Author Topic: To pay off Mortgage or Not  (Read 4307 times)

Snowman99

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To pay off Mortgage or Not
« on: March 30, 2017, 01:26:20 PM »
Hi All,

I understand that this is an age old debate and everyone has their opinion, but I am just trying to wrap my head around what I should do.

We have a mortgage at about $330k at 3.25% 30 year fixed.  Payments including taxes and insurance is roughly $2,100/mo or $25,200 /year.  P&I only is about $17,800/year ($1488/mo).  House is probably worth about $600k.

Work is good, but one never knows what may be lurking around the corner.  We have about $30k saved for emergency fund.

We are starting to make some real money, but no plans to ever move.  Maxing out 401k and Roth IRA at this point.  After paying some car debt (1.4 %- $10k) old school debt (fixed 2.5% at about $30k) (both accrued before I found MMM), we will have cash flow to throw $50k / year extra at whatever we want.

I have been thinking about just putting it in a taxable investment account, maybe some in the 529 for kids college, or just throwing it at the mortgage.

The way I'm running the figures, I would probably be able to get rid of the mortgage by 2024 either by paying it down outright or by investing and then paying in full once enough is in the kiddy (assuming we have positive returns), which would free up an extra $17,800 /year in cash flow to invest even more!

The way I'm also running the figures, and depending on the market, I could put it in a taxable investment account (thinking Vanguard Balanced Fund) which will likely have higher returns, but not guaranteed and not tax free like paying down a mortgage.  Market is a little heated lately too, although who am I to try to time the market.

The downside of paying down the mortgage is that you lose that money forever (unless you sell your house, which we don't want to do).  That can really suck if you need it later especially considering that there is no way we will ever get a better rate than we have now.  That and there is the tax deduction, etc., although we are pretty close to standard deduction in the interest we are paying.

 The upside of paying it down is the peace of mind and that it frees up a ton of cash flow to invest further (see above).  Tax free guaranteed returns as well.  The way I see it, freeing up $17800 / year of cash is a big plus.  That, and I just think it would be really awesome to not have a mortgage, although I would still be paying about $7400/year in taxes and insurance.

With all this in mind, I'm probably going to open a taxable investment account and aggressively save and then just pay off the mortgage balance when I am able to do that in full.  That way, I have the liquid in the interim, and I reap the expected higher returns (or perhaps losses) as well.  I really won't need the liquid so much without a mortgage to pay (I could quit my job and work minimum wage!).  There may be a time where I may need it, though, between now and 2024.

O, and you should know that I am 35 and have a 2 year old and pregnant wife to support.

Would love to hear your thoughts.  Thanks.

RWD

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Re: To pay off Mortgage or Not
« Reply #1 on: March 30, 2017, 01:36:09 PM »
Absolutely invest instead of paying that off. 3.25% is a ridiculously low rate, barely more than inflation. Join the club!

rubybeth

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Re: To pay off Mortgage or Not
« Reply #2 on: March 30, 2017, 01:57:59 PM »
Nah, I'd rather have the cash and be able to invest it. If you do lose your job or something, you have the cash to be able to pay the mortgage for a while. And you'd probably find a new job before you ran out of cash. I think cash offers more peace of mind than a paid off house. You can always use cash to pay it off, and yes, you can also get a HELOC if you need cash, but it's not quite the same.

EdwardMM

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Re: To pay off Mortgage or Not
« Reply #3 on: March 30, 2017, 03:20:10 PM »
I mostly agree with the others but I'll be contrarian. They are right that your rate, esp. given that it is tax-deductible interest, is just insanely low.  I faced this decision a few years back and opted to pay off my primary residence instead of investing. (We had some good years running a business with a lot of extra cash coming in.)  I was doing what you are doing (maxing all available tax-advantaged accounts).

My personal preference is:

1) Max tax-advantaged accounts (401K and IRA are obvious, but also HSA and 529s can be good.)

2) Pay off mortgage debt on primary residence. I think the key here is to make sure you have no more house than you need based on family size, so that the mortgage is as small as possible in the first place.

3) Start building up non-tax-advantaged assets. For me, our non-tax advantaged assets include rental real estate, a side business, and a taxable brokerage account.

Now, I will readily admit that this isn't totally Mustachian, but I and my wife both prefer the relief that comes with our primary being paid off. Perhaps it is possible to get that same relief from just having the money in an account as well, but I just liked not writing that damn mortgage check every month.

