The Money Mustache Community
General Discussion => Welcome and General Discussion => Topic started by: SeekingFIRE43 on March 24, 2019, 10:49:43 AM
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I am 43 years old, single and childless. My ultimate goal is to retire no later than 60 years old.
I am 5 years into a 30 year, fixed rate mortgage at 4.5% interest. I am very tentatively planning to live here until I am between 55 and 60 years old, then sell it and move into a 55+ community and purchase a ranch style home. Of course, all this is very tentative at this point. But my question is, should I bother to pay off my mortgage early if I am eventually planning to sell the house anyway? Or should I just continue to make the regular payments and save the rest of my money for investing?
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With that interest rate and that much time remaining on the mortgage it makes no sense to pay it off early.
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Depends on what you're investing the money in instead (your risk tolerance) and funds needed for next move.
-If you're investing the extra funds in CD's instead of paying down the mortgage, it doesn't make much sense. If you're investing in the market, it probably does.
-When you relocate you may have to do so before the house sells. Having the funds available to facilitate the move (and possibly carry the mortgage for a few months) makes it much easier.
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With that interest rate and that much time remaining on the mortgage it makes no sense to pay it off early.
Maybe. Or maybe not. If one has not yet filled up all their tax deferred accounts (401k, IRAs, HSA) I would definitely do that first. After that it becomes a decision with variables including mortgage rate, time horizon, alternatives to paying off mortgage early. It comes down to what you think you can do to get an effective 4.5% rate of return, which is what you are getting when you pay extra to the principle of your mortgage.
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With that interest rate and that much time remaining on the mortgage it makes no sense to pay it off early.
Maybe. Or maybe not. If one has not yet filled up all their tax deferred accounts (401k, IRAs, HSA) I would definitely do that first. After that it becomes a decision with variables including mortgage rate, time horizon, alternatives to paying off mortgage early. It comes down to what you think you can do to get an effective 4.5% rate of return, which is what you are getting when you pay extra to the principle of your mortgage.
He said he has about 25 years remaining and the mortgage is 4.5%. Since 1926, the lowest 25-year return of the S&P was about 6% with a high of about 16% and an average of about 9%. So unless the future is worse than the past, a nice index fund held for 25 years should crush that 4.5% mortgage pretty handily.
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He said he has about 25 years remaining and the mortgage is 4.5%. Since 1926, the lowest 25-year return of the S&P was about 6% with a high of about 16% and an average of about 9%. So unless the future is worse than the past, a nice index fund held for 25 years should crush that 4.5% mortgage pretty handily.
True but OP said s/he is planning on selling the house in 12-17 years, not 25 years.
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With that interest rate and that much time remaining on the mortgage it makes no sense to pay it off early.
Maybe. Or maybe not. If one has not yet filled up all their tax deferred accounts (401k, IRAs, HSA) I would definitely do that first. After that it becomes a decision with variables including mortgage rate, time horizon, alternatives to paying off mortgage early. It comes down to what you think you can do to get an effective 4.5% rate of return, which is what you are getting when you pay extra to the principle of your mortgage.
He said he has about 25 years remaining and the mortgage is 4.5%. Since 1926, the lowest 25-year return of the S&P was about 6% with a high of about 16% and an average of about 9%. So unless the future is worse than the past, a nice index fund held for 25 years should crush that 4.5% mortgage pretty handily.
Grande had some good questions that shouldn't be quickly dismissed with a 25-year rolling average returns for the U.S. stock market. The 25-year rolling average might be a good starting point except that 1) OP said he's quitting his job in 12-17 years, 2) the rolling average ignores sequence of returns risk, and 3) it only looks at roughly 4 independent data sets for one country on Earth to extrapolate what might happen in the future. Long-term historical returns are important, but they aren't everything.
OP, I'll second Grande's questions and add a few of my own: What does your current net worth look like, and how is it broken up by asset class (home equity, tax-deferred accounts, taxable equity accounts, etc.)? What does your income look like? What are your average annual expenses?
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Grande had some good questions that shouldn't be quickly dismissed with a 25-year rolling average returns for the U.S. stock market. The 25-year rolling average might be a good starting point except that 1) OP said he's quitting his job in 12-17 years, 2) the rolling average ignores sequence of returns risk, and 3) it only looks at roughly 4 independent data sets for one country on Earth to extrapolate what might happen in the future. Long-term historical returns are important, but they aren't everything.
Paying extra on the mortgage ignores the "Sequence of Income Risk", i.e., the "I just got laid off, can't sell my house, can't find a job, so I deplete my savings, get my house foreclosed on, lose all my equity in the house (including all those extra payments) and ONLY THEN find work again."
There are a host of independent data points in just my county - up to 101 foreclosed homes in my county alone on just one auction site as I write this - that were the result of some variation of the Sequence of Income Risk. The country is chock full of them and these are boom times. There will be more once we have the next recession.
Paying EXTRA on a mortgage doesn't make you financially safer. Only paying OFF a mortgage makes you financially safer.
I would invest the money. It adds additional protection to the Sequence of Income Risk in addition to all the other good reasons already listed.
And remember, in the US, the principal and interest portion of your mortgage payment gets an average of about 3% cheaper every year assuming your income keeps up with inflation.
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I think you're coming at this decision from a bad angle. The length of time you choose to have the house before selling shouldn't change the decision on whether paying down the mortgage early is beneficial for you. The extra money put into the house to pay down the mortgage is not lost or wasted just because you decide to sell the house - it is stored as equity. Given that you already bought the house and already know you will be selling it in the future, you might find it easier to make a decision by narrowing your scope from "If I'm going to sell the house, is it a good idea to pay down the mortgage early?" to "Does it make sense for me to pay down my mortgage early?"
