is/was your home mortgage holding you back?

[Adam Zapple]

I'm sorry to (potentially) rehash the most over-debated topic in the financial blog universe but I have been struggling with making the decision to payoff my home mortgage early.  I'm looking for stories from people who have paid off their mortgage early, and used the financial freedom associated with this choice to pursue great/fun things.  If you care to read my thoughts on this, see below.



I recognize all of the various benefits of borrowing money at 3.5% and investing to earn a potential 7-13% in the stock market and have done so for the last 15 years or so.  I now have a relatively healthy retirement account that is about 1/4 of the way to where I need it to be for FI.  If I continue down this path, I have a FI date that is about 9-10 years in the future, should markets cooperate. 

I have recently thought about possibly foregoing contributing to my retirement accounts and children's college savings accounts, and aggressively paying off my mortgage over the next 4 years.  I would then return to contributing to these accounts at my current rate plus contribute what are now my current principal/interest payments toward those accounts, or pursuing other investment opportunities.

I feel like many of the debates on this topic miss the following:

1.  Timeframe to payoff the mortgage and market timing

While I recognize nobody can predict the markets, we can make general assumptions toward where we are in the market cycle based on P/E ratios etc.  Obviously, making the decision to payoff your mortgage starting in the middle of 2008 thru 2012 instead of investing in the stock market would have proven to be a bad decision.  But is it a bad decision today?  Probably much less likely to be.

2.  The mental freedom associated with reducing expenses

I'm not talking about "We just paid off our mortgage and it feels great!"  I'm talking about, "We just paid off our mortgage, and feel much more secure, so we finally feel ready to pursue the following business ventures or personal goals...."  I feel as though having this large expense holds me back from jumping on good opportunities when the come along.  Anyone else agree?

[MrMathMustache]

Maybe it would feel less satisfying, but couldn't you just split the difference and throw more at your mortgage principal balance, while also investing to the degree needed to benefit from any employer match?

I feel like there are too many unknowns regarding markets in a historically low-interest rate environment for anyone to draw conclusions as to what constitutes overbought, or oversold bonds & equities at this point.  Just look at Friday's tumble based on raised expectations for a rate hike toward 0.75-1.00%!

[Adam Zapple]

"Maybe it would feel less satisfying, but couldn't you just split the difference and throw more at your mortgage principal balance, while also investing to the degree needed to benefit from any employer match?"

Sorry I left that portion out, yes to this.  My wife gets a 3 percent match, I get nothing, so we will continue to contribute 3 percent to her 401K.

[ender]

I look at my marginal tax rate and my effective mortgage interest rate. If I do not put money into my 401k, I pay marginal taxes (30% or so) and lose a fairly small deduction (mortgage rate of 3.625%, effectively 2.5%).

This takes over 10 years before the combined return on paying off the mortgage is equal to the tax savings on the 401k, entirely ignoring any market gains/losses.

We hit the full standard deduction without any mortgage interest, so we fully itemize all mortgage interest at our marginal rate, meaning our effectively is a lower rate.

[Life in Balance]

Reading your post, I have to say that I've been thinking a lot about your second point (and the first also, but more the second).  I just started throwing some extra money at my mortgage due to wanting to reduce my monthly outgo.  I'm careful to get the full benefit of my employer match and max out one of my pre-tax accounts (I mention this to offset the pro-investment concerns).  But it occurred to me that the sooner my monthly bills go down, the sooner I can go part-time.  My retirement accounts are in good shape and will grow nicely even with lower contributions.  But working less (even for a longer period of time) is sounding really nice to me about now.  So, for me, paying off the mortgage early is opening up new paths. 

[Tjat]

Why don't you just save up and equivalent amount of money in your investments and then have the option of bulk paying your mortgage? Depending on your timing, which you will have total control over, you can have the best of both worlds.

[Spork]

Why don't you just save up and equivalent amount of money in your investments and then have the option of bulk paying your mortgage? Depending on your timing, which you will have total control over, you can have the best of both worlds.

...or the worst.  It's also possible a big ass correction happens leaving your investments no longer able to pay it off AND you still owe money on your mortgage.   Is it likely to happen?  Probably not.  But if you are looking for a conservative approach, you should consider the possibility.

Back to the OP:
I really think BOTH approaches are relatively reasonable.  I went with a paid off house.  It was awesome and I don't know that I would have done it differently.  I know around here it's considered a financial mistake, but it's one of those "mistakes" where you may not be financially optimal, but you're still doing things that are making your life better and easier.

My retirement plan included a paid off house.  Yours may or may not.  The question I think you should ask yourself is this:  If you had a 100% paid off house, would you seek out a HELOC/mortgage in order to invest?  If that answer is no -- then paying it off early is a fine course of action.  If your answer is yes, and you've really worked through the situation logically -- then paying minimums is fine.

[bacchi]

Why don't you just save up and equivalent amount of money in your investments and then have the option of bulk paying your mortgage? Depending on your timing, which you will have total control over, you can have the best of both worlds.

...or the worst.  It's also possible a big ass correction happens leaving your investments no longer able to pay it off AND you still owe money on your mortgage.   Is it likely to happen?  Probably not.  But if you are looking for a conservative approach, you should consider the possibility.

True but the same happens if you're halfway through paying down the mortgage and the economy crashes and you're out of a job. That's hardly conservative since the bank won't care that you've been making extra payments.

