DONT Payoff your Mortgage Club

[boarder42]

Indeed we've had very nice investment gains on money that could have been thrown at our mortgage.

And as long as we can keep the rate on the mortgage below 4% (reminder: it's at 3% now), the math favors paying it down slowly.

Will it take one year or five years to close the door on our access to rates that low?

it doesnt have to be below 4% to favor paying it down slowly.  anything under 6% is still better though it gets grayer.  and you really should look at the real cost of the interest rate if you take the mortgage interest tax deduction b/c that would allow for a rate up around 6% to still get you around 4% assuming you're in the 25% bracket and have ~6% state income tax.  but your name is texan so you likely dont have the state tax.  but this would still allow for a much higher rate even at just 25% savings due to tax deductions

[Dicey]

Hmmm, today I heard an ad on the radio for a 15 year fixed mortgage at 2.99% APR and APY with no points. Mighty tempting. I wonder if this rate is actually obtainable by mere mortals or if it's just a tease? Our house has no mortgage and is worth about 1.3M. Problem is, we don't really need the money, as our 'stache is pretty fat, but still...

[Izzozi]

Alright, I wanted to join the club so I'm taking out a 30 year fixed 381K loan @ 3.875%. Jealous of some of the rates being thrown around here!

[Dicey]

Ooh, more details, please!

[Izzozi]

HCOL buying first house in mid-late 20's. 20% down. Decided to keep additional funds invested rather than sell and take out a much smaller loan. Between delaying capital gains and (hopefully) better long term stock performance, not paying off makes more sense to me!

[Dicey]

Ooh, I think I misunderstood. Your post was right after mine, so I assumed the circumstances were similar. For clarity, I was referring to taking out a loan on an existing home that's mortgage free, i.e. borrowing cheap money against our primary home in order to make other investments. I suspect that when loan rates return to historical norms, we'll sorely wish we had.

Now I think I see you're talking about an initial purchase, not about taking out a mortgage on an existing home that has no mortgage. Did I get it right this time? Hope so.

Kudos to you for taking out a long, cheap, affordable mortgage. It may seem hard to believe, but as long as you also keep adding steadily to your investment accounts, your future self is going to be pleased as hell about how smart past you was to do it this way. Also bonus points for you for amassing 20% down for your first house without cashing in all of your investments, and in a HCOLA to boot. Not easy, I know.

[ewkid]

I'm curious as to what the feeling of people in this thread is towards refinancing to increase monthly cash flow.  I've got about 8 years left on my 15 year mortgage.  If I refi to a new 15 year mortgage I estimate that I could reduce my payment by $800-$900 a month.

I would be kidding myself if I said that I would invest all of that savings as I know some portion would get spent.  I think I could safely say that I would put $500 a month into an index fund.

[dandarc]

I'm curious as to what the feeling of people in this thread is towards refinancing to increase monthly cash flow.  I've got about 8 years left on my 15 year mortgage.  If I refi to a new 15 year mortgage I estimate that I could reduce my payment by $800-$900 a month.

I would be kidding myself if I said that I would invest all of that savings as I know some portion would get spent.  I think I could safely say that I would put $500 a month into an index fund.

Need more info to do the math.  Your "refinance" option is the easiest to compute - I went with 7% expected return for 15 years on $6000 per year, and I get $150K or so.  At the end of 15 years, you have a paid-off house and $150K.

The "don't refinance" option has more variables - you have a paid-off house at the end of 8 years, and then more to invest.  How much is the P&I on the refinance?  Will your additional spending be proportional, or is the $400 / month extra spending from lower house-payment fixed?  Because in 8 years, you're freeing up more money, so what you expect you will do with that impacts this.

Example:
Your current P&I is $2200 / month.  In 8 years, your spending goes up by $400 as it would today, leaving you $1800 to invest.  So at the end of the 15 years you've got $186K plus your paid off house.  In this case, you should do the refinance.  $186K>$150K

Example 2:
Your current P&I is $2200 / month.  In 8 years, your spending goes up by a little less than half of that amount - $1,000, leaving $1200 to invest.  At the end of 15 years, you've got $124K plus your paid off house.  In this case, you should not do the refinance.  $124K<$150K

At very low market return assumptions, then not doing the refinance is the play, but you break-even with the "I'll spend about half of the amount I free up" earlier than you'd think - I'm getting that at about 3% assumed market returns.  But it is quite a ways up on the return amount - market returns of 11-12% before refinance is clearly the play if it is more like "I"ll spend another $400 / month or so out of the freed up mortgage".

