Author Topic: Extra Mortgage Payment  (Read 3122 times)

Bernard

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Extra Mortgage Payment
« on: June 03, 2019, 04:59:57 PM »
I heard on the tube that if one pays their mortgage bi-weekly, that this shaves off 7 years off a 30-year mortgage.
While that sounds too good to be true, I understand the mechanics behind this. There are 52 weeks in the year, so 26 bi-weekly payments, which translates in 13 months. Rephrased, if I were to pay 1 extra month's worth of mortgage payment each year, I can shave off years of my mortgage.

My question is, is there a calculator for this somewhere online?

My mortgage payment for June is $772.70 principal, $1,611.99 interest, and $764.90 Escrow (taxes and insurance). That's $3.149.59 total.
My interest rate is 4.00%.

What amount should I add to the principal?

nereo

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Re: Extra Mortgage Payment
« Reply #1 on: June 03, 2019, 05:45:56 PM »
I heard on the tube that if one pays their mortgage bi-weekly, that this shaves off 7 years off a 30-year mortgage.
While that sounds too good to be true, I understand the mechanics behind this. There are 52 weeks in the year, so 26 bi-weekly payments, which translates in 13 months. Rephrased, if I were to pay 1 extra month's worth of mortgage payment each year, I can shave off years of my mortgage.

My question is, is there a calculator for this somewhere online?

My mortgage payment for June is $772.70 principal, $1,611.99 interest, and $764.90 Escrow (taxes and insurance). That's $3.149.59 total.
My interest rate is 4.00%.

What amount should I add to the principal?

I would argue against making any additional contributions towards paying off your mortgage at 4.00%, particularly if you still have room in any of your tax-advantaged accounts (i.e. IRAs, 401(k), HSA).  SeeInvestment Order. Note that the current 10 year treasury note is ~2.1%.



The question of whether or not to pay down ones mortgage is a lively one around here, to say the least.

SAR

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Re: Extra Mortgage Payment
« Reply #2 on: June 03, 2019, 07:31:20 PM »
If you can make more money not paying off the mortgage, then it's not logical to pay it off.

Nonetheless, you might get some psychological utility out of that, in which case make your decision based on how much you value the paid off house.

A good calculator: http://www.mtgprofessor.com/calculators/Calculator2a.html

Exflyboy

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Re: Extra Mortgage Payment
« Reply #3 on: June 03, 2019, 10:12:37 PM »
Yes a single extra payment per year reduces a 30 year mortgage to 23 years. Doubling your payments reduces a 30 year to 7 years.

Excel spreadsheets has a mortgage repayment function.. I can't remember what its called though.

Does it work?.. Why yes it does.. I doubled my payments and was about to pay off in 7 years.. In the end I made my last payment in 6 years an 3 months.

As others have said, it doesn't make sense to pay off a low interest rate loan when you can make more in the stock market.

So why did I do it? Well at the time my company was handing out pink slips left and right. I never got laid off but having the roof over my head paid for gave me warm and fuzzies.

Adam Zapple

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Re: Extra Mortgage Payment
« Reply #4 on: June 04, 2019, 05:26:49 AM »
Yes it is true.  If you Google bi- weekly mortgage calculator you are sure to find one.  Just realize that this is the same as adding extra $$$ to your mortgage payment every month.  At 4% I think it's a decent idea. 

rantk81

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Re: Extra Mortgage Payment
« Reply #5 on: June 04, 2019, 05:51:31 AM »
ASIDE from the issue of WHETHER or NOT you SHOULD accelerate payments toward your mortgage --

Beware of companies that advertise to switch you to a biweekly payment program. In my experience, a lot of them are what I would classify as "scams" because signing up for them entails having to pay a lot of extra fees.  Up-front refinancing fees, potentially a different interest rate, and possibly a fee for each time they take one of your bi-weekly payments out of your checking account.  I say that they are scams because you could accelerate your mortgage principle payments at any time you wish... you need not pay any additional fees to do so.  Just send in larger payments each month, or send additional payments -- with a note on the check to apply excess to the principal balance of the loan.