How about: put the extra payments in T-bonds (or TIPS) at treasury.gov and, when the remaining principal equals the amount in bonds, sell the bonds and burn the lien?

This allows for the fact that shit happens, and people lose their jobs at inopportune times, and the desire to pay off the mortgage early.

[Spork]

Why don't you just save up and equivalent amount of money in your investments and then have the option of bulk paying your mortgage? Depending on your timing, which you will have total control over, you can have the best of both worlds.

...or the worst.  It's also possible a big ass correction happens leaving your investments no longer able to pay it off AND you still owe money on your mortgage.   Is it likely to happen?  Probably not.  But if you are looking for a conservative approach, you should consider the possibility.

True but the same happens if you're halfway through paying down the mortgage and the economy crashes and you're out of a job. That's hardly conservative since the bank won't care that you've been making extra payments.

That can happen, too.  I'm just saying think it through.  I always want a multi-tiered approach.  Invest pretax and post-tax.  Pay down debt.  Keep a big emergency chunk in near-line, low-paying funds.  I know that can be blasphemy around here sometimes, but it's always how I've done it.  I am sure some folks are leveraged to the hilt and made more money faster than I did.  I am okay with it.

[human]

The only investing would be in the 401k? How much exactly are you investing now, and how much do you plan to cut it by over 4 years?

4 years seems to be a long time to drastically reduce your investing when you are accumulating. There must be a middle ground somewhere?

A lot of these threads have so much context missing. How much is the house compared to your income? Are you sure a 3.5% mortgage will beat out market returns over 4 years? If you are sure, how exactly can you be sure?

I'm biased, I do not own a home and or pay a mortgage. I would probably buy a cheap place in a cheap location when I retire, I don't want to take the risk of dumping a lot of money in a house in a somewhat HCOL area (or maybe medium cost) and then watch the value plummet and pay property taxes that are equivalent to renting.

I would take the extra mortgage payments and calculate what they would grow to if invested over 4 years at 4 and/or 5%. If the investing beats paying down 3.5% (which it most likely will) I would stick to investing. If for some reason markets don't hit 4-5% and then they shoot up you will have lost out on purchasing stock. I think paying off a mortgage quickly is a very emotional decision. However, if it makes you feel secure it may be worth it.

[SwordGuy]

"Maybe it would feel less satisfying, but couldn't you just split the difference and throw more at your mortgage principal balance, while also investing to the degree needed to benefit from any employer match?"

Sorry I left that portion out, yes to this.  My wife gets a 3 percent match, I get nothing, so we will continue to contribute 3 percent to her 401K.

Because the monthly bills don't go down until the mortgage is paid off.   

And you now have half the money you had before to pay bills if the economy tanks and you lose your job.

And if the bank forces a foreclosure, they will sell it for what they are owed, not for what the property is worth, so the equity will disappear.

[ender]

"Maybe it would feel less satisfying, but couldn't you just split the difference and throw more at your mortgage principal balance, while also investing to the degree needed to benefit from any employer match?"

Sorry I left that portion out, yes to this.  My wife gets a 3 percent match, I get nothing, so we will continue to contribute 3 percent to her 401K.

Because the monthly bills don't go down until the mortgage is paid off.   

And you now have half the money you had before to pay bills if the economy tanks and you lose your job.

And if the bank forces a foreclosure, they will sell it for what they are owed, not for what the property is worth, so the equity will disappear.

If/when we have enough extra money other than tax advantage d accounts we're planning on post tax investing in a roughly 50/50 stock/bond split account until the balance exceeds the mortgage balance, then boom payit off.

That's sort of the best if both worlds.

[marty998]

Paid off the mortgage, and yes it did feel great, and made me feel secure. If SHTF I still have a roof over my head.

Hindsight say I would have made more on the markets, but I didn't have the benefit of hindsight at the time. I am now making up for it, with the spare $800-1,000 a week I used to be throwing at the mortgage.

The cash flow available now for it is dramatically large, and being able to buy in larger chunks helps to save on brokerage too.

[valsecito]

Regarding market timing for killing the mortgage with investment, I use value averaging: https://en.wikipedia.org/wiki/Value_averaging

Any investment return over the highest of 3% or inflation I throw at my mortgage. Any shortfall in investment return I compensate with emergency fund or HELOC equivalents if necessary.

Right now, the rate on my mortgage is so ridiculously low (0.5%) that I can beat it guaranteed. So I'm putting the surplus into a savings product earmarked for mortgage paydown instead of actually paying down the mortgage right now.

I know it's not the smartest from a financial point of view, but for me, this constitutes a good compromise between peace of mind and returns.

[Radagast]

Regarding market timing for killing the mortgage with investment, I use value averaging: https://en.wikipedia.org/wiki/Value_averaging

Any investment return over the highest of 3% or inflation I throw at my mortgage. Any shortfall in investment return I compensate with emergency fund or HELOC equivalents if necessary.

Right now, the rate on my mortgage is so ridiculously low (0.5%) that I can beat it guaranteed. So I'm putting the surplus into a savings product earmarked for mortgage paydown instead of actually paying down the mortgage right now.

I know it's not the smartest from a financial point of view, but for me, this constitutes a good compromise between piece of mind and returns.

