Author Topic: What to do with mortgage $ after paying off house?  (Read 12752 times)

Rockets34Life

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What to do with mortgage $ after paying off house?
« on: September 26, 2014, 10:35:45 AM »
I'm 8 months away from paying off my house. That extra money, what should I do with it? Should I invest it? If so, where?

This is what I have thought out -

For property taxes, I pay them on my own....no escrow. When I get my tax refund, I use that to pay them.

My current retirement funds are my old 401K from my 1st job and I'm contributing right now to 401K to my current job. My wife has a 401K with her current job, but doesn't contribute much. What retirement funds do you suggest?

I also tithe to the church and have a car payment (haven't started on it since it was lent by the parents, but I'm going to pay them back as a 5 year loan once the house is paid off), so that takes a chunk also.

After all expenses, tithing, etc., here's how I have it broken it down -

Children's college fund - 30% Retirement contribution - 30% Car Payment - 25% Savings - 15%

What do you guys think? Thanks in advance!

Cheddar Stacker

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Re: What to do with mortgage $ after paying off house?
« Reply #1 on: September 26, 2014, 10:51:25 AM »
Welcome to the forum.

I would move the old 401K into an IRA. Many places to do this. Most here would suggest Vanguard, and they can handle it for you. Most, not all, but most 401k plans have higher fees than you would otherwise be charged in an IRA, and you have unlimited investment options in an IRA.

Max out your 401k's ($17,500 each, so $35K total) if at all possible. This will reduce taxes and your paychecks would only go down by ~$25K. Use the other $10K to pay off the car loan, and once that's gone start the college fund.

catccc

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Re: What to do with mortgage $ after paying off house?
« Reply #2 on: September 26, 2014, 11:12:17 AM »
Do you have a Roth IRA?  I would contribute to a Roth if you aren't doing so already.

Terrestrial

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Re: What to do with mortgage $ after paying off house?
« Reply #3 on: September 26, 2014, 03:53:52 PM »
Are you paying your parents interest?  Including on the time this loan has been in 'deferral' and you have not been making payments?   If it was me personally, unless the loan is structured at something close to a market rate and they are receiving a return, (or MAYBE unless the amount is an 'insignificant' number to them, i.e. you owe them 10k and they are worth 10M) I would bang out the car loan from my parents.  I know this may not be the purely optimal financial move, but I would not want to take advantage of my family by having a loan outstanding and making investments for myself while they were not getting a fair return on their money.  Just how I feel about it, I'm sure there are a wide range of views.

If you are comfortable with the arrangement on that loan I agree with what Cheddar said...move the old 401k and max the current ones.

Do you have a Roth IRA?  I would contribute to a Roth if you aren't doing so already.

I think this depends on what his tax rate is now.  If he's in the 25% or higher bracket I would go the 401k route first. 
« Last Edit: September 26, 2014, 03:58:17 PM by Terrestrial »

GizmoTX

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Re: What to do with mortgage $ after paying off house?
« Reply #4 on: September 26, 2014, 05:01:29 PM »
RE: Taxes. We prefer to accrue property tax funds in our own account & arrange our income tax withholding to not have a refund.

TomTX

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Re: What to do with mortgage $ after paying off house?
« Reply #5 on: September 27, 2014, 06:59:33 AM »
I've thought about this (though I am 7 years away) - considering doing partial Roth conversions in order to use up 15% tax bracket.

I don't want to end up like my parents - next year RMDs from tIRA will push them into 25% bracket. Roth has no RMD.

Additionally, 5 years after conversion - Roth money is then available with no penalty.

TomTX

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Re: What to do with mortgage $ after paying off house?
« Reply #6 on: September 27, 2014, 07:02:58 AM »
RE: Taxes. We prefer to accrue property tax funds in our own account & arrange our income tax withholding to not have a refund.

I do this too, with the added fillip of stacking the property taxes in alternate years (ie - this year I paid 2014 in January, and will pay 2015 in December) - I will itemize this year, then take the standard deduction next year. Similar with charitable contributions.

This only works if your property taxes are enough to take you over/under the itemizing threshold.

Catbert

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Re: What to do with mortgage $ after paying off house?
« Reply #7 on: September 27, 2014, 10:46:53 AM »
Are you paying your parents interest?  Including on the time this loan has been in 'deferral' and you have not been making payments?   If it was me personally, unless the loan is structured at something close to a market rate and they are receiving a return, (or MAYBE unless the amount is an 'insignificant' number to them, i.e. you owe them 10k and they are worth 10M) I would bang out the car loan from my parents.  I know this may not be the purely optimal financial move, but I would not want to take advantage of my family by having a loan outstanding and making investments for myself while they were not getting a fair return on their money.  Just how I feel about it, I'm sure there are a wide range of views.