Arbitrage

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Re: Extra Mortgage Payment
« Reply #7 on: June 04, 2019, 07:52:34 AM »
I heard on the tube that if one pays their mortgage bi-weekly, that this shaves off 7 years off a 30-year mortgage.
While that sounds too good to be true, I understand the mechanics behind this. There are 52 weeks in the year, so 26 bi-weekly payments, which translates in 13 months. Rephrased, if I were to pay 1 extra month's worth of mortgage payment each year, I can shave off years of my mortgage.

My question is, is there a calculator for this somewhere online?

My mortgage payment for June is $772.70 principal, $1,611.99 interest, and $764.90 Escrow (taxes and insurance). That's $3.149.59 total.
My interest rate is 4.00%.

What amount should I add to the principal?

How much time you shave off of a mortgage with extra payments depends upon your interest rate.  The higher the interest rate, the more time you'll shave off with extra payments. 

Another calculator that allows you to play with the amount of extra principal you pay:
https://www.mortgagecalculator.org/calculators/what-if-i-pay-more-calculator.php

This is the math.  Whether or not you should pay extra is a different discussion, for which there is not necessarily a right answer but very strong opinions, as evinced above.  You do need to consider what you would be doing with the money instead of paying extra principal (the opportunity cost). 

v8rx7guy

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Re: Extra Mortgage Payment
« Reply #8 on: June 04, 2019, 08:01:00 AM »
This is a fantastic calculator to play around with loan payoff times.  I like it in particular because it works for existing loans.

http://loan.bizcalcs.com/Calculator.asp?Calc=Existing-Loan-Payoff

FrugalToque

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Re: Extra Mortgage Payment
« Reply #9 on: June 04, 2019, 08:12:53 AM »
MOD NOTE:  Yes, we're all aware of the controversy about paying off low-interest mortgages early.
1. The concern that sub-prime lending schemes can screw you over fast if the economy goes south, and it'd be nice to have zero mortgage at point.
2. You can usually make more money in the stock market than you would pay in interest on your loan.  You also have to consider that there are tax advantaged savings accounts that make investing even MORE lucrative, since failing to invest in those means higher income taxes.

All that said:
  • Those points have been made.
  • The OP now knows about them from Dabnasty's links.
  • The OP is asking a specific question and we're going to stick to that now instead of letting this turn into the usual explosion on the subject.

Thanks,
Toque

Bucksandreds

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Re: Extra Mortgage Payment
« Reply #10 on: June 04, 2019, 08:26:47 AM »
Pay it off ASAP. A 4% guaranteed rate of return is very good and a $0 mortgage is extremely high financial security. That's just my mentality.

Davnasty

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Re: Extra Mortgage Payment
« Reply #11 on: June 04, 2019, 08:38:42 AM »
I found one more calculator that I think specifically addresses OP's question.

https://www.mortgagefit.com/calculators/biweekly-monthly.html

scroll down past "Compare Mortgage Quotes"

Davnasty

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Re: Extra Mortgage Payment
« Reply #12 on: June 04, 2019, 09:05:27 AM »
The OP is asking a specific question and we're going to stick to that now instead of letting this turn into the usual explosion on the subject.

I'm fine with removing off topic comments but to be fair, I don't think most of the deleted comments were arguing that you should not pay off your mortgage, rather they were pointing out that advising someone on how they should handle their mortgage with inadequate information is not good practice.

If none of the responses to the original off topic comment can remain then the original off topic comment should be removed as well. As it stands it could be misleading that no one called the comment out.

ETA: If OP were interested in having their specific circumstances analyzed should that be posted in "Ask a Mustachian" or "Case Studies"? In any case I would invite @Bernard to start another thread to discuss the specifics of their situation.
« Last Edit: June 04, 2019, 09:15:52 AM by Dabnasty »

FrugalToque

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Re: Extra Mortgage Payment
« Reply #13 on: June 04, 2019, 09:26:22 AM »
The OP is asking a specific question and we're going to stick to that now instead of letting this turn into the usual explosion on the subject.

