Should I pay off my house?

[Scortius]

So what Is advised when your mortgage gets paid off in 30 years?  Get another mortgage and put all the money in the market in a lump sum?

I maintain that it's financially beneficial to hold a low-interest mortgage, given that your horizon is long enough.  By the time you pay off a 30 year mortgage, you may be looking at a short enough horizon that you aren't willing to invest completely in the market.  In this case you may be better off keeping the house paid off to lower your volatility.

Again, these are all financial arguments.  Unless you are unwilling to use the entire history of the US stock market as a guide, you will be better off in the long run holding on to a low-rate mortgage.  It will give you better returns.  It will give you more flexibility.  It will give you a bigger and more liquid safety net.

BUT, there are valid non-financial reasons to pay off a mortgage early.  People can receive a huge emotional boost from living in a paid off house.  I'm not arguing that those are invalid.  I'm simply arguing that the math is very clear on the financial side.

[BFGirl]

My house is paid for, but I have more in investments than the value of my house.  I tend to like the feeling of security (ignoring the lost investment opportunity math for now).  However, diversification is also important and I would not be comfortable having the majority of my net worth tied up in a single asset.

[tomsang]

My house is paid for, but I have more in investments than the value of my house. I tend to like the feeling of security (ignoring the lost investment opportunity math for now).  However, diversification is also important and I would not be comfortable having the majority of my net worth tied up in a single asset.

I know you and many others believe this, but I find it strange.  I get more security knowing that I have much more than my mortgage in investments.  To me, the security is that if it all hits the fan I can dump the house and move with my investments to provide me security.  When you add in loss of investment returns, tax breaks for mortgage rates, sub 4% mortgage rates given to us by the government to save us from an economic depression, distribution of my assets throughout the world, and the fact that I live in a state that is expected to have an earthquake any day or in 1,000 years makes me feel like a house is not a great place to store my assets.  To me having a paid off house is not very secure, where having investments makes me feel more secure and much wealthier. 

[Fishindude]

Question for those in the "keep the mortgage" camp.
So at 30 years old you borrow for a house and get a 30 year loan.   At age 60 you pay it off, then what?   Would you take a big home equity loan against it for another 10-20-30 years, throw that money in the market and continue to make payments so you don't miss out on the investment gains?

[JLee]

Question for those in the "keep the mortgage" camp.
So at 30 years old you borrow for a house and get a 30 year loan.   At age 60 you pay it off, then what?   Would you take a big home equity loan against it for another 10-20-30 years, throw that money in the market and continue to make payments so you don't miss out on the investment gains?

Maybe, maybe not.  If rates were low enough, that would be the appropriate mathematical choice.  You would probably find that some of the "keep the mortgage" camp would keep the paid-off house while recognizing that it's an emotional decision.

[Scortius]

Question for those in the "keep the mortgage" camp.
So at 30 years old you borrow for a house and get a 30 year loan.   At age 60 you pay it off, then what?   Would you take a big home equity loan against it for another 10-20-30 years, throw that money in the market and continue to make payments so you don't miss out on the investment gains?

Personally, at 60, I would likely consider my horizon too short to leverage the house (assuming the rates were favorable). I'd probably just keep the house paid off at that point.

[RWD]

Question for those in the "keep the mortgage" camp.
So at 30 years old you borrow for a house and get a 30 year loan.   At age 60 you pay it off, then what?   Would you take a big home equity loan against it for another 10-20-30 years, throw that money in the market and continue to make payments so you don't miss out on the investment gains?

Assuming interest rates were still low (less than 4%, including closing costs) I would definitely consider taking out a home equity loan. It would be the mathematical choice. Though at age 60 I expect to be long since retired so I would already presumably have more than enough money invested so I might deem it more hassle than it's worth (depending on the interest rate and what percentage of my net worth the house represents).

