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

[COcheesehead]

As I mentioned up thread, I also waffled between the two. Paid cash for the last house, the next one we are taking out a mortgage. We applied for our construction loan yesterday. The rate we should get it at seems fairly easy to beat with our portfolio even with relatively safe investments. Now is the time to borrow. Save your liquid assets for a rainy day. They are bound to happen.

 

[pb4uski]

... I didn't really get the whole I'm debt free this is awesome feeling, it was more like Meh. ...

+1 When posters fawn over how great it is to be debt-free I just don't get it... a bit silly IMO.

 

[harley]

I didn't really get the whole I'm debt free this is awesome feeling, it was more like Meh.

+1 When posters fawn over how great it is to be debt-free I just don't get it... a bit silly IMO.

Well, I tend to brag a bit about having a mortgage, and not having all that cash locked up in home equity. So that's about the same thing.

 

[tulak]

Well, I tend to brag a bit about having a mortgage, and not having all that cash locked up in home equity. So that's about the same thing.

+1. My goal is to always have a mortgage, ideally around 10-20% of investable assets.

It’s easy money, so why not?

 

[scrabbler1]

As eager as I was to pay off my mortgage back in 1997-98 and put ER onto my radar for the first time, I was ambivalent about how the math would play out.


The markets were beginning to explode in their late 1990s boom, so the question about where I was going to get the money from mattered. But I was also happy to take some of its early gains off the table so I could guarantee them.


Then, there was the interest rate on my one-year ARM which was creeping upward since I refinanced my mortgage in 1992, from nearly 11% (I got the mortgage in 1989 when interest rates were still sky-high) down to 6%. By 1997, it had crept back up to around 8%.


But what actually pushed me over the edge was running the numbers some more and discovering that I would no longer need to deduct mortgage interest on my STATE income tax return, instead being able to take the standard deduction. Therefore, there was no state income tax increase by having less interest to deduct on that return.


Even then, I was still hedging my bet by paying down the mortgage in chunks. The first was in April of 1997, then see what would happen after that as far as market gains to replace the money I used to pay some of it off. I used a mix of a bond fund and a mixed-asset fund to pay the first chunk. The second chunk, in early 1998, I used only the mixed-asset class fund. When I was informed that the interest rate was going to rise some more (to just over 8%) on its anniversary date (May), I decided to pay off the rest of it, which by then wasn't a lot.


I can't say I would have paid it off had my interest rate been only 3%, especially with a similarly booming market. Maybe I pay some of it off early.


The markets were booming so much in 1997-98 that the temporary reduction in portfolio value from those chunks were very quickly eliminated by market gains.

 

[corn18]

Paying off a 3%-4% mortgage is purely emotional, IMHO. I did it and it felt great. We are moving and I will need to get a mortgage on the new house until I sell the old house. I'll probably spend a few months debating it all over and then pay it off and it will feel great again. How cool is that?

 

[pb4uski]

Paying off a 3%-4% mortgage is purely emotional, IMHO. I did it and it felt great. We are moving and I will need to get a mortgage on the new house until I sell the old house. I'll probably spend a few months debating it all over and then pay it off and it will feel great again. How cool is that?

But.... getting a mortgage isn't frictionless, right? What does it ultimately cost to get a mortgage, pay it off and have the lien exinguishment recorded vs just paying cash?

 

[corn18]

But.... getting a mortgage isn't frictionless, right? What does it ultimately cost to get a mortgage, pay it off and have the lien exinguishment recorded vs just paying cash?

I don't have cash. I have equity that I will turn into cash.

 

[daylatedollarshort]

+1 When posters fawn over how great it is to be debt-free I just don't get it... a bit silly IMO.

I don't really get that either. I mean you could have a $10M portfolio and a $200K mortgage at 3% or no mortgage and a $100K portfolio. Technically the second scenario would be "debt free" but not the one I'd pick of the two.

 

[yorick]

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"

This. Strictly by the math, I shouldn't have bought my house when I did, in 2006. I knew that - though not just HOW bad it would get - and bought anyway, because math doesn't cover the freedom that comes with having my own house.

Strictly by the math, I shouldn't pay my house off early, by 55 or so. But math doesn't cover my husband's ease of mind, because he knows what it's like to not be able to afford rent, or the mortgage. Relaxed husband makes for a happier marriage. It's worth it.

Ultimately, I can't take it with me. I'll have enough for retirement. Maybe I'll retire a little later, or take an overseas trip or two less. And so.

 

[KT1R]

Pay It Off ASAP

Pay off your mortgage. If the stock market tumbles (as it will) you don't want to have a mortgage. Ignor math and go for it. Being out-of-debt is part of being wealthy.

 

[Wincherr]

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

I couldn’t agree more. I am 55 and paid mine off about 10 years ago. The only downside I found was that when I bought another house and wanted to own both for a few weeks in transition, I had to get a little creative with the cash.

 

[Earlygirl]

I love having my mortgage paid off. I think that feeling is priceless. As someone else mentioned, get a HELOC in place (no fees) in case you need to borrow money. If you already have a mortgage on your rental, keep it if it is a good rate. It's tax deductible right off the top.

 

[SeanPizzle]

Paid my house off in 2011 at age 43. The peace of mind far outweighs and of the long term potential index fund growth.