I'm fine with removing off topic comments but to be fair, I don't think most of the deleted comments were arguing that you should not pay off your mortgage, rather they were pointing out that advising someone on how they should handle their mortgage with inadequate information is not good practice.

If none of the responses to the original off topic comment can remain then the original off topic comment should be removed as well. As it stands it could be misleading that no one called the comment out.

ETA: If OP were interested in having their specific circumstances analyzed should that be posted in "Ask a Mustachian" or "Case Studies"? In any case I would invite @Bernard to start another thread to discuss the specifics of their situation.

To be honest, I waved a pretty broad brush in the deletions.

It was basically, "Any comment inflaming the issue or quoting someone doing the same."
So I took out a lot of "Hey, cool down a bit." type comments as well.

The original comments "Pay off your mortgage!  Yeah!" and "Hey, don't pay off your mortgage!" are both vaguely useful and relevant.  So are Dabnasty's links.  From there, the OP has all the important information on that subject and we can go back to the original, financial/arithmetical discussion.

Toque.

simonsez

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Re: Extra Mortgage Payment
« Reply #14 on: June 04, 2019, 09:55:55 AM »
I think you're better off building a spreadsheet for your situation rather than an online calculator.  This way you can add as many or as little extra payments (and of various sizes) as you wish as well as save as many scenarios as you can think of.  You can have a set of columns for the loan amortized over 30 years with no extra payments and then another set where you alter the principal paid in a given month as much as you want to provide an easy comparison.  I'll call the former set of columns 'Planned' and the other set 'Actual'.

I'd put the date, payment number, total payment, amount of escrow, principal, interest, balance, and LTV% as columns for the Planned side and then a reduced version of that on the Actual side plus a 'Extra Pmt Amt' column which will be assumed to go all toward principal.

I'll provide an example spreadsheet with using $624113 as the purchase price @ 4% interest for 30 years and 20% down payment as well as some made up extra payment amounts for the hypothetical first year of the loan but here is how it's built.

Looking forward, you can figure out the principal and interest (and thus, future LTV%) if you made the minimum required payments by using the PMT function.  i.e. =pmt(interest rate listed as a whole number/(12 months * 100 to turn percentage into proportion), number of payments, -loan amount) or in your example specifically this would be =pmt(4/(12*100),360,-(whatever your starting loan amount was which is purchase price minus down payment)).  This is more of a verification than anything to see that your current portion of your monthly payment devoted to P & I is properly amortized, i.e. is equal to $2384.69.  In the interest column, you can find out how much of that $2384.69 will be going toward interest moving forward by using =balance*whole number interest rate/(number of months in year*100 to turn percentage into proportion).  Then the principal amount on your next payment will just be $2384.69 minus the interest you just calculated.  After that, you can subtract the principal from the balance month-by-month.  Thus, the interest amount you calculate each month is going down (since the balance is lower each month).

When doing modeling with various extra payments in column F, keep in mind the loan is still amortized over 30 years so just look when the balance in column I gets to $0.

Cheers,

MrThatsDifferent

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Re: Extra Mortgage Payment
« Reply #15 on: June 04, 2019, 12:19:36 PM »
In Australia itís common to pay rent and mortgages every two weeks (fortnightly). Youíre really only talking 1 or 2 extra payments, which seems reasonable to reduce interest, while still allowing you to invest. I donít have a calculator but if you look up Australian mortgage calculators Iím sure youíll find one where you can put in your terms to show you the impact.