[frugaliknowit]

Time horizon the the 100K is critical:  http://paulmerriman.com/decade-returns/

[twell1]

I had the same scenario.  $200k left on mortgage with 15 years remaining and enough cash to pay it off completely.  I also originally liked the emotional satisfaction of paying it off early and have no mortgage payments.  I compromised.  I set up a separate account with some stocks and limited bonds of which the mortgage payment draws from.  I don't consider this part of my stache.  In my mind, my house is "paid for" and I'm still getting returns and have an effective interest rate of 2.4%.

[Scortius]

I had the same scenario.  $200k left on mortgage with 15 years remaining and enough cash to pay it off completely.  I also originally liked the emotional satisfaction of paying it off early and have no mortgage payments.  I compromised.  I set up a separate account with some stocks and limited bonds of which the mortgage payment draws from.  I don't consider this part of my stache.  In my mind, my house is "paid for" and I'm still getting returns and have an effective interest rate of 2.4%.

I like it.  It's a nice way to get the emotional benefit while still taking advantage of the investment opportunities!

[BFGirl]

My house is paid for, but I have more in investments than the value of my house. I tend to like the feeling of security (ignoring the lost investment opportunity math for now).  However, diversification is also important and I would not be comfortable having the majority of my net worth tied up in a single asset.

I know you and many others believe this, but I find it strange.  I get more security knowing that I have much more than my mortgage in investments.  To me, the security is that if it all hits the fan I can dump the house and move with my investments to provide me security.  When you add in loss of investment returns, tax breaks for mortgage rates, sub 4% mortgage rates given to us by the government to save us from an economic depression, distribution of my assets throughout the world, and the fact that I live in a state that is expected to have an earthquake any day or in 1,000 years makes me feel like a house is not a great place to store my assets.  To me having a paid off house is not very secure, where having investments makes me feel more secure and much wealthier.

What makes me feel secure is not necessarily the same thing that makes you feel secure and that is okay.  I don't feel the need to convince you and you shouldn't feel the need to convince me.  The feeling of security is subjective and can change depending upon the situation. I think there are pros and cons each way (some of which are subjective) and each person has to make the decision for themselves.  The value of my house is about 20% of my net worth, so I feel that I am fairly diversified and am willing to forego potential stock market gains on the money tied up in my home.  In fairness, I also had other legal concerns when I paid cash for my home that contributed to my decision.  Now that those concerns no longer exist, I still have no desire to trade the equity in my home for more cash to invest.

However, I also do not think it is prudent to have the majority of your net worth tied up in a single asset.

[cantgrowone]

I'm in an odd boat. I'm a Dave Ramsey listener and before I found this forum we put down $100k on our mortgage. Now with $52k left I'm on the fence of paying it off; we have the cash plus 6 months EM. We could pay off the house and invest an extra $1k/month or invest the $50k.

Ramsey puts it this way, 'would you take out a $200k low interest loan to invest in the stock market?'

I like the idea of paying it off, but @frugaliknowit makes a good point with his link of past decades returns.


Sent from my Nexus 6P using Tapatalk

[RWD]

I'm a Dave Ramsey listener

Stop listening. He's useless after step one (establish emergency fund) and the urgency to pay off your debt. Possibly even harmful, if you follow his investment advice.

You didn't mention your mortgage interest rate, but if it's below 4% it's usual best to focus on investments instead of paying it down.

[cantgrowone]

[
Stop listening. He's useless after step one (establish emergency fund) and the urgency to pay off your debt. Possibly even harmful, if you follow his investment advice.

You didn't mention your mortgage interest rate, but if it's below 4% it's usual best to focus on investments instead of paying it down.

We're through all the steps except the mortgage. It's interesting to listen to at work non the less.

Interest rate is 3.75%. I should take a step tomorrow and move the money to an investment.


A rental property is also on the table. We can comfortably afford a good 3 bed 1 bath, ~$100k. Would the market be better over an investment property?

[johndoe]

Regarding the "emotional" benefit... when my roommate and I paid a house off I expected this nice feeling of "ahh..job well done.  Now it's 'mine'".  Then I budgeted for the insurance and taxes and all of those feelings evaporated.