It's also worth noting that we do maintain a mortgage on a rental property, but the rents-in exceed the mortgage-out, so I view that as simply a business expense wherein I am making money on the bank's money. That just *feels* different to me.

Edward

Scortius

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Re: To pay off Mortgage or Not
« Reply #4 on: March 30, 2017, 04:04:06 PM »
If you're comfortable not paying down the mortgage (which I agree you should not), you should absolutely avoid paying off your lower interest rate car loan and student loans.

Heckler

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Re: To pay off Mortgage or Not
« Reply #5 on: March 30, 2017, 08:36:02 PM »
I am very happy we paid off ours in thirteen years and now put away ~80% to catch up on savings.  We always ran at bare minimum cash levels and dumped everything onto the house because we did not understand investing at all. . We are very lucky our house market has more than doubled in thirteen years, and not having the stress of a mortgage payment makes my quarterly layoffs at work much less stressful!   

RWD

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Re: To pay off Mortgage or Not
« Reply #6 on: March 30, 2017, 08:57:08 PM »
I am very happy we paid off ours in thirteen years and now put away ~80% to catch up on savings.  We always ran at bare minimum cash levels and dumped everything onto the house because we did not understand investing at all. . We are very lucky our house market has more than doubled in thirteen years, and not having the stress of a mortgage payment makes my quarterly layoffs at work much less stressful!

The S&P 500 has also more than doubled, almost tripled (+174%), in the last thirteen years.

Scortius

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Re: To pay off Mortgage or Not
« Reply #7 on: March 30, 2017, 09:40:11 PM »
The way I'm running the figures, I would probably be able to get rid of the mortgage by 2024 either by paying it down outright or by investing and then paying in full once enough is in the kiddy (assuming we have positive returns), which would free up an extra $17,800 /year in cash flow to invest even more!

Naturally you should absolutely do what works best for you.  But you should also realize that this approach is pretty much the same as simply paying it off early.  The fallacy is that paying it off early doesn't free up $18k/year, it removes $250,000ish from your investment portfolio.  At 18k/year, it will take you around 10 years just to get back to where you were, and you will be losing the gains on that money the whole time.  If you decide you do want to go the more aggressive route of not paying it off, you should consider not paying it off, period.

It may be weird thinking that you're committing yourself to annoying monthly payments for a long remainder of your life, but you really need to think of the fungability of money.  By the time you're part-way through, you will already have enough money put away to handle the payments until their completion.  At that point you can probably act as though your mortgage is paid off, except that money will still be in the market earning you returns instead of sitting in principal following inflation.

Snowman99

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Re: To pay off Mortgage or Not
« Reply #8 on: March 31, 2017, 04:17:32 AM »
If you're comfortable not paying down the mortgage (which I agree you should not), you should absolutely avoid paying off your lower interest rate car loan and student loans.

Thanks for the comment and yes, I have been thinking about this as well.  I think paying off this debt makes sense because it will free up about $5k/year in cash flow, and I will be able to pay them off relatively quickly, which isn't so much the case with the mortgage.

Khan

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Re: To pay off Mortgage or Not
« Reply #9 on: March 31, 2017, 05:34:39 AM »
By the time you're part-way through, you will already have enough money put away to handle the payments until their completion. At that point you can probably act as though your mortgage is paid off, except that money will still be in the market earning you returns instead of sitting in principal following inflation.
So much this.

Car Jack

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Re: To pay off Mortgage or Not
« Reply #10 on: March 31, 2017, 06:49:37 AM »
It's all risk vs guaranteed and what is important to you.

Pay the mortgage and you can calculate on paper exactly what your saving to the penny.

Don't pay the mortgage and invest instead and wave your hands around to pick a returns number out of the air.  Will it be bigger than the mortgage savings?  Maybe.  Will it be a negative return going forward actually losing you money?  Maybe.

You have to decide.  I opted to pay off my mortgage years ago but I got killed in black monday and never invested in anything besides my 401k and US Savings bonds until 27 years later.  I will tell you that after paying off my personal loans, student loans, car loans and finally the mortgage, I regretted exactly nothing.  That extra money that would have gone towards a mortgage payment is nice to have every month.