FIRE@50

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Re: Extra Mortgage Payment
« Reply #16 on: June 04, 2019, 01:15:04 PM »
The thing that comes to mind for me is, IF you can afford to pay the extra money AND you want to pay it off sooner, why didn't you get a shorter term mortgage? You would have gotten a better rate and saved even more money.

nereo

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Re: Extra Mortgage Payment
« Reply #17 on: June 04, 2019, 01:41:57 PM »
The thing that comes to mind for me is, IF you can afford to pay the extra money AND you want to pay it off sooner, why didn't you get a shorter term mortgage? You would have gotten a better rate and saved even more money.
Flexibility.  If you take the longer term you accept a slightly higher rate, but if the SHTF you can scale back your payments at any point.

For illustrative purposes, currently you can get a 30yr for about 3.75% and a 15 year at about 3.2%.  Minimum payments for the 30 year are $1,389 (PI only) vs $2,101 for the 15y - a difference of $712.

If you wanted to pay off the 30y in just 15 years, you would need to add $792 to your monthly payments. 

So yes, you could "save"* $80/month by going with the 15y note with the lower interest rate if you held to your 15 year payoff schedule, but you lose the opportunity to reduce your monthly expenses by $712 should a better use of your money or a fiscal emergency come along.  It also changes the possibility of making asymmetrical payments (e.g. maximizing retirement accounts early on, then shifting focus to reduce debt after hitting your FI number).


*I used the word "save" not very precisely.  As stated above I would not overpay a mortgage at current rates until all tax-advantaged buckets had been filled, several years of expenses were already in easily assessable taxable accounts and doing so would not increase the proportion of one's NW tied to their home above 15-20%.

MrThatsDifferent

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Re: Extra Mortgage Payment
« Reply #18 on: June 05, 2019, 04:42:02 AM »
The thing that comes to mind for me is, IF you can afford to pay the extra money AND you want to pay it off sooner, why didn't you get a shorter term mortgage? You would have gotten a better rate and saved even more money.

How is this helpful? OP doesnít have a time machine, that milk has been spilt. Why donít you go back in time and undue your errors? What, you canít? Hmmmm

nereo

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Re: Extra Mortgage Payment
« Reply #19 on: June 05, 2019, 05:36:15 AM »
The thing that comes to mind for me is, IF you can afford to pay the extra money AND you want to pay it off sooner, why didn't you get a shorter term mortgage? You would have gotten a better rate and saved even more money.

How is this helpful? OP doesnít have a time machine, that milk has been spilt. Why donít you go back in time and undue your errors? What, you canít? Hmmmm
Well, one can refinance their existing mortgage at essentially any point, so the discussion of having a 30 or 15 year could still be relevant to the OP.  It's also worth mentioning for others who may have a goal of paying down their mortgage more quickly, but have not fully understand the differences between overpaying a longer note and simply going for the shorter note to begin with.

FrugalToque

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Re: Extra Mortgage Payment
« Reply #20 on: June 05, 2019, 08:23:44 AM »
The thing that comes to mind for me is, IF you can afford to pay the extra money AND you want to pay it off sooner, why didn't you get a shorter term mortgage? You would have gotten a better rate and saved even more money.
A lot of the time, as it was in my case, I didn't know how good we were at saving money until after we got our mortgage.
At that point, we became Mustachians and started looking at how many double-payments and extra-payments we could make without penalty.
Before that, we set our mortgage at the level Common Wisdom suggested (based on percentage of income, which assumes Clown Consumption).

So I can see somebody discovering MMM, learning to save money, then having way more money hanging around which can pay off debts.

You could refinance at that point, but that often costs money and takes away your leeway in case you have some expense surprising you.
Besides, the bank might not even let you set your mortgage payments at 50% of gross income.

Toque.

nereo

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Re: Extra Mortgage Payment
« Reply #21 on: June 05, 2019, 08:42:43 AM »

Besides, the bank might not even let you set your mortgage payments at 50% of gross income.


From personal experience we've learned that the banks (and their lending algorithms) really don't know how to deal with people like us.  On the one hand we had a substantial amount in investments, particularly in "retirement" accounts after decades of being savers, and we contribute as much as possible to our tax-advantaged accounts and live frugally, so our take-home pay is relatively modest, particularly compared to our salaries.

