Author Topic: Pay off House or Invest  (Read 6174 times)

glh280

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Pay off House or Invest
« on: August 16, 2018, 11:01:04 AM »
Scenario #1:
  House is worth $630,000 with a $450,000 mortgage at 3.875% on a 15 year note.
  Should I take $450k out of my vanguard index fund to pay off the mortgage?
  I will NOT save the $2200 in payments going forward.
  This will leave me with $490k in investments at age 38 with a desired retirement age of 58 while adding $4600/mo.

Thoughts?

dougules

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Re: Pay off House or Invest
« Reply #1 on: August 16, 2018, 11:19:22 AM »
My first impression would be not to pay it off.   The earnings yield for the S&P 500 is 4.1% at the moment, and your mortgage rate is effectively only 1-2% when you account for inflation.  Also if it's your primary residence you get the mortgage interest deduction vs having to pay capital gains tax off of whatever your $450k has made. 

I'm not sure I understand what do you mean that you won't save the $2200 payments?


glh280

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Re: Pay off House or Invest
« Reply #2 on: August 16, 2018, 11:26:59 AM »
Under this scenario the mortgage payments are $2200/mo for P&I.  We would not save this after paying off the house, and would instead increase our spending by $2200/mo.

inline five

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Re: Pay off House or Invest
« Reply #3 on: August 16, 2018, 11:36:56 AM »
I would not pay it off. Unless you want the monthly cash flow. That's just too low a rate to pay off. We are at 3.12%, as much as I want to "own" my house it just makes no sense. In 10 years adjusted for inflation and raises that $2,200 a month will be a small amount of your pay check.

MDM

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Re: Pay off House or Invest
« Reply #4 on: August 16, 2018, 11:38:11 AM »
  Should I take $450k out of my vanguard index fund to pay off the mortgage?

  I will NOT save the $2200 in payments going forward [and would instead increase our spending by $2200/mo].
That's your call: take the $450K and enjoy/blow (you get to define...) it on things now, or leave it invested for future use.

JLee

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Re: Pay off House or Invest
« Reply #5 on: August 16, 2018, 11:44:25 AM »
Under this scenario the mortgage payments are $2200/mo for P&I.  We would not save this after paying off the house, and would instead increase our spending by $2200/mo.

Increasing spending by $2200/mo requires a $660,000 increase in portfolio size to sustain in retirement..FYI.

glh280

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Re: Pay off House or Invest
« Reply #6 on: August 16, 2018, 11:47:48 AM »
  Should I take $450k out of my vanguard index fund to pay off the mortgage?

  I will NOT save the $2200 in payments going forward [and would instead increase our spending by $2200/mo].
That's your call: take the $450K and enjoy/blow (you get to define...) it on things now, or leave it invested for future use.

This is the reason for the discussion.  My wife and I have differing opinions.  She wants to spend cash flow in addition to our already very bloated lifestyle.  I want to see the money grow and work for us.  I know that in 20 years that $450k could become $2M, and the house will be paid off after 15 years anyways.

dandarc

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Re: Pay off House or Invest
« Reply #7 on: August 16, 2018, 11:48:08 AM »
Under this scenario the mortgage payments are $2200/mo for P&I.  We would not save this after paying off the house, and would instead increase our spending by $2200/mo.
Is this just honest self-reflection about how you handle money, or are you experiencing a cash flow problem?

If you're having a relatively minor cash-flow problem, another thing you could do is refinance into a 30 year - even with a higher rate, your cash flow will improve due to the longer period the loan is spread out over. If $2200 fixes the problem and $700-1000 or so doesn't, you're probably still better off taking that out of the investment account gradually rather than in a lump sum.

If it is just "I don't need it, but if I have it I know I'll spend it", then you should not pay off the house - the mortgage is helping you control your behavior to your long-term benefit.

dandarc

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Re: Pay off House or Invest
« Reply #8 on: August 16, 2018, 11:53:11 AM »
  Should I take $450k out of my vanguard index fund to pay off the mortgage?

  I will NOT save the $2200 in payments going forward [and would instead increase our spending by $2200/mo].
That's your call: take the $450K and enjoy/blow (you get to define...) it on things now, or leave it invested for future use.