[matchewed]

Question for those in the "keep the mortgage" camp.
So at 30 years old you borrow for a house and get a 30 year loan.   At age 60 you pay it off, then what?   Would you take a big home equity loan against it for another 10-20-30 years, throw that money in the market and continue to make payments so you don't miss out on the investment gains?

Depending on the interest rate I'd just refinance near the end of the loan, or leave it paid off. A mortgage is a great thing to have depending on the economic climate.

[MrMoneySaver]

and also whats your answer that your statement cant be applied to basically any investment period.

if you own rentals - but rent has been xyz in the past so it wiill be so in the future. 

where do you draw the line at making the ridiculous statement of "past performance is not indictative of future results" - yes we all understand that may not be the case but where in the finance world do you draw the line and how do you plan to retire ever.  how do you go thru life with this assumption.  I mean this can litterally apply to every thing in life and any investment one were to make to secure their future.

you could save piles til none were needed to be invested but then you have inflation risk.  what if we have 2million percent inflation for a year.  wait thats never happened before ... but past performance is not indicative of future results. 

what if you get cancer and die at 35 while you were living by that moto and saving til youre 50 to make it work ... That statement is thrown around far too much by those who dont understand the math period.  yes its a factual statement no it doesnt really hold water, and i'd like to know your FIRE plan that doesnt require any past results as groundwork for its safety once FIREd

"Ridiculous" as it may be, that statement is required for all listed companies. The math supports investing in stocks rather than the market ... until it doesn't. I am not saying that anyone should do one vs. the other. What I am saying is that people talk about "the math" as if there is no variable involved. There absolutely is, and that is stock return. It is not a fixed 7 percent, and we do not know what it will be. Yes, the historical average returns of U.S. stocks may support that, but that's far from a guarantee.

All we can do is take our best guess in predicting the return, based on whatever factors we think are reasonable to look at. Some may look at historical returns of U.S. stocks and figure that's good enough, while others may look at other stock markets historically worldwide, at political conditions, or whatever else.

It is not accurate to say, "The math says you'll lose money if you pay off your mortgage vs. investing in stocks." It's only reasonable to say, "Based on the factors I choose to consider, it seems likely that you'll do better investing in stocks."

[matchewed]

and also whats your answer that your statement cant be applied to basically any investment period.

if you own rentals - but rent has been xyz in the past so it wiill be so in the future. 

where do you draw the line at making the ridiculous statement of "past performance is not indictative of future results" - yes we all understand that may not be the case but where in the finance world do you draw the line and how do you plan to retire ever.  how do you go thru life with this assumption.  I mean this can litterally apply to every thing in life and any investment one were to make to secure their future.

you could save piles til none were needed to be invested but then you have inflation risk.  what if we have 2million percent inflation for a year.  wait thats never happened before ... but past performance is not indicative of future results. 

what if you get cancer and die at 35 while you were living by that moto and saving til youre 50 to make it work ... That statement is thrown around far too much by those who dont understand the math period.  yes its a factual statement no it doesnt really hold water, and i'd like to know your FIRE plan that doesnt require any past results as groundwork for its safety once FIREd

"Ridiculous" as it may be, that statement is required for all listed companies. The math supports investing in stocks rather than the market ... until it doesn't. I am not saying that anyone should do one vs. the other. What I am saying is that people talk about "the math" as if there is no variable involved. There absolutely is, and that is stock return. It is not a fixed 7 percent, and we do not know what it will be. Yes, the historical average returns of U.S. stocks may support that, but that's far from a guarantee.

All we can do is take our best guess in predicting the return, based on whatever factors we think are reasonable to look at. Some may look at historical returns of U.S. stocks and figure that's good enough, while others may look at other stock markets historically worldwide, at political conditions, or whatever else.

It is not accurate to say, "The math says you'll lose money if you pay off your mortgage vs. investing in stocks." It's only reasonable to say, "Based on the factors I choose to consider, it seems likely that you'll do better investing in stocks."