Sweet, value averaging is how I plan to eventually pay off my house too. I haven't bought the house yet, so obviously I don't have the details. It seems pretty smart to me, money invested in the market is invested at a very low cost basis, thus giving higher than the average market returns over the period. The rest of your money is invested at the rate of the mortgage. It is a good way to have returns similar to the market return over the period, while paying off the house very quickly. I will probably use 1% plus inflation per quarter.

[WackyTomato]

I understand the argument about the merits of investing your cash instead of paying the mortgage in an all-time low interest rate period.  However, despite the fact that interest rates are at an all time low, I personally HATE the fact that banks grab a huge portion of interests on every monthly or biweekly payments.  Therefore, when I come back from my juicy gig abroad, I intend to buy a house cash.  A friend of mine is trying to convince me to get a small mortgage and invest the rest, but there is something about paying interests to a bank that I absolutely hate...

[faramund]

I understand the argument about the merits of investing your cash instead of paying the mortgage in an all-time low interest rate period.  However, despite the fact that interest rates are at an all time low, I personally HATE the fact that banks grab a huge portion of interests on every monthly or biweekly payments.  Therefore, when I come back from my juicy gig abroad, I intend to buy a house cash.  A friend of mine is trying to convince me to get a small mortgage and invest the rest, but there is something about paying interests to a bank that I absolutely hate...

I understand this point. Personally, as someone who does borrow money to buy shares, I console myself that the dividends from my shares (outside retirement accounts) pretty much pays all the interest I pay the bank. If my overall assets(again outside RAs) grow in value by 0.3% in a year - with the dividends, that covers all the interest. And as dividends tend to increase each year - it shouldn't be too long until they do directly cover the interest (and after that ... ho ho ho).

[Spork]

I understand the argument about the merits of investing your cash instead of paying the mortgage in an all-time low interest rate period.  However, despite the fact that interest rates are at an all time low, I personally HATE the fact that banks grab a huge portion of interests on every monthly or biweekly payments.  Therefore, when I come back from my juicy gig abroad, I intend to buy a house cash.  A friend of mine is trying to convince me to get a small mortgage and invest the rest, but there is something about paying interests to a bank that I absolutely hate...

We built our current house with cash.  We knew we were close to FIRE and it was part of the plan to have a paid off house.

When building, it also really makes you think about things.  It's easy to think that 3rd garage bay is only $20 a month.  It's harder when it's in black and white and it's $8000.*

*I'm making that number up.  I don't remember what the savings was as there was a laundry list of things we slashed to bring down the bottom line.

[2buttons]

Don't have a paid off mortgage, yet. But if you could pull it off in four years, I would seriously consider it because you are racing through the amortization schedule and lighting the interest payments on fire. 

It makes more sense to invest the longer the time horizon, on a short run the deltas are much less dramatic. If you did it, I would fill back up retirement after you were done to compensate for the loss during the four years including what your return would have been and treat it like a debt as well, which should be easy with no mortgage payment.

Truth in advertising, I am currently paying a big chunk extra on mortgage, I am putting some serious cash into retirement too, and investing a little post tax, and I am thinking I will be done with mortgage in 7 years.

[beastykato]

I personally think the mortgage payoff route is probably better for your lifestyle in the end.  Yes, you will probably end up with a lower total amount in your 401k and investments **** Based of the historical averages which people here constantly remind you that you can't rely on historical averages****.

For people like me I'm only semi-mustachian.  I live a lot cheaper than the Jones do, but I still buy the majority of things I want.  I don't plan on fully retiring until a more normal retirement age (45-55).  So, that means if I just pay my mortgage as normal and continue to max out my investments I'm pinching pennies at the end of every month.  However, if I stop/minimize investing for 4-5 years and slam my house and get it paid off, from that point on I can max all my investments AND live the way I want to at 35 y/o instead of waiting until my mortgage is paid off at 55 y/o.  All while living under the stress of trying to pay it all each month while maxing investments too. 

IMO do yourself a favor a pay of your mortgage early.  I may not yield the best return in all cases, but it is a GUARANTEED return.

My investments each year amount to $692.31 every 2 weeks for 401k, $212 every 2 weeks for $212 for the roth, and $250 every 2 weeks for the HSA.  That's $942.31 every 2 weeks pre-tax and $212 after on top of my mortgage and it's damn stressful to try to max it all and still have enough to support a family. 

[Aminul]

I paid off my mortgage back in March.  Last week the company I work for was purchased by a larger company and there is a lot of uncertainty in the office.  While I certainly hope it doesn't come to a large number of job losses in my area, I'm feel more prepared than many of my colleagues because of my low monthly expense.  If SHTF, I could work at the gas station 500m from my house and have my monthly expenses covered. 

My choice to pay off my mortgage early was not mathematically optimal! But it sure makes me feel good.  There are plenty of worse decisions that I could have made with those dollars.

[Jack]

I am not paying off my mortgage ahead of schedule (in fact, I just refinanced to a new 30-year). I don't get this "mental freedom" only because I've chosen to do all of my investing so far in tax-advantaged accounts.

If I cared about that freedom, I'd simply do the investing in a taxable account instead and know that the income from that could be used to make the mortgage payment.

