Should I keep or pay-off, part of or all of, new mortgage?

[rk911]

Dave Ramsey said it best....Debt is dumb. Cash is king. with a NW of $5.5m I see no reason to carry a mortgage. HNY!

 

[COcheesehead]

Here is recent youtube video on the subject.

Interesting video. Their point being the volatility of the alternative investment combined with the interest rate, drives the probability of successful outcomes other than paying it off.

 

[rayvt]

Not paying 6% is the same as earning 6%.

No it's not. Not paying X% is just that---an expense you don't have.

My DW says to pay off entire mortgage and I'll thinking of paying off maybe ½ ($250K or $300K).

There are only two states of a mortgage: 1) You have a mortgage, and 2) you don't have a mortgage.
There is no such thing as having half a mortgage. It is either paid off or not.
Keep the money in cash or invested until if/when you pay it all off.
If things go pear-shaped for you and you cannot make the monthly payments, the bank WILL foreclose no matter how much you have paid the balance down.

 

[pb4uski]

No it's not. Not paying X% is just that---an expense you don't have. ...

Nah... not economically.

If you don't have a 6% expense then economically you are ahead by 6%... it's simple math... a negative times a negative is a positive just like -1*-6% = +6%... -6% is the mortgage interest (negative because it is an expense) and -1 is avoiding paying the mortgage interest.

Now the other side of the equation is what is lost on the funds that were used to pay the mortgage interest, and lets's say they were earning 4%... -1*+4% is -4%.

So with those givens if one were to pay off the mortgage then they would be +2%... a 6% benefit from not having mortgage interest plus a 4% detriment from no longer having that interest income.

 

[daylatedollarshort]

This chart has actual mortgage rates since the 70s. There have been many times periods where a 6% mortgage was a good deal. If rates decrease one can always refinance, but rates go up, you may not be able to get 6% mortgage again for some time - https://www.cnbc.com/select/see-how-mortgage-rates-change-over-time/.

Right now it is hard to know what rates will do, so neither bet is a sure thing. Paying half might make sense as a way to hedge your bets. I'm surprised that so many here who rely on the 4% rule and historical averages over 50 to 100 year periods for their investment portfolios are not thinking longer term / historical averages on the 6% mortgage.

 

[MichealKnight]

Not to your level in age and experience however but I still will offer my two cents. With no pressing needs, with no need nor desire to "back up the truck and buy stocks" if they go down.....then paying off the mortgage is a guaranteed 6% return -- frankly, SAFER than the T-BILLS we chase for 4.7% in that given a choice, I'd say your balance sheet is 20 trillion better than Uncle Sam's.

Simply put: With your stage in life and level of security and success....if you came to me to write a check, help pay off your mortgage.....and in return you'll pay me 6%.........I tell you what I'm selling some of my portfolio and investing with you. I'd be getting a safe 6%.

 

[rayvt]

Nah... not economically.

If you don't have a 6% expense then economically you are ahead by 6%... it's simple math... a negative times a negative is a positive just like -1*-6% = +6%... -6% is the mortgage interest (negative because it is an expense) and -1 is avoiding paying the mortgage interest.

Now the other side of the equation is what is lost on the funds that were used to pay the mortgage interest, and lets's say they were earning 4%... -1*+4% is -4%.

So with those givens if one were to pay off the mortgage then they would be +2%... a 6% benefit from not having mortgage interest plus a 4% detriment from no longer having that interest income.

Now do that for your credit card with 18.24% interest rate.

You don't "earn" 18.24% by paying the full balance each month. You just don't get charged any interest if you pay the full balance.

We have had monthly balances of $4000-$5000 every month for the last 20+ years, on cards with rates of 16% to 25%. And have never paid any interest. I guarantee that my $5000/mo did not earn 25%. Nobody would say that. It just was an expense that I didn't have.

The only reason for thinking that paying off a 6% mortgage is equal to making 6% return is to just fool yourself. A return means you have more money than you started with. Avoiding an expense means you keep the same amount of money you started with.

 

[pb4uski]

Whatever ray. You're the only person on this thread that thinks that way.

 

[COcheesehead]

Now do that for your credit card with 18.24% interest rate.

You don't "earn" 18.24% by paying the full balance each month. You just don't get charged any interest if you pay the full balance.

We have had monthly balances of $4000-$5000 every month for the last 20+ years, on cards with rates of 16% to 25%. And have never paid any interest. I guarantee that my $5000/mo did not earn 25%. Nobody would say that. It just was an expense that I didn't have.

The only reason for thinking that paying off a 6% mortgage is equal to making 6% return is to just fool yourself. A return means you have more money than you started with. Avoiding an expense means you keep the same amount of money you started with.

Did you think about this before posting it?

 

[MdaPetralia]

As to number 3, I invite you to read the Golden Period thread on here. So much good info on fixed income.

Will do. Thanks!

Right now it is hard to know what rates will do, so neither bet is a sure thing. Paying half might make sense as a way to hedge your bets. I'm surprised that so many here who rely on the 4% rule and historical averages over 50 to 100 year periods for their investment portfolios are not thinking longer term / historical averages on the 6% mortgage.

Precisely why I was thinking to pay only half. Trying not to "time-the-market".

...if you came to me to write a check, help pay off your mortgage.....and in return you'll pay me 6%.........I tell you what I'm selling some of my portfolio and investing with you. I'd be getting a safe 6%.

I should have dialed you before I got the mortgage! Maybe you would have taken 5%?