So if you know you will look at the increased cash-flow as an opportunity to increase spending as well as investing, then the answer is not nearly as clear cut as invest the difference only analysis.  Which is something to think about - I think many more people do this than would readily admit, even in this community which is all about decoupling spending decisions from current income / cash-flow.

[boarder42]

Why 15. If you plan to stay there at least 7 more years a 30 will come out ahead. But if the interest rates are comparable a refi will make a lot of financial sense. And if the mortgage is that old the rates now are better. 

[talltexan]

Get them to quote you a rate on a 5/1 ARM. Your payments could be amortized to 15 years or to 30, but there should be a lower rate in either case.

[gmdv]

I'm in.  Have 9.5 years left on a 2.75% 15 years fixed. I prepaid  a bit in the first year, then thought what in the world am I doing with rate this low.

[Goldielocks]

Why 15. If you plan to stay there at least 7 more years a 30 will come out ahead. But if the interest rates are comparable a refi will make a lot of financial sense. And if the mortgage is that old the rates now are better.

Boarder has a good idea about the 30years, if you are looking at this.

IMO,  it would be better to refinance to 30 years, but take out a larger amount (back up to 80% financed) so that your monthly payment is the same, then invest the freed up cash in something you can get your hands on if future cashflow becomes a problem (e..g, sell $5k at a time to top off your mortgage payments).  Not sure if you can get an equally low mortgage rate for refinancing to release cash, though.

Do not just lower your payments because of lifestyle creep.  Unless you have a real shortfall each month, that is.

[nottoolatetostart]

This is a pretty boring update.....I made another mortgage payment with zero extra principle added. Only 356 payments to go until it's paid off. LOL

[Dicey]

This is a pretty boring update.....I made another mortgage payment with zero extra principle added. Only 356 payments to go until it's paid off. LOL

I'm so impressed and even a tiny bit envious of your lovely, long mortgage..

[boarder42]

This is a pretty boring update.....I made another mortgage payment with zero extra principle added. Only 356 payments to go until it's paid off. LOL

I'm so impressed and even a tiny bit envious of your lovely, long mortgage..

we just hit one year on our REFI from the absolute bottom of the market.  its nuts to think i have a 3.25% interest rate on a 30 year note. 

[talltexan]

This is a pretty boring update.....I made another mortgage payment with zero extra principle added. Only 356 payments to go until it's paid off. LOL

Something tells me that a savvy real estate expert like you can find a way to reset the clock so that it's many more than 356 payments :-)

[moonpalace]

we just hit one year on our REFI from the absolute bottom of the market.  its nuts to think i have a 3.25% interest rate on a 30 year note.

I timed our refi about the same as you, but picked 15-year fixed at 2.75%. The other option was 30 at 3.20, and now I'm sorta kicking myself for not picking that one...

But still, can't complain about the 15-year rate!

[SwordGuy]

we just hit one year on our REFI from the absolute bottom of the market.  its nuts to think i have a 3.25% interest rate on a 30 year note.

I timed our refi about the same as you, but picked 15-year fixed at 2.75%. The other option was 30 at 3.20, and now I'm sorta kicking myself for not picking that one...

But still, can't complain about the 15-year rate!

Yeah, I'm right there with you.  14 years to go on our 2.75% rate. 

[moonpalace]

Yeah, I'm right there with you.  14 years to go on our 2.75% rate.

Nice!

I'm keeping an eye out for opportunities to refi to 30 years at some point, if rates go down further. You?

[boarder42]

Yeah, I'm right there with you.  14 years to go on our 2.75% rate.

Nice!

I'm keeping an eye out for opportunities to refi to 30 years at some point, if rates go down further. You?

It's unlikely we see rates that low again anytime soon with the fed raising rates again.

[moonpalace]

It's unlikely we see rates that low again anytime soon with the fed raising rates again.

True. I'd be open to refinancing pretty much anytime during years 5-10 of my 15-year term, so maybe they'll be low again during that window. If not, I'll be even more content with that 2.75%!

[Rufus.T.Firefly]

Just checking in to join the club. I'm enjoying paying my mortgage slowly.

These are some nice interest rates being posted. We bought our house right before rate increases took effect - locking in 3.625% for 30 years.

[boarder42]

Just checking in to join the club. I'm enjoying paying my mortgage slowly.

These are some nice interest rates being posted. We bought our house right before rate increases took effect - locking in 3.625% for 30 years.

awesome welcome to the club!

