Here’s a topic that’s likely to cause a good bit of debate.
I love these sorts of questions. 🙂
Recently I have been receiving a lot of emails around the subject of whether it’s better to pay off a mortgage or keep the mortgage and invest instead.
For example, here’s one I recently received from a reader:
One question my husband and I always wrestle with a bit is the one of paying off the mortgage and not having the debt, or keeping the mortgage for various benefits (more money to invest elsewhere, supposedly to help with taxes, etc.)
Have you ever opened up a discussion on this topic? I’m sure there are many opinions and ways people have chosen to handle their mortgage. I think it could be a really valuable and insightful discussion.
Well, we’re just about to open up that discussion!
But first, here’s another one:
I was hoping to get your opinion on something I’ve been going back and forth on lately.
I have been aggressively paying my mortgage over the past 12m, however I have started going back and forth about doing this vs. saving this money.
A little background information about myself. My wife and I are in our mid 30’s, she stays home with 2 children and I work full time, HH income is variable (100% commission) the past few years it has ranged from anywhere between 200k and 325k.
As far as savings goes I’ve maxed out my 401k every year since I was 24, I fully fund our Roth IRA’s each year, saving $$ into 529 plan monthly, save monthly into UTMA’s for my children (future down payment on a home for them or college graduation gift…not sure yet what it will be used for), and send $$ to non-qualified brokerage account monthly.
Currently owe 150k on loan (market value 400k) 7 year 2.75%. Minimum payment is $2,300/m however I’ve been sending between $3,500- $4,500/m and recently sent in 12k last month (large check from work). My goal is to get the house paid off in 25m.
Should I save this money vs. paying extra on the home loan? Am I overthinking this?
Here was the response I sent to each of them:
I haven’t posted on this subject but it’s an on-going question and debate.
It really comes down to two points of view:
- Simply by the numbers, it’s “probably” better (we can’t be certain) to invest and not pay down the mortgage given interest rates are so low these days (as long as you have a long-term investment horizon). You also need to be self-controlled enough to really invest the difference and not spend it — which most people can’t do.
- Some people value the emotional satisfaction of having a mortgage paid off and thus do it even though it may not be the best financial decision.
Those are very broad generalities and each person’s situation is different, so from there you really need to decide what works for you.
Ok, so that’s my take — now it’s your turn…
What are your thoughts on the “pay off mortgage debt versus keep the mortgage and invest instead” debate?
BTW, Rockstar Finance had a recent Money Match-up on this subject that you might want to check out as well.
This is s no brained: Invest instead of paying off a mortgage. Interest rates are low plus in many cases are tax deductible. Why payoff a mortgage and tie up your money in basically an illiquid asset? Investing is the way to go. Let compounding work over time, and increase your liquidity, especially if other opportunities come up it is easy take advantage. Investing historically have averaged a 6-10% return which is much higher than 3 or 4 % mortgage. I my case I carried $500k in mortgages into my retirement 3 years ago. My investments are up over 35% in that timeframe.
Would you suggest the same if the market crashed and then stayed flat for 6 years? Sounds like one of the posters has a lot of disposable income and might be willing the take the chance… but I can virtually guarantee that the next three years will be very different than the previous three years and that’s what everyone forgets. Look at the level of the S&P 500 Index on Jan 1, 2000 compared to Jan 1, 2012…. or worse, to Jan 1, 2011 for example.
If we all had a crystal ball this would be so easy.
In fairness. I struggle with this as well… but I’m in my 50s. If I was in my 30s my viewpoint might be different as well.
Wrong, payoff the mortgage is usually the way to go. Banks are rich for a reason and it’s how they invest.
Bill D. says
Banks are rich because of fractional reserve banking. If we tried to do that we’d be in jail.
Ruben Aceves says
It depends on your mind set. Paying off a mortgage is something s middle class hard worker will choose to do. An entrepreneur will choose to invest, it takes money to make money, a home is never an asset unless it’s making you money Money monthly. I personally will save the additional 2k and Invest in another business that will generate at the very least 2k a month for the rest of your life. The more streams of income you have the most financial freedom you will have.