Of course, it's worth noting that applying the 4% SWR rule to a mortgage payment expense implies that you'd actually need an investment balance a little over twice as large as the actual mortgage balance. For example, my mortgage is about $85,000, for which I pay $673/month (including taxes and insurance). 12 * 25 * 673 = $201,900. But you know what that implies? It implies that it's safer to do that than to pay the mortgage off directly, because you know that at any time, if the investment balance is in danger of dropping below the mortgage balance, you can always instantly liquidate it to pay off the loan and be no worse off than you would have been otherwise. And, of course, if you're still otherwise in the accumulation phase, the concept of the SWR doesn't really apply anyway because your income is your backup.

If SHTF, I could work at the gas station 500m from my house and have my monthly expenses covered. 

If SHTF, my wife and I could also cover our expenses on two minimum-wage jobs... including our mortgage payment. (Doing it on one minimum-wage job might even be possible too, but it would be a stretch because then our housing expense would be a little over 50% of our income.)

[ender]

I am not paying off my mortgage ahead of schedule (in fact, I just refinanced to a new 30-year). I don't get this "mental freedom" only because I've chosen to do all of my investing so far in tax-advantaged accounts.

Realistically if you have Roth IRA contributions in a relatively stable fund, you can also get the same benefit over years.

We've got something like $20k worth of Roth IRA principle we can withdraw whenever we want. This number is only going to increase over the next years, particularly since we are flirting with being above deductibility limits for traditional IRAs.

Many folks here probably have access to quite a bit of Roth principle if SHTF.

[Adam Zapple]

For people like me I'm only semi-mustachian.  I live a lot cheaper than the Jones do, but I still buy the majority of things I want.  I don't plan on fully retiring until a more normal retirement age (45-55).  So, that means if I just pay my mortgage as normal and continue to max out my investments I'm pinching pennies at the end of every month.  However, if I stop/minimize investing for 4-5 years and slam my house and get it paid off, from that point on I can max all my investments AND live the way I want to at 35 y/o instead of waiting until my mortgage is paid off at 55 y/o.  All while living under the stress of trying to pay it all each month while maxing investments too. 

This is very similar to my situation.  I live cheaper than most so I can retire in my late 40's or early 50's.  I also agree with you about trying to raise a family and meet your investment goals every month...always walking the tight rope is a mental burden.

I understand this point. Personally, as someone who does borrow money to buy shares, I console myself that the dividends from my shares (outside retirement accounts) pretty much pays all the interest I pay the bank. If my overall assets(again outside RAs) grow in value by 0.3% in a year - with the dividends, that covers all the interest. And as dividends tend to increase each year - it shouldn't be too long until they do directly cover the interest (and after that ... ho ho ho).

I can't deny that this strategy is very enticing to my inner high-risk seeking self.  I just don't know if I could sleep at night if I tried it.  I think it all depends on your financial position and risk tolerance.  Can you explain further how you borrow and what you invest in?

[Jack]

I am not paying off my mortgage ahead of schedule (in fact, I just refinanced to a new 30-year). I don't get this "mental freedom" only because I've chosen to do all of my investing so far in tax-advantaged accounts.

Realistically if you have Roth IRA contributions in a relatively stable fund, you can also get the same benefit over years.

We've got something like $20k worth of Roth IRA principle we can withdraw whenever we want. This number is only going to increase over the next years, particularly since we are flirting with being above deductibility limits for traditional IRAs.

Many folks here probably have access to quite a bit of Roth principle if SHTF.

That's true, although I would be loathe to withdraw principle from a Roth IRA in any but the most dire of situations. Also, only my wife has a Roth IRA (mine is 100% traditional) and it only has maybe $10k or less of principle in it because we only contributed to it in our very lowest-income years. I'm glad you mentioned it though, because I just looked up the 2016 deductibility limits and suddenly realized I might have to worry about that...

[Spork]

I understand this point. Personally, as someone who does borrow money to buy shares, I console myself that the dividends from my shares (outside retirement accounts) pretty much pays all the interest I pay the bank. If my overall assets(again outside RAs) grow in value by 0.3% in a year - with the dividends, that covers all the interest. And as dividends tend to increase each year - it shouldn't be too long until they do directly cover the interest (and after that ... ho ho ho).

I can't deny that this strategy is very enticing to my inner high-risk seeking self.  I just don't know if I could sleep at night if I tried it.  I think it all depends on your financial position and risk tolerance.  Can you explain further how you borrow and what you invest in?

I know I always sound anti-leverage.  Personally: I am.  But that's me and not everyone else and I am cool with other folks having more risk tolerance.   That said, if you want to rely on the strategy of "my dividends can pay my interest payments" ... please do look to the past and make sure you include scenarios where dividends went way down.

I know my 2010 and 2011 dividends were a little less than half of my 2008 dividends.  And it was 2014 before my yearly dividends were equal to what I earned in 2008.

[Dicey]

DH and I paid cash for our clown house four years ago. We still kinda hate that we're missing out on such cheap money. My point in chiming in is if you are a worrier, you'll always find something to worry about. If it's not the mortgage, it will be the taxes, or the utilities, or the insurance, or the upkeep. It never ends.

Better to have a Big Ball O'Money (BBOM) to pay for everything with. Including your mortgage. Assuming your mortgage is at a low, fixed rate, your strategy to stop investing for retirement for FOUR YEARS (ack!) is going to cost you money in the long run. What is Mustachian about that? Nothing. Whining about what a burden a mortgage is is just complainypants nonsense.