This is the reason for the discussion.  My wife and I have differing opinions.  She wants to spend cash flow in addition to our already very bloated lifestyle.  I want to see the money grow and work for us.  I know that in 20 years that $450k could become $2M, and the house will be paid off after 15 years anyways.
So your wife wants another $2K / month in spending. Ignoring the whole discussion about that and just taking that as the written in stone goal here,

there are ways to make that happen without paying the house off in full today - instead of selling $450K of your funds shares today, start taking $2K / month out. That leaves the bulk of the money to grow and would also minimize any tax issues.

Dollar-cost-averaging usually works to your benefit when withdrawing for the same reason it hurts you when you're accumulating.

Or refinance the house to 30 years, and then you maybe only need to withdraw $1K / month to hit the cash-flow number.

Scortius

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Re: Pay off House or Invest
« Reply #9 on: August 16, 2018, 11:54:44 AM »
  Should I take $450k out of my vanguard index fund to pay off the mortgage?

  I will NOT save the $2200 in payments going forward [and would instead increase our spending by $2200/mo].
That's your call: take the $450K and enjoy/blow (you get to define...) it on things now, or leave it invested for future use.

This is the reason for the discussion.  My wife and I have differing opinions.  She wants to spend cash flow in addition to our already very bloated lifestyle.  I want to see the money grow and work for us.  I know that in 20 years that $450k could become $2M, and the house will be paid off after 15 years anyways.

This seems like a relationship question more than a financial one then.

glh280

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Re: Pay off House or Invest
« Reply #10 on: August 16, 2018, 11:55:32 AM »
Under this scenario the mortgage payments are $2200/mo for P&I.  We would not save this after paying off the house, and would instead increase our spending by $2200/mo.
Is this just honest self-reflection about how you handle money, or are you experiencing a cash flow problem?

If you're having a relatively minor cash-flow problem, another thing you could do is refinance into a 30 year - even with a higher rate, your cash flow will improve due to the longer period the loan is spread out over. If $2200 fixes the problem and $700-1000 or so doesn't, you're probably still better off taking that out of the investment account gradually rather than in a lump sum.

If it is just "I don't need it, but if I have it I know I'll spend it", then you should not pay off the house - the mortgage is helping you control your behavior to your long-term benefit.

You hit it right on the head!  "I don't need it, but if I have it I know I'll spend it".  Our spending in other areas would get me crucified in this forum.  :(

glh280

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Re: Pay off House or Invest
« Reply #11 on: August 16, 2018, 11:56:32 AM »
This seems like a relationship question more than a financial one then.

That is true and being worked on.

Davnasty

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Re: Pay off House or Invest
« Reply #12 on: August 16, 2018, 12:08:34 PM »
This seems like a relationship question more than a financial one then.

That is true and being worked on.

In that case you should let her know that increasing spending by that amount just because you have it available would be absolutely batshit fucking crazy. You can tell her the internet said so.

Just kidding don't say that but also don't pay off the mortgage.

MDM

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Re: Pay off House or Invest
« Reply #13 on: August 16, 2018, 12:09:04 PM »
A couple back-of-the-envelope calculation tables below.  See rows 48-70 of the 'Misc. calcs' tab in the case study spreadsheet.


Quick calculation of "Time to FI"
Planned Withdrawal RateWR4.0%
Annual Savings InvestedS55,200$/yr
Annual Expenses in RetirementE100,000$/yr
Current Assets InvestedA490,000$
Investment returnr_5.0%
Time to FIt16.7yr
Desired time to FIt20.0yr
Annual Savings NeededS36,288$/yr

Quick calculation of "Time to FI"
Planned Withdrawal RateWR4.0%
Annual Savings InvestedS55,200$/yr
Annual Expenses in RetirementE100,000$/yr
Current Assets InvestedA940,000$
Investment returnr_5.0%
Time to FIt11.6yr
Desired time to FIt20.0yr
Annual Savings NeededS178$/yr

glh280

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Re: Pay off House or Invest
« Reply #14 on: August 16, 2018, 12:11:43 PM »
A couple back-of-the-envelope calculation tables below.  See rows 48-70 of the 'Misc. calcs' tab in the case study spreadsheet.


