Real cost of paying off mortgage?

[George_PA]

For our family, a couple months ago we paid off our 15 yr mortgage, in about 2 years.  We are completely debt free.  For me personally, I think paying off the mortgage makes me a more risk tolerant individual for investing our future money in stocks. 

IMO, the minute you start putting money into a stock index fund, you are stepping onto that roller coaster and you better be ready for the ride which could include a stomach-curning 50% loss in a single year.  It is a valid question to ask your yourself before investing would you still be able to stand there and hold it without blinking? or even start shoveling more money into a dropping market when it looks like the whole world is collapsing around you, i.e. the great recession we just went through.

By having your personal life taken care of, i.e. no debt, a paid-off house, and low living expenses, it actually makes you a better investor for stocks because you then know you are not dependent upon the income as much.  It seems that many average Americans make the mistake of investing in stocks when they have high debts, i.e. CC or car payments, then they freak out when the market crashes and sell at the worst possible time (when the prices are at their lowest). 

So pre-paying a mortgage for me is like making yourself a more risk-tolerant individual for the future stock market highs and lows.  Maybe some were ok selling their shares when the DOW lost 50%+ of its value get to cash out to make their mortgage payments, but it is tough even if you already know all the statistics and historical returns.  Honestly, it would be really hard for me to do that.

[medinaj2160]

For our family, a couple months ago we paid off our 15 yr mortgage, in about 2 years.  We are completely debt free.  For me personally, I think paying off the mortgage makes me a more risk tolerant individual for investing our future money in stocks. 

IMO, the minute you start putting money into a stock index fund, you are stepping onto that roller coaster and you better be ready for the ride which could include a stomach-curning 50% loss in a single year.  It is a valid question to ask your yourself before investing would you still be able to stand there and hold it without blinking? or even start shoveling more money into a dropping market when it looks like the whole world is collapsing around you, i.e. the great recession we just went through.

By having your personal life taken care of, i.e. no debt, a paid-off house, and low living expenses, it actually makes you a better investor for stocks because you then know you are not dependent upon the income as much.  It seems that many average Americans make the mistake of investing in stocks when they have high debts, i.e. CC or car payments, then they freak out when the market crashes and sell at the worst possible time (when the prices are at their lowest). 

So pre-paying a mortgage for me is like making yourself a more risk-tolerant individual for the future stock market highs and lows.  Maybe some were ok selling their shares when the DOW lost 50%+ of its value get to cash out to make their mortgage payments, but it is tough even if you already know all the statistics and historical returns.  Honestly, it would be really hard for me to do that.

+12345

This is exactly why I am paying my mortgage fast. Not everyone's situation is the same; for instance I will have my house paid off next year (total payment time around 3 years). I plan on ER in about 7 and I don't think the cost of paying off the mortgage will be significant vs investing at least in my case.

Paying the mortgage gives me piece of mind. If I loose my job I don't have to worry about that monthly payment; I have emergency savings but you never know how long you will be unemployed. I think having no mortgage gives me the opportunity of going after risky investments, like George say we are more risk tolerant.

[tomsang]

This is exactly why I am paying my mortgage fast. Not everyone's situation is the same; for instance I will have my house paid off next year (total payment time around 3 years). I plan on ER in about 7 and I don't think the cost of paying off the mortgage will be significant vs investing at least in my case.

Paying the mortgage gives me piece of mind. If I loose my job I don't have to worry about that monthly payment; I have emergency savings but you never know how long you will be unemployed. I think having no mortgage gives me the opportunity of going after risky investments, like George say we are more risk tolerant.

If you have a fixed rate loan you can plug your numbers into the Excel spreadsheet that I provided to project out how much it costs you to pay off your mortgage early.  With rates of 3.5% - 4.5% in the US for 30 year fixed loans your investments can yield about 1/2 of what the stock market has averaged over a 30 year period and still come out ahead.  If you are structuring your investments to yield less than 4.5%, then your safewithdrawal rate will be around the lesser of 1% or your actuarial life.  All simulations account for the past returns.  We have never had a 30 year stretch of time yield less than 4.5% and the average has been around 9%+.  If we do have sub 4% 30 year returns then the retirement models will start to collapse with a 2%-3% Safe Withdrawal Rate.

