Author Topic: Some thoughts on NOT paying off the mortgage  (Read 4756 times)

Mississippi Mudstache

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Some thoughts on NOT paying off the mortgage
« on: December 31, 2014, 11:57:07 AM »
A frequent topic of discussion and disagreement around here has been whether it makes sense to pay down a mortgage vs. investing additional money. I had always considered paying down the mortgage to be a sound choice, but I changed my mind after reading a number of mathematical arguments in favor of keeping a low-rate mortgage.

Well, I've recently had an experience that muddies the waters a bit for me. My family moved from Mississippi to Florida for my new job in October this year. We currently owe ~128,000 on our home in Mississippi. It's been on the market for three months. We have been paying the $1000 mortgage plus $900 rent for those three months. We just received an offer, but it probably won't close until February. So we'll have to pay the mortage for Jan. and Feb. as well - for a total of $5,000 in mortgage expenses since moving out of that house. 

My mortgage note currently breaks down to $210 to escrow (taxes and insurance), $565 to interest, and $225 to principal. So the entire $5000 is not lost - my principal has gone down by $1125, I would have had to pay $1050 in taxes and insurace anyway. But the $2825 would be mine if the house was paid off.

Obviously, there are a number of variables at play here. Is there a possibility that you will move any time in the near future? How quickly are homes selling in your area? What is your interest rate? What kind of moving package is standard in your industry? What effect would paying down the mortgage have on your tax rate? Obviously the decision is personal and it's not strictly mathematical.

Ultimately, the last factor was the deciding one for me in keeping the mortgage. I was able to contribute ~$70,000 to tax-deferred retirement accounts in the past two years, which brought my total income tax bill to below zero. I'm sure I came out ahead by contributing to retirement accounts instead ouf paying down the mortgage, but the same might not be true if my home languished on the market for a year or more.

Bottom line: carrying costs of a vacant house are an often-ignored and hard-to-predict  variable when deciding whether or not to pay down a mortgage instead of investing. I'm not at all suprised that many people choose to go this route. I might just do it myself the next time I buy a house.

KingCoin

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Re: Some thoughts on NOT paying off the mortgage
« Reply #1 on: December 31, 2014, 01:10:36 PM »
I'm sure I came out ahead by contributing to retirement accounts instead ouf paying down the mortgage, but the same might not be true if my home languished on the market for a year or more.

Bottom line: carrying costs of a vacant house are an often-ignored and hard-to-predict  variable when deciding whether or not to pay down a mortgage instead of investing. I'm not at all suprised that many people choose to go this route. I might just do it myself the next time I buy a house.

The time you have to carry the house is largely irrelevant to the question at hand. Yes, you're paying out 4% on the mortgage, but the funds you invested in the market are generating returns over that period (hopefully over 4%), whether the house is on the market for two months or two years. 

If you feel like you're bleeding money while the house is on the market,  that's because you are.  You're paying the expenses of two properties rather than one. But again, that wouldn't change if you had directed funds toward the mortgage rather than investment (in the former case, your expense is coming in the form of opportunity cost of capital, which isn't as transparent as interest payments but is just as real).
« Last Edit: December 31, 2014, 04:31:33 PM by KingCoin »

Northerly

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Re: Some thoughts on NOT paying off the mortgage
« Reply #2 on: December 31, 2014, 04:08:55 PM »
What KingCoin said. You have the same actual carrying costs whether it's paid off or not (imputed vs actual). The real problem, I guess, is whether you can handle the bleeding (negative cash flow).

Mississippi Mudstache

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Re: Some thoughts on NOT paying off the mortgage
« Reply #3 on: January 01, 2015, 11:10:09 AM »
Damn, you're right King. Seems obvious now. Sorry folks, nothing to see here.

astvilla

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Re: Some thoughts on NOT paying off the mortgage
« Reply #4 on: January 01, 2015, 03:49:40 PM »
Sorry to hijack the thread a bit but what is the reason/thinking for not paying off a mortgage? I come from a family that taught you should always pay off your debt quick including mortgage. what is the thinking in not paying it off? like high inflation will kill the value of mortgage so don't rush or something?

matchewed

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Re: Some thoughts on NOT paying off the mortgage
« Reply #5 on: January 01, 2015, 03:59:50 PM »
Sorry to hijack the thread a bit but what is the reason/thinking for not paying off a mortgage? I come from a family that taught you should always pay off your debt quick including mortgage. what is the thinking in not paying it off? like high inflation will kill the value of mortgage so don't rush or something?