Quick calculation of "Time to FI"
Planned Withdrawal RateWR4.0%
Annual Savings InvestedS55,200$/yr
Annual Expenses in RetirementE100,000$/yr
Current Assets InvestedA490,000$
Investment returnr_5.0%
Time to FIt16.7yr
Desired time to FIt20.0yr
Annual Savings NeededS36,288$/yr

Quick calculation of "Time to FI"
Planned Withdrawal RateWR4.0%
Annual Savings InvestedS55,200$/yr
Annual Expenses in RetirementE100,000$/yr
Current Assets InvestedA940,000$
Investment returnr_5.0%
Time to FIt11.6yr
Desired time to FIt20.0yr
Annual Savings NeededS178$/yr

That is crazy.  If I actually reduced the annual savings by that much she would be happy, but ideally I want to save it still and do 'forced savings' through having the mortgage.

effigy98

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Re: Pay off House or Invest
« Reply #15 on: August 16, 2018, 12:13:58 PM »
This chart clearly says, PAY OFF HOUSE

http://www.multpl.com/shiller-pe/


JLee

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Re: Pay off House or Invest
« Reply #16 on: August 16, 2018, 12:29:45 PM »
This chart clearly says, PAY OFF HOUSE

http://www.multpl.com/shiller-pe/

On what planet is blowing $2200/mo on nothing the best option?

J Boogie

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Re: Pay off House or Invest
« Reply #17 on: August 16, 2018, 12:39:05 PM »
Seems like there's a lot going on here.

I think you and your family need to figure out what you want in life.

You can get by for quite a while and even save decently without clearly defined goals.

But you need to have a nice long talk and get on the same page when you start talking about opening up your piggy bank.



DS

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Re: Pay off House or Invest
« Reply #18 on: August 16, 2018, 12:44:00 PM »

glh280

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Re: Pay off House or Invest
« Reply #19 on: August 16, 2018, 12:51:40 PM »
You can get by for quite a while and even save decently without clearly defined goals.

We have been doing this since the beginning of 2017.  Fortunately I have been consistent with making out our retirement accounts.  I go through spurts where I get aggressive about saving and it causes conflicts.

DirtDiva

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Re: Pay off House or Invest
« Reply #20 on: August 16, 2018, 12:52:03 PM »
How much would you have to withdraw to end up with 450k?  Because, taxes.

This seems like a bad idea on many levels.

dandarc

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Re: Pay off House or Invest
« Reply #21 on: August 16, 2018, 01:00:19 PM »
How much would you have to withdraw to end up with 450k?  Because, taxes.

This seems like a bad idea on many levels.
Yeah - even if the budget discussion results in a $2K / month shortfall that needs to be covered, selling $450K worth of stock to make that happen is not the way to do it.

GuitarStv

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Re: Pay off House or Invest
« Reply #22 on: August 16, 2018, 01:01:07 PM »
I bet I know what boarder42 is going to say.

glh280

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Re: Pay off House or Invest
« Reply #23 on: August 16, 2018, 01:36:14 PM »
Thanks for the honest opinions.  I had to ask Scenario 1 the way I did to get unbiased responses.  Now I will ask Scenario 2 and see if the responses vary.

Scenario 2:
House has a $145k mortgage on it at 3.875% and 14 years left.
Cash-out Refi on the house for $450k and pay off the $145k first.  Rate remains 3.875% with only $2300 in closing costs.
$300k is invested into the market to grow.
Payment increases by $2200/mo (currently all being blown by not watching what is spent).

I want to do scenario 2 as it will force us to save $2200/mo that we are currently not saving and it will allow the $300k to grow. [The $300k came from aggressively paying off our last house from 2012-2016.]

My wife does not like the idea of having to restrict spending or make other decisions about what to scale back on.

Davnasty

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Re: Pay off House or Invest
« Reply #24 on: August 16, 2018, 01:50:04 PM »
I bet I know what boarder42 is going to say.

It's a personal decision that depends on lots of variables?

mathlete

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Re: Pay off House or Invest
« Reply #25 on: August 16, 2018, 01:51:57 PM »
I bet I know what boarder42 is going to say.

It's a personal decision that depends on lots of variables?

lol I'm dying!

DS

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Re: Pay off House or Invest
« Reply #26 on: August 16, 2018, 01:54:03 PM »
I bet I know what boarder42 is going to say.

It's a personal decision that depends on lots of variables?