If you lose your job you will have more liquidity and resources to weather the tragic event with an investment portfolio versus if your money is tied up in a paid off house. This is especially true when the house is not fully paid off. The bank still wants their monthly payment even if you prepaid $50k.

Regarding investments, I have tapped into some amazing investments due to having access to a large stache vs. a paid off house. If you are leaving your money in cash then yes you will be better off paying down your mortgage.  I think what is safer and structured for long-term retirement is to have your portfolio structured at 80% equities and 20% bonds or whatever you plan to use to achieve the yields needed to outpace inflation.  It is clear that having a portfolio that tracks inflation is more important than being safe.  In the accumulation faze I am actually taking on more risk as I am probably close to 95% equity.  I relate that to Arebelspy's post about gambling.  If investments continue to yield 8%+ then I will be be able to retire in x with a leveraged equity focused equation.  If they hit a lower yield then I work a few months to a year extra.

Play around with the math, cfiresim and understanding the need to outpace inflation.

Good luck!         

[medinaj2160]

This is exactly why I am paying my mortgage fast. Not everyone's situation is the same; for instance I will have my house paid off next year (total payment time around 3 years). I plan on ER in about 7 and I don't think the cost of paying off the mortgage will be significant vs investing at least in my case.

Paying the mortgage gives me piece of mind. If I loose my job I don't have to worry about that monthly payment; I have emergency savings but you never know how long you will be unemployed. I think having no mortgage gives me the opportunity of going after risky investments, like George say we are more risk tolerant.

If you have a fixed rate loan you can plug your numbers into the Excel spreadsheet that I provided to project out how much it costs you to pay off your mortgage early.  With rates of 3.5% - 4.5% in the US for 30 year fixed loans your investments can yield about 1/2 of what the stock market has averaged over a 30 year period and still come out ahead.  If you are structuring your investments to yield less than 4.5%, then your safewithdrawal rate will be around the lesser of 1% or your actuarial life.  All simulations account for the past returns.  We have never had a 30 year stretch of time yield less than 4.5% and the average has been around 9%+.  If we do have sub 4% 30 year returns then the retirement models will start to collapse with a 2%-3% Safe Withdrawal Rate.

If you lose your job you will have more liquidity and resources to weather the tragic event with an investment portfolio versus if your money is tied up in a paid off house. This is especially true when the house is not fully paid off. The bank still wants their monthly payment even if you prepaid $50k.

Regarding investments, I have tapped into some amazing investments due to having access to a large stache vs. a paid off house. If you are leaving your money in cash then yes you will be better off paying down your mortgage.  I think what is safer and structured for long-term retirement is to have your portfolio structured at 80% equities and 20% bonds or whatever you plan to use to achieve the yields needed to outpace inflation.  It is clear that having a portfolio that tracks inflation is more important than being safe.  In the accumulation faze I am actually taking on more risk as I am probably close to 95% equity.  I relate that to Arebelspy's post about gambling.  If investments continue to yield 8%+ then I will be be able to retire in x with a leveraged equity focused equation.  If they hit a lower yield then I work a few months to a year extra.

Play around with the math, cfiresim and understanding the need to outpace inflation.

Good luck!       

I used your calculator and with 7% return I would have around around 40-50K more in investments vs paying the mortgage. I know is a lot of money but to it feels like is better just to pay off the mortgage. Like you say, I can just work a few extra months to make up the difference.

[George_PA]

If you lose your job you will have more liquidity and resources to weather the tragic event with an investment portfolio versus if your money is tied up in a paid off house. This is especially true when the house is not fully paid off. The bank still wants their monthly payment even if you prepaid $50k.

There is a simple work-around for accounting for this risk.  What I did is when I made the decision to pre-pay my mortgage is that a I did not send any extra money to the bank to pre-pay down the balance until I had the entire amount.  This way you keep maximum reserves in case of a job loss.

Since I knew I wanted to pay it off completely, I had to keep this money out of equities for about a 1 year to avoid any possible risk of loss.  Thus, there was a point where I had about 150k sitting in a savings account yield only about 1% at most.  Also, I made sure to have 12 months of additional emergency fund set aside above and beyond the amount off the mortgage balance.  By my calculations, I found that this was the safest way to do it, because you do have to be really careful.   