[Slinky]

I'd love a paid off mortgage, but I have a 3.25% mortgage and a 25% income. I get way more bang for my buck to fully invest in my 401k and take advantage of the tax deductions and compounding in my investment accounts between now and FIRE.

Now, a 4% SWR says that covering my mortgage payment requires more principal than I actually owe on it, so there's a good chance I'll make mortgage payoff my last step before FIRE. I think it makes more sense to do that at the end though. Let the previously accumulated funds ride and compound while you pay down the low interest mortgage.

[beastykato]

We all have different lifestyle ideas about what is suitable for us.  So, worrying about the mortgage isn't comlainypants nonsense.  If you can max and your accounts, and pay your bills, and then still have enough cash left over to satisfy your lifestyle, sure, by all means, keep your mortgage.  It's wonderful if you have that type of income and/or have reduced your spending that much. 

In my case, after I've maxed out my investment accounts and paid my bills there isn't a whole lot of cash left for me to enjoy life.  In this aspect, I feel deprived by mustachianism.  If I continue to pay the minimum on my mortgage that means I'll have to budget like this for 25 more years until it's paid off and I'll be 55 y/o.   I'd much rather lose some money and live those 20 years of my life with the piece of mind that I can save what I need and still live how I want on a month to month basis.

As I've stated I'm only semi-mustachian.  I've used the ideas here to reduce my monthly expenses and save nearly 50% of my yearly income.  As for daily life and entertainment though, I still like expensive toys, alcohol, sporting events, traveling 2-3 times a year, etc.  and am not willing to sacrifice that stuff just to have a bigger dollar sign in my retirement account.

[Jack]

We all have different lifestyle ideas about what is suitable for us.  So, worrying about the mortgage isn't comlainypants nonsense.  If you can max and your accounts, and pay your bills, and then still have enough cash left over to satisfy your lifestyle, sure, by all means, keep your mortgage.  It's wonderful if you have that type of income and/or have reduced your spending that much. 

In my case, after I've maxed out my investment accounts and paid my bills there isn't a whole lot of cash left for me to enjoy life.  In this aspect, I feel deprived by mustachianism.  If I continue to pay the minimum on my mortgage that means I'll have to budget like this for 25 more years until it's paid off and I'll be 55 y/o.   I'd much rather lose some money and live those 20 years of my life with the piece of mind that I can save what I need and still live how I want on a month to month basis.

As I've stated I'm only semi-mustachian.  I've used the ideas here to reduce my monthly expenses and save nearly 50% of my yearly income.  As for daily life and entertainment though, I still like expensive toys, alcohol, sporting events, traveling 2-3 times a year, etc.  and am not willing to sacrifice that stuff just to have a bigger dollar sign in my retirement account.

That does not make sense. Investing instead of paying off your mortgage implies that you should have more money to fund the rest of your lifestyle, not less.

[faramund]

I understand this point. Personally, as someone who does borrow money to buy shares, I console myself that the dividends from my shares (outside retirement accounts) pretty much pays all the interest I pay the bank. If my overall assets(again outside RAs) grow in value by 0.3% in a year - with the dividends, that covers all the interest. And as dividends tend to increase each year - it shouldn't be too long until they do directly cover the interest (and after that ... ho ho ho).

I can't deny that this strategy is very enticing to my inner high-risk seeking self.  I just don't know if I could sleep at night if I tried it.  I think it all depends on your financial position and risk tolerance.  Can you explain further how you borrow and what you invest in?

I know I always sound anti-leverage.  Personally: I am.  But that's me and not everyone else and I am cool with other folks having more risk tolerance.   That said, if you want to rely on the strategy of "my dividends can pay my interest payments" ... please do look to the past and make sure you include scenarios where dividends went way down.

I know my 2010 and 2011 dividends were a little less than half of my 2008 dividends.  And it was 2014 before my yearly dividends were equal to what I earned in 2008.

Yes, I know and accept this - by the time I retire - my dividends should be large enough than my expenses that I can handle a drop of the 2008 level.

But really, this is all about risk tolerance - I'm planning to retire at 51 - and I almost like my job - so if worst comes to worst - I can always just work a bit longer.

Really, though, I think this is about the third or fourth of these threads I've seen, and eventually this is all it seems to come down to - some people don't want to accept the additional risk (and often admit that its historically not optimal), and some do. But as long as everyone does whatever with their eyes wide open - either way is fine.

[beastykato]

That does not make sense. Investing instead of paying off your mortgage implies that you should have more money to fund the rest of your lifestyle, not less.

I don't understand why you think this? 

I treat my investments like bills.  I make sure I max my 401k/roth/etc.  every year.  I take that money OUT of my daily living expenses.  My mortgage comes OUT of my daily living expenses.  What is left over is what I get to live on NOW. 

Total Money - Investment cash - Mortgage = Remaining money.

If I were to pay off my mortgage  and continue to invest after that it would be:

Total money - investing =  Remaining money (this is now higher because I don't have the mortgage payment.)

I understand that in the long run when I finally retire 20+ years from now I'll have a lesser value than if I had invested straight through, but I could be dead in 20 years.  This would allow me a lot more free cash flow each month while I was young and can enjoy it the most.

[ender]

I understand that in the long run when I finally retire 20+ years from now I'll have a lesser value than if I had invested straight through, but I could be dead in 20 years.  This would allow me a lot more free cash flow each month while I was young and can enjoy it the most.

