Author Topic: Talk me out of paying off my mortgage  (Read 4216 times)

Saving in Austin

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Talk me out of paying off my mortgage
« on: August 19, 2016, 09:52:13 PM »
We are 55 and 52 years old, both self employed. We average around $11k take home per month.

We have more money in cash and investments than we owe on the mortgage.

We owe 125K at 2.625% (15year) and will be finished paying in 9 years, 8 months (April 2026).

Monthly payment is $2,150 (900 principle, 300 interest, 950 in taxes and insurance).

House is worth about 600K.

All our investments are in VTSAX with Vanguard. We are maxing out retirement contributions each year.

We have $128K in an investment account, $325K in retirement accounts, HSA etc. and $65K in cash.

Monthly expenses are $ 6,500 and will go down to $ 5,300 if we pay off the mortgage.

We will take the extra $ 1,200 a month and increase contributions to our investment account to build it back up.

Would love some feedback if anybody is game. Thanks.


badbear

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Re: Talk me out of paying off my mortgage
« Reply #1 on: August 20, 2016, 12:46:53 AM »
You owe a bit less than your annual takehome at an extremely low interest rate. You could pay it off, and perhaps that would give you some peace of mind. However, the expected return of your investment account is significantly higher than the 2.625% return on paying off your loan. It's about equivalent to selling your stock investments and buying a bond fund, since you can consider a mortgage to be a negative bond. Conservatively you might expect at least 6% return, perhaps significantly more, per year if you kept that money invested for more than a decade. Your mortgage interest rate is comparable to the historical inflation rate--insanely low. If you keep this money borrowed, that 125K will likely go a lot further invested in the stock market than locked in at a 2.625% return to pay off the loan.

If you're not planning to retire before the end of your loan term, why would you pay it off early? At such a low interest rate, I would keep it as long as I could, unless I couldn't make the cash flow work. Clearly you have plenty of cash flow, since you're fully funding retirement accounts and doing taxable investing as well. I think it's usually a good idea to pay off your home before retirement, but you can wait until then and enjoy the tax deduction on interest (almost like you're effectively paying an even lower interest rate).

Another thought is the tax implications of selling from your investment account. I'm not exactly sure what tax bracket you are in, but if you're in the 25% income tax bracket or above you will have to pay capital gains taxes on the sale of VTSAX. Depending on what your basis is in that investment, that may be an important consideration.

In the long run, I don't think it would hurt you too badly to pay off the mortgage now. However, I wouldn't recommend depleting your emergency fund to do it, since you can't choose when a serious emergency might happen.

If it were me borrowing at such a low rate, I would hold onto that loan for as long as I could.

MoonLiteNite

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Re: Talk me out of paying off my mortgage
« Reply #2 on: August 20, 2016, 01:33:49 AM »
The only legit reason why you would pay off your house early is an ethics, or peace of mind.

Ethics, would you take a loan out and then go gambling/investing with it? Because basically you are doing that by not paying it off while investing money instead.

Peace of mind, no house paypayments, as long as you pay your taxes you have a place to call home no matter what.

Tjat

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Re: Talk me out of paying off my mortgage
« Reply #3 on: August 20, 2016, 06:36:12 AM »
...would you take a loan out and then go gambling/investing with it? Because basically you are doing that by not paying it off while investing money instead.

Peace of mind, no house paypayments, as long as you pay your taxes you have a place to call home no matter what.

I disagree with a few points of this. Equating long term investing in a total market index fund with "gambling" is a complete red herring. While investment returns aren't "guaranteed", it's also not guaranteed that a gigantic meteor won't fall on your house while you're sleeping. Having "place to call home" is also not going to be a struggle when you have $500k in liquid assets.

OP - Right now you have roughly a $1 million net worth (excluding your business).  Let's put aside the quaint notion of "having a place to call home" for a second... Do you really want to have 60% of that NW tied up in a single real estate property? Next consider flexibility. Say you pay off your home and your business collapses. Or you and your wife become ill. Or your home is destroyed from some peril not insured against. For all but the latter, 60% of your assets will be tied up in a illiquid asset that you also happen to live in. For the "destroyed" home scenario...you're even more SOL. Sure you may be able to get a HELOC (though that close to retirement age, I wouldn't count on it) or sell the house, but what if the Austin market crashes? Or you need the money now?