Sure if you want to model that stock returns are lower than the interest rate on your mortgage feel free. Then you'd also probably be proposing different investment vehicles for a FIRE attempt anyway.

[Evgenia]

Speaking only for myself here...

We agonized over whether or not to do this for months. We did extensive analyses on other investment potential, etc. I even emailed Mr. Money Mustache himself about it and he kindly wrote back!

We paid off the house. We have never, ever, ever regretted it, for a second. It is the best feeling to know we paid none of that interest, and are secure as long as we can pay our (fixed) property taxes. We DID have other savings, so we did not clean ourselves out, but we have never regretted a house, free and clear, FOREVER.

[Dicey]

That's a lot of money to spend to "feel good". Hey, wait a minute! Isn't that kinda related to how so many sukkas get into stupid debt in the first place?

You wanna feel good? Invest that money in smart equities and watch your money grow like wildfire. Meanwhile, your cheap-ass mortgage will never increase. As inflation eats away at your buying power, your mortgage will seem smaller and smaller, especially when compared to your balooning investment account balances.

Want more? Check this out:

https://goo.gl/images/ypF8If

[RWD]

"Ridiculous" as it may be, that statement is required for all listed companies. The math supports investing in stocks rather than the market ... until it doesn't. I am not saying that anyone should do one vs. the other. What I am saying is that people talk about "the math" as if there is no variable involved. There absolutely is, and that is stock return. It is not a fixed 7 percent, and we do not know what it will be. Yes, the historical average returns of U.S. stocks may support that, but that's far from a guarantee.

All we can do is take our best guess in predicting the return, based on whatever factors we think are reasonable to look at. Some may look at historical returns of U.S. stocks and figure that's good enough, while others may look at other stock markets historically worldwide, at political conditions, or whatever else.

It is not accurate to say, "The math says you'll lose money if you pay off your mortgage vs. investing in stocks." It's only reasonable to say, "Based on the factors I choose to consider, it seems likely that you'll do better investing in stocks."

I agree, though this essentially boils down to what one considers a safe withdrawal rate. If you trust a 4% withdrawal rate then you should also trust investing instead of paying down a mortgage at less than 4%. If you don't think the stock market is going to do as well, let's say [edit]you're expecting[/edit] an ultra-conservative 3% [edit]SWR[/edit], then you should pay off any loans you have that are above 3%.

[edit]I am ignoring tax deduction on mortgage interest and probably some other fine tuning that could be calculated[/edit]

[boarder42]

"Ridiculous" as it may be, that statement is required for all listed companies. The math supports investing in stocks rather than the market ... until it doesn't. I am not saying that anyone should do one vs. the other. What I am saying is that people talk about "the math" as if there is no variable involved. There absolutely is, and that is stock return. It is not a fixed 7 percent, and we do not know what it will be. Yes, the historical average returns of U.S. stocks may support that, but that's far from a guarantee.

All we can do is take our best guess in predicting the return, based on whatever factors we think are reasonable to look at. Some may look at historical returns of U.S. stocks and figure that's good enough, while others may look at other stock markets historically worldwide, at political conditions, or whatever else.

It is not accurate to say, "The math says you'll lose money if you pay off your mortgage vs. investing in stocks." It's only reasonable to say, "Based on the factors I choose to consider, it seems likely that you'll do better investing in stocks."

I agree, though this essentially boils down to what one considers a safe withdrawal rate. If you trust a 4% withdrawal rate then you should also trust investing instead of paying down a mortgage at less than 4%. If you don't think the stock market is going to do as well, let's say an ultra-conservative 3%, then you should pay off any loans you have that are above 3%.

this is incorrect.  the 3% SWR assumes returns that keep up with inflation making the returns on the market 6% for that so even if you dont count the tax savings from itemizing your mortgage interest your assumption of 3% is pretty far off and quite misleading.