Amy Hass says
What kind of businesses do you invest in to get that kind of return?
Ruben Aceves says
Try airbnb, for a single home you can make upwards of 5 to 6k on average.
No brainer? What if????? Disability/sickness…loss of a job….family catastrophe…maybe you or your spouse would like to leave the job market and tend to aged parents or children……how do you pay your mortgage with no or a dramatically reduced income. It happens. It happens all the time. It rains and sometimes it is a monsoon.
I understand the last few years have been fantastic from a stock market perspective. I too have benefited greatly. I also suffered through 2007 – 2010. There are no guarantees.
If you do have a low interest rate (as many do today) it is really tempting to carry the mortgage. If you chose to do that be prepared. Six months of expenses in savings (guaranteed security) is not too much.
I have been out of debt (completely) for 2 years now (at age 59) and I can’t begin to convey the peace that not owing anyone anything gives a person. But not everyone is the same.
Just make sure to have an umbrella. It will rain.
Thanks for the comments. Investor mentality understands risks and also ways to mitigate to the extent possible. I used my extra cash to build up investments and safety net.
1. Loss of Job: I was never concerned. Had a engineering degree and MBA. Worked for a great employer for 38 years in a very stable industry, loved my job, and work hard to be a successful top performer where I was rewarded for creating long term value . Also invested to have multiple streams of income (rental, side jobs, dividends, interest) so to have 100’s and 100’s of thousands of dollars set aside for an emergency (several years). I was employed continuously from 18 to age 65 at retirement.
2. Disability: Had disability insurance thru my employer. Set aside vast sums for emergencies. If seriously disabled, I would sell the homes and move to an appropriate facility.
3. Family catastrophe: I was fortunate and not had to deal with this unfortunate event.
4. Market risk: Diversify – I use – Rental property, I Bonds, Annuities, low cost Index Funds, Money Market funds, tax deferred accounts, etc. with a buy and hold strategy and all of the downturns have come back to new highs over the 45 years investing.
In any case – If one has a loss of a major income stream, even with a paid down mortgage, the monthly payment is still there. Wife and I now have $4.2 million in net worth in retirement due to my strategy, with retirement income of $102k and will increase another $42k when I go on SS at 70 in less than 2 years (Could do earlier if I needed the cash), so paying the mortgages is a very manageable portion of my cashflow without touching the assets. The freedom one feels with a large networth and great retirement income is liberating.
Check out my other post on this topic and also the ESI Millionaire 22 interview.
You are prepared! Congratulations! Unfortunately you are an exception. I too have arrived at retirement at 58 with a net worth of over $3m. Having two undergraduate majors, a CPA and an MBA. I too felt secure until the early 90’s when a layoff and 6 months of unemployment changed that.
I dodged a bullet. Many don’t.
phong lam says
High interest rate or low interest rate on mortgage is doesn’t matter. What matter is your giving bank your hard earn money. Pay off mortgage as soon as possible and than start saving for rainy day. We paid off our mortgage in 9 years on a $145k new construction home. We always been frugal and live on the cheap.
I have been thinking about this with my rental property. It would be nice to get that paid off then having around $1K in cash coming off of it per month. The remaining will cover the taxes and maintenance.
I still go back and forth on what makes since as my mortgage is 3%.. Markets seem high at the current time… so I have shifted to a pay down debt mode…
I am currently renting so I have no other mortgage, but I am choosing to keep renting at the moment since my annual living expense in the home I am renting is only ~5% of my annual income. I simply can’t even buy a house and live that inexpensive where I am now.
Getting rid of the mortgage is a game changer. It provides the freedom to do what you want vs. being married to a job you hate. I put 80% of leftover income to pay down the mortgage and invest the other 20%. This way I build the portfolio to create some momentum and have funds for a rainy day.
I get the investment angle and I struggled with this decision twice.
Both times I chose to pay off the mortgage. It’s not a rationale decision, nor the best financial decision. I get that.