"Live and let live, man. That's what it's all about. Peace" :'D

Davnasty

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Re: Pay off House or Invest
« Reply #27 on: August 16, 2018, 01:55:34 PM »
Thanks for the honest opinions.  I had to ask Scenario 1 the way I did to get unbiased responses.  Now I will ask Scenario 2 and see if the responses vary.

Scenario 2:
House has a $145k mortgage on it at 3.875% and 14 years left.
Cash-out Refi on the house for $450k and pay off the $145k first.  Rate remains 3.875% with only $2300 in closing costs.
$300k is invested into the market to grow.
Payment increases by $2200/mo (currently all being blown by not watching what is spent).

I want to do scenario 2 as it will force us to save $2200/mo that we are currently not saving and it will allow the $300k to grow. [The $300k came from aggressively paying off our last house from 2012-2016.]

My wife does not like the idea of having to restrict spending or make other decisions about what to scale back on.

This sounds more like a case study than a question of mortgage mathematics, or perhaps it's two different questions.

1) Should you stop spending money on things you don't need? Almost definitely, but it depends on where that money is actually going and how it will effect your relationship. Hence, case study.
2) Should you refinance and invest. Almost definitely.

mathlete

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Re: Pay off House or Invest
« Reply #28 on: August 16, 2018, 01:56:33 PM »
Honestly, I wouldn't even think about cashing out, or paying off, or refinancing or any of that until you've had a long, big picture discussion about finances.

Talk to your wife about what it is you guys want out of life. Thoroughly research what that costs. Then arrange your resources accordingly.

glh280

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Re: Pay off House or Invest
« Reply #29 on: August 16, 2018, 02:32:12 PM »
Honestly, I wouldn't even think about cashing out, or paying off, or refinancing or any of that until you've had a long, big picture discussion about finances.

Talk to your wife about what it is you guys want out of life. Thoroughly research what that costs. Then arrange your resources accordingly.

As sad as it sounds, and it will sound very sad.  Unless the money has an allocation we will find a way to spend it.  We need to protect ourselves from ourselves.  I feed off of her and she feeds off of me.  I will spend to buy something or do something because I know she really wants it and later regret the decision.

Our retirement plans are very different.  She imagines not needing much (yeah right!).  I am realistic that we will want to maintain a good lifestyle with travel and eating out.

patchyfacialhair

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Re: Pay off House or Invest
« Reply #30 on: August 16, 2018, 03:04:23 PM »
What changed in your circumstances to where your Vanguard Index fund is now available for spending.

You say you need to "protect yourself from yourself" but yet you were able to accumulate over $400k in after tax investments without spending it? Why now?

This seems dumb.

PDXTabs

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Re: Pay off House or Invest
« Reply #31 on: August 16, 2018, 03:18:06 PM »
I will NOT save the $2200 in payments going forward.

There you have it. Don't pay off the house.

BigMoneyJim

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Re: Pay off House or Invest
« Reply #32 on: August 16, 2018, 05:47:47 PM »
I am generally in the "invest" side of things since taxes and insurance don't go away, so I'm paying for my housing, anyway. But I think ultimately it comes down to whatever makes you feel better, either having the house worries "settled" or almost certainly making lots more money invested.

*However*, this is not your real problem. Your problem is how to keep your spouse from spending your savings. Paying off the house might sounds like a safe way to do this, but how long is it going to take her to think of something so life-improving that a home equity loan would be called for?

Or maybe more generally the problem is misaligned money approaches.

wageslave23

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Re: Pay off House or Invest
« Reply #33 on: August 17, 2018, 11:21:46 AM »
My first impression would be not to pay it off.   The earnings yield for the S&P 500 is 4.1% at the moment, and your mortgage rate is effectively only 1-2% when you account for inflation.  Also if it's your primary residence you get the mortgage interest deduction vs having to pay capital gains tax off of whatever your $450k has made. 

I'm not sure I understand what do you mean that you won't save the $2200 payments?

What measure are you using for your inflation info?  Just curious because I have seen between 2-3% depending on the measure.

wageslave23

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Re: Pay off House or Invest
« Reply #34 on: August 17, 2018, 11:24:35 AM »
Under this scenario the mortgage payments are $2200/mo for P&I.  We would not save this after paying off the house, and would instead increase our spending by $2200/mo.
Is this just honest self-reflection about how you handle money, or are you experiencing a cash flow problem?

