### Author Topic: Paying off Mortgage Early – How bad is it for your FI Date?  (Read 227761 times)

#### dabears847

• Posts: 83
• Location: Chicago
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #450 on: April 06, 2015, 08:09:25 PM »
How would I calculate the benefit gain in 5 years, 10 yrs, etc. for the rate of return over the mortgage payoff. Rate of return over the mortgage...

Investment Balance/Benefit Gain/Years?

#### MDM

• Senior Mustachian
• Posts: 10795
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #451 on: April 06, 2015, 08:21:24 PM »
How would I calculate the benefit gain in 5 years, 10 yrs, etc. for the rate of return over the mortgage payoff. Rate of return over the mortgage...

Investment Balance/Benefit Gain/Years?
Am having some trouble following the assumptions being used.  E.g.,
- Is there income from a job at any time in these scenarios?  If so, when (if ever) does it stop?
- Do the mortgage payments start at the same time retirement starts?  If not, when (number of months before or after retirement) do they start?
- If the house is paid off with a lump sum, does that happen at the same time retirement starts?  If not, when (number of months before or after retirement) is the lump sum paid?

#### tomsang

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• Posts: 1085
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #452 on: April 06, 2015, 10:37:19 PM »
How would I calculate the benefit gain in 5 years, 10 yrs, etc. for the rate of return over the mortgage payoff. Rate of return over the mortgage...

Investment Balance/Benefit Gain/Years?

dabears847 - In the worksheet that I created, the various years of 1,5, 10, 15, 20, 25, 30 are summarized on the input tab with the gain or loss calculated in Column J with the formula D-C.  You can go to the Math Tab and see the benefit by month in Column V if you want to view it by month.

I think that some of the confusion is that you are not understanding the formulas that are built into the calculator.  It appears that you are trying to create or calculate what is already calculated.  Let's go through how it works.

Title A: Mortgage Paydown Traditional. This just a standard amortization schedule for a loan.  This is calculating the loan to term as defined on the input sheet which Column B rows 5-8 and cell c6 is the monthly amount.

Title B: Investment.   This is the calculation of an investment account earning the yield that is input on the Input sheet which flows to B13.  With the monthly additional investment coming from cell B10.

Column P: Is if you liquidated all of your investments and paid any taxes as calculated in title C or Column N and paid down your mortgage.  This show what the mortgage would be once your investments were liquidated.

Column S: Is the calculation of your mortgage payment and your extra payments reducing your mortgage balance.  Note that once the mortgage balance is eliminated the formula has it grabbing the investment yield.  So if you go to the example as it is set up to row 222 column T you will see the loan balance going negative.  What that means is that the loan is paid off and all future mortgage payments and future extra payments are all being invested at the investment yield as input by you and listed as B13 and monthly yield at C13.

Column V:  Is just comparing the what the mortgage would be if you paid down your mortgage each month as calculating in Column T minus Column P which is your standard mortgage balance minus the amount of money in your investment account.  A positive number shows the benefit of keeping your mortgage a negative shows the loss of keeping your mortgage.

So as you can see if your investment yield is greater than your mortgage, then at any point in time you can liquidate your investments and use the proceeds to pay down your mortgage and be better off.  If you enter a capital gains rate then the investment yield needs to be greater than the mortgage rate to have a positive impact. As noted usually you can manage your capital gains to minimize or eliminate the tax under the current tax law.

Hopefully, this helps explain the calculator
« Last Edit: April 06, 2015, 11:00:12 PM by tomsang »

#### dabears847

• Posts: 83
• Location: Chicago
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #453 on: April 07, 2015, 11:47:05 AM »
How would I calculate the benefit gain in 5 years, 10 yrs, etc. for the rate of return over the mortgage payoff. Rate of return over the mortgage...

Investment Balance/Benefit Gain/Years?
Am having some trouble following the assumptions being used.  E.g.,
- Is there income from a job at any time in these scenarios?  If so, when (if ever) does it stop?
- Do the mortgage payments start at the same time retirement starts?  If not, when (number of months before or after retirement) do they start?
- If the house is paid off with a lump sum, does that happen at the same time retirement starts?  If not, when (number of months before or after retirement) is the lump sum paid?
similar to what I'm trying to determine. The equation assumes I'll be working for the loan terms, 180 or 360 months as example. I've been trying to look at this from additional angles such retirement in  5 yes, 10yrs., etc.

If I do a lump sum in  5 or 10 yrs. I better be in the money or all the risk is for not.

My gains were only 21,000 in five years which isn't much for risk reward.

The group appears to be proposing keeping the mortgage for the full term. If I did that, the calculation appears to show a loss of investment of \$550,000 with the the no early payoff plan. This assumes I'll be working though.

#### dabears847

• Posts: 83
• Location: Chicago
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #454 on: April 07, 2015, 11:52:46 AM »
How would I calculate the benefit gain in 5 years, 10 yrs, etc. for the rate of return over the mortgage payoff. Rate of return over the mortgage...

Investment Balance/Benefit Gain/Years?

dabears847 - In the worksheet that I created, the various years of 1,5, 10, 15, 20, 25, 30 are summarized on the input tab with the gain or loss calculated in Column J with the formula D-C.  You can go to the Math Tab and see the benefit by month in Column V if you want to view it by month.

I think that some of the confusion is that you are not understanding the formulas that are built into the calculator.  It appears that you are trying to create or calculate what is already calculated.  Let's go through how it works.