[talltexan]

So I was reading some investing articles over the weekend. It's a common theme that the market may perform well (10%/year before accounting for inflation), but the individual investor does not (because we buy high and sell low, and buy individual stocks, which carry a heavy risk penalty).

Being a member of this club means we need to perform the heavy lifting on the investment side as well...so...what are you doing to minimize fees, maximize returns, and stay the course when the next bear market comes?

[boarder42]

So I was reading some investing articles over the weekend. It's a common theme that the market may perform well (10%/year before accounting for inflation), but the individual investor does not (because we buy high and sell low, and buy individual stocks, which carry a heavy risk penalty).

Being a member of this club means we need to perform the heavy lifting on the investment side as well...so...what are you doing to minimize fees, maximize returns, and stay the course when the next bear market comes?

all of your questions are just about what your asset allocation is and how to maintain that at the lowest fees.  i invest in index funds with vanguard, max all tax advantaged accounts, and pick the lowest ER funds in those accounts to maintain my AA as i want it.  when a bear market comes its pretty simple you just dont sell. 

These questions are odd to me.

[Tyson]

So I was reading some investing articles over the weekend. It's a common theme that the market may perform well (10%/year before accounting for inflation), but the individual investor does not (because we buy high and sell low, and buy individual stocks, which carry a heavy risk penalty).

Being a member of this club means we need to perform the heavy lifting on the investment side as well...so...what are you doing to minimize fees, maximize returns, and stay the course when the next bear market comes?

That is what "active" investors do.  On MMM we are buy & hold passive investors.  So bear markets don't affect us because we never sell.  In fact, during a dip we might double down on buying more stock.  But otherwise we just more or less sit on our investments and re-balance our stocks/bonds to 80/20 (or 60/40). 

A lot of us use Vanguard because they have some of the lowest fees in the industry.  For example, a financial advisor might charge you 1% to manage your money, but the VTSAX total sock market Vanguard fund only charges .04% - yes, four tenths of one percent.  VTBLX, which is the total Bond market index fund has an expense ratio of .05%.  So you can get total stocks and total bonds, set them up in whatever ratio you like, and only get charged .04% and .05% which is a massive savings vs. traditional managed accounts.

[RWD]

[...] only charges .04% - yes, four tenths of one percent.

Isn't that four hundredths of one percent?

[solon]

So I was reading some investing articles over the weekend. It's a common theme that the market may perform well (10%/year before accounting for inflation), but the individual investor does not (because we buy high and sell low, and buy individual stocks, which carry a heavy risk penalty).

Being a member of this club means we need to perform the heavy lifting on the investment side as well...so...what are you doing to minimize fees, maximize returns, and stay the course when the next bear market comes?

That is what "active" investors do.  On MMM we are buy & hold passive investors.  So bear markets don't affect us because we never sell.  In fact, during a dip we might double down on buying more stock.  But otherwise we just more or less sit on our investments and re-balance our stocks/bonds to 80/20 (or 60/40). 

A lot of us use Vanguard because they have some of the lowest fees in the industry.  For example, a financial advisor might charge you 1% to manage your money, but the VTSAX total sock market Vanguard fund only charges .04% - yes, four tenths of one percent.  VTBLX, which is the total Bond market index fund has an expense ratio of .05%.  So you can get total stocks and total bonds, set them up in whatever ratio you like, and only get charged .04% and .05% which is a massive savings vs. traditional managed accounts.

Four one-hundredths of one percent, technically.

[JohnSteed]

I have 11.5 more years to enjoy my 2.625% mortgage.  With the stock market as expensive as it is, it is unlikely that the next 10 yrs of returns will be similar to historical averages.  I think we would be smarter to only plan for 4-5% per year.

[Tyson]

[...] only charges .04% - yes, four tenths of one percent.

Isn't that four hundredths of one percent?

Putting on my best Dr. McCoy voice:

"Dammit Jim, I'm a DOCTOR, not a mathematician!"

Sorry for the error :-) 

[Tyson]

I have 11.5 more years to enjoy my 2.625% mortgage.  With the stock market as expensive as it is, it is unlikely that the next 10 yrs of returns will be similar to historical averages.  I think we would be smarter to only plan for 4-5% per year.

Meh.  You might want to check out some of the "Red Dow" and "The Top is in" threads that show what happens when someone tries to predict what the stock market is going to do. 