Also, I can't argued with your allocation of 80% stocks, 20% bonds, that is exactly the type of portfolio I am setting up right now to take our family to FI in the next 5-7 years.

[Heywood57]

We paid our house off after 17 years into a 30yr mortgage.

At the time the total itemized deductions were just a bit more
than the standard deduction, so no real tax benefit there.

The approximate $2000 tax credit for mortgage interest 
was just bit more than we would get with contributions to a Spousal IRA.

A big chunk of the cash flow from not having a mortgage is
now being directed into maxing out a Spousal IRA.
401K with company match has always been maxed out.

The house value is currently just short of 3x the purchase price
which is a decent ROI.

[Jazzpolice]

Great job everyone who is mortgage free!!  I'm hoping to join you very soon!  Only $15,000 left so the countdown has begun…cannot wait to get rid of our only debt and finally build up the retirement fund (it's in need of some accelerated catch-up).  LOVE reading everyone's stories/circumstances…Thanks~

[Cassie]

That is wonderful that you are almost mortgage free!  It really has given us peace of mind:))

[CanuckExpat]

I just happened to be reading this today and thought some of you might be interested: http://www.mymoneyblog.com/pay-off-mortgage-early-vs-save-more-for-retirement.html

If you are wondering, he concludes:

I hope you agree that there is no clear answer to this question. The devil is in the details. It’s a mix of math, balancing future probabilities, and personal “sleep-well-at-night” risk tolerance.

[arebelspy]

If you are wondering, he concludes:

I hope you agree that there is no clear answer to this question. The devil is in the details. It’s a mix of math, balancing future probabilities, and personal “sleep-well-at-night” risk tolerance.

Yup.  That about sums it up.  :)

[frugalecon]

I just happened to be reading this today and thought some of you might be interested: http://www.mymoneyblog.com/pay-off-mortgage-early-vs-save-more-for-retirement.html

If you are wondering, he concludes:

I hope you agree that there is no clear answer to this question. The devil is in the details. It’s a mix of math, balancing future probabilities, and personal “sleep-well-at-night” risk tolerance.

I would just push back gently because, for those of us who got mortgages at or near the bottom, there are comparable risk fixed income investments (FDIC insured CDs, Treasuries) that have a higher after tax yield than prepaying the mortgage. Especially if you live in a high tax state, the fact that mortgage interest is generally tax deductible whole Treasury interest is exempt from state tax is hugely advantageous.

[Mortgage Free Mike]

I guess I'm the minority, but I spent less time on math and more time finding ways to earn more and spend less so I could live a better life completely debt-free. These spreadsheets hurt my head.

[arebelspy]

I guess I'm the minority, but I spent less time on math and more time finding ways to earn more and spend less so I could live a better life completely debt-free. These spreadsheets hurt my head.

Most of us here don't accept cop-outs as answers.

I also don't spend any time thinking about it, because the choice is clear for me: a long term, low rate, fixed mortgage is the best way to hedge against inflation that I know. Inflation is the number 1 killer of ER.  I plan to ER, therefore I should hedge against that risk.  Simple.

[NinetyFour]

I'm wondering what some of you might do in my situation.  My mortgage is $220K at 4.375% fixed.  I am in my early 50's and hope to retire in 6 - 8 years.  Should I be throwing extra $$ at my mortgage to try to pay it off early?

[arebelspy]

I'm wondering what some of you might do in my situation.  My mortgage is $220K at 4.375% fixed.  I am in my early 50's and hope to retire in 6 - 8 years.  Should I be throwing extra $$ at my mortgage to try to pay it off early?

lol.  I'm guessing this is a joke?  This whole thread, as well as multiple other threads, is about answering that exact question.

Some say yes.  Some say no.

Read their arguments and decide which sway you.

:)

[NinetyFour]

I'm wondering what some of you might do in my situation.  My mortgage is $220K at 4.375% fixed.  I am in my early 50's and hope to retire in 6 - 8 years.  Should I be throwing extra $$ at my mortgage to try to pay it off early?

lol.  I'm guessing this is a joke?  This whole thread, as well as multiple other threads, is about answering that exact question.

