The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: mastrr on August 25, 2018, 02:25:19 PM
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I just had a thought in regards to paying off my mortgage and want to run it by you all. I currently have about $85k left on my mortgage at a 4.25% rate and total value of my condo is $115k.
I've haven't paid any additional principle in the 4 years I owned it as my strategy is put my money in the market instead. That being said, I want to pay off my mortgage so I can be debt free. I've been hesitant to pay off additional principle in smaller chunks because that isn't going to lower my payment per month, so essentially I'm not going to see an immediate return on that cash.
I currently have a taxable brokerage account VTSAX that has around $15k which I can use as a fund to pay of my mortgage. I'm thinking that I can just start adding to that fund until the balance exceed the remaining principle. That way I can capitalize on market gains in the interim until I have enough to pay off the full balance. This way once I pay off the remaining I'll immediately see the benefit of no more mortgage payment. What do you think?
That being said, maxing out my 401k and IRA will still have a priority over adding to to this fund. But I think this strategy is optimal to paying off the principle in smaller chunks, let me know what you think.
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We had a five year arm and that is exactly what we did. When we got to the reset point we decided paying it off felt better than the higher interest rate. If it hadn’t jumped 2 points we could have stayed in the market. It’s a decision you can make when you get to the even point.
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Reasons why you shouldn't pay it off: you don't say how many years are left but if it's more than 10 inflation will decrease your "real" payment, and you will get a better return in the market. If it really bothers you for emotional reasons get a roommate.
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Yes, investing first and then paying it off in a lump sum is better than making small extra principal payments over time. Not paying extra on it ever is even better. This has been exhaustively discussed in the following thread, if you want to read more:
https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/
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Reasons why you shouldn't pay it off: you don't say how many years are left but if it's more than 10 inflation will decrease your "real" payment, and you will get a better return in the market. If it really bothers you for emotional reasons get a roommate.
I'm not sure what you mean by real payment. The way that I see it is:
-if I pay off my mortgage - $450 is my principle + interest so my total savings per year would be $5,400
-if I don't pay off my mortgage the expected return of 85,000 x .07 = $5,950 / if I drop down to 6% it's $5,100
what other factors are missing?
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I believe I can fly, I believe I can touch the sky...
Think about it every night and day...
-Honus Wagner-
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There's more opinions than assholes on this... do whatever you want to do and be happy you did it.
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if I pay off my mortgage - $450 is my principle + interest so my total savings per year would be $5,400
Unless the money to pay it off was a gift you are not saving money because you spent it. The money to pay it off comes from somewhere. You won't have that 85k in liquidity anymore. It will be in your house.
if I don't pay off my mortgage the expected return of 85,000 x .07 = $5,950
Right so you are able to make money off of having money. Once you have you used it to pay off your mortgage you can't use your 85k to make money for you anymore (compounding, interest etc)
What I was saying before is that if your wages grow over time do to inflation and or raises, the mortgage will comparatively become easier to pay. In ten years the 5400 you spend a year will be less adjusted for inflation. That's why it's important to know how many years you have left.
You also haven't said what you will do with the money you have from wages going forward. For some people who would otherwise blow all the money on tvs or whatever, putting all your money in your house can be a good idea. But you wouldn't do that right? :-)