However, it was a peace of mind decision. I simply don’t like owing anybody anything.
Boom. There you have it! Simple peace of mind.
I’m in this camp as well. I consciously know I would likely make more by investing in the market but have stayed mortgage free for 15+ years and I’m not retired. I’ve considered using my HELOC during the 2007 drop when the market went to half it’s peak value but didn’t pull the trigger. The peace of mind in not owning anybody anything was part of the reason I didn’t. The discomfort just isn’t worth it for me.
I am in total agreement – It is amazing what peace of mind does to the brain: We end us earning more, look younger, loose less hair, enjoy life/family/friends even more. Sure, investing those amounts may increase assets in the long run…but I opted for paying off the mortgage and having a smile on my face in the mornings. As ESI says: Do what you feel is best for you.
I get the “peace of mind” argument, but be able to write a check out of my investments to pay off a mortgage is double freedom. My net worth is essentially the same, but I find the freedom of access to a pot of money for any need more comforting than low mortgage debt.
I wrestle with this very topic (to payoff mtg or invest) just like many of your readers. I have a home valued at $800k with a 2.65% fixed with a balance of $214k. I know it’s emotional vs basic financial math – but I can’t wait to celebrate paying off my mortgage. Despite having the cash available ($4.2M net worth) I think it will bring major peace of mind when I retire the mortgage.
Given their is no ‘right’ answer to this one – I have decided on a hybrid approach …. paying an additional $500/mo principal payment while also auto depositing $850 into a Betterment account. So I am accelerating the mortgage payoff while also growing liquidity. I also do all the other things first – max work 401k and ESOP, no car or credit card debt, etc. So instead of an either or – im doing both.
The Physician Philosopher says
Why not put an extra payment towards the mortgage each month and pay it off in 15-20 years instead of thirty and then also put additional money into retirement vehicles?
For the most part I hate debt. You can’t really say you are financially independent, in my opinion, until you have paid off all of your debt. I recognize your net worth may be enough to cover the house if calamity happened and – as long as you have enough to still retire and pay off house – you are still financially independent. However, I agree with what you said above, which is that people don’t usually invest the extra money that they were going to put towards their mortgage.
I really want my next mortgage (that we will likely get in about a year) paid off in 15 years. Can’t imagine keeping it around for thirty.
This is pretty much my take.
I agree while this is hotly debated it does seem that it’s largely an emotional feel good vs rational saving perspectives.
I make an additional payment of 1/3 my payment monthly. So four extra pampers a year. I plan to have my 15 year mortgage paid off in. 9 or 10 years max.
However I have enough savings to pay it off immediately if I choose and believe me I think about this a lot especially as I am more cash heavy than I should be.
This is a tough stock market for me to jump in with cash so it’s an even harder decision. I know I’m not smart enough to time the market but I still hesitate to put all of my cash back in. I had to sell stock for diversification reasons but now am hesitant to put it in other stocks.
I’m probably taking one of the worst paths right now. I put the cash in a short term 2% CD and I’m waiting to see what the next 10 months look like. Then I’ll either invest it or reconsider paying off the mortgage.
My mortgage is already 24% LTV so I’m not too worried. Although bigger mortgage on bigger house.
Enough about me. I think ESI nailed it in the intro if you will save and invest then don’t pay it off. If you lack self control then pay off the mortgage.
I read that if you have low income then paying it off makes more sense so I think once I retire and being down the income I’ll just pay it off if it isn’t already.
I agree with ESI also. Why do people feel debt free when they still have property taxes to pay? In illinois, a 500k house will cost you 15-20k in property taxes per year. There is zero reason to pay off my mortgage early with a 15 yr 2.75% apr when the property tax bill as much or more than my mortgage payment.
