Save/invest vs pay off house

[Joe Schmo]

This is a circular discussion my wife and I always have, it goes like…
Me: Blah, blah, blah
Wife: Then we should just pay off the house ASAP!!!

Ok…the question is. Should we stop paying into ROTHs, 401Ks, 529s for 4 years and just pay off the house??
As it were we pay 1000/mo extra on mortgage putting us paid off in 9 years, but if we paid 3500ish extra a month we could cut that in half.

I’m not sure what variables matter to the experts but here’s a couple. We don’t need the 529s for 10 years and we’ve got 6+ months of expenses sitting in an account doing nothing.
Thoughts and thank you.

[Villanelle]

I suggest you check out the Don't Pay Off Your Mortgage thread.

With interest rates being what they are and assuming you are in the US, I would absolutely not pay off the mortgage and would pay only minimum payments.  So not only would I not pay off the house, I'd also stop the extra $1000 per month and invest that, as well. 

[Askel]

It's a circular argument on this forum as well!

There's lots of threads where you will see a lot of back and forth about this. 

The logical side almost always leads one to conclude that keeping the 30 year mortgage for as long as possible is probably the best. 

Nonetheless, many of us have a strong emotional preference to have a paid for house (I fall in this camp). 

But post up some numbers and we can help you see what the differences are like.  I'm not immune to logic, but when you have a $75k mortgage, the arguments for keeping a 30 year mortgage are not real compelling in the face of my fondness for no mortgage.   

[Joe Schmo]

Well shit. Circular indeed. We’ve got 2.625 with 14 years left…

[Askel]

So I'm guessing you have a grown-up mortgage? Couple hundred thousands dollars with a couple thousand dollar payment?  And you are also in favor of investing in tax leveraged accounts instead of paying down the mortgage?  If so, here are some topics of discussion for you and your wife to address the emotional aspect:

-A 99% paid of mortgage can be foreclosed on just as easy as a 1% paid of mortgage. It's often better to keep that money separate if thinking of "what-if" scenarios. Investing in something conservative that is tax sheltered can provide much more security if that's what you're looking for.

-A paid off house still entails certain expenses that will always prevent it from being 100% yours forever and ever and can never be taken from you- like property taxes. 

-What is your house and local market like? I always live in weird houses in boring, slow moving midwest real estate markets. Money put into the house is not very easy to get back out. Selling can take *years*.  Appraising for home equity loans is fraught with risk. 

-Having the majority of your net worth in one asset always presents risks.  Looking at your home as just one asset class in your entire portfolio can help better assess it's risk relative to other options. 

Considering all that though, I'm still looking forward to that day 13 years and 2 months from now when I can walk (or more likely snowshoe) the trails on my property and say THIS IS MINE and use that 15 year mortgage note to start a mid-hike bonfire.  I split the difference between the two arguments and took a 15 year this time.   

[mistymoney]

so the op is really slanted to get people to agree with you and provide additional arguments for you to present to your wife.

But that likely won't get you anywhere anyway - so - seems fruitless. while the odds are that investing will pay off moreso than paying off the house, that is not guranteed in the least and it could easily go the otherway if you buy into the stocks are way overvalued right now and a large correction is due. E.g. so you could essentially invest in stocks with 200k over the next 3-5 years rather than pay off the mortgage, and boom, the bottom drops out and your stocks are worth 150k and you still have a 200k mortgage.

I like the idea of putting investments into 100% stocks and considering the mortgage payoff $$ your bond allocation.

A paid off house is important to your wife. You two need to agree on a course of action, or compromise, not try to prove her wrong. Because neither of these paths are a bad idea.

Considerations are how much do you currently have saved? If the expected 10-11% yearly gain is significant - then you can be a bit more relaxed about it. If it equals say your current income, then funneling everything into the mortgage makes a lot more sense. If you don't have the first 100k invested yet - that is a different story, you need to get to a point where you have momentum.