[RWD]

"Ridiculous" as it may be, that statement is required for all listed companies. The math supports investing in stocks rather than the market ... until it doesn't. I am not saying that anyone should do one vs. the other. What I am saying is that people talk about "the math" as if there is no variable involved. There absolutely is, and that is stock return. It is not a fixed 7 percent, and we do not know what it will be. Yes, the historical average returns of U.S. stocks may support that, but that's far from a guarantee.

All we can do is take our best guess in predicting the return, based on whatever factors we think are reasonable to look at. Some may look at historical returns of U.S. stocks and figure that's good enough, while others may look at other stock markets historically worldwide, at political conditions, or whatever else.

It is not accurate to say, "The math says you'll lose money if you pay off your mortgage vs. investing in stocks." It's only reasonable to say, "Based on the factors I choose to consider, it seems likely that you'll do better investing in stocks."

I agree, though this essentially boils down to what one considers a safe withdrawal rate. If you trust a 4% withdrawal rate then you should also trust investing instead of paying down a mortgage at less than 4%. If you don't think the stock market is going to do as well, let's say an ultra-conservative 3%, then you should pay off any loans you have that are above 3%.

this is incorrect.  the 3% SWR assumes returns that keep up with inflation making the returns on the market 6% for that so even if you dont count the tax savings from itemizing your mortgage interest your assumption of 3% is pretty far off and quite misleading.

I think you're interpreting what I typed and not what I meant... I meant 3% SWR, not 3% stock market return. Post is edited now.

[boarder42]

still think its incorrect. even at a 3% SWR which is crazy conservative you still shouldnt be paying down a mortgage thats sub 5% and probably sub 6%. i like MDMs rule of thumb in comparison to the 10 year treasury note. 

[RWD]

still think its incorrect. even at a 3% SWR which is crazy conservative you still shouldnt be paying down a mortgage thats sub 5% and probably sub 6%. i like MDMs rule of thumb in comparison to the 10 year treasury note.

Okay. I think it's at least fair to treat your intended SWR as the floor for debts to pay down faster. If it's below the SWR then it should be obvious not to pay it off. If it's above then some more calculations could be done.

[brian313313]

I'm in the paid of my home camp. The mortgage interest deduction on a a 100k sub 4% mortgage is not likely to beat the standard deduction by much so it's not really tax deductible (at least it wasn't for my situation with a wife). It still wound have been a better decision financially to keep the money invested but the numbers for me didn't work out to be enough to sacrifice the emotional aspect of having someplace to live if everything goes to shit. Living in a cheaper home changes the argument.

[boarder42]

I'm in the paid of my home camp. The mortgage interest deduction on a a 100k sub 4% mortgage is not likely to beat the standard deduction by much so it's not really tax deductible (at least it wasn't for my situation with a wife). It still wound have been a better decision financially to keep the money invested but the numbers for me didn't work out to be enough to sacrifice the emotional aspect of having someplace to live if everything goes to shit. Living in a cheaper home changes the argument.

if everything goes to shit having a place to live is the least of your worries.  in any economic collapse large enough it makes sense to have paid down your home ... you better have been buying bullets ammo and beans b/c thats all that would be worth anything.

[brian313313]

I'm in the paid of my home camp. The mortgage interest deduction on a a 100k sub 4% mortgage is not likely to beat the standard deduction by much so it's not really tax deductible (at least it wasn't for my situation with a wife). It still wound have been a better decision financially to keep the money invested but the numbers for me didn't work out to be enough to sacrifice the emotional aspect of having someplace to live if everything goes to shit. Living in a cheaper home changes the argument.

if everything goes to shit having a place to live is the least of your worries.  in any economic collapse large enough it makes sense to have paid down your home ... you better have been buying bullets ammo and beans b/c thats all that would be worth anything.

LOL. Very true. I point out to my wife a lot that we're never guaranteed we'll never have to work again. I'm sure Russians 20 years ago did not know what was going to happen to their economy. It still didn't add up to enough savings for me to give up the benefits of having it paid off. For one, not having to write and/or account for monthly payments going out. Each of us makes the right decision based on what our criteria of what's important.