Title A: Mortgage Paydown Traditional. This just a standard amortization schedule for a loan.  This is calculating the loan to term as defined on the input sheet which Column B rows 5-8 and cell c6 is the monthly amount.

Title B: Investment.   This is the calculation of an investment account earning the yield that is input on the Input sheet which flows to B13.  With the monthly additional investment coming from cell B10.

Column P: Is if you liquidated all of your investments and paid any taxes as calculated in title C or Column N and paid down your mortgage.  This show what the mortgage would be once your investments were liquidated.

Column S: Is the calculation of your mortgage payment and your extra payments reducing your mortgage balance.  Note that once the mortgage balance is eliminated the formula has it grabbing the investment yield.  So if you go to the example as it is set up to row 222 column T you will see the loan balance going negative.  What that means is that the loan is paid off and all future mortgage payments and future extra payments are all being invested at the investment yield as input by you and listed as B13 and monthly yield at C13.

Column V:  Is just comparing the what the mortgage would be if you paid down your mortgage each month as calculating in Column T minus Column P which is your standard mortgage balance minus the amount of money in your investment account.  A positive number shows the benefit of keeping your mortgage a negative shows the loss of keeping your mortgage.

So as you can see if your investment yield is greater than your mortgage, then at any point in time you can liquidate your investments and use the proceeds to pay down your mortgage and be better off.  If you enter a capital gains rate then the investment yield needs to be greater than the mortgage rate to have a positive impact. As noted usually you can manage your capital gains to minimize or eliminate the tax under the current tax law.

Hopefully, this helps explain the calculator
I'm good with the worksheet and formulas. Just looking for perspective. For instance, my risk reward calculation 21,000 gains/349,000 portfolio balance/5 years , the difference is not millions.

#### MDM

• Senior Mustachian
• Posts: 10795
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #455 on: April 07, 2015, 12:04:57 PM »
How would I calculate the benefit gain in 5 years, 10 yrs, etc. for the rate of return over the mortgage payoff. Rate of return over the mortgage...

Investment Balance/Benefit Gain/Years?
Am having some trouble following the assumptions being used.  E.g.,
- Is there income from a job at any time in these scenarios?  If so, when (if ever) does it stop?
- Do the mortgage payments start at the same time retirement starts?  If not, when (number of months before or after retirement) do they start?
- If the house is paid off with a lump sum, does that happen at the same time retirement starts?  If not, when (number of months before or after retirement) is the lump sum paid?
similar to what I'm trying to determine. The equation assumes I'll be working for the loan terms, 180 or 360 months as example. I've been trying to look at this from additional angles such retirement in  5 yes, 10yrs., etc.

If I do a lump sum in  5 or 10 yrs. I better be in the money or all the risk is for not.

My gains were only 21,000 in five years which isn't much for risk reward.

The group appears to be proposing keeping the mortgage for the full term. If I did that, the calculation appears to show a loss of investment of \$550,000 with the the no early payoff plan. This assumes I'll be working though.
My apologies for not making my question clearer: dabears847, I was trying to understand what assumptions you are using.

tomsang's point that "if your investment yield is greater than your mortgage, then at any point in time you can liquidate your investments and use the proceeds to pay down your mortgage and be better off" is a fact.  It's a pure mathematical fact, so I don't understand "loss" as in "a loss of investment of \$550,000."

Of course, tomsang's quote starts with a small but important word: "if".  That takes us into the realm of risk/reward analysis, in which the only wrong answers are the ones not in accord with the assumptions one makes - thus the question about assumptions....

#### dabears847

• Posts: 83
• Location: Chicago
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #456 on: April 07, 2015, 01:51:26 PM »
I posted the input grid results which show my scenario only returning a gain of 21,000 in five years.  This is a 1.2% annualized return over the accelerated mortgage payoff. 1.2% risk vs reward.

In 30 years the value is in acceleration of the mortgage payoff generating a greater return of \$550,000 due to the extra cash flow. At the 15 year marker  the value shifts to mortgage accelerated payoff.

#### MDM

• Senior Mustachian
• Posts: 10795
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #457 on: April 07, 2015, 02:01:21 PM »
In 30 years the value is in acceleration of the mortgage payoff generating a greater return of \$550,000 due to the extra cash flow. At the 15 year marker  the value shifts to mortgage accelerated payoff.
Are you saying that if you have a \$500K mortgage balance at 4%, and \$500K available cash, and an investment opportunity that will return 7%, and a choice between
a) paying the mortgage in a lump sum so you have a paid mortgage but no more investable funds
b) investing the money and withdrawing as needed to pay the mortgage so you end up with a paid mortgage plus money left over in the investment
that option a) is better than option b)?

#### Neustache

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• Posts: 1230
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #458 on: April 07, 2015, 02:13:49 PM »
Dabears - I found something similar to you what you are saying, but I think what we are thinking and what TomSang's spreadsheet is doing are different beasts.  But heck if I can explain it!  I'm gonna go garden and figure out a way to say what I'm thinking.  Ha!

#### dabears847

• Posts: 83
• Location: Chicago
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #459 on: April 07, 2015, 02:19:06 PM »
Not so much, the newer excel sheet with my inputs show results in favor of the a fast payoff of the mortgage and then investing the cash flow compounding those extra dollars for 30 years. This results in a larger stash of \$550,000 vs straight investing without extra principal.

I'm not working that long so I'll need to find a way to pull the extra principal payments in scenarios which reflect the change in cash flow.

What are your thoughts on the impact on savings withdrawal rates with mortgage vs without? Mine go from needing 750,000 without mortgage to 1.7mm with mortgage.