I have always pay a little extra on my mortgage with a reason and a goal. My first house I bought in 1985 with a 9 5/8% 30 year mortgage. Yes interest rates were that high at one time. Then we bought our second house that we currently live in the year 2000 and it had a 8% 30 year mortgage. Once again interest rates were that high. Two years later we refi to a 5.75% 15 year mortgage same payment and paid off right around the time we would be thinking about retiring. My paying extra as typically if I owed $1375 I would pay $1400 or $1500. Chump change investing wise and not thousands on a cheap loan of 2.75%. Well as income rose I then started paying more. In 2008 the housing crisis hit and everything went into the toilet. My kids would be starting college in 2011 so for three years I hoarded cash as nothing was doing well. Well I did this wonderful thing called FAFSA for college to my surprise My son would now qualify for anything not even a subsidized loan. All he would qualify for is un subsidized loan at a wonderful 9.325%. Yuck. So making sure to have enough for college I started reducing these assets to see if that would help. Then I hit the magic number of barley being over the standard deduction on taxes. I finally paid off the mortgage in 2012 and have been glad ever since. I was then able to take the $1750 a month and pay for college without my sons taking out loans and with the economic uncertainty not have to worry about selling assets to pay the mortgage.
Now that bloggers are talking about FIRE having a house paid off seems like a good idea and my goal was to have the house paid off in 2017 so now that it has been paid off and I am looking at retirement in 2022.
So my reasons for this was my mortgage interest rates were high, I had cash assets that were hurting FAFSA and I did not want to invest in a volatile stock market or uncertain times. Plus I wanted to have the house paid for just before I was thinking of retiring.
My father said his biggest mistake was having a mortgage going into retirement for three years which significantly hurt his budget. His problem was market timing in he retired just before a recession.
Debt is so stressful. Back in 2009 I had accumulated over $500,000 in debt as I built my rental property portfolio. It was “good” debt – taken on to produce income – but debt nonetheless. The anxiety I had whenever I worried about what might happen if my rentals suddenly became vacant and cash flow dried up really affected my quality of life.
Value should be assigned to the peace of mind you get by not owing money. Sure, over time you will probably make more money on stocks than you would save in interest by paying off that mortgage, but what about the aforementioned stress that goes away when you no longer have to write that monthly check to the bank?
I think ones opinion can be influenced by which stage in life you are in. Someone in their mid-thirties and early in their career may look at it differently than someone in their late 50s preparing to retire.
Would we even be considering this question if mortgage interest rates were 7-8% like they were in the 90’s, or if they were 10+% in the late 80’s?
Probably not. Why? The rate was clearly too high and it warranted paying it off. We question it today because we recognize the rate is very low. So, our feelings about it are tied to the rate.
Like all debt, the interest rate is the largest contributing factor in our decision to pay it off more quickly or not. If the interest rate is low, then paying off the mortgage more quickly at the expense of saving for retirement may not be the best financial decision. It ultimately boils down to the interest rate on the loan and what you feel you could earn by investing instead.
As mentioned, paying off your mortgage more quickly certainly brings a sense of peace of mind and it reduces the overall interest you will end up paying, but like any financial decision, it should be weighed against the alternative.
Money invested tends to grow exponentially over time due to compound interest. As years go by, you lose the opportunity to take advantage of compounding interest. You also lose the ability to contribute to certain retirement accounts that have yearly contribution limits. If you neglect your retirement savings today by always favoring more money toward your mortgage, then you may end up in a situation in which you own your house, but have very little saved for retirement. A more balanced approach would be to only make extra principle payments toward your mortgage after you have contributed the maximum to certain tax-advantaged retirement accounts.
That’s my basic viewpoint on it. When you look back you’ll likely wish you had those years back when you could have maxed out your 401k. If you can max out your accounts now and still pay some extra to the mortgage, then with a low rate that’s what I would do.
I know other people have touched on it, but the answer is it depends. If you’re in your 30s and don’t have a scent safe retirement, you had better put that money in investment account.
Someone like myself who is in their forties and already a millionaire, if I take the extra money and invest in, it doesn’t really make much difference to my bottom line retirement. Given an 8% interest rate as opposed to the rampant bull market we’ve had in the last few years. If I don’t pay my mortgage off early and I invested instead, then I basically lose out on the money that I’ve invested because I have to use it to pay off the mortgage when I’m retired. It all depends in which part of the life cycle and coupled with the amount of money you’ve already saved and Investments. The answer is, once again, it depends on where you are at which point in your life.