That a paying off of a mortgage is equivalent to a return identical to the interest rate on the mortgage. If you assume that your investment can make a higher return, then mathematically speaking it is optimal to invest.

Or to provide an example, if your interest rate on your mortgage is 4% but you think you can make 6% with an investment 6%>4%.

This does not take into account the values that people bring into the equation such as what your family taught you.

benjenn

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Re: Some thoughts on NOT paying off the mortgage
« Reply #6 on: January 01, 2015, 04:30:08 PM »
We're paying off our mortgage in July because we're planning to retire (with pensions) in November.  Our montly mortgage payment is almost the same as my monthly pension... so not having that payment is pretty big for us. I wouldn't want to try to retire if I had to pay out my pension each month for the mortgage payment.

bwall

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Re: Some thoughts on NOT paying off the mortgage
« Reply #7 on: January 01, 2015, 07:11:43 PM »
Not everyone has discipline or good investment strategies. If the investment goes to zero, but you still have a mortgage, then you'd really kicking yourself. So, from that point of view it is better to pay off the mortgage.

Also, it is quite a psychological boost to pay off a mortgage. The first time I did it I spent the next two months thinking 'This piece of real estate/house belongs to me and my heirs FOREVER.'  YMMV

NinetyFour

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Re: Some thoughts on NOT paying off the mortgage
« Reply #8 on: January 01, 2015, 07:18:53 PM »
I paid a bunch of extra towards my mortgage principal in 2014--purely for psychological reasons.  Now the balance is under $200K (barely).  For the forseeable future, I plan to just make minimum payments--even though the rate is not great (4.375%).  The biggest reason is that I rent out my main house and live in another dwelling on the same property.  So in addition to deducting the mortgage interest on my Schedule A, I can also deduct a portion of the mortgage interest as a rental expense.  And I can use my surplus income to max out my 403b account (in addition to my 401a account) to lower my taxable income.

someday

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Re: Some thoughts on NOT paying off the mortgage
« Reply #9 on: January 02, 2015, 10:41:06 AM »
Another view point of not paying off your mortgage, albeit a rather anti-mustachian view point, is so that you can utilize the cash towards a larger down payment on another home to further leverage your money.  In this regard, you are assuming greater debt and with greater leverage comes greater risk.  This is under the assumption that you will turn your home into a rental property, and use the cash and additional debt for your new primary residence.

Your rental property should result in a minimum of a net zero cash flow, or hopefully a positive monthly income.  Meanwhile, you continue to pay off your new mortgage on your primary residence.  In this scenario, over the very long run, you will have made your  money work even harder for you as you now have a tenant increasing your net worth every month. 

Of course, by over leveraging yourself, your risks include a downturn in the rental market.  The good news is, your rental property mortgage is fixed, while rents typically just go up (unless your region experiences a downturn economically). 
 

CheapskateWife

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Re: Some thoughts on NOT paying off the mortgage
« Reply #10 on: January 02, 2015, 11:00:41 AM »
For my family, its a matter of keeping our NW a little more liquid in the years between my husband's military retirement and him reaching the age of 59-1/2.  Most of our assets are in tax-advantaged but age restricted accounts and we are going to need something liquid to pull from in the interim. 

NinetyFour

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Re: Some thoughts on NOT paying off the mortgage
« Reply #11 on: January 02, 2015, 11:37:42 AM »
CheapskateWife's reasons also apply to me.  I hope to be retiring in 3 years or so (at age 56), and need to bulk up the taxable account so that I will have expenses covered until I can access the stash.

Frankies Girl

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Re: Some thoughts on NOT paying off the mortgage
« Reply #12 on: January 02, 2015, 12:06:18 PM »
I did the math on this about a year ago, and found that paying off the mortgage was only going to save me around $300 a month since we would always have property taxes and insurance (and I kinda feel like the idea of truly owning a property is a fallacy - try not paying those things and see how long you keep your house).

And then figuring in my mortgage rate was really low (3.75%) kind of clinched it for me - I can do much better in the market than that, so won't bother paying it off.