When seeking a $190k mortgage we had one set of banks refuse to lend to us unless we put down 50% of the purchase price because our "available income" (take-home pay) was above a certain percentage of the mortgage payment, but the loan-advisor said they'd lend to us in a heartbeat if we stopped contributing to our retirement accounts (!).  The next day we visited our local credit union which pre-approved us for almost 3x the amount at their lowest rate.  Apparently the credit union weighted our assets and salary very heavily but did not consider our monthly take-home pay very much  (if at all).

(Edited for clarity)
« Last Edit: June 05, 2019, 08:58:24 AM by nereo »

FIRE@50

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Re: Extra Mortgage Payment
« Reply #22 on: June 05, 2019, 08:44:23 AM »
The thing that comes to mind for me is, IF you can afford to pay the extra money AND you want to pay it off sooner, why didn't you get a shorter term mortgage? You would have gotten a better rate and saved even more money.

How is this helpful? OP doesnít have a time machine, that milk has been spilt. Why donít you go back in time and undue your errors? What, you canít? Hmmmm
Calm down. This was not in anyway an assault on the OP. It was simply a general thought.

rantk81

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Re: Extra Mortgage Payment
« Reply #23 on: June 05, 2019, 08:51:17 AM »
From personal experience we've learned that the banks (and their lending algorithms) really don't know how to deal with people like us.

+1000

I've encountered this on several occasions too!  In fact, after I had been particularly jerked around by one lender w.r.t. providing excessive documentation (and considering I had enough liquid available to purchase the real estate with cash, a couple times over)  -- A quote from my attorney who was representing me in the purchase of real estate --

"Why don't you tell this bank to fuck off, and just buy it with cash?"

The reason was a 30 year fixed at 3.5% at the time :D


nereo

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Re: Extra Mortgage Payment
« Reply #24 on: June 05, 2019, 08:56:02 AM »
The thing that comes to mind for me is, IF you can afford to pay the extra money AND you want to pay it off sooner, why didn't you get a shorter term mortgage? You would have gotten a better rate and saved even more money.

How is this helpful? OP doesnít have a time machine, that milk has been spilt. Why donít you go back in time and undue your errors? What, you canít? Hmmmm
Calm down. This was not in anyway an assault on the OP. It was simply a general thought.

I'm not upset - just wanted to give some reasons how this could be applicable to the OP and to others following along.  Basically just answering the question you proposed.
no worries, I'm taking all of this as a chance for sharing various strategies, experiences and points of view.

EngagedToFIRE

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Re: Extra Mortgage Payment
« Reply #25 on: June 05, 2019, 11:06:25 AM »
Personally, I'm in the pay off your mortgage club.  However, I am also in the invest club.  I don't believe it's a good idea to throw money at a mortgage by making extra payments.  Since you'll still be on a path of years and years to pay it off, you have time.  Which means stocks probably make more sense.

What I did was put those extra payments in to an index fund.  When the fund was large enough to pay off the house, WHAM.

So my advice would be to avoid making the extra payments towards your mortgage, but to make those extra payments in to an index fund.  But by all means, make the extra payments to yourself whether it's the mortgage or index funds.  You may also need to review your retirement funds and how well funded those are before considering anything with your mortgage.  Lot of great advice here.

Adam Zapple

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Re: Extra Mortgage Payment
« Reply #26 on: June 06, 2019, 01:21:43 PM »
Personally, I'm in the pay off your mortgage club.  However, I am also in the invest club.  I don't believe it's a good idea to throw money at a mortgage by making extra payments.  Since you'll still be on a path of years and years to pay it off, you have time.  Which means stocks probably make more sense.

What I did was put those extra payments in to an index fund.  When the fund was large enough to pay off the house, WHAM.

So my advice would be to avoid making the extra payments towards your mortgage, but to make those extra payments in to an index fund.  But by all means, make the extra payments to yourself whether it's the mortgage or index funds.  You may also need to review your retirement funds and how well funded those are before considering anything with your mortgage.  Lot of great advice here.