If you are looking at purely your monthly cashflow perspective, then paying off your mortgage matters more -- you are ignoring any long term impacts.

Which is fine, as long as your goal isn't to maximize long term net worth cashflow potential. It does turn out the ability to FIRE is dependent on your long term cashflow potential, but if your goal is merely short term then yes, paying off your mortgage might be better.

It's all about your priorities.

[Jack]

That does not make sense. Investing instead of paying off your mortgage implies that you should have more money to fund the rest of your lifestyle, not less.

I don't understand why you think this? 

I treat my investments like bills.  I make sure I max my 401k/roth/etc.  every year.  I take that money OUT of my daily living expenses.  My mortgage comes OUT of my daily living expenses.  What is left over is what I get to live on NOW. 

Total Money - Investment cash - Mortgage = Remaining money.

If I were to pay off my mortgage  and continue to invest after that it would be:

Total money - investing =  Remaining money (this is now higher because I don't have the mortgage payment.)

I understand that in the long run when I finally retire 20+ years from now I'll have a lesser value than if I had invested straight through, but I could be dead in 20 years.  This would allow me a lot more free cash flow each month while I was young and can enjoy it the most.

You're thinking about it all wrong and therefore making a bad comparison.

First of all, the real (current) "total money equation" is as follows:

Investing case: total money - max retirement funds - mortgage minimum payment - additional investing  = remaining money.
Mortgage payoff case: total money - max retirement funds - mortgage minimum payment - additional mortgage principle = remaining money.

If additional investing equals additional mortgage principle then current cash flow is the same in both cases.

On the other hand, if you're setting additional mortgage principle to $0 while setting additional investing to a value greater than $0, then you're not doing a fair comparison.

Similarly, the future "total money equation" (after paying off the mortgage in the second case) is as follows:

Investing case: total money - max retirement funds - mortgage minimum payment - additional investing  = remaining money.
Mortgage payoff case: total money - max retirement funds - additional investing equal to the previous total mortgage payment = remaining money.

...and remaining money is still equal in both cases. The only difference is that, because investment returns are higher than mortgage rates, you can hold "years to retire" constant and end up with more assets in the investing case or you can hold "assets needed to retire" constant and end up getting there sooner in the investing case.

[beastykato]

You're not wrong with your formula, but I'm also not looking at this wrong.  Your formula is assuming everything is equal and my additional mortgage payments would be equal to my additional investment amounts. 

That's not the case. I want to free up money now.  The only way to do that is to remove an expense.  No matter how you change the formula nothing frees up money except for 1. Paying off the mortgage or 2. Reducing the amount I invest.

My intention is to lower my investing amount to free up cash for the additional mortgage payments.  I would take me ~4 years to pay off my house.  Then after its paid off I can return to maxing everything and have 1000 extra dollars a month to play with from 34 y/o on until I reach FIRE.   

If I continue the way I'm going both investing max and paying off the mortgage at the minimum payment, I'll reach fire in my late 40's.  I don't want to live on such a tight budget for the next 20 years that's not living IMO.  And I know some of the more mustachian types won't agree with that.  It's just my preference. I want the money now to travel all over the world and do things while I'm young and able.  You're only young once.

[ender]

You're not wrong with your formula, but I'm also not looking at this wrong.  Your formula is assuming everything is equal and my additional mortgage payments would be equal to my additional investment amounts. 

That's not the case. I want to free up money now.  The only way to do that is to remove an expense.  No matter how you change the formula nothing frees up money except for 1. Paying off the mortgage or 2. Reducing the amount I invest.

My intention is to lower my investing amount to free up cash for the additional mortgage payments.  I would take me ~4 years to pay off my house.  Then after its paid off I can return to maxing everything and have 1000 extra dollars a month to play with from 34 y/o on until I reach FIRE.   

If I continue the way I'm going both investing max and paying off the mortgage at the minimum payment, I'll reach fire in my late 40's.  I don't want to live on such a tight budget for the next 20 years that's not living IMO.  And I know some of the more mustachian types won't agree with that.  It's just my preference. I want the money now to travel all over the world and do things while I'm young and able.  You're only young once.

The thing is, the math doesn't agree with you.

[Jack]

That's not the case. I want to free up money now.  The only way to do that is to remove an expense.  No matter how you change the formula nothing frees up money except for 1. Paying off the mortgage or 2. Reducing the amount I invest.

My intention is to lower my investing amount to free up cash for the additional mortgage payments.  I would take me ~4 years to pay off my house.  Then after its paid off I can return to maxing everything and have 1000 extra dollars a month to play with from 34 y/o on until I reach FIRE.   

No, you don't have "1000 extra dollars a month." You're just choosing to invest/save 1000 fewer dollars a month. Again, it's not a fair comparison.

Even if you wanted to increase your spending by $1000 per month, you would be better off (i.e., less worse off) by reducing the amount you pay on your mortgage now rather than reducing the amount you invest, even if that means you invest less later because you still have a mortgage.

[2buttons]

Good Christmas. This again?

Repeat after me. Time horizon. Time horizon. TIME HORIZON.

On my mortgage, assuming the market performs at a static 10% return every year, it's a difference of $10k. No hiccups, no corrections, no fed manipulating rates. Has to meet that strict criteria.

[beastykato]

OK, so you're saying I'll be better of by reducing the amount i invest and doing what I want now instead of paying off the mortgage?