In short - Right now, you have a beautiful sum of money that within 24hrs to a week, you can transfer to any place in the world for any purpose. In addition, it's currently parked in a location that on average, will earn you significant returns. What more could you want?


pigpen

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Re: Talk me out of paying off my mortgage
« Reply #4 on: August 20, 2016, 06:52:47 AM »
My wife and I paid off the remainder of our mortgage around two years ago. Our interest rate was 4.25%, and we only owed $25,000, so the situation was a little different. I will say, though, that we're both glad we did it. I'm usually a run-the-numbers sort of guy when it comes to decisions like this, but I don't like to completely leave emotion out of the equation. We (or at least I) aren't purely logical beings, after all. For example, bad emotional reaction: "Oh no, the guy on tv said we're heading for a 70% crash, so I'm running to my computer to sell, sell, sell without thinking twice" vs. "Paying off our mortgage would bring us both peace of mind and mitigate some bit of risk if something catastrophic happens that eats up a lot of our money. After running the numbers on how much we'd save on interest and comparing it to historic returns on our investment allocation, we'll make a decision."

I mention this because of the "talk me out of..." subject line of the topic. Assuming that you clearly understand what badbear says about your interest rate and expected stock returns over the next decade (and you obviously do or you wouldn't have asked the question to begin with), I don't think you need to apologize to the MMM community and the gods of rationality if you decide that paying off your mortgage is a good idea for you, given yours and your partner's circumstances and psychology.

In my case, I think scratching an emotional itch was even a net positive to our bottom line. To clarify, my wife is smart and very thrifty by nature, but she's an artist, and she really couldn't care less about investing. When I start talking about FIRE calculations or even fairly basic investing, you can tell she's counting the seconds until I shut up. Paying off a mortgage, though, was a very tangible accomplishment to her and has helped give her further motivation to continue living simply in a way that numbers and spreadsheets can't.

Just a thought. On the other hand, of course, 2.625% is pretty damn low...

Saving in Austin

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Re: Talk me out of paying off my mortgage
« Reply #5 on: August 20, 2016, 07:34:14 AM »
Thank you all for the feedback. I understand the numbers and I guess it really is sort of a market timing urge as I see the stock market at all time highs this month. We will not be paying off the mortgage any time soon when considering the things everyone has posted. We may pay it early off as we come down the home stretch, but I'm not altogether sure we will even stay in the house for 10 more years.

SwordGuy

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Re: Talk me out of paying off my mortgage
« Reply #6 on: August 20, 2016, 10:22:59 AM »
I've got a very similar decision.   We will soon have a 2.75% 15 year mortgage that we could pay off in about a year and a half once we sell our old house, if we put our minds to it.  Or we could sell stock and pay it off now.

My wife and I REALLY REALLY REALLY like not having a mortgage payment.   It feels like freedom!

That said, let's look at some numbers.

You owe $125,000 and pay $300, or $3600 a year in interest.  That amount of interest will go down each year.

Let's pretend that your $125,000 investment returns 2.65% like clockwork.  It would make $3,312.50 a year for you.

You would be 287.50 in the hole on interest the first year, and progressively less each year.

Now, if that $125,000 was making 6%, it would be returning $7,500 a year.   Your interest cost would be free and you could re-invest the difference, pay down the principal, or use it for a monthly mortgage payment.

If you re-invested the $3,900 surplus you would have a house payment nest egg of $128,900 invested.  A 2.65% return next year would get you $3,415 and change, almost as much as your new, lower interest payment for the year.
A 6% return would get you $7,734.   You interest payments are covered and you have the same choices with the surplus as before.

What could go wrong?

Well, stocks could dive 50% and stay there for 3 or 4 years.   Your % income would be similarly affected.   

If you had to sell a lot of stock to pay your mortgage payments for the year, that would hurt.

However, if you could cover your mortgage thru that kind of downturn for a few years, then it's a slam dunk not to pay off the mortgage.  If things are too tight for you to do that, then maybe another decision is more appropriate.

If it would be too painful to make mortgage payments in that kind of downturn (and remember, in that kind of downturn, it's hard to find any work, especially if you're older), I would consider paying it off.  It takes a lot more invested money to cover the full cost of housing than it would to just pay it off.

For now, we're deciding not to pay off our mortgage early.   We're going to invest the money instead.   (We've decided we'll probably rent out the old house for a couple of years until we're ready to buy more rentals that would provide a better return.  We'll sell it then.  We're still researching rental and sales prices to make our choice.)

Best of luck!

Simpli-Fi

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Re: Talk me out of paying off my mortgage
« Reply #7 on: August 20, 2016, 11:23:10 AM »
If it would make you happy to pay it off...And be mortgage free at your age pay it off; next question please.

No other reason to pay it off.