As time goes on, I am liking this strategy more and more, despite the fact that it is statistically likely to be sub optimal.  My issue is that I've been plugging away at retirement savings but feel like I need to "reward" myself in some way.  Eliminating an $1800 monthly bill would sure feel good.  I could probably crush the mortgage in under 4 years but putting the money in a separate account gives me an out if I change my mind.

ysette9

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Re: Extra Mortgage Payment
« Reply #27 on: June 06, 2019, 03:48:50 PM »
I really like the idea of wiping out the mortgage in one fell swoop once a side account is at the right amount.

Il wondering if anyone had thought about the implications of this for someone who has a size able mortgage, and whether that changes things? For example, my mortgage is $800k. I have more than that in my taxable  vanguard account, but I cringe at the idea of wiping that account. Plus, there would be tax implications. Overall that mental exercise makes me realize that I am probably firmly in the ďkeep the mortgageĒ camp.

EngagedToFIRE

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Re: Extra Mortgage Payment
« Reply #28 on: June 06, 2019, 04:42:22 PM »
Personally, I'm in the pay off your mortgage club.  However, I am also in the invest club.  I don't believe it's a good idea to throw money at a mortgage by making extra payments.  Since you'll still be on a path of years and years to pay it off, you have time.  Which means stocks probably make more sense.

What I did was put those extra payments in to an index fund.  When the fund was large enough to pay off the house, WHAM.

So my advice would be to avoid making the extra payments towards your mortgage, but to make those extra payments in to an index fund.  But by all means, make the extra payments to yourself whether it's the mortgage or index funds.  You may also need to review your retirement funds and how well funded those are before considering anything with your mortgage.  Lot of great advice here.

As time goes on, I am liking this strategy more and more, despite the fact that it is statistically likely to be sub optimal.  My issue is that I've been plugging away at retirement savings but feel like I need to "reward" myself in some way.  Eliminating an $1800 monthly bill would sure feel good.  I could probably crush the mortgage in under 4 years but putting the money in a separate account gives me an out if I change my mind.

If you are looking at 4 years, then I would not invest in a broad stock market fund.  With ups and downs, this is too short of a time period to take the risk of getting caught in a down.

I have no mortgage.  So I totally get it.

EngagedToFIRE

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Re: Extra Mortgage Payment
« Reply #29 on: June 06, 2019, 04:47:26 PM »
I really like the idea of wiping out the mortgage in one fell swoop once a side account is at the right amount.

Il wondering if anyone had thought about the implications of this for someone who has a size able mortgage, and whether that changes things? For example, my mortgage is $800k. I have more than that in my taxable  vanguard account, but I cringe at the idea of wiping that account. Plus, there would be tax implications. Overall that mental exercise makes me realize that I am probably firmly in the ďkeep the mortgageĒ camp.

I'm probably the opposite.  I have roughly $2M locked up in my primary and secondary home.  And very little in my taxable accounts (relatively speaking).  But that was the plan for me.  I'm debt adverse and very much love increasing monthly cash flow.  My investment strategy worked out amazing, luckily with the market the way it's been the last decade or so. 

But I'm (as of last week) 100% out of debt.  No car leases or payments, no mortgages, no nothing.  And so now it's just a matter of building the taxable accounts, which is kind of fun throwing money at those every month now with a massive cash flow.  It's a good position to be in for us and we prefer having the house paid off.

There is truly no right answer which is why it's a good idea to keep this from becoming a debate.  But yeah, if you would cringe at emptying your account to pay off the house, definitely don't do it.  I was the exact opposite, I cringed at having a mortgage and was thrilled to empty a taxable account.  Do what makes you happy and feel good!

I did wipe out an $800k+ mortgage, my accountant didn't seem to have any issue with it or suggest major tax issues.  But you really do need to speak with a professional before making such a big decision.  A big part of the funds I used came from investment properties, which may have made a tax difference.
« Last Edit: June 06, 2019, 04:49:01 PM by EngagedToFIRE »