Pay Off Mortgage early?

[surpasspro]

I started with a 30 year mortgage on my primary residence about 15 years ago at 5.5%... and refinanced to a 15 year 4.5% and then a 10 year 2.4% interest rate.  I have a great rate and about 5 years left on the loan with about 100k balance.  I also have cash sitting in a money mark account earning about 2.2% that I could use right now to pay off the loan completely.

I could technically pay off the loan right now, but with rates going up I could surpass the loan rate at some point just in a money market.  I know I can earn more with a CD 1 year 2.5%, which is over my loan rate (not factoring in taxes).  I already have money in the market and don't want to invest anymore at this time.

This loan is my only outstanding debt.  So would you pay off the mortgage for piece of mind, keep the loan because of the great rate and being more liquid?  Is the feeling of being totally debt free worth more?  Thanks

[effigy98]

Financially, for me, I think I will make a lot more money having a paid off house then investing in the market.

I paid off the mortgage and it was one of the best feelings of my life and I have never regretted it. My health and well being is drastically improved just knowing I have ZERO debt as it caused me lots of anxiety. I now have a 90% savings rate. If I were to get layed off (and that is common in the tech industry during downturns), all our bills are under the unemployment insurance payment and that in itself feels great because I could take a long vacation and still keep the family happy where drawing down my stock/bonds at a time like that would not be fun.

I have noticed at work I can say NO to a great many things I was not able to before. I think, what is the worst they can do... fire me? Great, vacation time. I actually think it has helped my career by making me more assertive. I could argue that I have got much larger bonuses because of my no fear mentality so paying off the mortgage may actually pay off waaaay more in the long run for me then if I invested in VTI (and so far that seems to be the case).

[kpd905]

If you pay off the loan right now, how much cash do you have left?  Would it give you more peace of mind to have a paid off house or have enough cash to live for multiple years if you lost your job?

[seemsright]

if you search you will find different opinions on this topic.

As a child I was forced to be woken up in the middle of the night to find out that we were moving as my parents skipped out on the rent. We moved every 6 months or so.

You could tell me I would have more commas than I all ready have if I did not pay off my house...and I would still pay off my house.

Owning everything inside our fence is the best feeling in the world. FIRE is the next milestone.

[surpasspro]

I'll have another 50k left over for my emergency fund in cash.  As the market has gone down recently I've sold sold stocks.  I guess for me at the moment paying it off is a wash or I can make a little more investing it almost risk free.  I know I can make more in stocks, but who knows in today's market.

A lot of investing comes down to emotions and feelings... the little extra i'd make probably doesn't matter.  The state of mind of being debt free might mean more to me. idk, its a tough one because my rate is so low. 

[Irregular Joe]

Paying off our mortgage early is one of our life goals. We are huge proponents of it, and it will bring great peace of mind someday.

That said, for the first time in one of these threads, I would side with the not paying it off.  2.4% is a ridiculously low rate.  Inflation is currently at ~2.3% or so, so it's basically a free loan in real terms. And since it's fixed, it's actually a protection against future inflation. If inflation rises just a little, to say 3%, you're being paid to hold that mortgage. 

[tomorrowsomewherenew]

I'll have another 50k left over for my emergency fund in cash.  As the market has gone down recently I've sold sold stocks.  I guess for me at the moment paying it off is a wash or I can make a little more investing it almost risk free.  I know I can make more in stocks, but who knows in today's market.

A lot of investing comes down to emotions and feelings... the little extra i'd make probably doesn't matter.  The state of mind of being debt free might mean more to me. idk, its a tough one because my rate is so low.

The big question here is, why are you selling stocks in a down market and turning them into cash??? That doesn't sound like the way to retire early.

[TomTX]

On average, putting the money in the market (low cost indexing) beats out paying off the mortgage early for mortgages at current prevailing rates in the USA.

You may FEEL better paying it off, but it's not the rational decision. There have been plenty of threads beating this discussion to death around here.

[Much Fishing to Do]

Early on when I was 100% equities it made no sense to me to pay off mortgage early.

Once I was to the point closder to FI and wanted to diversify more into some safer investments like fixed income and eventually some cash, sending extra money to paying off my (6% at that time) mortgage accomplished a lot of that lowering of risk, basically getting a guaranteed 6% (which was really more like a guaranteed 5% considering lost deduction).  I could have made about 4.5% in cds at the time and that number was dropping.