Heckler

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Re: To pay off Mortgage or Not
« Reply #11 on: March 31, 2017, 07:49:38 AM »
I am very happy we paid off ours in thirteen years and now put away ~80% to catch up on savings.  We always ran at bare minimum cash levels and dumped everything onto the house because we did not understand investing at all. . We are very lucky our house market has more than doubled in thirteen years, and not having the stress of a mortgage payment makes my quarterly layoffs at work much less stressful!

The S&P 500 has also more than doubled, almost tripled (+174%), in the last thirteen years.

Funny thing - I just did the math. Not to including mortgage interest, our home is also at a 173% ROI.  The SP return - is that before or after tax?

RWD

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Re: To pay off Mortgage or Not
« Reply #12 on: March 31, 2017, 08:26:28 AM »
I am very happy we paid off ours in thirteen years and now put away ~80% to catch up on savings.  We always ran at bare minimum cash levels and dumped everything onto the house because we did not understand investing at all. . We are very lucky our house market has more than doubled in thirteen years, and not having the stress of a mortgage payment makes my quarterly layoffs at work much less stressful!

The S&P 500 has also more than doubled, almost tripled (+174%), in the last thirteen years.

Funny thing - I just did the math. Not to including mortgage interest, our home is also at a 173% ROI.  The SP return - is that before or after tax?

Before tax. Though there are scenarios where it wouldn't be taxed at all (low income or tax sheltered accounts).

You did get lucky. In the last city where I lived house prices have gone up only ~30% in the last thirteen years. The funny thing about house value appreciation though is that you don't have to pay down your mortgage to realize the gains.

Scortius

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Re: To pay off Mortgage or Not
« Reply #13 on: March 31, 2017, 09:31:52 AM »
If you're comfortable not paying down the mortgage (which I agree you should not), you should absolutely avoid paying off your lower interest rate car loan and student loans.

Thanks for the comment and yes, I have been thinking about this as well.  I think paying off this debt makes sense because it will free up about $5k/year in cash flow, and I will be able to pay them off relatively quickly, which isn't so much the case with the mortgage.

This argument keeps coming up over and over when it comes to paying off loans.  No, you are not increasing your cash-flow.  You are decreasing your investments by the lump sum of the outstanding balances of the loans.  It will take you years to get back to where you were by putting that $5k back into your portfolio and you will end up behind where you would have been unless the market tanks.

BFGirl

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Re: To pay off Mortgage or Not
« Reply #14 on: March 31, 2017, 09:52:10 AM »
In your situation where you only have $30K that you can access, I think it would be better to invest the money so that it is not tied up in your house.  There is a risk in investing it, but I think it is riskier to have the majority of your non-tax advantaged assets tied up in a house.  At the point where your investments are enough to pay the house in full, then perhaps you can reevaluate your situation and decide whether or not it makes sense to pay off your mortgage or whether you should keep the funds invested.

If you lost your job for a long period of time and went through your emergency fund, you would either have to try to pull the equity out of the house with a HELOC or raid your tax advantaged accounts. 

Other MMMers, see I'm not just a contrarian who always advocates to pay off your house, lol.

edited to add:  For full disclosure my house is paid for, but it made me feel nervous at the time that I did it because I only had $60K that I could access after paying cash for the house and the rest was tied up in a divorce.  However, the tactical advantage in the divorce was worth it to me.

« Last Edit: March 31, 2017, 10:09:34 AM by BFGirl »

Scortius

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Re: To pay off Mortgage or Not
« Reply #15 on: March 31, 2017, 09:54:44 AM »
In your situation where you only have $30K that you can access, I think it would be better to invest the money so that it is not tied up in your house.  There is a risk in investing it, but I think it is riskier to have the majority of your non-tax advantaged assets tied up in a house.  At the point where your investments are enough to pay the house in full, then perhaps you can reevaluate your situation and decide whether or not it makes sense to pay off your mortgage or whether you should keep the funds invested.

If you lost your job for a long period of time and went through your emergency fund, you would either have to try to pull the equity out of the house with a HELOC or raid your tax advantaged accounts. 

Other MMMers, see I'm not just a contrarian who always advocates to pay off your house, lol.

What is this?  I must have woken up in Bizarro World today!

BFGirl

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Re: To pay off Mortgage or Not
« Reply #16 on: March 31, 2017, 09:56:10 AM »
In your situation where you only have $30K that you can access, I think it would be better to invest the money so that it is not tied up in your house.  There is a risk in investing it, but I think it is riskier to have the majority of your non-tax advantaged assets tied up in a house.  At the point where your investments are enough to pay the house in full, then perhaps you can reevaluate your situation and decide whether or not it makes sense to pay off your mortgage or whether you should keep the funds invested.