I would say at least to 401k to get the match, as that is free money. After that, it is up to debate. your marginal tax rate would be an important consideration for keep the 401k minimal, considering the value of Roth money that is hard to pass up too!. The 529s not being needed for 10 years with house paid off before then? you could definitely reallocate that towards the house payment and then put the house payment towards the 529s and then for cash flowing the college expenses.

[cool7hand]

It's a circular argument on this forum as well!

There's lots of threads where you will see a lot of back and forth about this. 

The logical side almost always leads one to conclude that keeping the 30 year mortgage for as long as possible is probably the best. 

Nonetheless, many of us have a strong emotional preference to have a paid for house (I fall in this camp). 

But post up some numbers and we can help you see what the differences are like.  I'm not immune to logic, but when you have a $75k mortgage, the arguments for keeping a 30 year mortgage are not real compelling in the face of my fondness for no mortgage.

+1 This response is spot on.

[mastrr]

I would recommend following Dave Ramsey's "baby steps" as it helps address exactly what you are asking.  You have multiple financial goals (retirement, fund kids college, pay off mortgage) and his "baby steps" can help guide you how to work on them simultaneously.

I'm assuming you have an emergency fund and no debt besides your mortgage.  His "baby steps" suggest that you save 15% income for retirement, set aside a percentage of income to fund 529's, and all the rest goes on the principal to pay off the mortgage.  That way you're not neglecting any of your priorities and are able to get rid of your mortgage early.

https://www.ramseysolutions.com/dave-ramsey-7-baby-steps

[Kris]

As someone who paid off my/our mortgage early, I would say that first, you should be maxing out your investing because the return rate is gonna be way higher than your mortgage rate.

But once we were really on our way there and were trucking right along toward FIRE, there was a point where DH and I really wanted to clear our mortgage prior to his retiring.

So that was what we did. Now, he is retired, I am continuing to work so we are still accumulating/investing, but we have no house or car payment so our ability to save is huge while our monthly expenses are minimal.

And the psychological benefit of having no debt and owning our house free and clear is just… ahhhhhh…..

[Radagast]

I'm not sure if it is that circular, but it does come up a lot. There are two separate things here though which often are falsely conflated.
1. Having a paid off house
2. Making multiple early payments to pay off the house over the course of many years, short of paying it off completely.

#2 is just a terrible idea. First, as has been noted, there is a 95% chance it will end up with less money. https://dqydj.com/sp-500-historical-return-calculator/ The thing with 95% odds is that if you do them enough, you usually come out far, far ahead. The odds of investing being better than paying a mortgage are similar to a roulette wheel landing on any color other than green. I'll take both red and black. But the thing that is generally missed (but is probably most important) is the lack of financial security which results from making regular extra principal payments. If you have a $300k mortgage, and pay $200k extra, and then wake up one day needing $100k, you are SOL. That money is sunk. Lost a job? You still need to make house payments, but you don't have any money. HELOCs are more likely to be withdrawn during big recessions when you are also more likely to lose your job. The only way which is at all reasonable is to save that money in a moderately aggressive investment account, and lump it all into the mortgage when you have enough to pay it off all at once. This is both the higher return and lower risk way.

#1 is actually reasonable in many situations. Mortgage rates are higher than most bond yields. Paying off a mortgage while approaching retirement is a good hedge against sequence of returns risk. Saving money in mostly stocks, and selling them when you have enough, increases your odds of selling high, which is always a good thing. I do need to stop and point out that EE savings bonds pay 3.5% after 20 years, so mathematically those are a guaranteed win against a mortgage under 3.5% after taxes. I also need to point out that inflation is running like 5-6% recently, so a 2.625% mortgage is actually a -2.5% mortgage the past little while. If you want to butter your bread on the same side as the Fed and Treasury (who make money), you might consider holding on to the mortgage.