If you are comfortable with the arrangement on that loan I agree with what Cheddar said...move the old 401k and max the current ones.


.

Another vote for prioritizing paying off your parents for the car loan.  This may be a coastal view (where houses are way expensive compared to cars) but I can't image waiting patiently for someone to pay off a house before giving me anything for a car loan.  I'd start paying them something now even if that delayed the house pay-off.

I guess you can tell I've been a lender rather than a borrower in family situations.

Mortgage Free Mike

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Re: What to do with mortgage $ after paying off house?
« Reply #8 on: September 27, 2014, 01:47:51 PM »
I was in the position a few years ago.

I would up my 401K contributions, for sure. But do you also have a ROTH IRA? If not, consider opening up one of those and maxing it out as well.

This is a good time of year to open the ROTH IRA because you'll be able to make your 2014 contributions until tax time next year-- so April 15, 2015.

Exflyboy

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Re: What to do with mortgage $ after paying off house?
« Reply #9 on: September 27, 2014, 03:51:20 PM »
^^^ This,... the 401k will hide the $17,500 from the tax man. then max a Traditional IRA.. unless you got too much income to take the deduction in which case you can max a Roth IRA instead.

Frank

Rockets34Life

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Re: What to do with mortgage $ after paying off house?
« Reply #10 on: September 29, 2014, 08:54:41 AM »
Hello everyone,

The loan that is to my parents is interest free (lucked out), so I can pay them whenever.  But I do like the idea of using the children's college fund saving to the car payment to pay it off faster.

I currently do not have a ROTH IRA.  All I have is both of our 401K contributions to our current employers and then my 401K that's still active with my former employer.  I'm not very familiar with ROTH IRAs.  With the breakdown I made in my original post, should I take the 30% retirement contribution and put it in a ROTH IRA?  Traditional or regular?  How much can I max contribute every year?

My wife and I together make $110,000 a year, so I think that kicks us into the 25% tax bracket.  Is there anyway to get into the 15% tax bracket?

Cheddar Stacker

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Re: What to do with mortgage $ after paying off house?
« Reply #11 on: September 29, 2014, 08:58:06 AM »
You can get to 15%.

110,000 - 35,000 (2 maxed out 401k's) = 75,000 which is just above the 25% bracket without considering any other deductions or exemptions. So you're already there really. Once you get there, a Roth IRA might make more sense than a Traditional IRA, but get down to the 15% bracket first before considering Roth.

Also, you should look into rolling that old 401k into an IRA. Check out the investment options and fees in the old plan. Post them here if you'd like and we can help analyze whether it would make sense.

Rockets34Life

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Re: What to do with mortgage $ after paying off house?
« Reply #12 on: September 29, 2014, 03:59:30 PM »
Unfortunately, Cheddar Stacker, after expenses and tithe, I will have $1500 (give or take) available per month.  Now I could put the whole thing in there for both me and the wife, but she might have a say in wanting to enjoy that extra $ for other things.  Maybe down the road, we can max it out to $17,500/year, but I don't think right now that's the plan. 

What's the max amount we can make to stay in the 15% tax bracket?

Cheddar Stacker

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Re: What to do with mortgage $ after paying off house?
« Reply #13 on: September 29, 2014, 06:26:14 PM »
Taxable income limit is about 74k, but that means gross wage - medical premiums - 401k's - 8k exemptions (more if you have kids) - standard deduction or itemized which would include your tithing - traditional IRAs - a few other things.

plank

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Re: What to do with mortgage $ after paying off house?
« Reply #14 on: September 30, 2014, 08:37:09 AM »


I don't want to end up like my parents - next year RMDs from tIRA will push them into 25% bracket. Roth has no RMD.


Oh, the horror.

*joking*

Cheddar Stacker

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Re: What to do with mortgage $ after paying off house?
« Reply #15 on: September 30, 2014, 08:39:40 AM »


I don't want to end up like my parents - next year RMDs from tIRA will push them into 25% bracket. Roth has no RMD.


Oh, the horror.

*joking*

Yeah, this is definitely a "mustachian" problem. Good issue to have by any standard. But, I'm in the same boat hoping to never be required to take an RMD by planning a long-term Roth Pipeline.

