Author Topic: Better to Pay Off Mortgage and Save Less?  (Read 4552 times)

tllewis4

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Better to Pay Off Mortgage and Save Less?
« on: April 27, 2015, 07:47:48 AM »
Hey Mustachians,

Iím new to site, but already enjoying planning to be FI in 10-12 years! I do have a question I would like help with.  I just bought a house in October and am currently paying an additional $250 every month, putting my mortgage payment at $1250 per month. If I were to only pay this amount, I would pay it off in 18 years which by normal standards is great, but much too long by MMM standards. I think that my wife and I can get it done in around 6 though. My question would be, is it worth it to bust it for 6 years to pay off my mortgage, if I have to sacrifice socking away a lot of money in my investment account? It would look like ramping up my mortgage payment to 2k in 2016, and 3k for about 4 years after that. My wife and I currently bring in about 90k gross (around 70K after tax), and up until this month have not been living a mustachian lifestyle (granted we just got married in July and had nothing to start a home with). Weíve done some budgeting and I think we can get by on $2,000 to $2,200 a month not including mortgage and tithes, so letís say 3K not including the mortgage. We currently have about 15K in school debt, which I am planning to have paid off by spring of 2016. With just an average of 10% salary increase each year, we could still do 3K on the mortgage and save some, but nothing crazy. I do currently get all of my employer match, which puts around 11% of my paycheck into my 401K. I know after the mortgage is paid off, it will be a 5% return forever, and we could save like crazy then. Just wondering if itís worth it. Thanks in advance for the advice!

slugline

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Re: Better to Pay Off Mortgage and Save Less?
« Reply #1 on: April 27, 2015, 08:00:28 AM »
Discussions keep going around and around on this topic of mortgage-killing-versus-stash-building, and I really think it comes down to your specific situation and the opportunities in front of you.

That being said -- are you in the United States? Would it be possible to refinance to an interest rate below 5% with payments you can still handle at a shorter term? A 15-year fixed is well below 4% at the moment. . . .

bacchi

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Re: Better to Pay Off Mortgage and Save Less?
« Reply #2 on: April 27, 2015, 10:36:36 AM »
Put any additional principal payments in a separate brokerage account called "mortgage." When that account equals what is owed, you can choose to pay it off or keep the investments. If you have an emergency between then and now, it's far better to have investments over a half paid-off house.

JustGettingStarted1980

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Re: Better to Pay Off Mortgage and Save Less?
« Reply #3 on: April 27, 2015, 10:51:22 AM »
Hey Mustachians,

Iím new to site, but already enjoying planning to be FI in 10-12 years! I do have a question I would like help with.  I just bought a house in October and am currently paying an additional $250 every month, putting my mortgage payment at $1250 per month. If I were to only pay this amount, I would pay it off in 18 years which by normal standards is great, but much too long by MMM standards. I think that my wife and I can get it done in around 6 though. My question would be, is it worth it to bust it for 6 years to pay off my mortgage, if I have to sacrifice socking away a lot of money in my investment account? It would look like ramping up my mortgage payment to 2k in 2016, and 3k for about 4 years after that. My wife and I currently bring in about 90k gross (around 70K after tax), and up until this month have not been living a mustachian lifestyle (granted we just got married in July and had nothing to start a home with). Weíve done some budgeting and I think we can get by on $2,000 to $2,200 a month not including mortgage and tithes, so letís say 3K not including the mortgage. We currently have about 15K in school debt, which I am planning to have paid off by spring of 2016. With just an average of 10% salary increase each year, we could still do 3K on the mortgage and save some, but nothing crazy. I do currently get all of my employer match, which puts around 11% of my paycheck into my 401K. I know after the mortgage is paid off, it will be a 5% return forever, and we could save like crazy then. Just wondering if itís worth it. Thanks in advance for the advice!


I think this question depends so very much on what your goals are. For example, I'm going to pay off the damn mortgage as fast as I can not because I'm not aware that investing gets better results (a majority of the time), but because having that sucker paid off will allow me to work internationally for an NGO temporarily while keeping my house long term.  Paying off the house gives me FREEDOM, which I guess is one of the best principles of Mustachianism. Hope this helps.

socalteacher

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Re: Better to Pay Off Mortgage and Save Less?
« Reply #4 on: April 27, 2015, 11:14:41 AM »
Slugline is right about looking at the opportunities in front of you. Just from my own personal experience it was worth it to me to pay off a certain amount of the mortgage to get a certain percentage rate and avoid PMI and have a certain payment amount each month. This gave me flexibility when we had kids that my income allowed my wife to work part time (2 days a week) and stay home with our kids (which is full time work!). I also agree that you want to get that rate down lower if you can.