I can grasp that, I was simply trying to eliminate one of the variables by removing the mortgage all together.

You keep citing reducing my mortgage payment, but I'm already paying the minimum.  I'm not trying to argue that the mortgage payoff is better from a long-term numbers standpoint I know it's not. 

I'm just wanting to free up cash flow for myself. Now.  And I figured the best way to do that was eliminate my biggest debt.  If simply reducing how much I invest is the best way, OK.   I'm not trying to argue I'm all ears if I'm wrong.

[ender]

I'm just wanting to free up cash flow for myself. Now.  And I figured the best way to do that was eliminate my biggest debt.  If simply reducing how much I invest is the best way, OK.   I'm not trying to argue I'm all ears if I'm wrong.

Paying off your mortgage early will allow you to free up cashflow.

However, you are not talking only about that, you are talking about stopping retirement savings now in order to pay off a mortgage. This will still have the same effect, however you will almost assuredly not be able to FIRE as early as you would had you just paid the mortgage normally.

But what doesn't make any sense is the idea that paying your mortgage early somehow frees up cashflow. Downsizing and having a smaller house frees up cashflow. But if you spend $40k extra
paying off your mortgage, it's still money you could have spent/invested/etc. You could have gone on an incredibly extravagant vacation instead of paying off your mortgage early.

Maybe if you only see finances on a monthly or maybe even yearly perspective, but if you look at your life more holistically it doesn't really free up cashflow like you are implying.

[2buttons]

Ummm what?

True or false. If you kill your mortgage off you no longer have a mortgage payment.

[beastykato]

LOL =P  True

[Dicey]

Ummm what?

True or false. If you kill your mortgage off you no longer have a mortgage payment.

If you stop funding your investments to "kill your mortgage off", you're gonna need to earn a lot more money before you can retire. If optimizing every dollar you earn doesn't matter to you, why are you here again?

[beastykato]

It seems like many of the people here are very narrow-minded.  There is more than one way to skin a cat.

The majority of people here seem to think only about the end-game.  "Well I pay off my mortgage I gotta work until 50 instead of 45.," for instance. 

What about the time in-between though?  I'm only 29, even if I save and budget to the max at my current salary and spending level I'm looking at 45 at the earliest.  Do I really want to spend 16 years at minimum budgeting to the maximum? 

If I can pay off my mortgage and it allows me to have enough free cash-flow to maximize all my retirement accounts, and still have all the money I want to go and play as I see fit while still in my working years, is that not worth more than pinching pennies for 16 years and retiring a few years earlier?

Everyone's priorities are different.  Some people may view your way a saving as inefficient because you can't get to all that money until you reach FIRE age.  I would argue it's more efficient to spend a few more years working to live the way I see fit, for a longer portion of my time living, and during my youngest and most able-bodied years.

[faramund]

It seems like many of the people here are very narrow-minded.  There is more than one way to skin a cat.

The majority of people here seem to think only about the end-game.  "Well I pay off my mortgage I gotta work until 50 instead of 45.," for instance. 

What about the time in-between though?  I'm only 29, even if I save and budget to the max at my current salary and spending level I'm looking at 45 at the earliest.  Do I really want to spend 16 years at minimum budgeting to the maximum? 

If I can pay off my mortgage and it allows me to have enough free cash-flow to maximize all my retirement accounts, and still have all the money I want to go and play as I see fit while still in my working years, is that not worth more than pinching pennies for 16 years and retiring a few years earlier?

Everyone's priorities are different.  Some people may view your way a saving as inefficient because you can't get to all that money until you reach FIRE age.  I would argue it's more efficient to spend a few more years working to live the way I see fit, for a longer portion of my time living, and during my youngest and most able-bodied years.

Of course, if you accept that on average shares have a higher return than your mortgage interest rate, this doesn't matter.

Say, simply if your mortgage repayment is $1000 a month, and you have an extra $1000 a month to do with, as you wish.

So, you have two choices.. lets say at just $1000 it takes 30 years to pay off the house, and if the full $2000 is used it takes 13.

So, either, you can pay $2000 off the house for 13 years, and then have $2000 to do whatever with, or

you can put $1000 into shares, and $1000 into the house. After 13 years, if the shares have grown at their historical rate, you will then have enough in the shares, to stop making house and share payments, and thus also have $2000 to do whatever with. If the shares have outperformed, not only will you be able to make the next 17 years of house repayments with them, but if the shares have outperformed, you will not use all of the shares, and you will have an amount of them left - dependent on how big the out performance was.

This is just maths speaking - if you're dubious setup a spreadsheet and run some scenarios.

But in the end, this just goes back to my previous points, paying off the house vs shares really just comes down to what someone's risk tolerance is.

[ender]

Ummm what?

True or false. If you kill your mortgage off you no longer have a mortgage payment.

If you stop funding your investments to "kill your mortgage off", you're gonna need to earn a lot more money before you can retire. If optimizing every dollar you earn doesn't matter to you, why are you here again?

I think what this comes down to is beastykato isn't interested in the optimal financial plan over a lifetime, but rather in the short term.

Additionally, this is founded on a misguided cashflow approach rather than holistic approach, which leads to the conclusions being presented here - faramund articulated them well.

It seems like many of the people here are very narrow-minded.  There is more than one way to skin a cat.