LeRainDrop

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Re: Talk me out of paying off my mortgage
« Reply #8 on: August 20, 2016, 12:47:47 PM »
For your situation, I agree with badbear and Tjat.  As a financial matter, it really makes a lot more sense to keep your dollars invested than to tie them up in your primary residence, particularly when you have such a low interest rate on your mortgage.

To relate my own story, my mortgage is at 4.125%.  During these six years of owning my home, with my extra dollars each month, I mostly continued to invest in VFIAX and VTIAX, but I also rounded up my mortgage payments to an even number.  Some months that meant I paid an extra $90 on my mortgage, some $590, some $1,090, etc.  This satisfied my psychological draw to be getting ahead on the mortgage or doing better than the bank expected.  In the end, I left my job a few months ago for a sabbatical, and I'm very glad to see my investments continue to increase in value while I'm not working.  For me, it feels much better than I think I would feel sitting here with a paid off home but no tangible dollar growth.

MoonLiteNite

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Re: Talk me out of paying off my mortgage
« Reply #9 on: August 21, 2016, 01:07:27 AM »
...would you take a loan out and then go gambling/investing with it? Because basically you are doing that by not paying it off while investing money instead.

Peace of mind, no house paypayments, as long as you pay your taxes you have a place to call home no matter what.

I disagree with a few points of this. Equating long term investing in a total market index fund with "gambling" is a complete red herring. While investment returns aren't "guaranteed", it's also not guaranteed that a gigantic meteor won't fall on your house while you're sleeping. Having "place to call home" is also not going to be a struggle when you have $500k in liquid assets.

Yes gamble is not a good word, but it is a risk.

If it is not an issue, why are we not not ALL taking out lines of credit against our cars, and houses and buying more funds?
And i am really asking, because from my understanding, that is what you are doing when you choose to invest rather than paying off debt.

Why not just scale up your investing by taking more lines of credit against your property?

edit:
And i personally have this issue right now. I just sold about 25k in ESPP. I now have the option  of taking 75% left off my house, or invest. If i am going to invest, shouldn't i just take out a full line of credit on my house for 280k and then invest all of that into index funds while making min monthly payments?
« Last Edit: August 21, 2016, 01:09:53 AM by MoonLiteNite »

Simpli-Fi

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Re: Talk me out of paying off my mortgage
« Reply #10 on: August 21, 2016, 01:58:12 AM »
...would you take a loan out and then go gambling/investing with it? Because basically you are doing that by not paying it off while investing money instead.

Peace of mind, no house paypayments, as long as you pay your taxes you have a place to call home no matter what.

I disagree with a few points of this. Equating long term investing in a total market index fund with "gambling" is a complete red herring. While investment returns aren't "guaranteed", it's also not guaranteed that a gigantic meteor won't fall on your house while you're sleeping. Having "place to call home" is also not going to be a struggle when you have $500k in liquid assets.

Yes gamble is not a good word, but it is a risk.

If it is not an issue, why are we not not ALL taking out lines of credit against our cars, and houses and buying more funds?
And i am really asking, because from my understanding, that is what you are doing when you choose to invest rather than paying off debt.

Why not just scale up your investing by taking more lines of credit against your property?

edit:
And i personally have this issue right now. I just sold about 25k in ESPP. I now have the option  of taking 75% left off my house, or invest. If i am going to invest, shouldn't i just take out a full line of credit on my house for 280k and then invest all of that into index funds while making min monthly payments?

Do people really invest with borrowed money?  Is that a thing?  I
Must have a lot of reading to do.

MoonLiteNite

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Re: Talk me out of paying off my mortgage
« Reply #11 on: August 21, 2016, 02:39:19 AM »

Do people really invest with borrowed money?  Is that a thing?  I
Must have a lot of reading to do.

I dunno, that is basically what it is. I mean  if people are so sure of their funds to go up, why aren't we all doing it :/
It makes sense on paper, but the issue is there IS a risk there. So most people don't do it, but we tend to invest before paying off debt.

That is why i said what i said.

Tjat

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Re: Talk me out of paying off my mortgage
« Reply #12 on: August 21, 2016, 05:17:25 AM »
It's called diversification. Mortgage Debt isn't some monster under the bed that must be eradicated at all costs and priorities. It's also not Grammys sticky buns where you bury your face in and be licking the icing off your fingers for days.

