This is a big decision. Help me make the right one!

[MikeTN]

You need to consider taxes

Several have said you can probably make more than 4.25% by investing in equities. But You will have Federal (and state?) tax to pay on those earnings. There is no tax on the money you save by paying off the mortgage and avoiding the 4.25% interest cost. So now you need to make more than 5 to 6% in the market to make it come out ahead.

How about this: use savings to pay down mortgage while the market stays high. When a correction lowers stock prices you have the option of buying equities at that time.

 

[street]

^ that is great advise. I have always wanted to pay off loans as soon as I could. I felt I could always do better with those dollars in my hands instead of paying the lender each month.

 

[golfnut]

I am in a similar situation and am now leaning this way.

Mortgager balance a little over $50K. Interest rate of 2.875%. Current payment of just over $600/month has the payoff date in 2028, when I turn 70. The monthly payment are among our "regular" living expenses that are covered by my pension. The interest we pay pushes us just over the standard deduction, but not by much.

I have enough in cash to pay it off, not touch any investments, and, based on our retirement spending so far being half of we planned on, still have enough cash left to not have to touch investments before we choose to take SS - at which point pension + SS (for both of us) + investment income is looking like it will more than cover our expenses.

I mentally debate if I should invest some or all of this cash, as the monthly payment is not causing any issues. On the other hand, paying it off means one less payment to deal with, should. For DW, should I pass before her, it means one less financial issue to manage.

So I will likely take a middle ground... pay it down by a 3rd or a quarter this year, and see if our other spending stays below projection. Then re-evaluate at the beginning of next year.

One interesting thing: We bought the house in 1990, with a 30 year mortgage and a 10% interest rate. We refinanced 3 times over the years to the current mortgage. Paying it off this year would match the original mortgage term. An interesting thought for us.

The annual interest can't amount to much with a 2.875% rate and a $50,000 balance. Just curious how this could push you over the $24,400 sd?

 

[mystang52]

$140,000 seems a big nut to crack, to me. So, in the interest of simplicity I'd vote to continue to invest, and maybe make some additional payments to principal. When the mortgage principal becomes much smaller, perhaps in the 30-50,000 range, revisit the idea of paying it off.

 

[RetireAge50]

My checklist was:
1. Stay out of debt except mortgage
2. Fund 401k to company match
3. Fund Roth to max level
4. Fund 401k to max level
5. Pay kids college
6. Pay off mortgage
7. Retire with $1.5 million

I completed them in order except I never did pay off the mortgage.

 

[RobbieB]

I paid my mortgage off early, it was 8.5%.

If it was 4% I wouldn't have been in such a hurry.

 

[RetiredAt55.5]

Several have said you can probably make more than 4.25% by investing in equities. But You will have Federal (and state?) tax to pay on those earnings. There is no tax on the money you save by paying off the mortgage and avoiding the 4.25% interest cost. So now you need to make more than 5 to 6% in the market to make it come out ahead.

But you're not considering the tax savings by contributing to a 401K, since that reduces your AGI for the year. Every dollar added reduces your taxable income by one dollar.

The OP is probably in either the 12% or 22% tax bracket, so they're gaining (saving) 12 or 22% right from the get go, even if they make 0% in the market.

 

[jollystomper]

The annual interest can't amount to much with a 2.875% rate and a $50,000 balance. Just curious how this could push you over the $24,400 sd?

10K for State/'Local taxes + charitable contributions put us very close to the standard deduction, the mortgage interest is enough to push us over.

 

[pdxgal]

Several have said you can probably make more than 4.25% by investing in equities. But You will have Federal (and state?) tax to pay on those earnings. There is no tax on the money you save by paying off the mortgage and avoiding the 4.25% interest cost. /QUOTE]

Good point!

 

[teejayevans]

If you ever need extra cash, you might regret paying it off. If any doubt, I would not.

 

[pb4uski]

^ that is great advise. I have always wanted to pay off loans as soon as I could. I felt I could always do better with those dollars in my hands instead of paying the lender each month.