#### Neustache

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• Posts: 1230
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #460 on: April 07, 2015, 02:28:14 PM »
DaBears - I found the same, except on a smaller scale.

For example, without a mortgage we only 'need' about 900K (super spendy budget of 36K a year) but if I don't pay the mortgage off I end up needing 1,082,100 to support the PI portion of my payment (607X12X25)

So while I technically come out ahead in my investment account if I don't pay it off, it's not by much, and I need a larger investment account to FIRE.

I'm with you - not sure that the risk is worth the reward and if we work a few months longer to make up the difference....it's months of our lives.   I will work 5 more months - heck - a bunch of people end up in the one more year syndrome, what's 5 more months?

DaBears - correct me if I'm wrong - the way you did it assumes that you still have the "snowball" for all of the 30 years, right?  So it assumes the person is working for the entire 30 year term?

#### MDM

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• Posts: 10795
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #461 on: April 07, 2015, 02:45:12 PM »
What are your thoughts on the impact on savings withdrawal rates with mortgage vs without? Mine go from needing 750,000 without mortgage to 1.7mm with mortgage.
For example, without a mortgage we only 'need' about 900K (super spendy budget of 36K a year) but if I don't pay the mortgage off I end up needing 1,082,100 to support the PI portion of my payment (607X12X25)
All you "need" (assuming we believe the Trinity Study) is E/SWR + B, where
E = Expenses in Retirement
SWR = Safe Withdrawal Rate (e.g., 4%)
B = Remaining mortgage balance (i.e., the unpaid principal)

Do you see why you don't need to have the sum of remaining monthly P+I payments in your retirement stash?  You need only the sum of remaining monthly P payments.

#### Neustache

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• Posts: 1230
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #462 on: April 07, 2015, 03:08:51 PM »
Nope, I don't understand.  Not saying you are wrong (and I have not followed this whole thread!) but why don't I need to make the interest portion of my mortgage payment after I retire?

Edited -  LOL I get what you are saying now - but that's assuming I make the emotional decision to payoff the rest of my mortgage when I could be making better returns in the market.  Right?  I was assuming that we keep our mortgage forever, because we could theoretically make more in the market - because that's the logical choice.  ;-)
« Last Edit: April 07, 2015, 03:15:32 PM by Neustache »

#### sirdoug007

• Pencil Stache
• Posts: 585
• Age: 41
• Location: Houston, TX
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #463 on: April 07, 2015, 03:15:21 PM »
I believe this assumes you pay the interest out of your investment gains.

The problem with that approach is that over short to mid-term periods (0-10 years), your investment returns could be negative or zero even if over long terms (30 years) they are 7%.
« Last Edit: April 07, 2015, 03:25:45 PM by sirdoug007 »

#### MDM

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• Posts: 10795
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #464 on: April 07, 2015, 03:31:22 PM »
Nope, I don't understand.  Not saying you are wrong (and I have not followed this whole thread!) but why don't I need to make the interest portion of my mortgage payment after I retire?
Good question!  Assuming you continue to pay monthly, you absolutely do continue to make the interest portion of the mortgage payment.  But let's review the assumptions:
You start your retirement with amount E/SWR + B, where
E = Expenses in Retirement
SWR = Safe Withdrawal Rate (e.g., 4%)
B = Remaining mortgage balance (i.e., the unpaid principal)

1) You could simply take the amount B and pay off the mortgage, or
2) You can leave amount B invested.  Because it pays you a higher return than you pay on the mortgage, you have more than enough to cover the P+I payments each month.

E.g., a \$100K mortgage at 3.5% over 30 years needs a \$449.04 payment each month.  \$100K invested with a 7% return gives you \$100K*7%/12=\$583.33 the first month.  Subtract the \$449.04 and you have \$100,134.29.  Your investment balance continues to grow while your mortgage balance shrinks.

That's the math, given the assumptions.

There is the separate issue (as noted many times above, including sirdoug007's recent note) about the risk analysis of "how much of a short term decline can I stand"?

It gets confusing when we have both "What's the math?" and "What's the risk?" discussions at the same time.  Make sense?

#### sirdoug007

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• Age: 41
• Location: Houston, TX
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #465 on: April 07, 2015, 04:05:51 PM »
To be clear, this strategy has a very high likelihood of success IF you are in it for the long haul.

I ran the following scenario on cFIREsim.com:
Initial balance: \$100,000
Portfolio: 100% stocks
Expense Ratio: 0.05%
Annual Spending: \$5388 Non-Inflation adjusted (equals \$100,000 loan for 30 years at 3.5%)

The success rate is 97.39% (fails 3 out of 115 periods).  Those periods start in 1928, 1929, and 1930.  All other periods, including the bad ones in the mid 1960's do very well with a median ending portfolio of \$498,335.

Now that is 30 years.  If you don't keep your mortgage and corresponding investments that long you can have different results.  Here is a 10 year run.  After 10 years the remaining mortgage balance would be about \$77k.  The cases starting in 1999/2000 are pretty ugly!
« Last Edit: April 07, 2015, 04:14:54 PM by sirdoug007 »

#### Neustache

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• Posts: 1230
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #466 on: April 07, 2015, 04:19:30 PM »
I'm *this* close to understanding.  LOL.  So in my example above, I need a cool million instead of 900K to retire without paying off my mortgage (Oh goodness, I write that and still worry I don't get it! LOL).