Dicey

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Re: What to do with mortgage $ after paying off house?
« Reply #16 on: September 30, 2014, 03:35:50 PM »
Facepunch warning: I think you guys have screwed the pooch by paying off your mortgage early. A great way to lower your tax bracket is by writing off your (historically low) mortgage interest, stuff full all of your retirement vehicles, stock up on any HSA/FSA options available to you, and finally load up your kid's 529's. Before any of that, I'd pay back my parents. I can't believe you so diligently paid back the bank that cares about nothing but a steady payment and ignored your parent's generosity.

Honestly, if I were in your position, I'd add up what I owed my parents and the total amount I could contribute to all the retirement options I could qualify for, plus a nice round EF figure. I'd then - wait for it - strongly consider borrowing against my paid for house to fill all the other buckets. Not sure you'd get to 15%, but you'd be darn close.  I'd also use the internet to learn how tax brackets work. Even at 25%, only a portion of your income is taxed at that rate, not all of it.

waltworks

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Re: What to do with mortgage $ after paying off house?
« Reply #17 on: September 30, 2014, 06:18:25 PM »
$1500/mo to save/invest on $110k annual income?!?

You should post a case study, there has got to be a lot of saving that can happen. That's crazy.

Agree with other posters, as well - max retirement accounts, minimize payments on low-interest debt like the mortgage. IMO you have sort of been doing it backwards.

-W

yoga mama

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Re: What to do with mortgage $ after paying off house?
« Reply #18 on: September 30, 2014, 06:59:21 PM »
Agree with waltworks, let's see the numbers!  You mentioned car payment - that should definitely go before the mortgage.  Also, I would consider maxing out your pre-tax 401K before the kids' college fund.  I had to make this hard call myself, the hubby and I feel very strongly about education but follow the MMM theory that having both parents at home full time will be more valuable than going to an expensive school.  We will have savings in place to help if necessary, but we also hope our kids make smart financial decisions. 

Rockets34Life

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Re: What to do with mortgage $ after paying off house?
« Reply #19 on: October 01, 2014, 08:32:01 PM »
The numbers -

Even though we make $110,000/year as a couple, that's before taxes.

After taxes, our monthly income (estimate) - $5,509.90 ($66,118.80/year)

Current Monthly Expenses (all estimates are on the high end) -

Mortgage- $3,283.61
Credit Cards- $1,500.00 (this I'm trying to cut down.....need to breakdown what we have to spend on and what we need to stop spending on)
Home and Car Insurance - $212.00 (researching to find cheaper combo)
Utilities - $60.00 (estimate)
Cell Phone Plan - $80.00 (estimate)
Electric Bill - $150.00 (estimate)
HOA   - $25.00 (I pay the full annual amount at the beginning of the year, but I broke it down monthly)
OTA TV/Netflix/Amazon Prime/Simple.TV - $25.00
Gas Bill - $30.00 (estimate)
Internet - $70.00 (estimate)
Lawn Cutting -   $23.00 (estimate)
Daycare - $836.00 (currently daughter is going to dcare, son is being taken care of by gparents....but he will go next yr, which will increase $).  This will drop off once both kids are in kindergarten (Sept. 2018).
Home Security - $18.35
Church Tithe - $200.00

My wife contributes to 401K, but not much.  I take advantage of the match (1st 3% at 100%, next 2% at 50%) at my current employer.  I have an existing 401K from a former employer that is currently at $121,777.
« Last Edit: October 01, 2014, 08:43:25 PM by Rockets34Life »

pucksr

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Re: What to do with mortgage $ after paying off house?
« Reply #20 on: October 01, 2014, 08:50:31 PM »
Facepunch warning: I think you guys have screwed the pooch by paying off your mortgage early. A great way to lower your tax bracket is by writing off your (historically low) mortgage interest, stuff full all of your retirement vehicles, stock up on any HSA/FSA options available to you, and finally load up your kid's 529's. Before any of that, I'd pay back my parents. I can't believe you so diligently paid back the bank that cares about nothing but a steady payment and ignored your parent's generosity.

Honestly, if I were in your position, I'd add up what I owed my parents and the total amount I could contribute to all the retirement options I could qualify for, plus a nice round EF figure. I'd then - wait for it - strongly consider borrowing against my paid for house to fill all the other buckets. Not sure you'd get to 15%, but you'd be darn close.  I'd also use the internet to learn how tax brackets work. Even at 25%, only a portion of your income is taxed at that rate, not all of it.
Never been a huge fan of 529s. Locking up all that money in an education fund?