This is silly. If you feel you can "always do better with those dollars" in your hands why would you write a big check to the mortgage lender to pay off your mortgage? By your own assertion you could always do better with those dollars. Bad advice.

 

[mckittri2000]

Paying off the mortgage was the second most important thing for me as far as ER. FireCalc was the first. Not having debt will make it much easier for you to pull the plug as far as early retirement.

 

[pb4uski]

Several have said you can probably make more than 4.25% by investing in equities. But You will have Federal (and state?) tax to pay on those earnings. There is no tax on the money you save by paying off the mortgage and avoiding the 4.25% interest cost. So now you need to make more than 5 to 6% in the market to make it come out ahead.

How about this: use savings to pay down mortgage while the market stays high. When a correction lowers stock prices you have the option of buying equities at that time.

Not necessarily Mike. Depending on the OP's other income, if the money not used to payoff the mortgage is invested in domestic equities, then the tax rate on qualified dividends and LTCG could be 0%... at most would likely be 15%. Ditti if invested in international equities, plus you get the foreign tax credit for any foreign taxes paid.

 

[street]

This is silly. If you feel you can "always do better with those dollars" in your hands why would you write a big check to the mortgage lender to pay off your mortgage? By your own assertion you could always do better with those dollars. Bad advice.

Silly to you LOL! I make it just fine and won the game to where I'm at today, doing it the silly way. Thanks!

 

[RetiredAt55.5]

My checklist was:
1. Stay out of debt except mortgage
2. Fund 401k to company match
3. Fund Roth to max level
4. Fund 401k to max level
5. Pay kids college
6. Pay off mortgage
7. Retire with $1.5 million

I completed them in order except I never did pay off the mortgage.

+1

This is how I did it, except I deviated after (6) - I had the mortgage paid off, then I bought a second vacation home using a new mortgage on the primary home.

I retired only 5 years into the new mortgage, and I still have 21 years to go. Having a 3.99% mortgage was not an impediment to retiring early. In fact, having cash on hand rather than tied up in a paid up mortgage allows me to manage our income for ACA.

Inflation? Meh, not my worry for the mortgage payment as it's fixed for the next 21 years.

Rising interest rates? Cool, that'd make my 3.99% mortgage look better.

I agree with the other posters that said paying off the mortgage is a personal decision, as it depends on one's situation.

 

[PatrickA5]

Assuming you can save up a nice emergency fund first, I'm of the camp of making extra principal payments. Maybe 1/2 investment, 1/2 mortgage. Who really knows what your investments will bring? But, you DO know your ROI on paying off the mortgage.

I started making extra principal payments back in the late 90's. All of my buddies were "playing" the market and literally laughed at me for paying down my mortgage. Most were taking out HELOC's to "invest". Fast forward to 2008 and I have a paid off house and they were maxed out on their mortgages and ended up actually down in their "can't miss" investments. Then, the Great Recession hit and I had a paid off house and feeling great. I knew no matter what happened, my family had a home.

Sure, over time, you should make more than 4.25% investing the money. So what? There's no law that says you have to make every last cent.

 

[pacergal]

What I would do/ YMMV:
*Max 401K
*build 6 month Emergency Fund
*Max Roth
*Add extra Principal payment monthly, your mortgage rate is low enough, I don't think I would be in a rush to pay off
*Add to After Tax investments
*Have a Vacation Fund--make sure to have some fun!

 

[Toocold]

I had a similar choice and I decided to pay off the mortgage. It was the right decision for me -- and it let me ride 2008 without second thoughts. Since then, my net worth appreciated significantly -- to the point that I no longer need to work -- and I have no regrets.

I know you think this is a big decision but in hindsight I think you'll find that either approach is fine. There are other factors that are bigger for your future wealth than this one.

 

[street]

^ I get called names when I suggest that action you took, on many occasions too! Lol

 

[Gumby]

We got our first 30 year mortgage loan in mid 1993. We first refinanced in late 2001 to a 15 year, lower rate. At that time, we committed ourselves to having no mortgage by 2017. We refinanced 4 more times, each time for a lower rate and twice for a shorter term - first to 10 years and then to 5 years. We never took any cash out. We made our final payment in January 2017, 23.5 years after we bought the house and 15 years after our first refinance. It worked out that our monthly payment was almost the same over the entire period.

