Should I pay off my mortgage early? :D
08-13-2018, 11:45 AM
#23
If your mortgage rate is under 3.5% it doesn't make any mathematical sense to pay it off earlier. You take the extra money and put it in the market and you'll beat that rate over the long term and maintain better liquidity.
Paying of the mortgage early generally has some psychological benefits though. This is why personal finance is personal. You have to decide what makes you sleep better. For me, I prefer a big stack of liquid assets that can keep me afloat in the event of job loss or injury.
It's not an all or nothing thing though. Occasionally I throw a chunk of money at my mortgage principal because I have a portfolio loan which can be recast at no charge to me. This means that they will reamortize the payment schedule over the remaining term of the loan to reflect the extra principal paydown which lowers my minimum monthly payment and frees up monthly cashflow. It's actually not the best use of funds for me mathematically but it does make me more comfortable when my fixed expenses are lower.
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08-13-2018, 12:10 PM
#24
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This. If you have a significant amount of cash laying around ( enough to pay off mortgage ), you can likely find a way to leverage it into an investment of some sort. Pick up a cheaper paid off rental property that might give you enough monthly income to cover whatever interest and pay off your house eventually for 'free' with rent while gaining equity ?
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08-13-2018, 12:11 PM
#25
If you've got a super low interest rate - (I'm at 2.7%, for instance) - then the decision to pay off the mortgage early really needs to be weighed against the alternative use of that money. If I'm paying 2.7% interest in my mortgage and I think I can average 4% on an investment account, that money is better spent in that investment account.
edit: wow, beat to the punch. I guess this is why I shouldn't open up threads in multiple tabs all at once before reading each thread.
edit: wow, beat to the punch. I guess this is why I shouldn't open up threads in multiple tabs all at once before reading each thread.
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08-13-2018, 12:40 PM
#26
The answer will vary based on mentally of the respondents. On paper it usually makes sense to keep the low interest loan and leverage the excess funds for higher returns. Many people don’t have the discipline or knowledge to do so. Then there’s the temptation to squander it on frivolous things.
Beyond the numbers the state of mind of 100% ownership is fantastic! HELOC’s allow you to tap capital for wise business ventures. When you’re free of a mortgage the lifestyle opportunities really open! If you’re really lucky you get income from the home too (duplex, inlaw or roommates). I’ve got 10 years of freedom under my belt. It’s slowed me to pursue business ventures and remain free. I adjust my lifestyle to current income. It all works with very little extra $$$. When I have great years I get to splurge a bit.
Looking back to the time I was on the fence with making the same decision I weighted the delta of the mortgage interest to potential returns. The nominal amount (conservative investing) was not worth the risk or peace of mind. As I grow older I see creative types leverage sep savings for investment properties and I wonder if I made the right choice. I also know I could have lost it all on frivolous expenditures so I am happily in the middle somewhere.
Congradulations on being in such a position!
Beyond the numbers the state of mind of 100% ownership is fantastic! HELOC’s allow you to tap capital for wise business ventures. When you’re free of a mortgage the lifestyle opportunities really open! If you’re really lucky you get income from the home too (duplex, inlaw or roommates). I’ve got 10 years of freedom under my belt. It’s slowed me to pursue business ventures and remain free. I adjust my lifestyle to current income. It all works with very little extra $$$. When I have great years I get to splurge a bit.
Looking back to the time I was on the fence with making the same decision I weighted the delta of the mortgage interest to potential returns. The nominal amount (conservative investing) was not worth the risk or peace of mind. As I grow older I see creative types leverage sep savings for investment properties and I wonder if I made the right choice. I also know I could have lost it all on frivolous expenditures so I am happily in the middle somewhere.
Congradulations on being in such a position!
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08-13-2018, 01:03 PM
#27
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As a general rule, good idea. However-
Mortgage schedules front-end load the interest, and by the end you’re paying nearly all principal. If you’re most of the way into the mortgage (say 20 years into a 30 year loan), then the majority of your interest is already paid and the majority of your payments are going to principal. Your effective interest rate going forward may be very low, probably less than 1%. In which case it makes more sense to keep the money you’ve saved invested. You would get a better return even if you put it into a money market fund.
If you’re still early in the mortgage, then pay it off. Sooner the better.
Mortgage schedules front-end load the interest, and by the end you’re paying nearly all principal. If you’re most of the way into the mortgage (say 20 years into a 30 year loan), then the majority of your interest is already paid and the majority of your payments are going to principal. Your effective interest rate going forward may be very low, probably less than 1%. In which case it makes more sense to keep the money you’ve saved invested. You would get a better return even if you put it into a money market fund.
If you’re still early in the mortgage, then pay it off. Sooner the better.
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08-13-2018, 01:51 PM
#29
That's not how interest rates work. They charge you the same interest rate for the entirety of the loan on the outstanding balance. The reason the amount of interest per payment seems front loaded is because your outstanding balance is higher in the beginning. The effective interest rate is always the same. The balance is just reduced without the monthly payment changing so it snow *****. If you make additional payments towards principal on a 30 year loan the interest party of the payment adjusts accordingly.
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08-13-2018, 02:26 PM
#31
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Not at all man, I don't have much experience with taxes so that is why I'm asking here and getting advice from people that are more knowledgeable in the subject.
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08-13-2018, 02:37 PM
#32
Fair enough. I am very happy to have paid off our house, but I can see some of the fair/valid points these other guys made too. IMO if you're financially savvy and can make your money make you more money then I suppose it's not as clear cut of a solution as I thought (I am by no means a finance expert like some of these other guys). To me, paying several hundred dollars per month or several thousand per year in interest vs the itty bitty tax break was a no-brainer.
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08-13-2018, 07:35 PM
#33
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If you have the money to pay off the loan, and you decide to do so, you're effectively saying that you are certain that you will not make more than 4.5% return on that money by investing it in other places. 4.5% is generally considered an extremely conservative ROR on investments. If you are content with that ROR and the peace of mind it brings, then cut the check.
We pay 3.375% to the bank on our mortgage. Since buying our house ~2 years ago, the S&P is up roughly 29%.
In the last 30 years, the S&P has averaged a return of roughly 11.5%. In only 7 of those years did the S&P return less than 4.5%.
We don't pay our mortgage early and never will. If we are ever in a position to do so, we will invest that money in other ways.
We pay 3.375% to the bank on our mortgage. Since buying our house ~2 years ago, the S&P is up roughly 29%.
In the last 30 years, the S&P has averaged a return of roughly 11.5%. In only 7 of those years did the S&P return less than 4.5%.
We don't pay our mortgage early and never will. If we are ever in a position to do so, we will invest that money in other ways.
Last edited by Savington; 08-13-2018 at 07:46 PM.
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