Cheddar Stacker

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Re: What to do with mortgage $ after paying off house?
« Reply #21 on: October 01, 2014, 09:10:44 PM »
That's around a 40% tax rate. You might want to look into that. Do you get big tax refunds? If so you might want to change your w-4s. Maybe there's also 401k and medical deductions in there??

I'm not gonna say anything on expenses, I will let others critique that.

I would immediately get a heloc, pay off the mortgage, then pay the minimum each month on the heloc. That is a huge payment that could be put to better use sooner.

Whether you do that or not, your first move should be to max your 401k's as soon as that $3k payment is gone.

Rockets34Life

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Re: What to do with mortgage $ after paying off house?
« Reply #22 on: October 02, 2014, 07:54:24 AM »
I forgot to mention that once the mortgage payment falls off, then the tithe increases to either 10 or 15% of our net income.....haven't decided yet.  So that $200 would increase to $551 or $827.

Cheddar Stacker, where are you getting the 40% tax rate?  I'm not sure about big tax refunds, but having 2 kids help.  I usually have all the taxes taken out of my paychecks.....never withhold.

I will do my best on maxing the 401ks.  Just have to figure out how to cut down the credit card expense (the others are pretty much fixed amounts).

Cheddar Stacker

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Re: What to do with mortgage $ after paying off house?
« Reply #23 on: October 02, 2014, 08:08:26 AM »
Cheddar Stacker, where are you getting the 40% tax rate?  I'm not sure about big tax refunds, but having 2 kids help.  I usually have all the taxes taken out of my paychecks.....never withhold.

66,119/110,000=60.11%
Where is your other 40%?
401k is about 5%.
Medical premiums = $___
If medical is another 5% ($5,500) that still leaves 30% taxes or $33,000 which is crazy high for that level of income. With all your deductions and exemptions you should be closer to 20% withholdings including federal, state, and FICA.

You might want to take a closer look at your paystubs because I think you might be missing something here.

waltworks

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Re: What to do with mortgage $ after paying off house?
« Reply #24 on: October 02, 2014, 09:35:37 AM »
You need to go sit down with a CPA, with all your paystubs, mortgage statements, etc, and figure out what is going on here. Your tax rate should not be anywhere near that high - CS is right, you are missing large amounts of money.

FWIW, "withholding" in this context means having taxes paid by your employer out of your paycheck so you are indeed having your taxes withheld. Do you get a (really big) refund at tax time?

-W

I forgot to mention that once the mortgage payment falls off, then the tithe increases to either 10 or 15% of our net income.....haven't decided yet.  So that $200 would increase to $551 or $827.

Cheddar Stacker, where are you getting the 40% tax rate?  I'm not sure about big tax refunds, but having 2 kids help.  I usually have all the taxes taken out of my paychecks.....never withhold.

I will do my best on maxing the 401ks.  Just have to figure out how to cut down the credit card expense (the others are pretty much fixed amounts).

acroy

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Re: What to do with mortgage $ after paying off house?
« Reply #25 on: October 02, 2014, 09:53:01 AM »
RE: Taxes. We prefer to accrue property tax funds in our own account & arrange our income tax withholding to not have a refund.

I do this too, with the added fillip of stacking the property taxes in alternate years (ie - this year I paid 2014 in January, and will pay 2015 in December) - I will itemize this year, then take the standard deduction next year. Similar with charitable contributions.

This only works if your property taxes are enough to take you over/under the itemizing threshold.

NICE
I'm gonna steal that one, that's excellent :)

Dicey

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Re: What to do with mortgage $ after paying off house?
« Reply #26 on: October 02, 2014, 11:33:51 AM »
...and finally load up your kid's 529's.
Never been a huge fan of 529s. Locking up all that money in an education fund?
I completely agree with you, pucksr, which is why I listed it last. My point is that OP seems to be doing everything in the wrong order. Paying off the mortgage before parents? WRONG. Loading kid's college funds before retirement funds? WRONG AGAIN. Seems the "Kill all the debt" folks are missing a crucial point. If you end up with no debt and insufficient savings, you still lose in the end.

pucksr

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Re: What to do with mortgage $ after paying off house?
« Reply #27 on: October 02, 2014, 08:23:47 PM »
Livelikeabank

Rockets34Life

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Re: What to do with mortgage $ after paying off house?
« Reply #28 on: October 03, 2014, 07:41:25 AM »
...and finally load up your kid's 529's.
Never been a huge fan of 529s. Locking up all that money in an education fund?
I completely agree with you, pucksr, which is why I listed it last. My point is that OP seems to be doing everything in the wrong order. Paying off the mortgage before parents? WRONG. Loading kid's college funds before retirement funds? WRONG AGAIN. Seems the "Kill all the debt" folks are missing a crucial point. If you end up with no debt and insufficient savings, you still lose in the end.