If you lost your job for a long period of time and went through your emergency fund, you would either have to try to pull the equity out of the house with a HELOC or raid your tax advantaged accounts. 

Other MMMers, see I'm not just a contrarian who always advocates to pay off your house, lol.

What is this?  I must have woken up in Bizarro World today!

You must have ;)

MustacheAndaHalf

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Re: To pay off Mortgage or Not
« Reply #17 on: March 31, 2017, 10:38:31 AM »
I am very happy we paid off ours in thirteen years and now put away ~80% to catch up on savings.  We always ran at bare minimum cash levels and dumped everything onto the house because we did not understand investing at all. . We are very lucky our house market has more than doubled in thirteen years, and not having the stress of a mortgage payment makes my quarterly layoffs at work much less stressful!

The S&P 500 has also more than doubled, almost tripled (+174%), in the last thirteen years.

Funny thing - I just did the math. Not to including mortgage interest, our home is also at a 173% ROI.  The SP return - is that before or after tax?
When you don't show the numbers, and claim your house had a nearly identical gain to the S&P 500 (173% vs 174%) it does look a bit suspect.  But hopefully we agree this doesn't apply to the OP's house or time frame.

MustacheAndaHalf

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Re: To pay off Mortgage or Not
« Reply #18 on: March 31, 2017, 10:46:56 AM »
We have a mortgage at about $330k at 3.25% 30 year fixed.
...
After paying some car debt (1.4 %- $10k) old school debt (fixed 2.5% at about $30k)
Numerically this might be backwards: you might decide to pay down your mortgage, but you wouldn't want to pay off lower interest loans first.

Think of your mortgage as your "cost of money".  If it costs you 3.25% to invest in the stock market, do you come out ahead?  And if that mortgage interest is deductible, and you are in the 25% tax bracket, maybe the loan looks more like 2.44% after tax.  Most years the stock market averages much better than 2.4%, so you're more likely to do better by investing in the stock market than paying off the loan early.

The nervous feeling you'll get is the risk the stock market drops for a few years running, making your decision look bad retroactively.  That doesn't make it wrong - nobody can accurately predict stock market performance ahead of time.  We just know that over medium and long time frames, the stock market tends to do much better than your loan.  So let the loan eat up 2.4% of your money, because the stock investments should outpace that.

Another point is that you have your loans in the wrong order.  You mentioned planning to pay off a 1.4% car loan before paying down your 3.25% mortgage (2.44% after tax in 25% bracket).  This may be an emotional decision, but numerically you are getting less out of your money by paying off the car loan than if you paid down the mortgage.  And most likely, they are both beaten by stock market returns.

Consider your highest interest loan to be the cost of investing.  If it's too high and the stock market is unlikely to beat it's interest rate, then pay down the loan instead of investing in the stock market.  But in this case it's probable (but not known) that the stock market will beat the interest rate on your mortgage, making the stock market the better investment for your dollars.

BFGirl

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Re: To pay off Mortgage or Not
« Reply #19 on: March 31, 2017, 11:16:04 AM »
Oh and discuss it with your spouse and make the decision together.

Heckler

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Re: To pay off Mortgage or Not
« Reply #20 on: April 01, 2017, 08:53:19 AM »
I am very happy we paid off ours in thirteen years and now put away ~80% to catch up on savings.  We always ran at bare minimum cash levels and dumped everything onto the house because we did not understand investing at all. . We are very lucky our house market has more than doubled in thirteen years, and not having the stress of a mortgage payment makes my quarterly layoffs at work much less stressful!

The S&P 500 has also more than doubled, almost tripled (+174%), in the last thirteen years.

Funny thing - I just did the math. Not to including mortgage interest, our home is also at a 173% ROI.  The SP return - is that before or after tax?

Before tax. Though there are scenarios where it wouldn't be taxed at all (low income or tax sheltered accounts).

You did get lucky. In the last city where I lived house prices have gone up only ~30% in the last thirteen years. The funny thing about house value appreciation though is that you don't have to pay down your mortgage to realize the gains.