#### Neustache

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• Posts: 1230
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #467 on: April 07, 2015, 05:11:17 PM »
Yes - I've got examples on my journal.  But I need to revise it a bit based on what MDM taught me!  My numbers are not exactly like MDM's hypothetical (4.25% rate on mtg) so that might be lead to some differences for me personally.

#### dabears847

• Posts: 83
• Location: Chicago
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #468 on: April 07, 2015, 05:13:30 PM »
DaBears - I found the same, except on a smaller scale.

For example, without a mortgage we only 'need' about 900K (super spendy budget of 36K a year) but if I don't pay the mortgage off I end up needing 1,082,100 to support the PI portion of my payment (607X12X25)

So while I technically come out ahead in my investment account if I don't pay it off, it's not by much, and I need a larger investment account to FIRE.

I'm with you - not sure that the risk is worth the reward and if we work a few months longer to make up the difference....it's months of our lives.   I will work 5 more months - heck - a bunch of people end up in the one more year syndrome, what's 5 more months?

DaBears - correct me if I'm wrong - the way you did it assumes that you still have the "snowball" for all of the 30 years, right?  So it assumes the person is working for the entire 30 year term?

Hello,
Glad someone is worried about the same things as I. Yes I did the plan based on a 15 year payoff plan and it was right around then the excel sheet (Tomsang's sheets) stated it was better for me long term to payoff the mortgages.

Risk as others mentioned with a higher than recommended SWR concerns me as well. I'm guessing the years of downturn make for a stressful household knowing the plan is at risk from depleting the investment account to pay the mortgage.

#### dabears847

• Posts: 83
• Location: Chicago
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #469 on: April 07, 2015, 05:23:15 PM »
To be clear, this strategy has a very high likelihood of success IF you are in it for the long haul.

I ran the following scenario on cFIREsim.com:
Initial balance: \$100,000
Portfolio: 100% stocks
Expense Ratio: 0.05%
Annual Spending: \$5388 Non-Inflation adjusted (equals \$100,000 loan for 30 years at 3.5%)

The success rate is 97.39% (fails 3 out of 115 periods).  Those periods start in 1928, 1929, and 1930.  All other periods, including the bad ones in the mid 1960's do very well with a median ending portfolio of \$498,335.

Now that is 30 years.  If you don't keep your mortgage and corresponding investments that long you can have different results.  Here is a 10 year run.  After 10 years the remaining mortgage balance would be about \$77k.  The cases starting in 1999/2000 are pretty ugly!

This helps! The big part is needing a 30 year mortgage to lower the swr. For the 4% withdrawal rate you would need \$134,700.

15 year mortgage on 100,000 is 714 monthly, 8568 annually x 25 is 214,200 needed for the 4% swr.

What was happening at the end of your post?

#### MDM

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• Posts: 10795
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #470 on: April 07, 2015, 05:36:26 PM »
I'm *this* close to understanding.  LOL.  So in my example above, I need a cool million instead of 900K to retire without paying off my mortgage (Oh goodness, I write that and still worry I don't get it! LOL).
If the unpaid mortgage principal is \$100K - yes, you have got it!

#### MDM

• Senior Mustachian
• Posts: 10795
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #471 on: April 07, 2015, 05:37:42 PM »
For example, without a mortgage we only 'need' about 900K (super spendy budget of 36K a year) but if I don't pay the mortgage off I end up needing 1,082,100 to support the PI portion of my payment (607X12X25)

Are you taking into consideration you will also need the cash to own your house free-and-clear?  Seems like you would need 900K + cost of house in your first example that I bolded.
I believe "without a mortgage" means "if the mortgage is already paid off."

#### MDM

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• Posts: 10795
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #472 on: April 07, 2015, 05:54:04 PM »
I ran the following scenario on cFIREsim.com:
Initial balance: \$100,000
Annual Spending: \$5388 Non-Inflation adjusted (equals \$100,000 loan for 30 years at 3.5%)
This helps! The big part is needing a 30 year mortgage to lower the swr. For the 4% withdrawal rate you would need \$134,700.
15 year mortgage on 100,000 is 714 monthly, 8568 annually x 25 is 214,200 needed for the 4% swr.

Note that sirdoug007's example starts with a 5.388% withdrawal rate and "only" \$100K.  Given the success demonstrated in cfiresim, it's not clear how one justifies the need for \$134,700, let alone \$214,200.

E.g., run the numbers for a 15 year \$100K loan at 3.5%, withdrawing from a \$100K investment returning 7% for the monthly payments.  After 15 years the investment will still have \$58,306 and the mortgage will be paid.
« Last Edit: April 07, 2015, 06:19:53 PM by MDM »

#### Neustache

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• Posts: 1230
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #473 on: April 07, 2015, 06:10:31 PM »
I reran the numbers based on our situation and my new (thanks to MDM!) understanding and it does make a larger difference - now hubby is working 21 months longer than he would have under my previous math (assuming I needed all the P and I payments).

For me this was all a mental exercise anyways.  We are, so far, paying off the mortgage anyways because that's what DH (who makes all the income!) wants to do! Although after the day he had today, 21 months might seem way too long - but he's also very risk averse so it may not sway him.

#### dabears847

• Posts: 83
• Location: Chicago
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #474 on: April 07, 2015, 06:27:00 PM »
Not so much, the newer excel sheet with my inputs show results in favor of the a fast payoff of the mortgage and then investing the cash flow compounding those extra dollars for 30 years. This results in a larger stash of \$550,000 vs straight investing without extra principal.