Diane,

One thing I failed to mention about my interest-free car loan from my parents.....we just bought the car last July.  They haven't bugged me at all for the payment and I'm pretty sure they would just give it to me.  But I don't want any strings attached to anything from my parents.  That's why I planned when my mortgage is paid off next year, I don't have to worry about how am I going to pay them.  Using the amt. I was going to set away for my children's college fund along with the payment I was going to make to them, I'll be done paying them back in 2 1/2 years.  Then I can either continue putting away the same amount for the children's college fund or put that amount plus the car payment into retirement savings.

I don't get your "losing in the end" comment.  Who says I have insufficient savings?  I have the next 20+ years to work on my savings w/o a mortgage over my head.  Once I pay off my mortgage, I can build an emergency fund quick and then enjoy the rest w/ no stress.  Also as of yesterday, I just bumped my 401K to 10% (4% match plus another 2% from me).

Right now, with what me and my wife make, we have enough to pile on the principal to pay off the mortgage.  I looked at our finances, cut back what we felt needed to (which was only satellite TV, cell phone plan, internet, and home security), and used the extra $ to invest in something that will benefit us for the rest of our lives.  I don't even have to take a HELOC out to pay off the mortgage.  Just 8 month (maybe less) and I'll be mortgage free.

Sure your way sounds good, but I don't want that mortgage debt hanging over my head when in my 50s or close to retirement.  Hell, what if I lost my job, got sick or injured?  Who's going to be making that mortgage payment?  My retirement investments?  Why would I want to touch that?  If I'm investing in retirement, I would rather not touch it and let it grow.  Fortunately for me since I'm still in my 30s, it feels awesome to have that mortgage paid off and not worry about anymore debt.
« Last Edit: October 03, 2014, 07:45:34 AM by Rockets34Life »

Cheddar Stacker

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Re: What to do with mortgage $ after paying off house?
« Reply #29 on: October 03, 2014, 09:07:47 AM »
I don't even have to take a HELOC out to pay off the mortgage.

You don't have to, but you could. If you did you'd have $3K/month to invest and repay your parents. Not all your investments should be in 401k plans, you should build a taxable account as well and that would be what pays your mortgage.

Here's the thing most "debt destroyers" never quite let sink in: If you lose your job today and can't find income replacement, how would you make next month's $3,300 mortgage payment? The bank will have no mercy. They will not care that you've been a good debtor and made all your payments, including extra principal each month. They need next month's payment and if they don't get it they can take your house. If you'd been paying $2K on the mortgage and investing $1,300 in a taxable account for the last few years, maybe you'd have $35K in taxable investments and a mortgage of $60K. Now you'd have 36 months worth of $2K mortgage payments sitting in your taxable investment account which is ample time to find a new income source.

If you do nothing else, apply for a HELOC and don't take any money out. It's better to have the safety net in place. You don't put out the safety net after the tight rope walker falls, you put it out before. A bank will not give you a HELOC if you don't have a job. The annual fee for a HELOC is $50 which is a small price to pay for a backup plan.

waltworks

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Re: What to do with mortgage $ after paying off house?
« Reply #30 on: October 03, 2014, 09:43:08 AM »
Hey, Rockets4Life - just remember, we're all huge geeks here and you've missed out on the optimization that is possible in your situation. Nobody is saying it's *bad* to pay off debt. We're saying it's sub-optimal and you could do a lot better.

You can make a very strong and logical argument that paying off very low-interest debt (especially tax-advantaged low interest debt like a mortgage) is a bad move because that money:
1: Isn't very liquid. If you need it, you have to get a HELOC or sell the house.
2: Is only "earning" the interest rate as a return (in your case, 3.5%, or even lower if you are itemizing your deductions) whereas over a 20 year span you'd expect something like 7% gains in stocks. If stocks are too volatile for your tastes, there are plenty of very safe investments that will return more than 3.5% over a decade+.

So you could make minimum mortgage payments, use the mortgage interest deduction to reduce tax burden, and invest all your extra money. In 10-20 years, you'll have plenty to pay off the house anytime you want plus quite a bit more cash than you would have had by paying the mortgage off early. Plus you'll be more financially secure since stocks or bonds can easily be liquidated in an emergency if you need cash.