Considering the fact you can make more now in some cash options (especially if you'll be losing a deduction), and thus have the money always available, and that rate is likely to rise even more over time, I would have probably made a different choice if I were in your shoes.  If you want something as conservative as paying off your mortgage just put the money into cash that pays the best and know that you could always use it to pay off your mortgage if you wanted to but have the money available if you need it.

[kpd905]

The big question here is, why are you selling stocks in a down market and turning them into cash??? That doesn't sound like the way to retire early.

Yes, this needs to be answered.  Buy high, sell low?

[Brother Esau]

Oh, I miss Boarder

[coppertop]

We paid our mortgage off five years ago.  That allowed me to retire at age 62, which was important to me because I felt used and abused at work.  Once we paid off the mortgage, I was able to fully fund my 401(k) at $24,000 a year, fully fund my HSA, etc.  We have no debt and thus I can keep the income I recognize from my retirement accounts at a minimum, since I can live mostly from Social Security. 

I grew up in a time and place where paying off the mortgage was considered a desirable and great feat. My sister, one year younger than I, paid off her mortgage early too ... and is now very happy about it because her company was sold and she just lost her job at age 62.  Her chances of finding another job such as she had are nil due to her age.

If I were 45, though, and in the same situation as the OP, I think I might invest the cash in a CD for terms long enough to earn more interest than he/she is paying in mortgage interest.  I'd probably ladder it in some way so that I'd have CD's maturing often enough to take advantage of increasing rates that might occur or to provide cash if the need should arise. 

[surpasspro]

"The big question here is, why are you selling stocks in a down market and turning them into cash??? That doesn't sound like the way to retire early."

I sold some bond funds that had been down and with rates going up, those particular funds don't make sense at the moment... other stocks were sold because I turned bearish on them and to do some tax loss harvesting since we're getting closer to the end of the year.  I already had cash in my emergency fund, so that's how I got to my total.  The rest of my portfolio is still invested fully.  I max out my 401k, Roth IRA and HSA.

The mortgage interest deduction will not be big, since most of the loan at this point is principle.  Also, with the new tax laws and the new $12k standard deduction, I'm not sure I'll itemize this year and that interest deduction won't matter.

[toocold]

We paid off our mortgage 8 years ago and it felt awesome.  Reflecting back, while we could have made more money investing in the stock market, I would not have changed my decision.  With the reduction of our personal expenses, we levered up by buying investment properties which has in its own right paid off.

[Goldy]

I never thought I would say this but I wish boarder42 was here.

[CoffeeR]

Might holding mortgage have gotten me more in the market?  Don't care.  Really, I know that is probably a Six-Figure Don't Care.  Peace of mind is worth that to me.  And yet many will insist that is stupid.  Whatevs, we get to do what we want and run our own race.       

I [finally] paid off my mortgage in 2012. I would do it again.

[Boofinator]

A lot depends on your FIRE timeline. Are you retiring extremely soon? If so, I'd pay off your mortgage, unless you can get a guaranteed return greater than your mortgage rate (post-tax). Are you still planning on working for a while? That interest rate is really low, and you could probably get a better return in the market (or a nice tax loss harvest if the market crashes). At the very least, intermediate-term bonds have about the same duration as the remainder of your mortgage and currently a better yield, so you are almost guaranteed to get a better return. 2.4% is pretty nice not to invest with, even if you feel the market is high.

[DirtDiva]

Oh, I miss Boarder

I don’t miss them at all!  He/ she was completely incapable of comprehending or analyzing nuance in individual situations, and basically resorted to telling me to go away and die since my cancer diagnosis 2 years ago changed my perception of risk.  Buh-bye B42.

[TomTX]

A lot depends on your FIRE timeline. Are you retiring extremely soon? If so, I'd pay off your mortgage, unless you can get a guaranteed return greater than your mortgage rate (post-tax). Are you still planning on working for a while? That interest rate is really low, and you could probably get a better return in the market (or a nice tax loss harvest if the market crashes). At the very least, intermediate-term bonds have about the same duration as the remainder of your mortgage and currently a better yield, so you are almost guaranteed to get a better return. 2.4% is pretty nice not to invest with, even if you feel the market is high.

Holding a fixed 30 year mortgage in retirement is a GREAT inflation hedge.

