Author Topic: Should I pay off my mortgage?  (Read 1728 times)

Hayden Frys Mustache

  • 5 O'Clock Shadow
  • *
  • Posts: 39
  • Age: 32
  • Location: Iowa
Should I pay off my mortgage?
« on: January 16, 2015, 03:18:21 PM »
I have a $120,000 balance on my home mortgage for a house I purchased for $161,000 in 2013 at a 3.5% interest rate with 20 percent down (no PMI). I also picked up a tax incentive for a 50% tax credit for mortgage interest paid on the mortgage up to $4,000.

In 2014, for example, I paid $4,065 in mortgage interest (barely exceeding the credit maximum) but for doing that I will be able to secure a tax credit worth $2,000. I figure for every year going forward, my effective mortgage rate is 1.75 percent. Assuming no other debt and as long as I am earning income, is there a case to be made for paying off the mortgage early?

Cheddar Stacker

  • Magnum Stache
  • ******
  • Posts: 3714
  • Age: 41
  • Location: USA
Re: Should I pay off my mortgage?
« Reply #1 on: January 16, 2015, 03:30:55 PM »
Depends.

If your choice is pay down debt or spend money on stuff, pay down debt for sure.

If your choice is pay down debt or invest, while I've never heard anyone mention a tax credit for mortgage interest and this brings a new wrinkle into the discussion, this question is asked regularly here and there is not consensus/clear winner.

I would absolutely never pay down a debt with an interest rate that low instead of investing. Others disagree:

http://forum.mrmoneymustache.com/ask-a-mustachian/let's-settle-this-with-a-vote-invest-or-payoff-debts/
http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/

rpr

  • Guest
Re: Should I pay off my mortgage?
« Reply #2 on: January 16, 2015, 04:29:59 PM »
Some other factors to consider:

How long till retirement/FIRE?
Are you maxing out all Tax advantaged accounts such as 401ks, IRAs, etc.?
Tax bracket?
Cash flow situation?
Does this tax credit last forever?

You have a very sweet deal on your mortgage. I would personally keep it but you have to evaluate what is best for you.

Lmoot

  • Pencil Stache
  • ****
  • Posts: 734
    • Journal
Re: Should I pay off my mortgage?
« Reply #3 on: January 17, 2015, 09:51:13 AM »
I agree it's a very personal decision. The main 2 options are to pay it off or somehow invest the money at a higher rate, thereby earning more on the investment, and retaining the tax credit. It's hard to base it on numbers because the numbers involve a certain amount of guestimation/ fortune telling. It's easy to make it look better to keep the mortgage on paper. But that involves you having knowledge where to invest it, and having the will to invest it without taking it back out.

Personally my goal is to be debt-free including the mortgage. For me it doesn't matter what percentage the past investments have paid at...the economy is still fragile and the future is unknown. Also, I don't know that I would have the will power to give that much money to the whims of the market, however I would have no problem doing it for a guaranteed return of 5.375 (my mortgage interest rate). And it's more difficult to get cash out of house than it is to sell some stock; some might say this is precisely why you shouldn't that much money into the house, but I say that is a good thing.

My plan is to pay the mortgage off very quickly (by year 8 of the mortgage) AND then start investing the savings. Automatic 40k savings, and my money is freed up for investment ventures.

However, as long as the tax law is that favorable for you, even I can't argue much with a 1.75% rate. There are CDs going for more than that. It depends on what your personal goals, and the type of effort you want to put in.

Earthling

  • Guest
Re: Should I pay off my mortgage?
« Reply #4 on: January 17, 2015, 05:15:54 PM »
If you intend to live in the house for more than, say, five years, I'd vote to pay off the debt. There is no better feeling than owning one's home free-and-clear, particularly if you intend to live in that house for a very long time.

If you have a shorter time horizon, I'd apply a rigorous financial analysis to your decision, as in this scenario the calculation is a bare-knuckled financial assessment of capital allocation with an overlay of the condition of the local real estate market.