Some say yes.  Some say no.

Read their arguments and decide which sway you.

:)

No, it wasn't a joke.  I have read the whole thread.  I thought perhaps my particular timeline and mortgage rate might elicit some different sorts of replies.

[arebelspy]

Oh.  Well I (probably) wouldn't pay it off (though a few variables may change that depending on your situation).  I'd be maxing your tax advantaged accounts and then investing the surplus into taxable.   When will it pay off naturally?

[NinetyFour]

Oh.  Well I (probably) wouldn't pay it off (though a few variables may change that depending on your situation).  I'd be maxing your tax advantaged accounts and then investing the surplus into taxable.   When will it pay off naturally?

I just refinanced in August 2013, for 30 years.  (Because my place was viewed as an investment property, the lender said I did not qualify for a shorter time frame.)

Thanks--I'd appreciate any thoughts you have.

[mark_saver]

I'm wondering what some of you might do in my situation.  My mortgage is $220K at 4.375% fixed.  I am in my early 50's and hope to retire in 6 - 8 years.  Should I be throwing extra $$ at my mortgage to try to pay it off early?

lol.  I'm guessing this is a joke?  This whole thread, as well as multiple other threads, is about answering that exact question.

Some say yes.  Some say no.

Read their arguments and decide which sway you.

:)

No, it wasn't a joke.  I have read the whole thread.  I thought perhaps my particular timeline and mortgage rate might elicit some different sorts of replies.

I am also in my early 50's, and I would recommend NOT paying it down slowly month by month. See my comment on that topic above in this thread on March 14'th. I also still have a mortgage, a 15-year at 4% that has about 12 years left on it.

Financially ... if you run the numbers, depending on interest rates (and they are still historically low), it is probably most advantageous to take the largest , longest fixed-rate term loan possible and keep it till the end. And it makes sense - if you take a 30-year $417k loan at 4.5%, and put that $417k into the S&P500 for 30 years at 8.5%, you're going to come out ahead. If you ask people in other countries, they will tell you that a fixed-rate, long-term mortgage is a gift "from the gods", or from the government as the case may be.

But not everything, not every decision, is financial ... some are emotional, and for some, the feeling of being debt free in retirement (or before retirement) is worth a lot.

[NinetyFour]

I am also in my early 50's, and I would recommend NOT paying it down slowly month by month. See my comment on that topic above in this thread on March 14'th. I also still have a mortgage, a 15-year at 4% that has about 12 years left on it.

Financially ... if you run the numbers, depending on interest rates (and they are still historically low), it is probably most advantageous to take the largest , longest fixed-rate term loan possible and keep it till the end. And it makes sense - if you take a 30-year $417k loan at 4.5%, and put that $417k into the S&P500 for 30 years at 8.5%, you're going to come out ahead. If you ask people in other countries, they will tell you that a fixed-rate, long-term mortgage is a gift "from the gods", or from the government as the case may be.

But not everything, not every decision, is financial ... some are emotional, and for some, the feeling of being debt free in retirement (or before retirement) is worth a lot.

Thanks, mark_saver.  I do understand that, long term, the math definitely points to investing rather than paying the mortgage early.  I'm just not sure that, because of my age and my (hopefully) retirement in the next 6 - 8 years, I have a "long term" still in the cards.  I was also unsure whether 4.375% would be considered "low" by others who posted earlier.

I did see your post from March 14, and I took it to heart.  You made a very good point, that I had not previously considered.

Right now, I am leaning toward paying aggressively for the remainder of this year, in order to get the balance below $200K.  Purely for psychological well-being.  Once I accomplish that, I like the idea of putting the hypothetical extra mortgage payments in a tax-deferred account and watching it grow.  (I have never been able to max out my 401K, so there is plenty of room there.  Beginning in 2015, I could stash an extra $1000 per month, tax-deferred.)  Plus, the deduction of the mortgage interest is significant for me.

I guess I'm still not really comfortable with the idea of having a big mortgage when I retire, but if I max out my 401K for the next 5 years, that chunk of money ought to make me feel better.

Sorry if this was sort of rambly--I'm just trying to think it through and weigh all the variables.