[elysianfields]

My nine reasons for NOT paying off my mortgage early:

1. Mortgages are probably the cheapest loans you can obtain (thanks to government subsidy, government-sponsored mortgage securitization, etc.)
2. Mortgage interest is tax-deductible (YMMV)
3. Mortgage payments become easier over time (inflation favors the borrower, who repays in depreciated money)
4. Mortgages allow you to extract equity without selling
5. Mortgages allow you to invest more than you otherwise could (mortgages provide some leveraged investment money)
6. Historically, index investing provides higher returns than the cost of the mortgage, especially after-tax
7. Mortgages provide greater liquidity - you only need to make next month's payment
8. The greater liquidity mortgages provide reduces your risk
9. Mortgages allow you to minimize opportunity costs (cash used to pay your mortgage costs you because you could have invested it more profitably elsewhere)

[Boofinator]

A lot depends on your FIRE timeline. Are you retiring extremely soon? If so, I'd pay off your mortgage, unless you can get a guaranteed return greater than your mortgage rate (post-tax). Are you still planning on working for a while? That interest rate is really low, and you could probably get a better return in the market (or a nice tax loss harvest if the market crashes). At the very least, intermediate-term bonds have about the same duration as the remainder of your mortgage and currently a better yield, so you are almost guaranteed to get a better return. 2.4% is pretty nice not to invest with, even if you feel the market is high.

Holding a fixed 30 year mortgage in retirement is a GREAT inflation hedge.

Like B42, absolutely zero nuance. In reality, it depends on a number of factors, primarily interest rate and remaining duration of loan.

[Latestarter73]

Greater liquidity from not paying your mortgage off or holding too much cash in the current account, if you're like me, gives a heightened/unavoidable risk of feeling rich and wasting cash (really just pissing it away in the most horribly upsetting way).

If you're at all as daft as me paying the mortgage down might give the better return! My experience here is from the pre-MMM reading period so may be irrelevant to the worthies on this forum, but sadly I only found MMM about two months ago.

[nick663]

We paid our mortgage off five years ago.  That allowed me to retire at age 62, which was important to me because I felt used and abused at work.  Once we paid off the mortgage, I was able to fully fund my 401(k) at $24,000 a year, fully fund my HSA, etc.

I'm always confused by this kind of reasoning.  You paid extra money towards the mortgage for years... you could have been contributing that to your 401k, HSA, etc over that period of time instead of waiting until the mortgage was paid off.  If the market returned better than what your mortgage rate was (spoiler:  5 years ago it did) you would have been able to retire earlier.

I agree with having it paid off in retirement if you are trying to keep taxable income down for eligibility of subsidies/programs/taxes etc.  I just don't understand the "pay it off quick and then invest!" logic as there are very few scenarios where that ends up ahead (due to market timing).

I grew up in a time and place where paying off the mortgage was considered a desirable and great feat. My sister, one year younger than I, paid off her mortgage early too ... and is now very happy about it because her company was sold and she just lost her job at age 62.  Her chances of finding another job such as she had are nil due to her age.

That is because mortgage rates were very high at that time.  This is no longer the case.

[Boofinator]

My nine reasons for NOT paying off my mortgage early:

1. Mortgages are probably the cheapest loans you can obtain (thanks to government subsidy, government-sponsored mortgage securitization, etc.)
2. Mortgage interest is tax-deductible (YMMV)
3. Mortgage payments become easier over time (inflation favors the borrower, who repays in depreciated money)
4. Mortgages allow you to extract equity without selling
5. Mortgages allow you to invest more than you otherwise could (mortgages provide some leveraged investment money)
6. Historically, index investing provides higher returns than the cost of the mortgage, especially after-tax
7. Mortgages provide greater liquidity - you only need to make next month's payment
8. The greater liquidity mortgages provide reduces your risk
9. Mortgages allow you to minimize opportunity costs (cash used to pay your mortgage costs you because you could have invested it more profitably elsewhere)

1. Agreed.
2. This is becoming very rare outside of the really expensive markets due to the new tax law.
3. Yes, but only compared to rent. There's no inflation on zero mortgage, so any inflation hedging is non-existent when comparing paying off the mortgage to keeping the mortgage.
4. So do HELOCs.
5. This is good during early stages of FIRE, but less important during later stages due to sequence of return risk.
6. Agreed, though you need to add the qualifiers about either expected returns or over long durations. Otherwise, it isn't always the case.
7. Agreed, important if you have no other source of liquidity.
8. This is simply a consequence of #7.
9. This is #6 stated differently.