From my own readings on here I get the feeling that the math is not on your side to pay it off early. We are currently doing what Bacchi suggested to you. Rather than lock the money away in the house we are saving it in various accounts until we decide for sure what our plan is. This is why I enjoy this site and all the different people and ideas on it. There is so much learning that can take place here that it can really help you figure out what that plan is. Then you can execute! Good luck!

zinethstache

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Re: Better to Pay Off Mortgage and Save Less?
« Reply #5 on: April 27, 2015, 11:26:08 AM »
I always thought I would own my home first and foremost. But now with rental properties being the focus, we re-fi'ed our home down to 3.625 and have 2 rentals at that same low, low rate for 30 years. We are now saving up the next "chunk" of cash and will evaluate whether to buy another property, invest it or hold for more. If we did pay off one of our properties it would be our highest interest one (not our primary). MMM puts a very different perspective on the power of money and making sure it doesn't get stuck in such a way it is not working for you!

In fact we thought this would be our forever home, but now 13 years later with a thorough indoctrination of MMM, it feels way to big with too much upkeep. We will be selling when we FIRE, likely will travel a few years, THEN will figure out what to buy to live in... which will be much smaller, and likely in a LCOLA. Be sure to read all you can about the pros and cons of paying off the mortgage and plan from there!

Welcome to the fun:)

Mother Fussbudget

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Re: Better to Pay Off Mortgage and Save Less?
« Reply #6 on: April 27, 2015, 02:24:19 PM »
Ideas on this topic that resonate with me:
NOTE:  I plan to continue to LIVE IN my current home into ER. A key point - most people do NOT stay in housing longer than 5 years, and the math is different in that case.

Pre-paying is largely an emotional decision - for the long term, the numbers favor paying off the loan over the life of the loan with no pre-payment. But the key is a low mortgage interest rate (PenFed 3.5% for me)
I want to KEEP my 30 year mortgage so I will have an interest deduction for tax purposes during ER. 
I *might* pay down something on the principle, but not much per month (~$100) for emotional reasons and because I'm an old f---.
I think of my 30 year mortgage as a 3.5% bond, and therefore a part of my retirement portfolio.

I formerly double-paid the principle of the loan amount each month - for the first 2 years - but that was BEFORE doing more research on this topic.  Now I'm of the mindset to let the low-interest loan 'ride', built into my FIRE budget, and pay it off over the stated life of the loan.   (all IMHO)

tllewis4

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Re: Better to Pay Off Mortgage and Save Less?
« Reply #7 on: April 28, 2015, 06:08:29 AM »
Discussions keep going around and around on this topic of mortgage-killing-versus-stash-building, and I really think it comes down to your specific situation and the opportunities in front of you.

That being said -- are you in the United States? Would it be possible to refinance to an interest rate below 5% with payments you can still handle at a shorter term? A 15-year fixed is well below 4% at the moment. . . .

I plan on refinancing once we get to 80% LTV. We only have about 7% equity in our house right now.

tllewis4

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Re: Better to Pay Off Mortgage and Save Less?
« Reply #8 on: April 28, 2015, 06:10:12 AM »
Put any additional principal payments in a separate brokerage account called "mortgage." When that account equals what is owed, you can choose to pay it off or keep the investments. If you have an emergency between then and now, it's far better to have investments over a half paid-off house.

I hadn't even thought of this! I actually plugged it in and I'd pay it off a few months faster if I just paid $1500 a month and made a $20,000 payment at the end of every year.  Thank you for the suggestion!

frugaliknowit

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Re: Better to Pay Off Mortgage and Save Less?
« Reply #9 on: April 28, 2015, 07:07:13 AM »
Put any additional principal payments in a separate brokerage account called "mortgage." When that account equals what is owed, you can choose to pay it off or keep the investments. If you have an emergency between then and now, it's far better to have investments over a half paid-off house.

Echo Bacchi!

Merrie

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Re: Better to Pay Off Mortgage and Save Less?
« Reply #10 on: April 28, 2015, 03:05:53 PM »
Think about taxes too. If you are in the 15% tax bracket, for every $1000 you use for something other than a tax-advantaged account, you lose $150 of it to taxes. So if you aren't taking full advantage of those accounts, but are instead using those $ for your mortgage or other debt paydown, you're soaking up a loss. It doesn't make sense to pay down a mortgage at 4% but not put money into your IRA or 401k.

thd7t

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Re: Better to Pay Off Mortgage and Save Less?
« Reply #11 on: April 28, 2015, 03:13:54 PM »
Discussions keep going around and around on this topic of mortgage-killing-versus-stash-building, and I really think it comes down to your specific situation and the opportunities in front of you.

That being said -- are you in the United States? Would it be possible to refinance to an interest rate below 5% with payments you can still handle at a shorter term? A 15-year fixed is well below 4% at the moment. . . .

I plan on refinancing once we get to 80% LTV. We only have about 7% equity in our house right now.

Do you have PMI?  That's a really good reason to pay down faster.  Mortgage insurance is like an additional higher rate interest on the top 22% of your loan, usually averaging over 10%, because your initial rate is in there, as well.  With 7% LTV, there are ways around PMI/MIP, but if you're paying it, it's worth figuring out how to get out from under it.