If you're having a relatively minor cash-flow problem, another thing you could do is refinance into a 30 year - even with a higher rate, your cash flow will improve due to the longer period the loan is spread out over. If $2200 fixes the problem and $700-1000 or so doesn't, you're probably still better off taking that out of the investment account gradually rather than in a lump sum.

If it is just "I don't need it, but if I have it I know I'll spend it", then you should not pay off the house - the mortgage is helping you control your behavior to your long-term benefit.

You hit it right on the head!  "I don't need it, but if I have it I know I'll spend it".  Our spending in other areas would get me crucified in this forum.  :(

Tell her you would be basically dipping into your retirement savings to subsidize spending more than you can afford.   That way it doesn't seem like the $2200 is just free money.

dougules

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Re: Pay off House or Invest
« Reply #35 on: August 21, 2018, 10:55:55 AM »
How did things go? 

boarder42

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Re: Pay off House or Invest
« Reply #36 on: August 21, 2018, 11:29:17 AM »
you have a unique situation - i think you should pay it off - everyone is always telling me there are unique situations i think we just found one where it makes sense.

Scortius

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Re: Pay off House or Invest
« Reply #37 on: August 21, 2018, 03:00:32 PM »
you have a unique situation - i think you should pay it off - everyone is always telling me there are unique situations i think we just found one where it makes sense.

*Head Explodes*

=)

boarder42

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Re: Pay off House or Invest
« Reply #38 on: August 21, 2018, 04:37:48 PM »
you have a unique situation - i think you should pay it off - everyone is always telling me there are unique situations i think we just found one where it makes sense.

*Head Explodes*

=)

I mean better yet selling it and just go on a wild spending spree. Why have any assets when you have all that cash you can just spend it all you'll be happier.

MrSeven

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Re: Pay off House or Invest
« Reply #39 on: August 21, 2018, 04:55:42 PM »
I paid off my mortgage several years ago and have never regretted it. It feels so good to know that you have a roof over your head no matter what happens. The next month after paying it off I took that and put it straight into Vanguard Index fund and set up automatic investments every month. That has already grown to 6 digits and steadily increasing.

simonsez

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Re: Pay off House or Invest
« Reply #40 on: August 21, 2018, 05:10:24 PM »
I paid off my mortgage several years ago and have never regretted it. It feels so good to know that you have a roof over your head no matter what happens. The next month after paying it off I took that and put it straight into Vanguard Index fund and set up automatic investments every month. That has already grown to 6 digits and steadily increasing.
Glad it worked out for ya but that's almost the opposite of what is being considered here.  OP is asking if he should pay it off and then BLOW the money no longer being used toward house payments.

boarder42

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Re: Pay off House or Invest
« Reply #41 on: August 21, 2018, 05:33:34 PM »
I paid off my mortgage several years ago and have never regretted it. It feels so good to know that you have a roof over your head no matter what happens. The next month after paying it off I took that and put it straight into Vanguard Index fund and set up automatic investments every month. That has already grown to 6 digits and steadily increasing.

You'd be richer if you'd done that before. And not paid it off.

One

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Re: Pay off House or Invest
« Reply #42 on: August 21, 2018, 05:57:02 PM »
I paid off my mortgage several years ago and have never regretted it. It feels so good to know that you have a roof over your head no matter what happens. The next month after paying it off I took that and put it straight into Vanguard Index fund and set up automatic investments every month. That has already grown to 6 digits and steadily increasing.

You'd be richer if you'd done that before. And not paid it off.

How do you know, he didn't even say what interest his loan was. Fuzzy math.

h82goslw

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Re: Pay off House or Invest
« Reply #43 on: August 22, 2018, 09:51:25 AM »
I paid off my mortgage several years ago and have never regretted it. It feels so good to know that you have a roof over your head no matter what happens. The next month after paying it off I took that and put it straight into Vanguard Index fund and set up automatic investments every month. That has already grown to 6 digits and steadily increasing.

You'd be richer if you'd done that before. And not paid it off.