[RWD]

I have 11.5 more years to enjoy my 2.625% mortgage.  With the stock market as expensive as it is, it is unlikely that the next 10 yrs of returns will be similar to historical averages.  I think we would be smarter to only plan for 4-5% per year.

Wow, what a coincidence! That's exactly the same rate and approximate payoff date as runewell!

[boarder42]

I have 11.5 more years to enjoy my 2.625% mortgage.  With the stock market as expensive as it is, it is unlikely that the next 10 yrs of returns will be similar to historical averages.  I think we would be smarter to only plan for 4-5% per year.

Wow, what a coincidence! That's exactly the same rate and approximate payoff date as runewell!

haha nice catch

[Tyson]

I have 11.5 more years to enjoy my 2.625% mortgage.  With the stock market as expensive as it is, it is unlikely that the next 10 yrs of returns will be similar to historical averages.  I think we would be smarter to only plan for 4-5% per year.

Wow, what a coincidence! That's exactly the same rate and approximate payoff date as runewell!

haha nice catch

Who knew there were TWO bridge playing actuaries on this board?!

[Le Barbu]

I have 11.5 more years to enjoy my 2.625% mortgage.  With the stock market as expensive as it is, it is unlikely that the next 10 yrs of returns will be similar to historical averages.  I think we would be smarter to only plan for 4-5% per year.

Wow, what a coincidence! That's exactly the same rate and approximate payoff date as runewell!

haha nice catch

Who knew there were TWO bridge playing actuaries on this board?!

Registration date is coincidently the same than the "Stop worrying about the 4% rule" thread wreck...

[josh4trunks]

I was thinking of another permutation yesterday while working on my house. (Removing carpet and installing vinyl plank flooring).

My mortgage has a $180-185K balance but because of market appreciation is probably worth nearly $300K. What if I did a cash-out, no-cost, refinance and take out $50-60K. I think a fear would be that the housing market is overvalued, but I think the main issue with this is if you try to sell the home and are underwater. In my situation, if I plan to use the money somewhat wisely, I am just leveraging an asset.

Instead of having the money sitting in equity, I could pull it out, pay tax deductible interest on the loan, and use it to invest, or pay down debt at a higher real rate. In my case I have a car loan at 3.49% which costs me more than my mortgage interest rate of 3.625% - tax deduction.

[dreadmoose]

I was thinking of another permutation yesterday while working on my house.

This is my plan once enough value has appreciated in my home. I've got it all down to anything less than 6% interest and I'll pull a line of credit against the house and invest it.

In Canada it's called the Smith Manoeuvre (basically our mortgages are NOT tax free, but borrowed money to invest is). We're only allowed to pull out 80% of the value of our house but it should provide gains that prove worth it. In most cases (except the most dire), you'd have the money to pay back the loan plus any interest accrued.

[dandarc]

I was thinking of another permutation yesterday while working on my house. (Removing carpet and installing vinyl plank flooring).

My mortgage has a $180-185K balance but because of market appreciation is probably worth nearly $300K. What if I did a cash-out, no-cost, refinance and take out $50-60K. I think a fear would be that the housing market is overvalued, but I think the main issue with this is if you try to sell the home and are underwater. In my situation, if I plan to use the money somewhat wisely, I am just leveraging an asset.

Instead of having the money sitting in equity, I could pull it out, pay tax deductible interest on the loan, and use it to invest, or pay down debt at a higher real rate. In my case I have a car loan at 3.49% which costs me more than my mortgage interest rate of 3.625% - tax deduction.

Many are planning on doing this.  Not me - I have a spouse to convince before I could re-mortgage our paid off house, but lots on this board have done / are doing this.  You weigh the amount you can pull out easily against interest and closing costs and if it makes sense do it.  I'd probably invest the dough in your scenario because 3.49% is also a very low rate.

[Basenji]

I'm in: 30 year fixed at 2.85%
Over 500k and 28 years to go...I'll be pulling SS before that sucker is paid off. Or maybe at that point (when we start SS) we'll pay it off.

[boarder42]

Just came up with a new thought that really isnt mentioned much when people try to say this is a personal choice and there is no financially incorrect decision.

We always make the assumption that people are in the same spot and keep the same E fund whether they pay down your mortgage or invest.  AND when paying down a mortgage an E Fund is 100% necessary throughout the entire paydown for most people b/c of the massive amount of increased risk if they were to lose their income and not be able to make mortgage payments.  But to the savvy Indexer like those in this group your taxable account will grow to a point that a traditional E Fund is no longer necessary and will then allow to you to invest that E fund money in your index funds as well.  So there is around an extra 20-30k that the invester will be able to invest 7-8 years sooner than the person paying down their mortgage.