[TomTX]

A lot depends on your FIRE timeline. Are you retiring extremely soon? If so, I'd pay off your mortgage, unless you can get a guaranteed return greater than your mortgage rate (post-tax). Are you still planning on working for a while? That interest rate is really low, and you could probably get a better return in the market (or a nice tax loss harvest if the market crashes). At the very least, intermediate-term bonds have about the same duration as the remainder of your mortgage and currently a better yield, so you are almost guaranteed to get a better return. 2.4% is pretty nice not to invest with, even if you feel the market is high.

Holding a fixed 30 year mortgage in retirement is a GREAT inflation hedge.

Like B42, absolutely zero nuance. In reality, it depends on a number of factors, primarily interest rate and remaining duration of loan.

Look a little closer.

Note the present tense, and term listed in my post. Current rates for someone with a good credit score and a fixed 30 year mortgage.  Just about anytime in the last decade would have been fine too.

Or if you want advice specific to your needs, I suggest posting a separate thread with your details.

[Boofinator]

A lot depends on your FIRE timeline. Are you retiring extremely soon? If so, I'd pay off your mortgage, unless you can get a guaranteed return greater than your mortgage rate (post-tax). Are you still planning on working for a while? That interest rate is really low, and you could probably get a better return in the market (or a nice tax loss harvest if the market crashes). At the very least, intermediate-term bonds have about the same duration as the remainder of your mortgage and currently a better yield, so you are almost guaranteed to get a better return. 2.4% is pretty nice not to invest with, even if you feel the market is high.

Holding a fixed 30 year mortgage in retirement is a GREAT inflation hedge.

Like B42, absolutely zero nuance. In reality, it depends on a number of factors, primarily interest rate and remaining duration of loan.

Look a little closer.

Note the present tense, and term listed in my post. Current rates for someone with a good credit score and a fixed 30 year mortgage.  Just about anytime in the last decade would have been fine too.

Or if you want advice specific to your needs, I suggest posting a separate thread with your details.

A 30-year mortgage does not imply the remaining duration. Only the initial duration. And with current interest rates, someone looking to retire is making the optimal choice by paying off immediately. So yes, there is nuance missed by many who are simply comparing mortgage rates to historical 30-year stock returns.

[accolay]

Asking a crowd the early mortgage pay off is akin to asking what oil should you put in your car.

I have a foot in the camp of paying off earlier than the loan term if possible, slowly but consistently. I think the security felt from paying it off early is a powerful thing, and the thought that I'm paying so much interest to the bloodsuckers and the bank makes me angry. As in, if I have more cash I'd put some both into investments and some into the mortgage as well so instead of it taking 30 years, with semimonthly payments and then extra cash, maybe it only takes 10-15 years.

I say if it works for you, and it feels right, do whatever you'd like despite some potential lossed gains in other sections of your portfolio.

[SwordGuy]

I just have to ask you this:

If you have enough invested already, you have enough cash to pay off the mortgage (and then some), and you know you can park that money in a completely safe place where it will earn more than you are paying in interest, why don't you already have "peace of mind"?

Seriously.

If you don't have financial peace of mind now, why not?


And in the scenario you just laid out, you're crazy to pay  it off early.

[maizefolk]

My nine reasons for NOT paying off my mortgage early:

1. Mortgages are probably the cheapest loans you can obtain (thanks to government subsidy, government-sponsored mortgage securitization, etc.)
2. Mortgage interest is tax-deductible (YMMV)
3. Mortgage payments become easier over time (inflation favors the borrower, who repays in depreciated money)
4. Mortgages allow you to extract equity without selling
5. Mortgages allow you to invest more than you otherwise could (mortgages provide some leveraged investment money)
6. Historically, index investing provides higher returns than the cost of the mortgage, especially after-tax
7. Mortgages provide greater liquidity - you only need to make next month's payment
8. The greater liquidity mortgages provide reduces your risk
9. Mortgages allow you to minimize opportunity costs (cash used to pay your mortgage costs you because you could have invested it more profitably elsewhere)

1. Agreed.
2. This is becoming very rare outside of the really expensive markets due to the new tax law.
3. Yes, but only compared to rent. There's no inflation on zero mortgage, so any inflation hedging is non-existent when comparing paying off the mortgage to keeping the mortgage.
4. So do HELOCs.
5. This is good during early stages of FIRE, but less important during later stages due to sequence of return risk.
6. Agreed, though you need to add the qualifiers about either expected returns or over long durations. Otherwise, it isn't always the case.
7. Agreed, important if you have no other source of liquidity.
8. This is simply a consequence of #7.
9. This is #6 stated differently.