Now THAT’S the Boarder we all know and love. 
Regarding OP, I’d just make extra payments on the mortgage as opposed to selling assets to pay it off.

boarder42

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Re: Pay off House or Invest
« Reply #44 on: August 22, 2018, 11:00:17 AM »
I paid off my mortgage several years ago and have never regretted it. It feels so good to know that you have a roof over your head no matter what happens. The next month after paying it off I took that and put it straight into Vanguard Index fund and set up automatic investments every month. That has already grown to 6 digits and steadily increasing.

You'd be richer if you'd done that before. And not paid it off.

How do you know, he didn't even say what interest his loan was. Fuzzy math.

i'm aware you're just trolling but "several" as defined i the dictionary is around 3-4 years which means he was paying down during some the best returns the US stock market has seen.  Also at a time when rates hit the low 3's for 30 year fixed rate mortgages so its pretty safe to assume he lost hand over fist with this strategy. 

MrSeven

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Re: Pay off House or Invest
« Reply #45 on: August 22, 2018, 02:35:35 PM »
Yes, I paid it off in 2015 - and yes I know looking back it would have been better to have invested it in the market. Hind sight is 20/20 and it could have gone the other way just as easily.

I also have lost a lot of paper money in my company stock. Just the other day I think I lost over $10,000 as our company stock dropped hard (in the tech sector). You have to make decisions between risk vs reward. I am comfortably on my path to FI... Yes, I could have gotten there faster, but I will get there nonetheless. To each his own.

Thanks Simeonsez - you are right about the original question.

boarder42

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Re: Pay off House or Invest
« Reply #46 on: August 22, 2018, 02:58:38 PM »
Yes, I paid it off in 2015 - and yes I know looking back it would have been better to have invested it in the market. Hind sight is 20/20 and it could have gone the other way just as easily.

I also have lost a lot of paper money in my company stock. Just the other day I think I lost over $10,000 as our company stock dropped hard (in the tech sector). You have to make decisions between risk vs reward. I am comfortably on my path to FI... Yes, I could have gotten there faster, but I will get there nonetheless. To each his own.

Thanks Simeonsez - you are right about the original question.

its not really hindsight its easily predictable based on what the market has historically done - b/c thats what we're all assuming it will do in the future and basing our FIRE plans on.

One

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Re: Pay off House or Invest
« Reply #47 on: August 22, 2018, 03:08:33 PM »
Yes, I paid it off in 2015 - and yes I know looking back it would have been better to have invested it in the market. Hind sight is 20/20 and it could have gone the other way just as easily.

I also have lost a lot of paper money in my company stock. Just the other day I think I lost over $10,000 as our company stock dropped hard (in the tech sector). You have to make decisions between risk vs reward. I am comfortably on my path to FI... Yes, I could have gotten there faster, but I will get there nonetheless. To each his own.

Thanks Simeonsez - you are right about the original question.

its not really hindsight its easily predictable based on what the market has historically done - b/c thats what we're all assuming it will do in the future and basing our FIRE plans on.

Great depression lasted 10 years, the historical average looks good but overconfidence is a fools game.

One

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Re: Pay off House or Invest
« Reply #48 on: August 22, 2018, 03:59:53 PM »
Yes, I paid it off in 2015 - and yes I know looking back it would have been better to have invested it in the market. Hind sight is 20/20 and it could have gone the other way just as easily.

I also have lost a lot of paper money in my company stock. Just the other day I think I lost over $10,000 as our company stock dropped hard (in the tech sector). You have to make decisions between risk vs reward. I am comfortably on my path to FI... Yes, I could have gotten there faster, but I will get there nonetheless. To each his own.

Thanks Simeonsez - you are right about the original question.

its not really hindsight its easily predictable based on what the market has historically done - b/c thats what we're all assuming it will do in the future and basing our FIRE plans on.

Great depression lasted 10 years, the historical average looks good but overconfidence is a fools game.

With that attitude you'll never be able to retire if you truly believe that troll

okay boss

bilmar

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Re: Pay off House or Invest
« Reply #49 on: August 23, 2018, 10:07:08 AM »
If your target retirement age is 58 then you have to consider healthcare too - here's why:

If you pay off your mortgage at or before your last year of work then you reduce your required income and that impacts what help you may get from some future version of ACA.

This is something I wish I had done just before I retired 4 years ago because if I had then I would be looking at a required income of $12K less per year with substantial ACA savings and better plan terms because I would be 'Poor" as defined by income.

 

Wow, a phone plan for fifteen bucks!