[tomsang]

I'm wondering what some of you might do in my situation.  My mortgage is $220K at 4.375% fixed.  I am in my early 50's and hope to retire in 6 - 8 years.  Should I be throwing extra $$ at my mortgage to try to pay it off early?

If you are planning to live a long life, then the historical models show that keeping your 30 year mortgage when you are retired is benefitial.

[NinetyFour]

Thanks, Tom.  I think I am sold.  This thread has been very helpful.

I ran some numbers.  If I do what I said above (pay it down to $199,999 on 12/31/14 and then just do minimum payments), keep my other expenses low, and stash the rest of my income under my mattress, I will accumulate enough by the end of 2019 to pay off the mortgage.  That's without any investment return at all!  Wow--that was eye-opening.  Now I am even beginning to question paying it down to below the $200K mark for the psychological benefit!  (Back to the spreadsheets!)

[tomsang]

Thanks, Tom.  I think I am sold.  This thread has been very helpful.

I ran some numbers.  If I do what I said above (pay it down to $199,999 on 12/31/14 and then just do minimum payments), keep my other expenses low, and stash the rest of my income under my mattress, I will accumulate enough by the end of 2019 to pay off the mortgage.  That's without any investment return at all!  Wow--that was eye-opening.  Now I am even beginning to question paying it down to below the $200K mark for the psychological benefit!  (Back to the spreadsheets!)

If you are not going to invest the excess, then you would be better off paying off your mortgage.  If you are comfortable investing or beefing up your portfolio of stocks and bonds then according to the historical returns you would be better off not paying off your mortgage.  Inflation will kill you if you keep too much money in cash vs. investments over the long haul.  Under the mattress has many other issues regarding loss, fire, etc. 

[NinetyFour]

Oh, what I meant was that even if I didn't invest any of my savings, it would all work out well. Of course, I will invest it.  The first thing I will do is max out my 401K every year.  Then probably max the Roth every year.

Thanks.

[arebelspy]

Thanks, Tom.  I think I am sold.  This thread has been very helpful.

I ran some numbers.  If I do what I said above (pay it down to $199,999 on 12/31/14 and then just do minimum payments), keep my other expenses low, and stash the rest of my income under my mattress, I will accumulate enough by the end of 2019 to pay off the mortgage.  That's without any investment return at all!  Wow--that was eye-opening.  Now I am even beginning to question paying it down to below the $200K mark for the psychological benefit!  (Back to the spreadsheets!)

Exactly.  I'd rather have the money in the market earning more than my mortgage rate (historically, most likely) and know that I could pay it off than have it trapped as equity in my house not earning anything (the house will appreciate the same regardless of if there is a mortgage or not, so the trapped equity doesn't earn anything).

[mark_saver]

Oh, what I meant was that even if I didn't invest any of my savings, it would all work out well. Of course, I will invest it.  The first thing I will do is max out my 401K every year.  Then probably max the Roth every year.

Thanks.

By the way, if you're over 50 1/2, you may contribute even more to your 401(k). They call it "catch up" contribution and it is $5,500 for 2014. So you can contribute a total of $23,000 ... $17,500 regular plus $5,500 catch up to your 401(k) this year.

[NinetyFour]

Thanks, Tom.  I think I am sold.  This thread has been very helpful.

I ran some numbers.  If I do what I said above (pay it down to $199,999 on 12/31/14 and then just do minimum payments), keep my other expenses low, and stash the rest of my income under my mattress, I will accumulate enough by the end of 2019 to pay off the mortgage.  That's without any investment return at all!  Wow--that was eye-opening.  Now I am even beginning to question paying it down to below the $200K mark for the psychological benefit!  (Back to the spreadsheets!)

Exactly.  I'd rather have the money in the market earning more than my mortgage rate (historically, most likely) and know that I could pay it off than have it trapped as equity in my house not earning anything (the house will appreciate the same regardless of if there is a mortgage or not, so the trapped equity doesn't earn anything).

Agreed.  Not sure why I was so slow to realize this.  Thanks for your patience!

[NinetyFour]

Oh, what I meant was that even if I didn't invest any of my savings, it would all work out well. Of course, I will invest it.  The first thing I will do is max out my 401K every year.  Then probably max the Roth every year.