-W

pucksr

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Re: What to do with mortgage $ after paying off house?
« Reply #31 on: October 03, 2014, 07:54:12 PM »

I don't get your "losing in the end" comment.  Who says I have insufficient savings?  I have the next 20+ years to work on my savings w/o a mortgage over my head.  Once I pay off my mortgage, I can build an emergency fund quick and then enjoy the rest w/ no stress.  Also as of yesterday, I just bumped my 401K to 10% (4% match plus another 2% from me).

...

Sure your way sounds good, but I don't want that mortgage debt hanging over my head when in my 50s or close to retirement.  Hell, what if I lost my job, got sick or injured?  Who's going to be making that mortgage payment?  My retirement investments?  Why would I want to touch that?  If I'm investing in retirement, I would rather not touch it and let it grow.  Fortunately for me since I'm still in my 30s, it feels awesome to have that mortgage paid off and not worry about anymore debt.
Rockets4Life: Here is the gist of the argument.
Imagine you won the exact amount of a mortgage on a house. What would be the best thing to do with the money? Pay for the house or invest the money?
You believe that paying off the mortgage gets you "out from under" a loan and is financially beneficial.
MANY Mustachians believe that it would be wiser to invest the money in an account that earns more than mortgage interest rates(which are insanely low right now).

The math is on the side of those encouraging you to invest. If you put the money into an investment account for 30 years you would be in a far better financial situation for those 30 years and beyond. You would have a large sum of highly liquid assets. You would earn more money on the investment than you would lose to interest on your mortgage. There is risk with investment, but betting that you can beat current mortgage rates over the next 30 years in some kind of investment vehicle is very low risk.

If debt bothers you, then I can understand wanting to pay it off. However, it is foolhardy to argue that paying off your debt is mathematically a good decision. In most cases it isn't a good decision. It would be a long and detailed argument to explain why this works, but I would recommend you consider the following: Do banks take out loans? They do! Banks borrow money at a low cost and then they use that money to invest. Banks are leveraged. Banks, for regulatory purposes, must invest in relatively safe things. This is why they give mortgages. Mortgages are low-interest, but they are very safe investments. You are not 50 yet. You can probably afford some financial risk.

Dan_at_Home

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Re: What to do with mortgage $ after paying off house?
« Reply #32 on: October 03, 2014, 09:18:08 PM »
sigh .... here we go again with the paying off the mortgage vs keeping it and investing the money instead argument, how many times has this come again in the forums? 

the downfall of mustachianism will be mustachians turning on each other arguing endlessly over these two very good paths to FIRE (those two camps off course being the mortgage free people then invest more vs. the hardcore mathematical spreadsheet type where debt and emotions be damned and all I do is go straight by the numbers to find the maximum total sum possible and run the mortgage for all 30 years camp).

anyway, our household recently paid off our home early this year, and the extra money since then goes into a regular taxable Vanguard fund with 75% stocks and 25% bonds to build up the stash for FI; I already max out the retirement account with my work.  I would also mention that we have no debt at all.  This discussion had some mention about a car loan, that definitely needs to go as well even if it is to your parents at 0%. So you should put your extra money first towards making sure your emergency fund is solid, then towards the loan to your parents, and then invest after that. 
« Last Edit: October 03, 2014, 09:30:02 PM by Dan_at_Home »

starbuck

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Re: What to do with mortgage $ after paying off house?
« Reply #33 on: October 04, 2014, 08:36:49 AM »
So you could make minimum mortgage payments, use the mortgage interest deduction to reduce tax burden, and invest all your extra money. In 10-20 years, you'll have plenty to pay off the house anytime you want plus quite a bit more cash than you would have had by paying the mortgage off early. Plus you'll be more financially secure since stocks or bonds can easily be liquidated in an emergency if you need cash.

Agreed. To me, this is the safer route. Investing, not paying off my house early. I'm in a much more flexible position to respond to financial emergencies because I invested my extra cash instead of putting it into the mortgage. It's a numbers game, and you need to take the emotion out of it.

I'd recommend maxing out your 401ks, and then paying off your parents ASAP. With the amount of income your household pulls in, why would you have needed to borrow from them anyways? A 0% interest loan benefits you, not your parents, especially if you drag it out over 5 years. And since you're not in dire financial straits, I don't think you should take advantage of that situation because you know, family and all.