Johndogsan, we basically gave the same answer at the same time! I posted and then read your comment…haha. Great minds…
I think an age based hybrid approach is best which is what I did. When you’re young (as in mid 30’s stated above) you need to invest aggressively with all available cash to build your portfolio and the low mortgage rates of today make this a no-brainer. With time, your portfolio balance will grow and allow you to easily pay off the mortgage balance at any time if so desired. While doing this, a balanced approach of paying off via a 15 year amortization is a great idea. As you get into your 40’s/50’s, you want to position yourself for retirement and maximum cash flow in the event you voluntarily or involuntarily find yourself out of a job. Taking financial risk out of your life is key at this time. If you’ve invested up to this point you can easily retire your mortgage. This is what I did….I had a 15 year mortgage and with only a small balance left in 2015 so I paid it off. I was 54 and the corporate re-orgs were brewing. I agree with the above comments that it does give a great piece of mind. So do both…keep the mortgage and invest heavily when you are young and can incur more risk, then at some point pay it off when cash flow becomes the key concern.
We needed mortgage interest deduction and wanted to save more making higher return in stock market.
Yes, our mortgage balance is high, but now we will simply sell the larger place, make a profit and maybe pay cash for a condo or smaller home. No mortgage in retirement.
A few years ago, my wife and I decided to make paying off our mortgage a priority. We’re now about a year away from having it gone forever.
Don’t get me wrong — we have been maxing out our 401ks the whole time. It’s not a question of “do I put every last dollar towards one or the other?” You can do some of both. We’ve simply chosen to put our “extra” money towards paying off the mortgage, rather than additional investing.
Why do we want the mortgage gone?
1. It cuts down on risk. We’re way less leveraged now than we were a few years ago, and won’t be at all soon. We’re better able to handle whatever life throws our way.
2. It also gives us more freedom. My wife recently changed jobs, to an opportunity with fewer guarantees but much more upside. She wouldn’t have felt as free to do that if we were carrying a huge mortgage.
3. The market is not an ATM that spits out 10% (or more) every year. It has been recently — but we’re also overdue for a correction. I don’t want to wake up tomorrow and find that the markets are down 40% (as was the case in 2008, so don’t say it can’t happen) — but if it would come to pass, it’ll be a storm that we can ride out pretty easily.
4. To build off of that point: I’ve had big mortgages when the market took a tumble. And it’s awful. I remember the dot-com bubble bursting in the early 2000s … and then the mortgage market meltdown in 2007-08. It’s not fun to watch your investment accounts nosediving while your debt balance stays right where it is. And if any life events do happen then — a job loss, an extended illness, whatever — then you’re hosed. Been there, done that, got the T-shirt, don’t want another one.
5. The original question mentioned tax breaks for mortgages. That’s always been a fallacy — you should never spent a dollar just to get 25 cents back — but it’s almost completely gone in the wake of the Tax Cut and Jobs Act. Most everybody will be taking the standard deduction now, instead of itemizing. So there’s almost no tax benefit from carrying a mortgage.
Everybody has to do what they think is right for them. Having lived through some nasty recessions, we know that having no mortgage (and no debt, period) is the right move for us.
Great point on the tax breaks! It’s a simple concept that seems difficult for many to get their head around. I argue it alot and many say that I am giving away “the 25 cents”. That is true, but I am keeping 75 cents!
Thanks Paul! It’s never made sense to me. I’ll make a deal with those people — if they want to send me a dollar, I guarantee that I will send them 25 cents back. The offer stands for however much they want to send me. 🙂
Lots of good points in there. I’ll still itemize but your points are spot on!!!
Thanks! If it still makes sense for you to itemize, then of course you should do that; I was just pointing out that under the new tax laws, itemizing is going to make sense for a lot fewer people than before.