I'm not working that long so I'll need to find a way to pull the extra principal payments in scenarios which reflect the change in cash flow.

What are your thoughts on the impact on savings withdrawal rates with mortgage vs without? Mine go from needing 750,000 without mortgage to 1.7mm with mortgage.
So I've rerun the scenarios with a 30 year mortgage to compare and I would need \$250,000 more in retirement assets to make the plan work with a SWR of 4%. Not sure how I feel about having to refi my lower 15 year rates for a higher 30 year rate to then have to save more money so that I could go the path of investing instead of just paying off the house.

#### arebelspy

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##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #475 on: April 07, 2015, 06:51:52 PM »
You shouldn't need any more than your original amount + whatever the amount you'd put into the mortgage would be. It should not delay time to FIRE, only speed it up.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

#### dabears847

• Posts: 83
• Location: Chicago
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #476 on: April 07, 2015, 07:03:02 PM »
I ran the following scenario on cFIREsim.com:
Initial balance: \$100,000
Annual Spending: \$5388 Non-Inflation adjusted (equals \$100,000 loan for 30 years at 3.5%)
This helps! The big part is needing a 30 year mortgage to lower the swr. For the 4% withdrawal rate you would need \$134,700.
15 year mortgage on 100,000 is 714 monthly, 8568 annually x 25 is 214,200 needed for the 4% swr.

Note that sirdoug007's example starts with a 5.388% withdrawal rate and "only" \$100K.  Given the success demonstrated in cfiresim, it's not clear how one justifies the need for \$134,700, let alone \$214,200.

E.g., run the numbers for a 15 year \$100K loan at 3.5%, withdrawing from a \$100K investment returning 7% for the monthly payments.  After 15 years the investment will still have \$58,306 and the mortgage will be paid.
Hmmm... gears are turning... Is the success rate due to the locked in costs for 30years and inflation of 3% But I'm still stuck on the idea that I'm taking a higher level of risk when I could withdraw at 4% SWR with 250,000 less with savings.

#### arebelspy

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• Age: -999
• Location: Seattle, WA
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #477 on: April 07, 2015, 07:36:55 PM »
I ran the following scenario on cFIREsim.com:
Initial balance: \$100,000
Annual Spending: \$5388 Non-Inflation adjusted (equals \$100,000 loan for 30 years at 3.5%)
This helps! The big part is needing a 30 year mortgage to lower the swr. For the 4% withdrawal rate you would need \$134,700.
15 year mortgage on 100,000 is 714 monthly, 8568 annually x 25 is 214,200 needed for the 4% swr.

Note that sirdoug007's example starts with a 5.388% withdrawal rate and "only" \$100K.  Given the success demonstrated in cfiresim, it's not clear how one justifies the need for \$134,700, let alone \$214,200.

E.g., run the numbers for a 15 year \$100K loan at 3.5%, withdrawing from a \$100K investment returning 7% for the monthly payments.  After 15 years the investment will still have \$58,306 and the mortgage will be paid.
Hmmm... gears are turning... Is the success rate due to the locked in costs for 30years and inflation of 3% But I'm still stuck on the idea that I'm taking a higher level of risk when I could withdraw at 4% SWR with 250,000 less with savings.

So the thing is, you also have all that money tied up in the house.  So your 4% includes all that idle money.

When you have the mortgage, and that money invested, your WR looks like it's higher, cause you have higher expenses, but a lot of that mortgage payment is shifting some of that extra money in your stache into principal of the house.  It's not actually an expense (it's just creating dead equity, which you're clearly fine with, if you're okay paying off the whole thing).
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

#### TomTX

• Magnum Stache
• Posts: 4649
• Location: Texas
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #478 on: April 08, 2015, 05:31:43 AM »
I think one point of confusion is that people are using cfiresim with the 4% SWR for normal expenses, then adding in the mortgage payment and additional investment money while leaving inflation adjustment of withdrawals turned on.

This is WRONG, because the mortgage payment is fixed. If you allow inflation adjustment on the whole withdrawal you end up simulating a mortgage payment that increases 2-3% per year (whatever your inflation estimate is.) If you pick a 3% inflation rate, your estimate of the mortgage payment at Year 30 will be more than double what it really is.

#### sirdoug007

• Pencil Stache
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##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #479 on: April 08, 2015, 09:00:30 AM »
The lack of inflation adjustment in mortgages is critical to the success of investing over making more mortgage payments.

In the example above, with a 30 year mortgage the success rate is 97.39%.

If the annual payment amount was inflation adjusted, the success rate falls to 70.43%!

If you are not modeling that correctly you are going to get results that are far from correct.

#### tomsang

• Handlebar Stache
• Posts: 1085
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #480 on: April 08, 2015, 09:42:43 AM »

Hello,
Glad someone is worried about the same things as I. Yes I did the plan based on a 15 year payoff plan and it was right around then the excel sheet (Tomsang's sheets) stated it was better for me long term to payoff the mortgages.

The workbook or any workbook would show it was better to keep the mortgage if the projected investment return is greater than the mortgage rate.  So I am not sure what you mean by my workbook shows that it is better to pay off the mortgage early unless you put an investment yield lower than your mortgage rate.

My workbook is not that exciting, but it appeared a lot of people did not understand the concept that if you choose to invest vs. paying off the mortgage that you would have the investment to fund your retirement, payoff your mortgage or anything else.  It seemed like some people were only looking at the mortgage and the mortgage payment without understanding that a portion of the mortgage payment is paying down the mortgage so not really an expense.(Taking money from one pocket and putting in the other pocket).  A 30 year fixed rate mortgage is an amazing hedge against inflation.  Inflation is one of the killers of retirement.