 

[MdaPetralia]

There are only two states of a mortgage: 1) You have a mortgage, and 2) you don't have a mortgage.
There is no such thing as having half a mortgage. It is either paid off or not.

I think that's a bit simplistic as there is a lot more to a mortgage than that. e.g. the proportion of interest to principal changes over the course of the mortgage, as you pay down the principle, you owe less interest.

 

[COcheesehead]

I think that's a bit simplistic as there is a lot more to a mortgage than that. e.g. the proportion of interest to principal changes over the course of the mortgage, as you pay down the principle, you owe less interest.

But your payment remains the same.

 

[rayvt]

But your payment remains the same.

And the risk of foreclosure remains the same. As long as the mortgage is not completely paid off, there is that risk.

I personally saw a house worth more that $150,000 go into foreclosure with only $5000 balance.

There was a case in Chicago where an elderly couple got foreclosed, but their escrow balance was *more* than the outstanding mortgage balance. That got a huge amount of publicity and the bank eventually relented and withdrew the action.

All it takes is one set of unfortunate circumstance where you miss a couple of monthly payments and you can lose your house. No matter how much you have paid down the mortgage and not matter how much extra you have paid toward principal.

It's just not worth the risk. Put that money into a savings account or CD and earmark it as your "mortgage freedom account". Only when you are ready to completely pay off the mortgage do you take that money and pay it off.

 

[captain3d]

You still lose your ‘paid off’ house if you do not pay the taxes. So you can never pay it off 100%

 

[daylatedollarshort]

You still lose your ‘paid off’ house if you do not pay the taxes. So you can never pay it off 100%

Or you get sued (some states). The OP has a high asset amount he'd have to lose before not having enough to pay a mortgage.

 

[COcheesehead]

A paid off home is no guarantee of anything, though people think it is.

 

[rk911]

A paid off home is no guarantee of anything, though people think it is.

if you mean there are no guarantees in life...maybe. but a paid-for home provides security of a roof over your head. sure, you have property taxes, utilitie, maintenance, upkeep and repairs. but you'd have those things with a mortgage as well. a paid-off home is an addition to net worth. it's an asset. you may choose to not include that in NW calculations but we do. when we paid off our 15-yr fixed, early, I might add, it was a wonderful feeling. that as the last piece of the debt puzzle to disappear before I put in my papers.

 

[COcheesehead]

if you mean there are no guarantees in life...maybe. but a paid-for home provides security of a roof over your head. sure, you have property taxes, utilitie, maintenance, upkeep and repairs. but you'd have those things with a mortgage as well. a paid-off home is an addition to net worth. it's an asset. you may choose to not include that in NW calculations but we do. when we paid off our 15-yr fixed, early, I might add, it was a wonderful feeling. that as the last piece of the debt puzzle to disappear before I put in my papers.

There are two ways to look at a paid off mortgage. One is emotional and one is math. You picked emotional and your punctuation, spelling and capitalization skills are off, which, frankly, says a lot.

 

[rk911]

There are two ways to look at a paid off mortgage. One is emotional and one is math. You chose emotional and your punctuation and capitalization skills are off.

maybe...but math was also a factor. with the mortgage paid that freed up nearly $900 per month that we added to the $ we already were investing in a red hot market. at the same time the value of our home kept climbing also adding to our NW. as with anything YMMV.

 

[HawkeyeNFO]

maybe...but math was also a factor. with the mortgage paid that freed up nearly $900 per month that we added to the $ we already were investing in a red hot market. at the same time the value of our home kept climbing also adding to our NW. as with anything YMMV.

That's not sound logic. It's all about opportunity cost. Paying off the mortgage locks your cash into the real estate. If the market goes up 10% per year for ten years, you would optimally put the money into the market at the beginning. if you put it in gradually over time, you don't make as much money. So, not paying off the mortgage means that you are free to invest it other things. The value of the home is irrelevant.

 

[Aerides]

There are two ways to look at a paid off mortgage. One is emotional and one is math. You picked emotional and your punctuation, spelling and capitalization skills are off, which, frankly, says a lot.

This isn't a college essay, it's an online social forum. No one should be critiqued on their typing, which may well be done on a phone these days.
Lighten up.

 

[COcheesehead]

This isn't a college essay, it's an online social forum. No one should be critiqued on their typing, which may well be done on a phone these days.
Lighten up.

I agree. I may have gone too far. I apologize.

 

[CRLLS]

I assumed that Net Worth is the same either way. I looked at what your account balance would be after 15 years with and without the mortgage. I probably have done it wrong. I assumed starting with 1,000,000 and without paying off the mortgage. Somewhere around 13 years the paid of mortgage scenario surpasses the keeping a mortgage scenario. At
the end of a 15 year mortgage, the no mortgage scenario was over 14% higher. Likely those here with the financial expertise in excel could do a more accurate evaluation. My assumptions were 8% market growth and a 50/50 AA resulting with a 4% annual return on invetments.

 

[Koolau]

This isn't a college essay, it's an online social forum. No one should be critiqued on their typing, which may well be done on a phone these days.
Lighten up.

Yeah, I find that I can't trust the spell checker here either. It changes word to different meanings so I have to really be careful. I'm thinking it would be even more difficult if I used a phone. My fumble fingers make all kinds of mistakes when I text.

A little grace goes a long way among friends but YMMV.

 

[nobody]

I have lived in paid off houses for 17 years, retired at 47. My engineering coworkers thought I was crazy to do this because of the "math." Funny thing is they are still working to pay for their stuff.