The majority of people here seem to think only about the end-game.  "Well I pay off my mortgage I gotta work until 50 instead of 45.," for instance. 

What about the time in-between though?  I'm only 29, even if I save and budget to the max at my current salary and spending level I'm looking at 45 at the earliest.  Do I really want to spend 16 years at minimum budgeting to the maximum? 

If I can pay off my mortgage and it allows me to have enough free cash-flow to maximize all my retirement accounts, and still have all the money I want to go and play as I see fit while still in my working years, is that not worth more than pinching pennies for 16 years and retiring a few years earlier?

Everyone's priorities are different.  Some people may view your way a saving as inefficient because you can't get to all that money until you reach FIRE age.  I would argue it's more efficient to spend a few more years working to live the way I see fit, for a longer portion of my time living, and during my youngest and most able-bodied years.

The irony is that we are actually doing the opposite you are - maxing retirement accounts when we're young while paying the minimum on our mortgage - in order to do the same thing, free up resources later. The more we put into retirement in our 20s and early 30s the less we need to do later, exponentially so.

By putting more money into retirement early, we free up the need to save in tax advantaged plans later, which means we could instead pay down a mortgage or otherwise invest in after-tax accounts (or travel, or light money on fire, whatever).

If your goal is a not-so-early-retirement it's in your best interest to stuff retirement as early as possible and let it sit for much longer.  Longer compounding period means you need less cashflow throughout your life in order to reap the benefit. If we wanted to retire at age 59 we wouldn't need any more tax advantaged savings, actually, assuming only 4% post-inflation returns throughout the 30+ year timeframe.

[Jack]

OK, so you're saying I'll be better of by reducing the amount i invest and doing what I want now instead of paying off the mortgage?

I can grasp that, I was simply trying to eliminate one of the variables by removing the mortgage all together.

You keep citing reducing my mortgage payment, but I'm already paying the minimum.  I'm not trying to argue that the mortgage payoff is better from a long-term numbers standpoint I know it's not. 

I'm just wanting to free up cash flow for myself. Now.  And I figured the best way to do that was eliminate my biggest debt.  If simply reducing how much I invest is the best way, OK.   I'm not trying to argue I'm all ears if I'm wrong.

I'm saying that in the four years before you reduce your savings rate, it's better to put that additional $1000/month towards investments instead of the mortgage. Then when you cut back on savings later you'll still have a mortgage (and your monthly investment at that point will therefore be reduced by the amount of your mortgage payment), but you'll still have come out ahead because the return you gained from investing sooner will exceed the interest you've lost paying longer on your mortgage.

(That's in the average case, of course: we're comparing the fixed rate of return for paying off your mortgage against the variable rate of return for investing in the stock market. It's possible for the strategy I'm suggesting to underperform relative to yours, but chances are it won't.)

The point is that money is fungible -- $100k in investments and a $50k mortgage is exactly equivalent to $50k in investments and a $0 mortgage. The only difference is that each dollar you put towards paying down your mortgage saves you 3.5% (or whatever your mortgage rate is), while every dollar you put towards investments earns you 7%+ (again, on average).

(Also note that all of the above ignores taxes, as well as the nebulous, irrational "feelings" people have about having a paid-off mortgage.)

[fiveoh]

It seems like many of the people here are very narrow-minded.  There is more than one way to skin a cat.

The majority of people here seem to think only about the end-game.  "Well I pay off my mortgage I gotta work until 50 instead of 45.," for instance. 

What about the time in-between though?  I'm only 29, even if I save and budget to the max at my current salary and spending level I'm looking at 45 at the earliest.  Do I really want to spend 16 years at minimum budgeting to the maximum? 

If I can pay off my mortgage and it allows me to have enough free cash-flow to maximize all my retirement accounts, and still have all the money I want to go and play as I see fit while still in my working years, is that not worth more than pinching pennies for 16 years and retiring a few years earlier?

Everyone's priorities are different.  Some people may view your way a saving as inefficient because you can't get to all that money until you reach FIRE age.  I would argue it's more efficient to spend a few more years working to live the way I see fit, for a longer portion of my time living, and during my youngest and most able-bodied years.

I did exactly this, earlier this year.  My wife and I want to spend 40k/yr in retirement.(planning for roughly 50, currently 35)  We were only spending 32k to try and save for retirement goals.  Some people close to me died this year and it made me realize I may not make it to 50, I should live the lifestyle I want to now and enjoy it.  So we threw everything at the mortgage instead of investing and paid it off.  Now we are spending 40k yr AND saving the same amount as before.  Is it optimal for having the biggest stache at 50?  Hell no.  Are we happier?  Hell yes.  :)  do what brings you the most happiness.

[beastykato]

I don't know why I was so pigeon-holed in my thinking yesterday.  I still think paying the mortgage off early is a good idea like I stated.  However, yes investing the money on the side and then paying it off once the lump sum is available as many have suggested in this thread would probably be my route of choice.  Because the return is higher as stated and then also the flexibility it gives you in not having the money locked up in the house.

The reason this did not occur to me in my particular situation is all of my accounts are tax-advantaged and I cannot reach my money until I FIRE (except for Roth principle).  Sorry for being difficult and letting that blow right over my head. 

[Jack]

However, yes investing the money on the side and then paying it off once the lump sum is available as many have suggested in this thread would probably be my route of choice.

Simply leaving it invested would still be even better.