Thanks.

By the way, if you're over 50 1/2, you may contribute even more to your 401(k). They call it "catch up" contribution and it is $5,500 for 2014. So you can contribute a total of $23,000 ... $17,500 regular plus $5,500 catch up to your 401(k) this year.

Yes, thanks, I am aware of the $23,000 max for us "seasoned" folks.  Up 'til now, I had been happy enough with my 8% contribution and my employer's 11.5% contribution.  But my contribution only amounted to about $13,000 last year, which means I can defer another $10,000 of my salary--and have it grow for me instead of for Wells Fargo!  This is looking better and better!  Thanks again.

[Roland of Gilead]

If you know 100% that you will be selling your home in a short time period (for us, 2 years or shorter) then it makes perfect sense to pay off the mortgage (3.625% in our case) and shift bond investments that yield a lower amount to stocks.

We don't itemize, so paying off a 3.625% loan is the same as buying a two year bond with a tax exempt 3.625% return.  This does not exist in today's market for good reason.  The best you can do right now on a 2 year bond is probably 2%, and that is taxable.

So sometimes it can be a mathematical and not emotional decision.

[arebelspy]

If you know 100% that you will be selling your home in a short time period (for us, 2 years or shorter) then it makes perfect sense to pay off the mortgage (3.625% in our case) and shift bond investments that yield a lower amount to stocks.

We don't itemize, so paying off a 3.625% loan is the same as buying a two year bond with a tax exempt 3.625% return.  This does not exist in today's market for good reason.  The best you can do right now on a 2 year bond is probably 2%, and that is taxable.

So sometimes it can be a mathematical and not emotional decision.

Your short term sale does not change your long term investing horizon.  This is the flaw in your thinking.  Unless you are saying you're upgrading to a larger house in two years and need the money for a down payment.  Then I follow.

[Roland of Gilead]

Your short term sale does not change your long term investing horizon.  This is the flaw in your thinking.  Unless you are saying you're upgrading to a larger house in two years and need the money for a down payment.  Then I follow.

Quite the opposite, we are downgrading to no house (live in a RV and boondock).  We will need easy access to some cash for living expenses while we do IRA to Roth conversions in order to stay at a low MAGI for maximum ACA subsidy.  It makes sense to think of the house sale as this cash sitting in a 2 year CD earning 3.625% and change our deferred accounts to be 100% stocks.  Thus right now if you look at our invested accounts we would appear to be around 95% stocks 5% cash but if you include the future sale of our house in 2 years it is more like 75% stocks 20% bonds 5% cash.

[arebelspy]

Your short term sale does not change your long term investing horizon.  This is the flaw in your thinking.  Unless you are saying you're upgrading to a larger house in two years and need the money for a down payment.  Then I follow.

Quite the opposite, we are downgrading to no house (live in a RV and boondock).  We will need easy access to some cash for living expenses while we do IRA to Roth conversions in order to stay at a low MAGI for maximum ACA subsidy.  It makes sense to think of the house sale as this cash sitting in a 2 year CD earning 3.625% and change our deferred accounts to be 100% stocks.  Thus right now if you look at our invested accounts we would appear to be around 95% stocks 5% cash but if you include the future sale of our house in 2 years it is more like 75% stocks 20% bonds 5% cash.

Gotcha. If that is part of your future preplanned AA, that makes sense.

[The Happy Philosopher]

Many people are comparing paying off mortgage with investing 100% in stocks. In reality most people would invest with more diversity. A conservative diversified portfolio did not lose 40% and really should not be used as a comparison. Paying off a mortgage at under 3% is mathematically crazy. Remember that when you pay down debt with cash you have no access to this money. There is no rule the bank has to lend the money back to you. Having liquid investments is very useful when the credit market freezes. You can't buy distressed assets with home equity like you can with cash/bills/bonds etc. you can't pay for emergency medical bills/unemployment expenses with home equity (unless the bank lets you borrow). You don't need the banks permission to use your cash or sell your assets. And as mentioned a fixed mortgage is a wonderful inflation hedge, and this is the long term killer for long retirements. The exception to this in my opinion is right before retirement paying off mortgage to reduce need for taxable income if this applies to your income level.