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

[ckelly78z]

After an insurance (pain/suffering) settlement from a drunk driver running a stop sign about 6 years, I was able to pay off our mortgage 10 years early. We LOVE the feeling of not having that $1000 a month payment hanging over our heads, and would recommend it to you....Math Smath !At the same time I cranked u my 401k from 6% to 20%, and have averaged far more percentage each year than the mortgage was.

 

[euro]

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.

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.

This! And it is why I recommended to the OP based on what he described, I would pay it off.

This is in spite of the fact that I, myself have not one, but over a half-dozen mortgages going (rental properties). Math works for me and the debt doesn't bother me at all. That said, if it ever keeps me up at night, I will pay them off in hurry. No profits are worth any sleepless nights IMHO.

 

[GenXguy]

I paid off my houses very early - definitely no regrets. Of course, I bought my houses when mortgage rates were in the 7% to 9% range.

 

[Sue J]

I've never been in debt and despise it,

Go with your gut.

I'm a math nerd so I understand the cheap mortgage rate vs investing idea. But there is nothing like knowing that you own your home. We paid ours off early (only a few years left) when DHs job looked insecure and we were looking at early retirement for him. Because we had no mortgage our cost of living was very low and it made the decision to retire a lot clearer.

If you are hesitant to commit the full amount I like the 1/3, 1/3, 1/3 idea from golfnut.

 

[Nords]

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?

We've been discussing this for well over a decade:
http://www.early-retirement.org/for...rtgage-without-losing-your-ass-ets-15237.html

Financially, you're borrowing against your future military pension payments by putting your home up as collateral. Your military pension and Social Security deposits are rising with inflation while your mortgage is a fixed payment that will be worth less than half of its value in 30 years.

Emotionally, though, it's a question of sleeping better at night.

Our P&I payments are covered by my pension, and we sleep fine.

In 2017 we refinanced our mortgage to 30 years at 3.50%. I'll make the last payment when I'm 87 years old, unless we refi for less than 3% and restart the 30-year clock again.

We're still a little over 8%/year, and I suspect we'll have longer-term after-tax returns of at least 6%/year.

 

[COcheesehead]

I flipped on this issue. We paid cash for our last house, but rates were higher. We are now in the early stages of building another home (our second retirement home, long story) and I had intended to pay cash again, but I ran the numbers and with rates so low, I plan to get a mortgage. It kind of makes my stomach turn to have debt in retirement, but even with conservative investments, I come out hundreds of thousands ahead and we have so much more in liquid assets which provide flexibility in a uncertain world. I remember in 2008 when my neighbors were not allowed to refinance. So money stuck in your walls at times may have to stay there.

Took me awhile to warm up to the idea, but the difference is the rates I can now get. Now is the time to borrow.

 

[Markola]

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.

I’m not sure that’s apples to apples, is it? In your dividend have you accounted for taxes, insurance and upkeep that renters don’t have? I know the OP asked to hear from paid off mortgage folks but I guess I don’t understand the renters dividend and would like to.

Due to taxes and insurance not changing one cent, my own $2,600 mortgage payment would only drop by $1,800 if we paid off the mortgage. Within that $1,800 is about $500 right now that goes to principle, building equity, more down the line as the mortgage matures. So the principle amount I pay over time equals the same amount as the OP would have to pay up front. Paying off our mortgage now would only save us $1,300/month, i.e. the interest payment, which declines over time. That $1,300 would be lovely to have available to spend now but it would cost my portfolio growing at a CAGR of 7%+/year $270,000 right now to save $1,300/month while that $270,000 also becomes a hard, illiquid asset that grows at a CAGR of 3% if I’m lucky.

As the OP said, the math dictates keeping the mortgage, so I’d guess the fact that he despises debt is the larger factor, which is fine. Some sleep better with no debt. Of course, others sleep better having every cent invested in stocks and bonds, working hard and accessible if needed, and they like the reasonably safe leveraged equity growth inherent in a mortgage.

