: "What's all the fuss about? Sure, I'm doing some belt tightening but it's wonderful to sleep as well as I do."

OK, I tried. If that wasn't very funny, then feel sorry for my poor brother who put up with my weird jokes for decades.

I like it and a lot of truth in what you said. I paid a home off when in my later 20's and it was the right move for me. Through the years I gained a lot of equity in that home without interest adding my equity and gains grew instead of the home costing me more if I would of went the full payment plan. This plan worked for me and it might not work for the next.

Yes recasting and pay down on loan you pay just pay the principle and no interested is added to that extra payment that you pay ahead. To me it is a great savings but again I know anything, I do what works for me with common sense approach.

 

[MarieIG]

Under those circumstances, I would:

Keep maxing out your retirement accounts;

Set up the Roth for wife;

Keep an emergency fund for six months expenses intact in case of job loss/ emergency;

Print out an amortization chart - and see what additional payments of principal would save you.

 

[steelyman]

Never heard of this before. Always learning new things here. Thanks.

True about learning new things here. Recasting is a new term to me, here’s a little more background:

https://www.bankrate.com/finance/mortgages/what-is-mortgage-recasting-and-why-do-it-1.aspx

[ADDED] It seems similar to making extra payments toward principal.

 

[Montecfo]

We had some people report on this forum that the HELOC was not available when they needed it. It probably works in most cases, but not always - then what?

It is a tool. It definitely will not "work" if the value of your equity is or becomes zero.

And not sure what you mean by "then what"? Then you tap your emergency cash you have on hand for just such situations. A standby HELOC is no substitute for that.

edit/add to the posts that just came in - I actually am not too thrilled with a 4.6% rate, and the likelihood that it won't be tax deductible. But back when you could lock in 3% for 15 or 30 years, and get a tax deduction, I thought it was a very good bet.

-ERD50

Ah, memories. Yes

 

[ERD50]

It is a tool. It definitely will not "work" if the value of your equity is or becomes zero. ...

As I recall, people had their HELOCs frozen, they could not tap them when needed. They still had equity I think, it is just that the banks were not providing loans.

... And not sure what you mean by "then what"? Then you tap your emergency cash you have on hand for just such situations. A standby HELOC is no substitute for that. ...

In the case where someone pre-pays the mortgage, has little free cash, and is depending on that HELOC. There are people on this forum that have reported doing that - pre-pay the mortgage and retain very little liquidity.

I guess we'd need to search out threads from 2008-2009 for examples of frozen HELOCs, but that's my memory of it.

-ERD50

 

[Montecfo]

As I recall, people had their HELOCs frozen, they could not tap them when needed. They still had equity I think, it is just that the banks were not providing loans.

In the case where someone pre-pays the mortgage, has little free cash, and is depending on that HELOC. There are people on this forum that have reported doing that - pre-pay the mortgage and retain very little liquidity.

I guess we'd need to search out threads from 2008-2009 for examples of frozen HELOCs, but that's my memory of it.

-ERD50

I think your memory is accurate except the problem was prices were falling so quickly equity was hard to determine or was far less than homeowners realized. An extraordinary circumstance for sure.

As far as someone using their emergency cash to pay down their mortgage, that would be a different thread.

My suggested to anyone with material home equity is to get a standby HELOC. I do not think there is a case against doing so.