For #3, assuming you have the same amount of money to divert to either investing or paying down a mortgage ahead of schedule, a 30 fixed rate mortgage mortgage provides a better inflation hedge than a paid off house, although either of them are superior positions to be in rather than renting if inflation kicks into high gear.

For #4, HELOCs are generally both callable and have variable interest rates.

For #5, if you pay your mortgage on schedule the impact is going to be much more significant in the early years when you are vulnerable to sequence of returns risk. In late FIRE when you have more money than you could possible use (in most historical scenarios) you'll have paid off your mortgage anyway without any heroic efforts.

[maizefolk]

@surpasspro as you can probably tell you kicked over a bit of an ant's nest with your question. To summarize a lot of sturm und drang that gets kicked off every single time mortgages come up on this forum:

1) Mathematically, given current interest rates and historical stock market returns you will always come out ahead paying your mortgage off on schedule and putting extra money into the stock market instead and for people who save the same amount (including principle pay down if applicable), not paying ahead on the mortgage increases your FIRE success rates.

1b) If you instead use historical mortgage interest rates (and impute what they would have been before 30 year fixed rate mortgages existed using their strong but non-linear correlation to US 10 year treasury interest rates), 85% of the time you'd come out ahead paying your mortgage off on schedule and putting any extra money into the stock market instead.

2) Some, but not all, people get a great deal of emotional satisfaction and or release of stress from having their home completely paid off. MMM emphasizes conscious spending on the things that make your life better, so if you figure out you're one of those people, it is completely okay, and even makes sense, to give up a lot of money (/work longer) to sleep better at night.

2b) But if you can find a way to get the same benefits of sleeping better at night through convincing yourself that you'll have plenty of money to pay the mortgage, you'll have to work fewer months (or years depending on your situation) so it's worth exploring whether you can convince yourself of the above before you decide you're a person for whom the financial sacrifice of working longer/saving more is the only way to get the emotional reward of peace of mind.

[Telecaster]

3. Yes, but only compared to rent. There's no inflation on zero mortgage, so any inflation hedging is non-existent when comparing paying off the mortgage to keeping the mortgage.

Not quite.  If you pay extra on the mortgage now, you are spending fully valued dollars.   But you save tiny, inflation-ravaged dollars in the future.  Why pay a buck now to save the equivalent of 60 cents in the future?

[Boofinator]

My nine reasons for NOT paying off my mortgage early:

1. Mortgages are probably the cheapest loans you can obtain (thanks to government subsidy, government-sponsored mortgage securitization, etc.)
2. Mortgage interest is tax-deductible (YMMV)
3. Mortgage payments become easier over time (inflation favors the borrower, who repays in depreciated money)
4. Mortgages allow you to extract equity without selling
5. Mortgages allow you to invest more than you otherwise could (mortgages provide some leveraged investment money)
6. Historically, index investing provides higher returns than the cost of the mortgage, especially after-tax
7. Mortgages provide greater liquidity - you only need to make next month's payment
8. The greater liquidity mortgages provide reduces your risk
9. Mortgages allow you to minimize opportunity costs (cash used to pay your mortgage costs you because you could have invested it more profitably elsewhere)

1. Agreed.
2. This is becoming very rare outside of the really expensive markets due to the new tax law.
3. Yes, but only compared to rent. There's no inflation on zero mortgage, so any inflation hedging is non-existent when comparing paying off the mortgage to keeping the mortgage.
4. So do HELOCs.
5. This is good during early stages of FIRE, but less important during later stages due to sequence of return risk.
6. Agreed, though you need to add the qualifiers about either expected returns or over long durations. Otherwise, it isn't always the case.
7. Agreed, important if you have no other source of liquidity.
8. This is simply a consequence of #7.
9. This is #6 stated differently.

For #3, assuming you have the same amount of money to divert to either investing or paying down a mortgage ahead of schedule, a 30 fixed rate mortgage mortgage provides a better inflation hedge than a paid off house, although either of them are superior positions to be in rather than renting if inflation kicks into high gear.

For #4, HELOCs are generally both callable and have variable interest rates.

For #5, if you pay your mortgage on schedule the impact is going to be much more significant in the early years when you are vulnerable to sequence of returns risk. In late FIRE when you have more money than you could possible use (in most historical scenarios) you'll have paid off your mortgage anyway without any heroic efforts.