 

[pb4uski]

Yup, does he despise debt more than he likes money?

 

[corn18]

The reason this is discussed endlessly on ALL financial fora is that there is no way to know the right answer ahead of time. And there really is no wrong answer. We paid off our current house last Sep. We did it because we could and to be honest, we were always so broke we never thought in a million years we could own our home. So we did it. It felt good. Now we are moving and building a house and I am looking at whether to take out a mortgage or not. I told my broker that if 30 year rates hit 3% with no points, to lock in a conforming loan and I will probably keep it. Subtract 2% inflation and the tax deduction and the real rate is closer to 0%. That's almost free money. And if inflation goes up, I am making money with a mortgage. Or I may just pay it off on a whim. Neither course of action is wrong.

 

[Sunset]

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]

But during the stock recession times, I look at my house where the value stays flat and my stock where the value drops 40% and say "Yippee it's paid off".

Even if my paid for house drops 10%, I still get the full value of living in it, while I wipe my but_ with Eron shares.

 

[LiveBelowMeans]

Pay off the mortgage. The return is a guaranteed 3%. Any stock returns are hoped for.... jmho

 

[gauss]

I could have paid cash for my home when I bought it, but rates were fairly low. I think I ended up putting down 30% - enough to avoid PMI, escrow of property tax etc.

I continued to refinance as rates continued to drop and quickly shortened my term from 30 years to 15 years. I realized on this schedule that the house would be paid off 6 months before DW retired (I retired 6 years prior).

For me this worked out really well because it helped to smooth out our cash flow. As DW retired and received a fraction of her paycheck as a pension, the house payment went away also.

Of course the market returns over the prior 17 years were more than 3% so we did okay.

I guess in our case, having the money to pay off the house was just as good as actually paying off the house. The income smoothing was the win for me.

-gauss

 

[Dash man]

We own four homes, one which is a part time beach rental in New Jersey. Living without a mortgage is amazing. I realize with the market rising we could do better leveraging our properties, but we don’t put any of them at risk. We sleep well at night and have no regrets. Your choice, but I hate 𝐃𝐞𝐛𝐭.

 

[hpnutty]

I've never been in debt and despise it

Not being in debt is a great feeling. We have not had a mortgage for 12 years. There was a deeper sense of security, maybe ill-founded, that we always had a place to live even if the worst happened. Especially since I was the only bread winner at the time. We used the "mortgage payment" to cash flow two DDs through college and continue to fund our retirement via investments. Many of our friends bought bigger houses and moved out of the neighborhood. They still have the mortgages and "have to continue to w*rk". Paying off the mortgage was one of the best decisions we ever made.

 

[rk911]

we retired at 55 and paid off the house several years before that. we had been debt free except for the mortgage for over a decade and we wanted to walk into retirement 100% debt free. besides, the most carefully designed plan can blow up in your face when life happens. with no debt a storm can be more easily weathered. pay it off and do as we did and invest those dollars or build up your emergency fund.

 

[Hardatit]

Thanks for all of the replies, I enjoy seeing the different perspectives, it really helps in making the decision.

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.

Noted and edited, thank you. My taxable account and Roth are both in VG TR2040, 83/13 AA. If I understand you correctly, you paid off your mortgage with funds that were in a savings account earning 1.7%? That would make sense to me to pay off the mortgage. I understand the market timing and that it is frowned upon and that's not what I am trying to do but simple thinking in my mind, if the market is up wouldn't that be a better time to sell the taxable shares and pay the mortgage off if I decide to do so?

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.

My taxable account is in the VG TR2040 fund. 83/13
Yes that's correct, I am living off my side income now and have been for some years. The rental income is extra and was not originally a planned part of my retirement income.
In reality, after military retirement I could put the rental income toward my house payment and only be coming out of pocket $625 to make the payment with no extra to principal. I'm somewhere in between the math and emotions.