 

[tulak]

Being out-of-debt is part of being wealthy.

Not even close. Plenty of wealthy people have debt and they’re doing just fine. Some have even posted on this thread.

 

[harley]

Pay off your mortgage. If the stock market tumbles (as it will) you don't want to have a mortgage. Ignor math and go for it. Being out-of-debt is part of being wealthy.

There's some truth in this post. The stock market will tumble.

 

[akrono]

Pay it Off

If you were to poll those who have payed off their mortgage I don't think you will find too many who have any regrets. You can't put a price on peace of mind and there is something very soothing about knowing the house is yours free and clear and you are living debt free.
It will also free up more money to invest monthly without the mortgage payments to be made. This question frequently comes up and is asked of Dave Ramsey the financial advisor on radio. His stock response is to pose the question back in reverse...." if you had a paid off house would you take out a loan against it to invest the money in the stock market??" To a person they will answer NO... his reply is "so what is the difference" . Essentially, that is what you are doing by maintaining the mortgage....food for thought.

 

[reneeh63]

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).

Options give peace of mind! I've never been emotional about my mortgage - I have no (what I consider to be) irrational fears about low interest debt. I'm pretty much a by-the-numbers gal and actually fight emotions so I'd keep the mortgage and put off a decision until one was truly necessary, otherwise, it's cheap money. It's not like your only options are to pay it off completely or invest it all in junk bonds you know! Don't create a situation that's not real.

 

[Jim in PA]

Ok so from all of the answers, it’s never about the math. It’s about the warm feeling you have from being mortgage free.
Here’s a couple more thoughts.

I look at paying extra principle (or paying off your mortgage) as making a long term investment at the mortgage rate, say 3%. So I ask myself, do I want to make a 15 or 30 year investment at a guaranteed 3%? For me that answer is no and I DO have the mortgage.
Also, you are a younger person (compared to 70 year old me). I have had mortgages as high as 8% and I paid them off aggressively. My expectation is that at some point, interest rates will be a lot higher than they are now. If that’s correct, I’ll like having that money locked in at 3%. So I carry the mortgage. But what if I’m wrong and rates never go up? I’m ok with that, because I’m not really losing anything.

 

[harley]

If you were to poll those who have payed off their mortgage I don't think you will find too many who have any regrets. You can't put a price on peace of mind and there is something very soothing about knowing the house is yours free and clear and you are living debt free.
It will also free up more money to invest monthly without the mortgage payments to be made. This question frequently comes up and is asked of Dave Ramsey the financial advisor on radio. His stock response is to pose the question back in reverse...." if you had a paid off house would you take out a loan against it to invest the money in the stock market??" To a person they will answer NO... his reply is "so what is the difference" . Essentially, that is what you are doing by maintaining the mortgage....food for thought.

It's well known that Dave Ramsey gives mediocre advise for people with no financial knowledge. And Suze Orman recommends working until you're at least 70. This is the wrong audience for them.

Personally, I would answer his question YES! If I could get a low rate cash out mortgage against a paid off house I'd do it in a heartbeat. Not to invest in the stock market, just to invest in my regular AA.

 

[retire202052]

As Mike Tyson once said "everyone has a plan until they get punched in the mouth"

If you plan to stay single and never have any children, then that's awesome and your set. Just curious if someday you plan to get married and have children. Then your plans will change dramatically

 

[Dash man]

We paid off our mortgage in 2010 with no regrets. Since then we have bought two more beach homes for cash and remained debt free. No debt for nine years and we couldn’t be happier. We’re considering buying a fifth property soon that will also be a cash deal. It’s amazing how quickly your net worth grows when you don’t pay anybody interest.

 

[RunningBum]

I think there are no wrong answers, unless you leave yourself with a cash flow problem after paying off your mortgage. Early retirees are probably most like to hit this issue if they can't yet access their IRAs, and pension and social security income hasn't started with. Otherwise, do what you want. No need to tell others what to do. You can retire with a mortgage, you can be rich with a mortgage, and it's ok to pay off your mortgage. Some people like the feeling of not having that debt, others like to leverage their house to invest more.

 

[catii]

Owning a nice home in Hawaii, with a 5000+ monthly mortgage payment, doesn't exactly point towards an early payoff, but we did accelerate it by adding a few extra hundred each month.

Paid it off normally this month, which gives us the equivalent of a $5000/month raise in early retirement!

 

[tulak]

Personally, I would answer his question YES! If I could get a low rate cash out mortgage against a paid off house I'd do it in a heartbeat. Not to invest in the stock market, just to invest in my regular AA.

As would I. I actually did this in ~2012. Rates were low, so I took out an equity loan against my house and invested it. I'd do this again if the conditions are right.

Paid it off normally this month, which gives us the equivalent of a $5000/month raise in early retirement!

Congrats, but the money is still there. It's locked up in equity in your home. How much would that equity have earned if it was invested?

The money part of this is about cash flow. If you can earn greater than the rate of the mortgage, you'll come out ahead. It's not hard. It's also not hard to get more than 3.5%.

But if you want peace of mind, don't want to deal with the hassle of a mortgage, feel better about lowering your monthly cashflow, etc, then pay off the mortgage.