#3 Stocks generally do pretty shitty during times of high inflation, so investing in stocks isn't a guaranteed inflation hedge (though perhaps a good hyperinflation hedge).
#4 I was giving an example of a way to pull money out of the house. But in general, one shouldn't pay off the house without significant liquidity anyways. So really a moot point.
#5 Let me clarify my poor choice of words. I intended to say early in the journey toward FIRE, one should take on equity risk with low-rate loans due to the long time horizon. Late in the journey toward FIRE / early in actual FIRE is when one faces sequence of return risks as you mention.

[maizefolk]

#3 Stocks generally do pretty shitty during times of high inflation, so investing in stocks isn't a guaranteed inflation hedge (though perhaps a good hyperinflation hedge).

If you are investing for the long term stocks tend to shrug off the effects of inflation. That's why the inflation adjusted CGAR of the stock market is actually more stable than the nominal CGAR.

When I talk about an inflation hedge I tend to think of an even like the late 1970s (which is is a major player in one of the few times a 4% SWR has failed in US history) which is not hyperinflation, but certainly more inflation than we're used to thinking about in the USA anymore. Having an extra 80% of your house's value in the stock market at the start of FIRE, and a mortgage payment that rapidly inflated away to peanuts make it much easier for a hypothetical FIREee to survive those years, even though they weren't great for the stock market.

#4 I was giving an example of a way to pull money out of the house. But in general, one shouldn't pay off the house without significant liquidity anyways. So really a moot point.

Okay, I'm just establishing a HELOC is a poor substitute for a 30 year fixed rate mortgage if you are going to owe money on part of the value of your house (regardless of the specific circumstances).

#5 Let me clarify my poor choice of words. I intended to say early in the journey toward FIRE, one should take on equity risk with low-rate loans due to the long time horizon. Late in the journey toward FIRE / early in actual FIRE is when one faces sequence of return risks as you mention.

Have you run the numbers and found that paying off your mortgage right before actual-FIRE reduces sequence of returns risk? If so, we should probably compare assumptions.

However, I could potentially see that working given some sets of assumptions as it would function sort of like the "bond tent" strategy some folks advocate of shifting to less price volatile asset mixes right around FIRE when you're most vulnerable to SORR. The problem is that you really do have to make it a tent for the bond tent to reduce overall risk of portfolio failure, and while it is practical to first sell some stocks to buy some bonds right before FIRE and then gradually sell those bonds to buy more stocks again over time, it would be more expensive to pay off your mortgage pre-FIRE and then take out a new one 5-10 years later and it might also be difficult or impossible to get approved for the new loan without a job.

[Boofinator]

#3 Stocks generally do pretty shitty during times of high inflation, so investing in stocks isn't a guaranteed inflation hedge (though perhaps a good hyperinflation hedge).

If you are investing for the long term stocks tend to shrug off the effects of inflation. That's why the inflation adjusted CGAR of the stock market is actually more stable than the nominal CGAR.

When I talk about an inflation hedge I tend to think of an even like the late 1970s (which is is a major player in one of the few times a 4% SWR has failed in US history) which is not hyperinflation, but certainly more inflation than we're used to thinking about in the USA anymore. Having an extra 80% of your house's value in the stock market at the start of FIRE, and a mortgage payment that rapidly inflated away to peanuts make it much easier for a hypothetical FIREee to survive those years, even though they weren't great for the stock market.

#4 I was giving an example of a way to pull money out of the house. But in general, one shouldn't pay off the house without significant liquidity anyways. So really a moot point.

Okay, I'm just establishing a HELOC is a poor substitute for a 30 year fixed rate mortgage if you are going to owe money on part of the value of your house (regardless of the specific circumstances).

#5 Let me clarify my poor choice of words. I intended to say early in the journey toward FIRE, one should take on equity risk with low-rate loans due to the long time horizon. Late in the journey toward FIRE / early in actual FIRE is when one faces sequence of return risks as you mention.

Have you run the numbers and found that paying off your mortgage right before actual-FIRE reduces sequence of returns risk? If so, we should probably compare assumptions.

However, I could potentially see that working given some sets of assumptions as it would function sort of like the "bond tent" strategy some folks advocate of shifting to less price volatile asset mixes right around FIRE when you're most vulnerable to SORR. The problem is that you really do have to make it a tent for the bond tent to reduce overall risk of portfolio failure, and while it is practical to first sell some stocks to buy some bonds right before FIRE and then gradually sell those bonds to buy more stocks again over time, it would be more expensive to pay off your mortgage pre-FIRE and then take out a new one 5-10 years later and it might also be difficult or impossible to get approved for the new loan without a job.