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

Thank you and I'm glad to be able to serve. This is something I haven't thought of doing but definitely an interesting idea. Forgive my ignorance but haven't pulled out of my taxable account enough to understand the tax implications of doing so. Would doing it this way majorly affect my tax situation or be better than pulling out a lump sump?

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.

Interesting... I haven't thought of it this way and I haven't seen anyone in all the other threads I read mention it in that aspect. Just my home not counting the rental would cost me $12-1500 a month to rent. Not to mention the "dividend" that I get from the rental house. Would you mind diving a little deeper into your thoughts on this?

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!

Thank you and I'm glad to do it. Yes that is both a curse and a blessing for me sometimes I overthink things especially big financial decisions. I'm on the fence but leaning towards paying it off just to have the freedom/flexibility/clean cut slate of no debt/new life path when I retire from the military. I just like hearing different perspectives on the issue.
For 20 years I've been to places that are dangerous and that I don't want to be in (in the middle east as we speak) and some good, some bad with little flexibility on when you live and what you do. I grew up having most everything I needed but definitely not everything I wanted. My parents and most everyone else in my family are still w*orking and paying on their houses into their 60's. The feeling of being mortgage free would definitely be a good feeling of being free and a feeling of accomplishment but I am still looking long term and want to take into account the math. As I mentioned above, with the rental income I could make my mortgage payment with only $625 out of pocket. Does this make more sense, maybe?

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.

Yes I understand. I do itemize on my taxes so the rental would be a plus, with this being my first year to have it and not being done with my taxes yet, I'm not sure how much it will help me. Won't I still be able to use the rental home as a significant tax deduction after it's paid off though?

The reason this is discussed endlessly on ALL financial fora is that there is no way to know the right answer ahead of time. And there really is no wrong answer. We paid off our current house last Sep. We did it because we could and to be honest, we were always so broke we never thought in a million years we could own our home. So we did it. It felt good. Now we are moving and building a house and I am looking at whether to take out a mortgage or not. I told my broker that if 30 year rates hit 3% with no points, to lock in a conforming loan and I will probably keep it. Subtract 2% inflation and the tax deduction and the real rate is closer to 0%. That's almost free money. And if inflation goes up, I am making money with a mortgage. Or I may just pay it off on a whim. Neither course of action is wrong.

These are exactly my thoughts when thinking about the math portion of it. I'll never borrow money that cheap again. I've also tossed around the idea of paying it off and then sending the amount I would normally be paying for the mortgage back to my taxable account for XX number of years.

 

[daylatedollarshort]

We refinanced when mortgage rates bottomed out and will do so again if they drop further. We won't be giving up our low fixed rate mortgage unless it is for an even lower rate. We always refinance with no point, no fee mortgages whenever rates drop. For us it is good inflation and asset protection, since our state otherwise doesn't have great asset protection laws concerning personal residences. We have mainly non-inflation adjusted pensions so they help offset the fixed mortgage. I don't think there is one size fits all to this question, especially since asset protection laws and home prices really vary state by state.

 

[pb4uski]

....if the market is up wouldn't that be a better time to sell the taxable shares and pay the mortgage off if I decide to do so? ....

Probably not. The average return for a 80/20 portfolio from 1926-2018 was 9.4%... let's say that because we're currently near market highs that you only get 70% of that.... that's still 6.6% so you make a spread of 3.6% a year... for 12 years on an average morgage balance of $50k that is $21.6k.

 

[DrRoy]

I did pay off my mortgage in 2013 but it was at 5.5%. I viewed it as like making a fixed income investment at that rate which was not bad. I had substantial other investments and liked the new free cash flow, some of which was invested.