#### dabears847

• Posts: 83
• Location: Chicago
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #481 on: April 08, 2015, 07:29:42 PM »
I've been running the calcs on cfiresim with three scenarios and I'm seeing the opportunity with a 30 year mortgage.

1. 15 year Mortgages have a big failure rate with investing all the dollars and paying p&I minimum
2. 30 year 96% success rate with big balance at end of thirty years 2.1MM
3. Accelarted Mortgage Payoff with 75,000 balance at end of payoff has 100% success rate and 474,000 balance at 30 years
4. tbd, Rental Income with Payoff cash flow and investing, once the rentals are paid off then the cash can be invested.

#### arebelspy

• Senior Mustachian
• Posts: 28503
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• Location: Seattle, WA
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #482 on: April 08, 2015, 09:31:11 PM »
4. tbd, Rental Income with Payoff cash flow and investing, once the rentals are paid off then the cash can be invested.

Answer:  Can you invest the money you would be using to prepay the mortgage into something that earns higher than the mortgage rate?  Then you should come out ahead with a large balance the vast majority of the time.

It's just simple leverage.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

#### brooklynguy

• Handlebar Stache
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• Age: 41
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #483 on: April 09, 2015, 06:56:10 AM »
To be clear, this strategy has a very high likelihood of success IF you are in it for the long haul.

I ran the following scenario on cFIREsim.com:
Initial balance: \$100,000
Portfolio: 100% stocks
Expense Ratio: 0.05%
Annual Spending: \$5388 Non-Inflation adjusted (equals \$100,000 loan for 30 years at 3.5%)

The success rate is 97.39% (fails 3 out of 115 periods).  Those periods start in 1928, 1929, and 1930.  All other periods, including the bad ones in the mid 1960's do very well with a median ending portfolio of \$498,335.

Also keep in mind that the true advantage of this strategy (based on historical data) may be even higher than the outrageously high success reported by cFIREsim, because cFIREsim may be materially understating the actual historical success rate and/or average ending portfolio values obtained by employing this strategy (as described in posts 440 and 442 above).

#### boarder42

• Walrus Stache
• Posts: 9157
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #484 on: April 09, 2015, 08:23:26 AM »
http://www.cnbc.com/id/102570850

finally some common sense. to some level...

#### arebelspy

• Senior Mustachian
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##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #485 on: April 09, 2015, 09:14:11 AM »
http://www.cnbc.com/id/102570850

finally some common sense. to some level...

Giving that advice to the mainstream is dangerous, because they won't save the difference.  All of the listed points (retirement accounts, emergency fund, and credit card debt) are definitely good things to do before pre-paying the mortgage though.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

#### TomTX

• Magnum Stache
• Posts: 4649
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##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #486 on: April 11, 2015, 01:48:18 PM »
I'm wondering about how the success rate looks if you only use this strategy once the (stock) market has dropped 25%. Or 40%.

The equity in the house could be considered "dry powder" which could be used to purchase equities when they are on sale.

Yes, this edges onto market timing territory, but for me I would need something like that to make it worthwhile (emotionally) to slow down paying off the house.

#### arebelspy

• Senior Mustachian
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• Location: Seattle, WA
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #487 on: April 11, 2015, 03:34:22 PM »
I'm wondering about how the success rate looks if you only use this strategy once the (stock) market has dropped 25%. Or 40%.

The equity in the house could be considered "dry powder" which could be used to purchase equities when they are on sale.

Yes, this edges onto market timing territory, but for me I would need something like that to make it worthwhile (emotionally) to slow down paying off the house.

Once it's trapped in the house, it can be hard to get it out.  If you're into market timing, stick it in a CD that's just below your mortgage rate, so you're losing only a tiny bit of money, then dump it in the market when it drops.  Or CD rates rise, and you end up ahead.

I don't time the market like that, but if you do think we're due for a big drop (and that the market is overvalued), keeping the funds liquid for that seems much better than putting it into your house's low rate fixed mortgage.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

#### TomTX

• Magnum Stache
• Posts: 4649
• Location: Texas
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #488 on: April 13, 2015, 02:09:10 PM »
Agreed that it is hard (or at least costly) to get cash back out - which is why I am not taking equity back out of my house, nor am I paying extra.

If there is a stock crash, it could be worth the closing costs to get money back out of the house for investment.

#### boarder42

• Walrus Stache
• Posts: 9157
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #489 on: April 14, 2015, 06:06:36 AM »
Agreed that it is hard (or at least costly) to get cash back out - which is why I am not taking equity back out of my house, nor am I paying extra.

If there is a stock crash, it could be worth the closing costs to get money back out of the house for investment.

there are many no/low cost REFI companies out there.  i havent paid closing costs once and have REFI'd 5x

#### ljsurfer2002

• Posts: 11
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #490 on: May 19, 2015, 05:10:00 PM »
Lots of good info in this thread, but now I have to really think about putting a \$180,000 windfall from grandparent life insurance into the \$260,000 left in house principle (30-year fixed loan at 3.5% which still has 28 years left on it) or investing that amount into vanguard index funds (which will have a higher return above 3.5%)... I still feel like paying off the house ASAP is better, to allow for FI sooner, right? Maybe after the principle gets down to 80,000 really ramping up hard all the payments that would have gone to 401k / Roth IRA and have it go to Principle instead (i've been contributing to Roth IRA / 401k for 10+ years now and have a current value of \$170,000 at the age of 34. I feel like I can cool those contribution jets for a few years to help get the house down to near paid off ...

thoughts ?