Paying off the mortgage at the beginning of FIRE increases historical success rate according to cFIREsim in most situations compared to investing in equities.

Given seventies style inflation and returns, today's mortgage rates, and 30 years duration remaining on your mortgage, you're right, keeping the mortgage would likely be optimal. However, given the same factors but only ten years remaining on the mortgage, paying the mortgage would brake even during the seventies, but beat a number of the other (non-1970s) scenarios so be a better overall bet (according to cFIREsim).

[BlueHouse]

I just have to ask you this:

If you have enough invested already, you have enough cash to pay off the mortgage (and then some), and you know you can park that money in a completely safe place where it will earn more than you are paying in interest, why don't you already have "peace of mind"?

Seriously.

If you don't have financial peace of mind now, why not?


And in the scenario you just laid out, you're crazy to pay  it off early.

What is this "completely safe place" that you refer to?

[surpasspro]

Its been an interesting debate and because the rate is so low it makes it a harder decision.  Some people value piece of mind no matter the cost and others is about $ in the bank.

I'm thinking of possibly moving (i'd rent out the rest of the home if I do) and/or changing jobs next year.  Since that's a big unknown, for now having that extra cash cushion may be better.

[maizefolk]

Given seventies style inflation and returns, today's mortgage rates, and 30 years duration remaining on your mortgage, you're right, keeping the mortgage would likely be optimal. However, given the same factors but only ten years remaining on the mortgage, paying the mortgage would brake even during the seventies, but beat a number of the other (non-1970s) scenarios so be a better overall bet (according to cFIREsim).

Interesting! So now that you bring that up, it makes sense, since the cost of paying off the mortgage is much lower with 10 years left than 30 (or put another way, the additional liquid investments in the stock market enabled by keeping the mortgage are much smaller), but the amount of cash flow required to service the loan each month would still be the same.

Now the alternative would be to refinance back to a new 30 year term right before FIRE (either pulling cash out, or just stretching the remaining payments over a new 30 year term). But either way it's a very valid point that a lot of the analyses we discuss on this forum WRT mortgages implicitly assume you're near the beginning of the term, not towards the end.

[Boofinator]

Given seventies style inflation and returns, today's mortgage rates, and 30 years duration remaining on your mortgage, you're right, keeping the mortgage would likely be optimal. However, given the same factors but only ten years remaining on the mortgage, paying the mortgage would brake even during the seventies, but beat a number of the other (non-1970s) scenarios so be a better overall bet (according to cFIREsim).

Interesting! So now that you bring that up, it makes sense, since the cost of paying off the mortgage is much lower with 10 years left than 30 (or put another way, the additional liquid investments in the stock market enabled by keeping the mortgage are much smaller), but the amount of cash flow required to service the loan each month would still be the same.

Now the alternative would be to refinance back to a new 30 year term right before FIRE (either pulling cash out, or just stretching the remaining payments over a new 30 year term). But either way it's a very valid point that a lot of the analyses we discuss on this forum WRT mortgages implicitly assume you're near the beginning of the term, not towards the end.

Sorry, just to clarify my empty quote in the last comment, it was a link to plots showing a safe maximum withdrawal rate comparison between paying off and not paying off your mortgage at the beginning of retirement based off several pertinent factors.

[SwordGuy]

I just have to ask you this:

If you have enough invested already, you have enough cash to pay off the mortgage (and then some), and you know you can park that money in a completely safe place where it will earn more than you are paying in interest, why don't you already have "peace of mind"?

Seriously.

If you don't have financial peace of mind now, why not?


And in the scenario you just laid out, you're crazy to pay  it off early.

What is this "completely safe place" that you refer to?

The OP said they could put it in a CD that would pay more than their mortgage interest rate.  Aren't CDs covered under the FDIC insurance? (or equivalent for Savings and Loans or Credit Unions)?   That's as safe as it gets.

[BlueHouse]

I just have to ask you this:

If you have enough invested already, you have enough cash to pay off the mortgage (and then some), and you know you can park that money in a completely safe place where it will earn more than you are paying in interest, why don't you already have "peace of mind"?

Seriously.

If you don't have financial peace of mind now, why not?