 

[Andre1969]

As much as I like the idea of no debt, a 3% interest rate makes it tempting to hold onto it! Also, if I'm doing the math right, you borrowed about $161,250K, and the principal/interest portion of your mortgage payment is about $1114/mo. The interest portion of that would have been about $403 the first month, and steadily going down from there. Since it's just a 15 year mortgage, one way to look at it is, you're already paying it down pretty quickly!

 

[golfnut]

Quote:
Originally Posted by 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

Thank you and I'm glad to be able to serve. This is something I haven't thought of doing but definitely an interesting idea. Forgive my ignorance but haven't pulled out of my taxable account enough to understand the tax implications of doing so. Would doing it this way majorly affect my tax situation or be better than pulling out a lump sump?



Not a tax guy but I would imagine the year you take out the entire lump would be the year you pay the most taxes. Paying off loan in 3 years would even taxes out over 3 years (maybe even pay less taxes). Of course, you'd still be paying the monthly interest rate which is small any way.


My feeling here is if you have hesitancy of pulling a large sum of money out of your investments, take smaller bites of it, see if you like it and can always stop when you don't.

 

[pb4uski]

....Thank you and I'm glad to be able to serve. This is something I haven't thought of doing but definitely an interesting idea. Forgive my ignorance but haven't pulled out of my taxable account enough to understand the tax implications of doing so. Would doing it this way majorly affect my tax situation or be better than pulling out a lump sump?....

When you sell some of the VG TR2040 fund you will have a capital gain for the difference between your sale proceeds and your "basis" what you paid for those shares. You can see what the gain would be by logging on to Vanguard and going to Cost Basis under My Accounts and then Show Details... that will show you your purchase lots, what each is worth and what the tax gain would be. Depending on your income level, long-term capital gains are taxed at 0% or 15%.

For 2020, long-term capital gains and qualified dividends face the following tax rates:

• 0% tax rate if they fall below $80,000 of taxable income if married filing jointly, $53,600 if head of household, or $40,000 if filing as single or married filing separately.
• 15% tax rate if they fall above the 0% threshold but below $496,600 if married filing jointly, $469,050 if head of household, $441,450 if single, or $248,300 if married filing separately.
• 20% tax rate if they fall above the 15% threshold.

Also, keep in mind that taxable income is after deductions. The standard deductions for 2020 is:

The 2020 standard deduction amounts are as follows:

• Single or married filing separately: $12,400
• Married filing jointly: $24,800
• Head of household: $18,650

Believe it or not, that means if a single had $52,400 of long-term capital gains in 2020 and no other income that their tax would be $0!

 

[NotYourAverageJones]

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.

Agree that while it's not the norm, it isn't a false statement either. Some people may be able to get a mortgage in retirement, refinance their homes or take a HELOC. Lenders do want to see a "steady income stream" versus someone who "just" has a few million in the bank.

As a military retiree, we have been pulling in a pretty sizable ret. check plus a tax-free VA disability check now for the past 17 years and we will retire in a few years with a pretty sizable mega corp pension. So while getting a HELOC may not ALWAYS be possible, it is possible depending on persons circumstance, as you noted above. But it's good that you clarified my comment offering others some solid advice and a general word of warning. I was just throwing in my 2 cents along with everyone else's change. Take what what you want from it and leave the rest. That's my best advice.

 

[Cayman]

The only payments I like are payments to myself. Payments to anyone else are a thorn in my side. Annoying! Others here hold mortgages by choice and it works great for them.

 

[GRR1865]

I waffle between the two. In 2016 I paid off my previous home. I had minimal amounts in the brokerage account. I didn't really get the whole I'm debt free this is awesome feeling, it was more like Meh. In 2017, I got a chance to have work transfer me to where I wanted to live and move. I took out a modest mortgage on my current house and rolled about 75% of my home equity into my brokerage account. Needless to say that has worked out well in this crazy market. My brokerage account is now large enough that I have actually swung back to paying splitting my extra amount between adding to the brokerage and accelerating the mortgage so that it will be paid off in 5-10 years vs 28.