#### MDM

• Senior Mustachian
• Posts: 10795
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #491 on: May 19, 2015, 05:46:14 PM »
Lots of good info in this thread, but now I have to really think about putting a \$180,000 windfall from grandparent life insurance into the \$260,000 left in house principle (30-year fixed loan at 3.5% which still has 28 years left on it) or investing that amount into vanguard index funds (which will have a higher return above 3.5%)... I still feel like paying off the house ASAP is better, to allow for FI sooner, right?
Wrong.  Apparently the good info in this thread hasn't been absorbed....

• Handlebar Stache
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• Location: NC
• Solar Powered Slice
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #492 on: May 19, 2015, 09:19:02 PM »
Lots of good info in this thread, but now I have to really think about putting a \$180,000 windfall from grandparent life insurance into the \$260,000 left in house principle (30-year fixed loan at 3.5% which still has 28 years left on it) or investing that amount into vanguard index funds (which will have a higher return above 3.5%)... I still feel like paying off the house ASAP is better, to allow for FI sooner, right? Maybe after the principle gets down to 80,000 really ramping up hard all the payments that would have gone to 401k / Roth IRA and have it go to Principle instead (i've been contributing to Roth IRA / 401k for 10+ years now and have a current value of \$170,000 at the age of 34. I feel like I can cool those contribution jets for a few years to help get the house down to near paid off ...

thoughts ?

ljsurfer2002:
The math, using cfiresim or other means, favors not paying off the mortgage and investing every single penny you would otherwise put toward the mortgage, into investments yielding above your mortgage rate. Whether or not YOU should do that depends on your situation:

1) How old are you? Are you young enough to enjoy the profits of a 30 year investment strategy?
2) How stable is your income? Can you make those house payments the entire time you are investing?
3) How's your cash flow? Does your mortgage payment take up so much of your monthly paycheck that you couldn't invest even if you wanted to?
4) Do you get any special benefits from the home you are talking about? Is it one-of-a-kind, or worth way more than you owe, or a neighborhood you MUST be in? That is, are you SURE you would keep the house for 30 years and not want to leave it?

Now, I'm doing both at the same time. I'm investing about 35% of my income (21% pre-tax 401k and 14% post tax Roth, HSA and Betterment). Also, I am paying down the mortgage with another 15% yearly. When I reach a principal amount that I can refi to create a specific monthly payment (under \$1000 monthly payment), I'll refi into a 10 year loan and let it ride while I redirect all available money into investment.

I'm doing this because my problem is that I have very short timeframes to work with (I don't expect to have 30 years to deal with) and to solve the cash flow problem I have with my current mortgage.

Plus, I want the lowest possible interest rate and I want to finish the mortgage before I start drawing Social Security. Until my mortgage is gone, I can't get my living expenses down to a level I desire. If I'm frugal enough to live on Social Security alone, my stash will be assured.

Now be mindful of two facts:
1) What I have just told you is wrong based on a 30 year investment vs. mortgage. But remember, I don't have 30 years.
2) I live frugally and practice badassity.

I am 52 and I work in the tech industry. I expect to be employed for 2-4 more years. My strategic priority is lowering my mortgage payment without lengthening the term of the loan. I need to live on less than \$2k/month: \$1k mortgage and \$1k food/utilities/whatever.

Good luck!
mefla
« Last Edit: July 20, 2015, 09:18:28 AM by mefla »

#### brooklynguy

• Handlebar Stache
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##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #493 on: May 20, 2015, 06:37:35 AM »
I'm going to tread lightly to try to avoid stepping on any toes...

1) How old are you? Are you young enough to enjoy the profits of a 30 year investment strategy?

This question is really only relevant if you intend for your financial planning to include estate planning (i.e., if it matters to you what happens to your assets after you die).  If your goal is to pass on a mortgage-free house to your heirs, then this consideration is relevant.  If you are merely trying to plan for your own retirement (which, of course, ends the day you expire from this world), then this consideration is not relevant, and the invest-in-lieu-of-prepay strategy is just as suitable for a 90-year old as for a 30-year old.

Quote
2) How stable is your income? Can you make those house payments the entire time you are investing?
3) How's your cash flow? Does your mortgage payment take up so much of your monthly paycheck that you couldn't invest even if you wanted to?

Both of these questions are more relevant for whether or not it made sense to take out the mortgage in the first place than whether it makes sense to invest vs. prepay.  If your income/cash flow are not sufficient to comfortably meet your monthly mortgage payments, you probably took out too much mortgage to begin with (unless you took out the mortgage for the purpose of leveraged-investing-via-mortgage).

Quote
When I reach a principal amount that I can refi to create a specific monthly payment (under \$1000), I'll refi into a 10 year loan and let it ride while I redirect all available money into investment. Why 10 year? I want the lowest possible interest rate and I want to finish the mortgage before I start drawing Social Security.

This assumes that then-prevailing mortgage rates will allow you to lower your rate by refinancing into a 10-year loan.  What if by the time you have saved enough to refinance into a 10-year, rates have gone up, and 10-year loans cost more than your 30-year loan?

Quote
Until my mortgage is gone, I can't get my living expenses down to a level I desire. . . My strategic priority is lowering my mortgage payment without lengthening the term of the loan. I need to live on less than \$2k/month: \$1k mortgage and \$1k food/utilities/whatever.