And in the scenario you just laid out, you're crazy to pay  it off early.

What is this "completely safe place" that you refer to?

The OP said they could put it in a CD that would pay more than their mortgage interest rate.  Aren't CDs covered under the FDIC insurance? (or equivalent for Savings and Loans or Credit Unions)?   That's as safe as it gets.

Ahhh, I missed that.  Yes, they are covered.  But where can we get a CD that is higher than a mortgage rate?  OP must have a very low rate. 

[TomTX]

Ahhh, I missed that.  Yes, they are covered.  But where can we get a CD that is higher than a mortgage rate?  OP must have a very low rate.

I'm sitting on a 2.5% fixed rate. Unfortunately, getting close to the end.

If I had understood the math sooner, I would have gotten a slightly higher rate and a 30 year loan.

If I had the courage of my convictions, I would go ahead and get a 30 year loan now.

[BlueHouse]

Ahhh, I missed that.  Yes, they are covered.  But where can we get a CD that is higher than a mortgage rate?  OP must have a very low rate.

I'm sitting on a 2.5% fixed rate. Unfortunately, getting close to the end.

If I had understood the math sooner, I would have gotten a slightly higher rate and a 30 year loan.

If I had the courage of my convictions, I would go ahead and get a 30 year loan now.

I'm having trouble finding a CD with a term longer than 3 or 4 years right now with a rate over 3% . 
I get the idea, but I just don't think this option exists at this time.   Would love it if it were.    I love a sure thing

[Scortius]

Ahhh, I missed that.  Yes, they are covered.  But where can we get a CD that is higher than a mortgage rate?  OP must have a very low rate.

I'm sitting on a 2.5% fixed rate. Unfortunately, getting close to the end.

If I had understood the math sooner, I would have gotten a slightly higher rate and a 30 year loan.

If I had the courage of my convictions, I would go ahead and get a 30 year loan now.

I'm having trouble finding a CD with a term longer than 3 or 4 years right now with a rate over 3% . 
I get the idea, but I just don't think this option exists at this time.   Would love it if it were.    I love a sure thing

OP said they have 5 years left at 2.4%. Given the Fed is still steadily raising rates, I think it would be a safe bet to park the money in Ally at 1.9%, or take a 1 year CD around 2% with the idea that medium term CDs will be higher a year from now (and if not you're only giving up 0.4% for a year). Or, you could take a 5 year CD right now for about 3%. That said, if CDs are the only option, then the benefits become pretty marginal and the end result won't be much different.

[surpasspro]

I currently have the money parked in a money market getting about 2.2%.  I figure I need a pre-tax equivalent of around 2.85% rate to make up for taxes.  So in the end the difference will be negligible.  However, between now and the end of the term of the loan, who knows what might happen.  Maybe having that dry powder  at my disposal might allow me to jump into another opportunity I otherwise couldn't if I'm less liquid.  Right now it seems like a toss up for me.  I think I'll wait to have my taxes done coming up and see what my accountant says and if the interest deduction plays factor at all considering the new standard deduction.

[elysianfields]

Given seventies style inflation and returns, today's mortgage rates, and 30 years duration remaining on your mortgage, you're right, keeping the mortgage would likely be optimal. However, given the same factors but only ten years remaining on the mortgage, paying the mortgage would brake even during the seventies, but beat a number of the other (non-1970s) scenarios so be a better overall bet (according to cFIREsim).

Interesting! So now that you bring that up, it makes sense, since the cost of paying off the mortgage is much lower with 10 years left than 30 (or put another way, the additional liquid investments in the stock market enabled by keeping the mortgage are much smaller), but the amount of cash flow required to service the loan each month would still be the same.

Now the alternative would be to refinance back to a new 30 year term right before FIRE (either pulling cash out, or just stretching the remaining payments over a new 30 year term). But either way it's a very valid point that a lot of the analyses we discuss on this forum WRT mortgages implicitly assume you're near the beginning of the term, not towards the end.

This has given me food for thought, @maizeman.  Assuming low mortgage rates continue, I'd really like to refinance just before FIRE, while I still have a paycheck.  In fact, if we decide to purchase a separate / retirement house, we should probably do so with an "owner-occupied" conforming 30-year just before those paychecks stop.  Thanks for the tip!

[LoanShark]

Really just a philosophical question. I work in a demanding - produce or get let go - type role. For me, it’s worth every penny of “opportunity cost” to have no debt.