Dicey

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Re: What to do with mortgage $ after paying off house?
« Reply #34 on: October 04, 2014, 10:11:56 PM »
To Cheddar, waltworks, pucksr and starbuck:  I love you guys, I really do! Thanks for holding up the light to show the way. I've been really busy lately and haven't had time to check in. (Yeah, sucks to be so busy in retirement. All fun all the time, lol.) Thanks for offering such great responses and insights. It feels awesome to be in such learned company.

To Dan_At_Home: The earlier you start saving for retirement, the less you have to save. Your fixed mortgage payment will stay the same year after year while your income and investments will grow over time. It's not just about killing debt, it's also about creating wealth.

BTW, I hope your bonds are short- and mid-term. When interest rates go up (and they will), bond yields drop precipitously. Anyone who doesn't understand this could experience quite a walloping. I sincerely hope this will not happen to you.

Rockets34Life

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Re: What to do with mortgage $ after paying off house?
« Reply #35 on: October 04, 2014, 10:21:07 PM »
Cheddar Stacker, where are you getting the 40% tax rate?  I'm not sure about big tax refunds, but having 2 kids help.  I usually have all the taxes taken out of my paychecks.....never withhold.

66,119/110,000=60.11%
Where is your other 40%?
401k is about 5%.
Medical premiums = $___
If medical is another 5% ($5,500) that still leaves 30% taxes or $33,000 which is crazy high for that level of income. With all your deductions and exemptions you should be closer to 20% withholdings including federal, state, and FICA.

You might want to take a closer look at your paystubs because I think you might be missing something here.

Cheddar Stacker, to answer your above question about where is the other 40%, I finally got a chance to breakdown both our paystubs (I have health benefits under my current job and still on my wife's insurance) -

My Paycheck Tax % Breakdown -

16.84% - Federal Income Tax
6.10% - Social Security Tax
1.43% - Medicare Tax
2.35% - Health Benefits (just me)
2% 401K (it's been changed to 10% as of 10/2/14)

Total = 28.72%

Wife's Paycheck Tax % Breakdown -

10.04% - Federal Income Tax
5.22% - Social Security Tax
1.22% - Medicare Tax
16.31% - Health Benefits (whole family including me)
6% 401K

Total = 38.79%

Both of us on our W-4 put down married but tax at higher single rate.

waltworks

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Re: What to do with mortgage $ after paying off house?
« Reply #36 on: October 04, 2014, 11:26:13 PM »
Yeah, your 401k isn't a "tax". Nor are health care premiums. So counting just federal/SS/Medicare, you're at ~25% and ~16%. Your state taxes should be shown on your paystub as well - what are they?

You can still do MUCH better on your total tax burden if you max 401ks and IRAs (or you could go Roth, depending on what bracket you're ending up in and what you're expecting for future income).

Again, you probably need to talk to a CPA and figure out what you're paying, why, and develop a coherent strategy.

-W

falcondisruptor

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Re: What to do with mortgage $ after paying off house?
« Reply #37 on: October 05, 2014, 12:20:37 PM »
Pay off your parents.  If you don't want strings attached, you can't have this amount hanging out for the next 2.5 years.

pucksr

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Re: What to do with mortgage $ after paying off house?
« Reply #38 on: October 05, 2014, 12:45:10 PM »
sigh .... here we go again with the paying off the mortgage vs keeping it and investing the money instead argument, how many times has this come again in the forums? 

the downfall of mustachianism will be mustachians turning on each other arguing endlessly over these two very good paths to FIRE (those two camps off course being the mortgage free people then invest more vs. the hardcore mathematical spreadsheet type where debt and emotions be damned and all I do is go straight by the numbers to find the maximum total sum possible and run the mortgage for all 30 years camp).

anyway, our household recently paid off our home early this year, and the extra money since then goes into a regular taxable Vanguard fund with 75% stocks and 25% bonds to build up the stash for FI; I already max out the retirement account with my work.  I would also mention that we have no debt at all.  This discussion had some mention about a car loan, that definitely needs to go as well even if it is to your parents at 0%. So you should put your extra money first towards making sure your emergency fund is solid, then towards the loan to your parents, and then invest after that.
There is the eternal argument. Pros and con's of each. Both camps, however, agree that you should have some liquid account for emergencies. Don't pay off your home and have no savings account.

Dan_at_Home

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Re: What to do with mortgage $ after paying off house?
« Reply #39 on: October 05, 2014, 01:25:58 PM »
To Dan_At_Home: The earlier you start saving for retirement, the less you have to save. Your fixed mortgage payment will stay the same year after year while your income and investments will grow over time. It's not just about killing debt, it's also about creating wealth.