As others have said, paying down your mortgage early depends on your risk tolerance, overall net worth portfolio, and opportunity costs. Assuming you would otherwise invest the money into the stock market a la VTSAX or similar, 4.5% fixed is low enough that I would rather invest the money instead and keep the inflation hedge from the fixed rate debt.
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Paying extra to the mortgage is incredibly risky in the event of job loss especially if combined with an economic downturn.
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Something I'm wondering about: since you pay so much more in interest at the beginning of a home loan, wouldn't the OP get a better than 4.5% return by paying extra now and selling in 12-17 years?
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I would only do it if by refinancing you got an even lower interest rate, and it gives you peace of mind to pay it off early. Otherwise it makes more sense to invest the money for better return.
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Something I'm wondering about: since you pay so much more in interest at the beginning of a home loan, wouldn't the OP get a better than 4.5% return by paying extra now and selling in 12-17 years?
That's a common misperception about mortgage interest. The reality is that every month you are paying 4.5% on the remaining principle for the loan, which works out to more dollars of interest initially despite a constant payment (due to loan amortization).
So the alternatives with extra cash is to either put it into the mortgage and receive 4.5%, or choose a different investment with its own expected returns and risk. (This is putting things simplistically, as these threads bare out.)
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If you do decide to pay the mortgage off, the safest way to do so is to put the extra payments aside (invested in CDs, bonds, and/or stocks, depending on your timeline and risk tolerance) and then pay off the mortgage when you have enough saved to pay off the whole thing at once.
As others have pointed out, paying extra to the mortgage puts you at risk of losing the house and some or all of your equity if you lose your source of income. If instead, you have a mortgage payoff fund that you can use to keep making the mortgage payments, you can prevent being forced to sell the house at a loss.
The only reason to pay extra to the mortgage is if, psychologically, it's the only way you will save. And in that case, you need to have a very large emergency fund (>6 months) to protect your investment in the house.
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Personally I did pay mine off very early.. but times and more so interest was a little different even a few years ago plus I took a gamble and had a 5/1 ARM but I assumed rates would go down and they did.
I used this calculator (there is a newer version) which I found very helpful to play with the numbers
https://www.drcalculator.com/mortgage/old/ie/
and paid off my house in under 10 yrs.
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What happens when you are ready to move into that 55+ community? What if you find the perfect place in the perfect community? Will you have the funds immediately available to put an offer on that perfect place? Will you 'have' the funds, but you need to sell your house first? What if your current house doesn't sell? Will you be able to buy that second house still? Would you be able to carry two houses?
Slightly different, but my Grandmother had been looking into an assisted living community for awhile. That was where she wanted to go. It was her perfect place. She was on the wait list and she received a call one morning out of the blue and they said she had until the end of business to decide yes or no and then she had to move in next week if she wanted the spot. There was no idea when the next spot would open up. So that day she decided to sell her villa and move within the week irregardless of when the house would close. Because she had funds available she was able to put a deposit on the place immediately and didn't have to wait to sell her house. Or to sell her house and then be homeless if there wasn't an opening at closing. This was a different level of care and renting/paying for service instead of buying, but depending on what you are looking for, some retirement communities are in extreme demand and openings usually only happen if someone dies (commonly the longest living of a couple) or needs to move to a higher level of care so you may be forced to act very quickly when something comes up. Especially if it's what you want.
There is more risk in your goal than if markets will outperform the 4.5% interest rate or you lose your job and face foreclosure. I would not suggest putting any amount of money into extra mortgage payments if that would prevent you from being able to make an above market, all cash offer with closing in 10 days when something perfect comes up. I'm not saying that you will have to do that, just that you should be prepared to do that. To me, not taking a real risk with my happiness would be worth potentially not optimizing my dollars to the extreme. That said, to pay extra on a mortgage or to invest is not a binary decision you set in stone. You can do both and change courses along the way.
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Slightly different, but my Grandmother had been looking into an assisted living community for awhile. That was where she wanted to go. It was her perfect place. She was on the wait list and she received a call one morning out of the blue and they said she had until the end of business to decide yes or no and then she had to move in next week if she wanted the spot. There was no idea when the next spot would open up. So that day she decided to sell her villa and move within the week irregardless of when the house would close. Because she had funds available she was able to put a deposit on the place immediately and didn't have to wait to sell her house. Or to sell her house and then be homeless if there wasn't an opening at closing. This was a different level of care and renting/paying for service instead of buying, but depending on what you are looking for, some retirement communities are in extreme demand and openings usually only happen if someone dies (commonly the longest living of a couple) or needs to move to a higher level of care so you may be forced to act very quickly when something comes up. Especially if it's what you want.
Great post. I have some dear friends who are facing a similar situation. They are close to retirement age and the husband developed Parkinson's which is progressing quickly. A year ago they thought they were living in their forever house, and today he clearly needs assisted living. The gentle stairs in their house went from a struggle to impossible for him to manage. They found a great assisted living place, but there is a wait list, and as you point out you have to pounce when those spaces become available. Deposits for places like that are typically very large, and many people need to sell their existing homes to be able to afford it. Bridge loans and such are available, but they add time, cost, and complication at a time when you don't want more time, cost, or complication.
This is yet another example why houses are a poor place to park money. Life circumstances can--and for most people will at some point--take unexpected turns and illiquid assets are not your friend.