Once you have investments "earmarked" for servicing your mortgage (i.e., the investments that were made using the funds that otherwise would have gone towards prepaying the mortgage), then why do you need to lower your total expenses (including mortgage expense) down to a level that can be covered by other income?  The premise behind investing-in-lieu-of-prepaying is that, once the present value of those "earmarked" investments equals the remaining principal balance of the mortgage, those investments alone will pay for the mortgage themselves (so it's equivalent to having paid off the mortgage -- you only need an amount of additional investments/income to cover your non-mortgage-related living expenses).

• Handlebar Stache
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##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #494 on: May 20, 2015, 01:30:27 PM »
I'm going to tread lightly to try to avoid stepping on any toes...

...blah blah here....

No offense taken. I don't care THAT much.
However...OP hasn't responded. I am wondering if it's a real question or trollbait.
« Last Edit: May 20, 2015, 04:33:43 PM by mefla »

#### brooklynguy

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##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #495 on: May 20, 2015, 03:39:04 PM »
No offense taken. I don't care THAT much.
However...OP hasn't responded. I am wondering if it's a real question or trollbait.

I don't view ljsurfer's lack of follow-up as an indication that his/her question was trollbait (or were you just poking fun at our reactions to the "effective APR" poster in the recent mortgage thread in the Real Estate subforum?), but my questions related to the reasoning you outlined in your response to ljsurfer.  Maybe I'm misinterpreting your post, but it sounded like you were under the impression that if you follow the "invest instead of prepay" strategy, then you need to cover the mortgage payments using cash flow that is unrelated to the investments purchased with the funds that would have otherwise gone towards prepaying the mortgage.  Really, it's the opposite:  once the investments purchased with the cash that could have instead been used to prepay the mortgage are equal to the remaining principal balance of the mortgage, that pile of investments itself will be used to pay off the mortgage (according to its regularly scheduled amortization schedule), including through withdrawals of the "principal" of those investments.  (There doesn't really need to be a separate investment account earmarked for the mortgage or anything, but it makes it easier to think about it this way using mental accounting.)  So this can be thought of as equivalent to having paid off the mortgage -- instead of removing the mortgage expense from your budget by paying off the mortgage, you've "removed" the mortgage expense from your budget by earmarking a pile of your investments to pay it off for you.  As long as the CAGR of those earmarked investments is higher than the mortgage rate (which it will be, if the underlying premise behind the strategy pans out in reality), then once the mortgage is paid off at maturity, there will be a positive balance left over.

That's the way I like to think about it once you've reached the point where your earmarked investments equal your remaining mortgage principal balance.  Before that point, as you divert cash towards investments instead of towards prepaying the mortgage, you're on your way to the goal of having a dedicated pile of investments to pay off your mortgage for you, but haven't reached that goal yet.  But, if you lose your job or switch to a lower-paying job midway, you've still accumulated some amount of investments that could be used to meet your mortgage payments (unlike in the alternative scenario, where you've been plowing excess cash into mortgage prepayments, and are then stuck still owing the same monthly mortgage payment with no job (or a lower-paying job) and no investments to liquidate to satisfy the payments).  That's why I don't understand what you meant by your reasoning that prepaying your mortgage helps in the event of job loss or switching to a lower-paying job.

#### ljsurfer2002

• Posts: 11
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #496 on: May 20, 2015, 04:33:33 PM »
not a troll! just a good mustacian who is too busy working hard at work to follow up too much here in the thread (and didn't get a chance yet to read the 10+ pages of thread before I threw my question out there).

but i think the way i currently view debt (invest it if you can make more than the cost of your interest) is still the way to go and not pay off my house with the windfall.

i.e. my car loan is 0.9% for 3 years. it would be stupid to pay it off in full right now (though I can) since I can instead use that money to invest in vanguard index funds for the same duration and make a good 10-15% return instead of paying off a 0.9% car loan ...

#### ljsurfer2002

• Posts: 11
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #497 on: May 20, 2015, 04:35:51 PM »
4. tbd, Rental Income with Payoff cash flow and investing, once the rentals are paid off then the cash can be invested.

Answer:  Can you invest the money you would be using to prepay the mortgage into something that earns higher than the mortgage rate?  Then you should come out ahead with a large balance the vast majority of the time.

It's just simple leverage.

This seems to be what I just was saying and what I think is the best way to go.

just divide the \$160,000 into 20,000 chunks and invest in 8 different low cost vanguard index funds.

#### tyir

• Posts: 60
##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #498 on: May 23, 2015, 03:26:03 PM »
4. tbd, Rental Income with Payoff cash flow and investing, once the rentals are paid off then the cash can be invested.

Answer:  Can you invest the money you would be using to prepay the mortgage into something that earns higher than the mortgage rate?  Then you should come out ahead with a large balance the vast majority of the time.

It's just simple leverage.

This seems to be what I just was saying and what I think is the best way to go.

just divide the \$160,000 into 20,000 chunks and invest in 8 different low cost vanguard index funds.

*8* different index funds? Why so many?
US Large cap, small cap, bonds, developed international, emerging, REIT.... I can't even get to 8 if I try.

#### tomsang

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##### Re: Paying off Mortgage Early – How bad is it for your FI Date?
« Reply #499 on: July 19, 2015, 07:23:37 PM »
Decent pros vs. cons article on paying off the mortgage. http://www.cnbc.com/2015/07/13/should-you-pay-off-your-mortgage-early-maybe-not.html