Just food for thought.

[Lmoot]

You also always assume that indexes are the only/main form of investing that are sought. For other types of investing (business and real estate), liquidity and cashflow are more of a priority. If you earn enough money from a job, to buy enough indexes to make a real difference, in the amount of time desired, that is wonderful. For others who may not regularly earn enough active income to meet the hypothetical numbers in your examples, and who's chosen investments rely on spending, not saving, your one size fits all crusade is bogus.

[boarder42]

regardless of starting a business or indexing or real estate investing if i have money left over after paying my minimum mortgage payment it should be going to any one of those 3 over paying down a mortgage b/c if the real estate or the business isnt beating passive investing why in the F. would you being doing it. 

i dont understand any part of what your statement is and it makes 0 sense. 

[Lmoot]

regardless of starting a business or indexing or real estate investing if i have money left over after paying my minimum mortgage payment it should be going to any one of those 3 over paying down a mortgage b/c if the real estate or the business isnt beating passive investing why in the F. would you being doing it. 

i dont understand any part of what your statement is and it makes 0 sense.

 I didn't mention pre-paying a mortgage in my statement. I was referring to your theory that an emergency fund should be irrrelevant when someone reaches a certain level of investing. But once again, you are assuming that based on only one specific type of investment. And it just reminds me yet again that the underlying bias of most of your comments and maths are assuming a priority on index investing.

[Snowman99]

Lets do this the right way.  And spread the word about how great NOT paying down our mortgages are for our FIRE dates.

I have a 349k Left on my mortgage and i will be taking that the full 29 years left.  Who's with me!!

3.25% fixed for 30 years

Nice work.  We fetched the same rate on our 30 year at $342k right after Brexit last year.  I don't think a 30 year will ever go lower than that.  Thank you Brits!

[boarder42]

regardless of starting a business or indexing or real estate investing if i have money left over after paying my minimum mortgage payment it should be going to any one of those 3 over paying down a mortgage b/c if the real estate or the business isnt beating passive investing why in the F. would you being doing it. 

i dont understand any part of what your statement is and it makes 0 sense.

 I didn't mention pre-paying a mortgage in my statement. I was referring to your theory that an emergency fund should be irrrelevant when someone reaches a certain level of investing. But once again, you are assuming that based on only one specific type of investment. And it just reminds me yet again that the underlying bias of most of your comments and maths are assuming a priority on index investing.

there have been many surveys done on this forum and over 90% of this forum index invests.  so the statement is true for most cases.  bringing me back to the point that the default answer to paydown my low cost mortgage or invest question should be invest ... then when compelling evidence is presented otherwise maybe paying it down makes sense. 

[mizzourah2006]

In. Have 25 years left at 3.375%. I actually had the opportunity to re-fi right to a 15 year right before the election that would have brought my interest rate down to 2.75% and only cost me $800 out of pocket, but the election happened and the broker didn't lock in the rate, so needless to say I never heard from him again. But the up-tick in rates does make me realize that we may never see rates that low again, so the 3.375% is looking mighty good to me.

[boarder42]

yeah and 25 years at 3.375 is much better than 15 at 2.75

[talltexan]

Can you go into more detail about why you judge the higher interest rate situation to be better?

[boarder42]

Can you go into more detail about why you judge the higher interest rate situation to be better?

its really a math equation and can be plugged into https://michaelbluejay.com/house/15vs30.html

my blanket statement wasnt 100% correct as its a sliding scale in most 30 year vs 15 year mortgage situations you're looking at around a .75 to 1% difference in interest rate.  In most cases you must live in your house for 7 years give or take for the 30 year to come out ahead of the 15 year.  in the scenario posted above there were a few less years left meaning higher prinicpal payments being made and there was a smaller spread.  i havent done the math but that would likely take it down to around a 3-4 year break even.  And the poster wasnt talking about selling and we're almost another year in so i made an assumption they would live there longer than the break even point ...

[talltexan]

Michael's calculator doesn't include the option value of a HELOC against equity (you'd have extra equity with the 15).

I don't want to pay down my mortgage fast, but I *hate* paying interest I don't have to. I was lucky when I got my mortgaage to have such a favorable rate for an ARM at 30-year amortization (it was 3.0 when 30-year fixed was 4.125).

HELOC sounds strange, but people thought rates were going to jump between 2013 and now, and...they haven't.