To us, the interest payments were the biggest certainty, and the faster you pay down principle, the less interest is lost. No one knows what the interest rate will be in five years, the same as no one knows what the S&P return will be. 

powskier

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Re: To pay off Mortgage or Not
« Reply #21 on: April 01, 2017, 11:57:32 PM »
Can we make a sticky of every single "pay off mortgage or invest?" thread and just call it good?

bobechs

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Re: To pay off Mortgage or Not
« Reply #22 on: April 02, 2017, 12:14:10 AM »
Can we make a sticky of every single "pay off mortgage or invest?" thread and just call it good?

Or just agree that on mmm forums for mortgage and other loan discussions, principle and principal are the same word, with no distinct and different meanings?

Spicolli

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Re: To pay off Mortgage or Not
« Reply #23 on: April 05, 2017, 04:08:13 PM »
One thing I don't see discussed in these debates is how far into the term your loan is...if you're relatively early into a 30 year loan, you're paying a large % of your house payment into interest. Wouldn't that make a difference in this decision?

Scortius

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Re: To pay off Mortgage or Not
« Reply #24 on: April 05, 2017, 04:25:12 PM »
One thing I don't see discussed in these debates is how far into the term your loan is...if you're relatively early into a 30 year loan, you're paying a large % of your house payment into interest. Wouldn't that make a difference in this decision?

Please head over to the General Discussion forum and check out the two pay off mortgage threads.  The math favors not paying off the mortgage even more if you're early on in the term.

Heckler

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Re: To pay off Mortgage or Not
« Reply #25 on: April 06, 2017, 07:45:45 AM »
I am very happy we paid off ours in thirteen years and now put away ~80% to catch up on savings.  We always ran at bare minimum cash levels and dumped everything onto the house because we did not understand investing at all. . We are very lucky our house market has more than doubled in thirteen years, and not having the stress of a mortgage payment makes my quarterly layoffs at work much less stressful!

The S&P 500 has also more than doubled, almost tripled (+174%), in the last thirteen years.

Funny thing - I just did the math. Not to including mortgage interest, our home is also at a 173% ROI.  The SP return - is that before or after tax?
When you don't show the numbers, and claim your house had a nearly identical gain to the S&P 500 (173% vs 174%) it does look a bit suspect.  But hopefully we agree this doesn't apply to the OP's house or time frame.

We paid $275,000 in July 2003 and a neighbour in the townhouse complex similar size but with a rental bedroom/kitchen but without our two spot carport sold at over asking price of  $749,900.  Please do the math and welcome to Vancouver. 


And I fully agree it doesn't apply to anyone else - housing price is purely supply and demand with a bit of interest rate risk thrown in the mix.  As is the stock market!

However, in 2003, our knowledge of the stock market was nil.  I was happily paying 3% MER for poorly diversified funds and did not understand why every $100 I put in during 2008-9 made the value of my RSP decrease by $200.  We were paying more in fees than I was contributing.  Surely we fared better off on the house. 
« Last Edit: April 06, 2017, 08:04:04 AM by Heckler »

SeattleCPA

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Re: To pay off Mortgage or Not
« Reply #26 on: April 08, 2017, 04:09:18 PM »
I mostly agree with the others but I'll be contrarian. They are right that your rate, esp. given that it is tax-deductible interest, is just insanely low.  I faced this decision a few years back and opted to pay off my primary residence instead of investing. (We had some good years running a business with a lot of extra cash coming in.)  I was doing what you are doing (maxing all available tax-advantaged accounts).

My personal preference is:

1) Max tax-advantaged accounts (401K and IRA are obvious, but also HSA and 529s can be good.)

2) Pay off mortgage debt on primary residence. I think the key here is to make sure you have no more house than you need based on family size, so that the mortgage is as small as possible in the first place.

3) Start building up non-tax-advantaged assets. For me, our non-tax advantaged assets include rental real estate, a side business, and a taxable brokerage account.

Now, I will readily admit that this isn't totally Mustachian, but I and my wife both prefer the relief that comes with our primary being paid off. Perhaps it is possible to get that same relief from just having the money in an account as well, but I just liked not writing that damn mortgage check every month.

It's also worth noting that we do maintain a mortgage on a rental property, but the rents-in exceed the mortgage-out, so I view that as simply a business expense wherein I am making money on the bank's money. That just *feels* different to me.

Edward

For what it's worth, I think Edward's advice and thinking are really solid. Also, using mortgage repayment as a way to "store up" the bounty from a good patch of earnings seems very wise.