BTW, I hope your bonds are short- and mid-term. When interest rates go up (and they will), bond yields drop precipitously. Anyone who doesn't understand this could experience quite a walloping. I sincerely hope this will not happen to you.

Diane C most of the time (but not always) you are right in that you will better off with keeping the fixed rate mortgage as long as possible.

Keep in mind that your approach can be hard too, i.e. when the stock market crashes such as in 2008.  During these bad periods is when cash is the hardest to come by to make your debt payments.  During the severe crashes is when people are most likely to get laid off, tenants are most likely to not be able to make rent in your rental house, dividends are reduced or are suspended, customers to small businesses disappear, home prices drop, and it is the hardest time to sell a home or car or anything, home equity loans or other forms of credit dry up, etc.

Thus, in my opinion you have to be mentally ok with a worst case scenario, i.e. you lost your job (during the crash is the most likely time it would happen), your investments are down 50%, i.e. you are losing, i.e. 6k a week in the market due to falling stock prices, and you have to sell some investments at a loss to make your fixed mortgage payments.  If you can do this and hold on for the long term then great, however some people will panic and sell all their investments completely during the market crash.  I like the paid off mortgage option because it minimizes my necessary monthly expenses to live on during hard economic times.  Thus, I feel like I can take the risk better in these situations by being debt-free rather than having debt.

So yeah emotions play a part in my way of thinking, and if the mustachians have a problem with my paid off mortgage and it is not allowed in this forum, then I will go find some other financial independence blog to follow where it is ok.

Also with bonds, I personally do not try to time the market or try to guess which investment will do better than other, I maintain an asset allocation and rebalance once a year.  Just because the market is "supposed" to do something does not mean it will.  It may or may not, and frankly I don't care and don't have to care, that is the nice thing about asset allocation with index funds.  If you read a book like William Bernstein's, The Intelligence Asset Allocator, it explains why this is the best way to invest in the market by finding some low fee index funds and do the asset allocation, rebalance once a year, and not try time the market.
« Last Edit: October 05, 2014, 01:29:50 PM by Dan_at_Home »

Cheddar Stacker

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Re: What to do with mortgage $ after paying off house?
« Reply #40 on: October 05, 2014, 07:03:34 PM »
Hey dan, it's not only allowed, it's preferred by 75% of the members here. The 25% is just a bit more vocal about what we feel is the more optimal choice. A lot of ways to skin a cat. Eventually we will all have that cat skinned, some will be bloodier than others.

And don't ever be afraid to speak your mind here either. Just be ready for a lot of opposing views on this topic and just about every other topic. That's why I love this place though.

Dan_at_Home

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Re: What to do with mortgage $ after paying off house?
« Reply #41 on: October 06, 2014, 01:07:07 PM »
thanks for the forum advice cheddar stacker, I suppose there must have been a poll at some point to know it is 75%-25%

Cheddar Stacker

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Re: What to do with mortgage $ after paying off house?
« Reply #42 on: October 06, 2014, 02:31:05 PM »
As a matter of fact YES

Have fun reading. Good points on both sides. I was actually thinking about another post on this thread today as something just came to me this morning, so it may get going again.

Rockets34Life

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Re: What to do with mortgage $ after paying off house?
« Reply #43 on: October 17, 2014, 09:39:25 AM »
Sorry, I haven't had a chance to reply back into this thread.  As I read this thread from top to bottom, I didn't want it to be a debate about which is better - paying off mortgage or invest while having a mortgage.  As Cheddar Stacker's last post, there are threads for that. 

If I had posted here 5-10 years ago before I started this quest, I would of taken up on Diane C's advice, but now it's completely useless.  I'm not going to stop paying off my mortgage with 7 months left.  That's crazy.

I'm not experts like you guys and I don't have the numbers to back it up, but I think even if I didn't pay off my house and invested, I think it will be the same as if I did pay off the house and used that mortgage payment to invest back into stocks, dividends, ROTH IRA, etc.   

My wife and I will be 36 with a paid off house.  We have the next 20+ years with that mortgage payment to invest, start owning property, travel, etc.

I created this thread to get advice on what to do with that extra $.  Thank you for those who have stayed on topic and have tried to help me out.

Now getting back on topic -

waltworks, I don't think Texas has state taxes.  I didn't see it on both of our paychecks.....unless it's rolled in with federal taxes.  I'm not sure what a CPA can do. Both of us do not claim extra allowances from our employer.  We are allowing the max amount of taxes withheld. 

falcondisruptor, that's my 1st step once the house is paid off to pay off the car from my parents.