Also, I'd invite you to look at the every handy investment order thread:https://forum.mrmoneymustache.com/investor-alley/investment-order/

As for what I'd do, I'd save up the money in 10-40% bonds, and a mix of US and international stock funds, or at least enough in stocks to be able to out-run the mortgage with some reliability. Then, when I had enough money to pay off the mortgage, pay the taxes on my capital gains, and still have a little bit of an emergency fund left over, I'd pay off the mortgage in a lump sum if I still felt like it.

[mastrr]

#2 is just a terrible idea. First, as has been noted, there is a 95% chance it will end up with less money. https://dqydj.com/sp-500-historical-return-calculator/ The thing with 95% odds is that if you do them enough, you usually come out far, far ahead. The odds of investing being better than paying a mortgage are similar to a roulette wheel landing on any color other than green. I'll take both red and black. But the thing that is generally missed (but is probably most important) is the lack of financial security which results from making regular extra principal payments. If you have a $300k mortgage, and pay $200k extra, and then wake up one day needing $100k, you are SOL. That money is sunk. Lost a job? You still need to make house payments, but you don't have any money. HELOCs are more likely to be withdrawn during big recessions when you are also more likely to lose your job. The only way which is at all reasonable is to save that money in a moderately aggressive investment account, and lump it all into the mortgage when you have enough to pay it off all at once. This is both the higher return and lower risk way.

Let's say instead of putting money directly on the principal of the mortgage you put it in a separate savings account designated to pay off your house?  That way you stay liquid while saving to pay off your house.  It accomplishes virtually the same thing.

The problem with not putting money directly on the principal is behavior based.  Most people aren't going to have the discipline to not spend that money that they were supposed to be saving to pay off their house.

Putting extra money towards principle of your mortgage doesn't mean you shouldn't have a sufficient emergency fund to reduce risk of the things you mention.  You will be less liquid while you're in the process of paying off your mortgage.  However, the other side of the coin is that once your mortgage is payed off you'll have a lot less risk then people that still have a mortgage payment.

[Radagast]

Let's say instead of putting money directly on the principal of the mortgage you put it in a separate savings account designated to pay off your house?  That way you stay liquid while saving to pay off your house.  It accomplishes virtually the same thing.

Yeah, that's basically what I'm proposing, except I am suggesting a brokerage account to invest in stocks and bonds, instead of a savings account. It would pain me to put money in an account with a lower yield than the mortgage. I recommend either of the two simple Bill Bernstein portfolios: the three-fund 1/3 US stock, 1/3 international stock, and 1/3 tax appropriate bond fund. Or his "no brainer portfolio" which is like that but with a fourth equal split of small cap value stock. You could also do the Dave Ramsey growth, growth and income, and whatever they are, provided you only use low cost DIY funds.

The problem with not putting money directly on the principal is behavior based.  Most people aren't going to have the discipline to not spend that money that they were supposed to be saving to pay off their house.

True. But this website isn't for most people. It isn't for people who are more financially responsible than most people. It is mostly not even for people who are more financially hard core than that. We are beyond level 1 hard core! Not spending money is like personal finance 101.

Putting extra money towards principle of your mortgage doesn't mean you shouldn't have a sufficient emergency fund to reduce risk of the things you mention.  You will be less liquid while you're in the process of paying off your mortgage.  However, the other side of the coin is that once your mortgage is payed off you'll have a lot less risk then people that still have a mortgage payment.

Suppose that you have an emergency fund of $50,000. Well in my example, you also weren't making additional mortgage payments so you would actually have $250,000, which covers a lot more emergency than $50,000 does!

Yes, once you have it fully paid of there will be less risk, and likely less return as well. The typical relationship. It is only when it is partly paid off that you have more risk and likely less return (the opposite of a good financial strategy).

[Joe Schmo]

Thanks all. Yeah Dave R is a big reason that we…my wife and I (2 become 1) are here today. Baby step 4/5/6 I guess we’re dealing with the temptation of throwing everything at the mortgage vs 15% retirement/college/house. It’s been awhile since I’ve looked at our balance between those three things, I’ll check it out.
Thanks again. Wealth of knowledge in this forum👍