Within that spectrum is what we call risk tolerance
« Last Edit: August 21, 2016, 05:19:28 AM by Tjat »

gggggg

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Re: Talk me out of paying off my mortgage
« Reply #13 on: August 21, 2016, 06:10:27 AM »
I'm at no where near your level of income and house, but I would at least put some of it on the mortgage to get it down; maybe to just below 100k, just so you're not in triple digits. I only had 40k left to go on my house, and decided to pay it off. Took a chunk out of taxable investments, and sold every single item I owned that I wasn't using, and finally paid it off.

matchewed

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Re: Talk me out of paying off my mortgage
« Reply #14 on: August 21, 2016, 06:26:00 AM »
...would you take a loan out and then go gambling/investing with it? Because basically you are doing that by not paying it off while investing money instead.

Peace of mind, no house paypayments, as long as you pay your taxes you have a place to call home no matter what.

I disagree with a few points of this. Equating long term investing in a total market index fund with "gambling" is a complete red herring. While investment returns aren't "guaranteed", it's also not guaranteed that a gigantic meteor won't fall on your house while you're sleeping. Having "place to call home" is also not going to be a struggle when you have $500k in liquid assets.

Yes gamble is not a good word, but it is a risk.

If it is not an issue, why are we not not ALL taking out lines of credit against our cars, and houses and buying more funds?
And i am really asking, because from my understanding, that is what you are doing when you choose to invest rather than paying off debt.

Why not just scale up your investing by taking more lines of credit against your property?

edit:
And i personally have this issue right now. I just sold about 25k in ESPP. I now have the option  of taking 75% left off my house, or invest. If i am going to invest, shouldn't i just take out a full line of credit on my house for 280k and then invest all of that into index funds while making min monthly payments?

Why not because there are actual mathematical calculations you can take and various amounts of risk you may be willing to take. Some will be fairly sound and work in your favor most of the time some may not. It's reasonable to take the risks for the "sound" ones and not for the ones which are not.

SwordGuy

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Re: Talk me out of paying off my mortgage
« Reply #15 on: August 21, 2016, 08:39:56 AM »
The only legit reason why you would pay off your house early is an ethics, or peace of mind.

Ethics, would you take a loan out and then go gambling/investing with it? Because basically you are doing that by not paying it off while investing money instead.

Ethics?  Really?

If I went to a family member or friend, and got an emergency loan from them, and then didn't pay them back as fast as humanly possible, yep. that's an ethical question.  My family or friends didn't want to make the loan, they aren't in the business of making loans, and they might have better things to do with their money than bail my loser self out of my (probably self-induced) problems.
But they might do it anyway out of love.

But a business that's in the business of loaning money on terms?   Ethics only applies if I do not pay them back according to the agreed upon terms and I was able to do so (but chose not to).  In fact, if I paid them back early they would make less money!  So would you argue that paying them back early was unethical?

(I would not, fyi, because the agreed upon terms allow for early payment with no penalty.  (Or they do with all the loans I take out.)

 

MoonLiteNite

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Re: Talk me out of paying off my mortgage
« Reply #16 on: August 21, 2016, 12:01:55 PM »
The only legit reason why you would pay off your house early is an ethics, or peace of mind.

Ethics, would you take a loan out and then go gambling/investing with it? Because basically you are doing that by not paying it off while investing money instead.

Ethics?  Really?

If I went to a family member or friend, and got an emergency loan from them, and then didn't pay them back as fast as humanly possible, yep. that's an ethical question.  My family or friends didn't want to make the loan, they aren't in the business of making loans, and they might have better things to do with their money than bail my loser self out of my (probably self-induced) problems.
But they might do it anyway out of love.

But a business that's in the business of loaning money on terms?   Ethics only applies if I do not pay them back according to the agreed upon terms and I was able to do so (but chose not to).  In fact, if I paid them back early they would make less money!  So would you argue that paying them back early was unethical?

(I would not, fyi, because the agreed upon terms allow for early payment with no penalty.  (Or they do with all the loans I take out.)

If you read the other post i explain and ask a question.
I do agree, math says it is a smart thing to do, with very low risk and good upside.

Now the question is why don't we all just take huge lines of credit against our homes, cars, TVs, and everything we own to invest more with?

also OP, didn't say to give him your personal thought, he said to talk him out of it. And that is honestly 1 if the only 2 reasons someone would pay down house over investing.
I personally have always gone towards investing.



Metric Mouse

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Re: Talk me out of paying off my mortgage
« Reply #17 on: August 21, 2016, 07:42:45 PM »

Now the question is why don't we all just take huge lines of credit against our homes, cars, TVs, and everything we own to invest more with?

Who says we don't?

But to answer your question, houses have a greater chance of appreciating in value than the other things you listed.