That said, our final loan was for 1.99%. If I could have kept that for a longer term and still been able to deduct mortgage interest, I may well have done that, as we were easily FI by then.

 

[Another Reader]

At 3.125 percent, I'm not going to pay off the mortgage on my personal residence anytime soon. However, I had two rental mortgages that were coasting along at 5.875 percent. I was paying $2k a month extra on the smaller loan, but in December I decided to bite the bullet and pay them both off. I hated the servicer that inherited these nonconforming loans and even the after tax interest rate gave me a much higher return than CD's or most bonds.

I have the resources to pay the remaining mortgages in almost all imaginable cases. The payoff did cut into my cash reserves, but I will now work on rebuilding those.

 

[golfnut]

10K for State/'Local taxes + charitable contributions put us very close to the standard deduction, the mortgage interest is enough to push us over.

Thanks, I only asked to see if we were missing something with our taxes. You're obviously very generous with the charitable contributions. Very nice!

 

[Slow But Steady]

Here's an oddball thought: your mortgage company may become a pain in the ass.

In my case, I was paying down a 10 year, 3.375 mortgage, even though I had plenty of money to pay it off. Then I had an insurance claim and they wouldn't send me the money they had retained until they had an inspector come out and sign off on the repairs. I was doing a lot of other work and I didn't feel like waiting on them, so I paid them off, about $33,000.

If you pay down quickly, you might be in a better position to jettison the mortgage company if the become a pain.

BTW, in my case, the mortgage servicer (Ditech) went bankrupt shortly after I got my money from them, so I was really glad I made that move.

 

[Wincherr]

You are going to always get all kinds of answers on this. It really is a personal decision. I was in almost your exact same situation about eight years ago and had a certificate of deposit mature when the best interest rate I could get on a renewal was a percent or two. I talked to many people and got many opinions but made the decision to pay my mortgage off. Again, it has to do with how you feel about things, but I am so happy I did it. There is a lot of freedom in that.

This spreadsheet, link below, is what I used to track my progress. I started with set extra principle monthly Then started applying other extra payments when I will get a tax refund or have extra cash. The spreadsheet let you model it both ways. I became obsessed and quickly got my mortgage balance low enough for the pay off when that CD matured.

https://www.vertex42.com/ExcelTemplates/extra-payments.html

 

[24601NoMore]

I think that's really what it boils down to. Most people seem to understand that the market normally would return better results, but we don't know for sure. The mortgage is a guaranteed return and while it may come up short it provides some emotional peace and stability.

Agreed. Paying off the mortgage is a guaranteed return. Investing in markets is not, as we all know. What if you invested all the years between now and when the market drops another 40-50% again? You'd be seriously kicking yourself - because instead of a guaranteed return of 4+% each year, you're now down 40-50%. No thanks!

Are the markets "likely" to exceed your mortgage interest rate in terms of real return over the next decade? At these current, very lofty valuations? Possibly (and I suspect probably) not.

I vote (strongly) in favor of paying off the mortgage as soon as you're able. We bought and paid for two different houses to-date, and paid off the mortgages (in both cases via aggressive pre-payments on remaining principle) as soon as we were able. We're still in very good shape in terms of ER portfolio assets. It's not an "either, or" in most cases but especially since you apparently can't deduct the mortgage interest - definitely pay it off and take the guaranteed return. All JMHO but that's what worked for us and what many will advise..(back when mortgage interest was still generally deductible, it became obvious quickly that spending $1 in interest to deduct ~.35 from our taxes was not beneficial, LOL).

PS: when we were making these very same decisions over the past 25+ years, there was no shortage of brokers and other similar people pushing investments over debt paydown. I remember going to one seminar with an agent who was saying we should take out as big of a mortgage as we could get approval on, so that we could invest more. (I think he was probably in the same camp as the "150% leveraged equities - yeehaw!!" crowd)..Sure am glad we ran from that "advice". Being debt free is one of the best things you can do for FI and ER, IMHO.