Author Topic: Payoff mortgage or invest?  (Read 1621 times)

jtoomey

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Payoff mortgage or invest?
« on: April 10, 2018, 11:16:06 AM »
Hey mustachians! I am working my way toward FI and have a question. I am 32 years old, work full time as a teacher and have part time jobs as well, am married with a 1 year old, and own a home that is about 25% paid off (3.75% on the mortgage). I am currently putting about 35-40% of my take home pay into my IRA and Vanguard funds. I also am putting close to $500/month additional principal toward my mortgage to pay it off early (on track to pay it off before my wife and I are 40!). Should I continue to put this $500 toward the mortgage principal or use that money to bump my savings rate up even further but delay paying off the house?

Catbert

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Re: Payoff mortgage or invest?
« Reply #1 on: April 10, 2018, 11:27:33 AM »
I would drag out a 3.75% mortgage as long as possible.  3.75% looks good today, but I will look brilliant in the future when interest rates rise.  I say that as someone who once had an 18% mortgage before it was refinanced to 12% which was good at the time.

bobfnbw

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Re: Payoff mortgage or invest?
« Reply #2 on: April 10, 2018, 11:34:26 AM »
Having owned 8 homes and never paid any of them off.... take this with a grain of salt, but there is a lot to be said for owning your own residence. True the mortgage interest rate is low, and you get a tax deduction on the mortgage interest, but knowing that your house is yours and not owned by the bank is a type of security that is hard to measure in dollars.
I currently have 2 homes with mortgages, one I rent out, 1  we live in. I have no plans to pay them off ever. I will sell them first or continue to rent them both out if possible. Mostly because in the future I plan on living on a sailboat, that will be bought with cash.  If I did live in a house, I would want to pay it off and be free from the bank.
Will be interested in what others have to say about this.
Bob

frugaliknowit

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Re: Payoff mortgage or invest?
« Reply #3 on: April 10, 2018, 11:48:43 AM »
Since you are working toward FI, why wouldn't you want a paid for house?  The obigation is an impediment toward FI.

Telecaster

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Re: Payoff mortgage or invest?
« Reply #4 on: April 10, 2018, 11:50:59 AM »
Since you are working toward FI, why wouldn't you want a paid for house?  The obigation is an impediment toward FI.

Now you've done it. 

Raenia

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Re: Payoff mortgage or invest?
« Reply #5 on: April 10, 2018, 12:33:44 PM »
Do you prioritize the warm fuzzies of paying off the mortgage, or do you prioritize the mathematical 'right' answer?  Putting the money in savings, especially if you haven't yet filled all your tax-advantaged savings, is mathematically superior to paying off the mortgage at that low interest rate, especially if you're deducting the mortgage interest on your taxes.  My advice is hold the mortgage as long as possible, stop overpaying, and put it all into your savings instead.

Just Joe

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Re: Payoff mortgage or invest?
« Reply #6 on: April 10, 2018, 12:41:42 PM »
Raenia is technically correct for FI/RE but b/c you don't know what the future might hold - sickness or unemployment - consider paying it off if you plan on staying in the same place. That way if you have one income or two or no income - you still have a place to live. Just get a dinky job to cover taxes, utilities and insurance (even that is optional during a personal crisis).

Another thing is to consider whether the neighborhood is going up or down in value.

Raenia

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Re: Payoff mortgage or invest?
« Reply #7 on: April 10, 2018, 12:44:20 PM »
Raenia is technically correct for FI/RE but b/c you don't know what the future might hold - sickness or unemployment - consider paying it off if you plan on staying in the same place. That way if you have one income or two or no income - you still have a place to live. Just get a dinky job to cover taxes, utilities and insurance (even that is optional during a personal crisis).

Another thing is to consider whether the neighborhood is going up or down in value.

That only applies to paying the mortgage off entirely, not to overpaying each month.  If you lose your job, the bank isn't going to forgive a month's payment just because you payed extra for the last few years.  If this is a concern, I would recommend putting the 'extra' payment money in a safe investment, say money markets or something else stable, until it is enough to pay off the remaining principle in one go.  Or, just have a larger emergency fund to cover the mortgage payment in the case of job loss.

tomsang

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Re: Payoff mortgage or invest?
« Reply #8 on: April 10, 2018, 12:49:13 PM »
Since you are working toward FI, why wouldn't you want a paid for house?  The obigation is an impediment toward FI.

Now you've done it.

Funny stuff!!  When you look at the facts, paying off a 3.75% 30 year fixed rate loan is an impediment towards FI.  Paying off this type of loan would push your FI timeline out, is less safe with your funds tied up in an illiquid asset, that a 3.75% fixed rate mortgage is a great hedge against inflation, and it just plain Un-Mustachian!!

Read through this if you would like a deep dive on the pros and cons of paying off a mortgage, the math that shows it is poor in virtually all scenarios, and the fact that if you believe that the market over the next years is not going to beat 3.75%, then you should not be retiring until your SWR is less than 1%. 
https://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/