Pay it off as soon as possible. Once you are in a position of safety with a roof over your head you can max out investments and only be risking money. If you invest all instead you are risking both money and the roof over your head if the markets tank and interest rates rise. If that happens jobs usually go and there is less money around to earn commission on, so you could end up with less income from which to pay higher mortgage payments and expenses.
I’ve wrestled with this my entire life. I am now 51 and 14 years from retirement and owe another 21 years on my mortgage. I am currently paying down my equity loan and should have that done with in 2 years. I never fully appreciated the burden having debt entails. I won’t argue that you could probably make more investing in the market, but very few actually do that. My brother just paid off his house and he showed me his before and after budget. The freedom he now has to spend 70% of his income on anything he wants, to include investing, is just too compelling.
I don’t understand why I never correlated the freedom I have not having a car payment to that of not having a mortgage, but plan on having my mortgage gone in the next 9 years. I will never sacrifice my retirement to pay off the mortgage, but the sooner I can get the mental freedom from debt the better.
Razorback 14 says
All you shared (and others too) makes sense to me. However, the questions still remains for me ——????
My wife and I are in our early 60’s and nearing retirement (2020), and we’ve been debt free for the last five years, and it’s felt great. But was it the smart thing to do?
We have always saved and have been blessed to build our Net-Worth to over $3 million and we still struggle with this question—— have we done the right thing by paying off our mortgage early?
Some days I feel good about my decision and other days, I question our move of working so hard to become debt free.
Here’s a question I need help with ——
In January 2020, we will break ground on our new and final home. Over the years, we have moved from home to home (all because of my jobs), but we’ve been in our current home for the last 20 years and although it’s a nice home, it’s far from our dream home. So, we plan to build our final home and we’ll probably have to get a sizable loan to get what we want. So, if we do this, we will enter retirement with a loan and that cuts opposite of everything I’ve done, read about and watched others do ——.
Here’s my thinking —— I’m going to get a loan, build my last home and invest all (or most) the $$$ from the sale of my current home. Once, I secure my loan and build my home, then I’ll start working on paying it off , like I’ve done in the past.
What do you think of my plan ? Again, my wife and I go back and forth on this question—- I would appreciate yours and others thoughts as we try to make the right decision for our upcoming retirement-
A 3M net worth is great but it seems unusual to go into more debt so close to retirement.
Using asset income to pay debt is risky. Borrowing long and financing short is a real risk to cash flow when the market corrects and interest rates rise. Your quality of life may suffer.
You would need a pretty good income / expense plan and lots of understanding around the risks you face.
I would recommend for a Saavy 35 year old, not for a retiree with 3M
Razorback 14 says
Thanks for your reply, Mohammed. Interesting— yes, I too feel it’s a bit unusual to carry any debt in to retirement, so that’s why I’m weighing all my options and thinking hard about my next moves.
FYI — you mentioned something about having the income to cover a home loan in retirement— when we retire in 30 months, my wife and I will have a combined pension of $7500 per month , so a portion of this money would go toward paying each monthly note. We will still have plenty of funds to pull from to live on.
In saying that, I’m still not what I’m going to do yet. The next 30 months should give me time to make my final decision about taking on more debt as I enter retirement-
Razor – first of all, congrats on building a $3M+ net worth. I have a feeling that no matter which path you choose, you’re going to be fine.
I’d need to know a few things before I could provide any suggestions. (Bearing in mind, of course, that the advice will be worth what you paid for it. 🙂 ) What’s the price tag of the house, and how much in liquid assets do you have? What is the equity in your current home (I’m assuming you would be selling it when you build the new place)?
Razorback 14 says
Thank you, John. My wife and I , as a team, have worked extremely hard to save over the last 40 years, so building a nice final home will be part of our plan —
Anderson to your question:
1. Price for final home @ $650K
2. Current home value is @$275K – we plan to sell this home in 30 months so it could increase in value – no debt
3. Rental property valued – current value $230K – no debt
4. I will have close to 1 million in additional liquid assets to pull from, if needed.
5. We’ve already purchased the lot/land and it’s valued @$100K — no debt
Where’s this home going to be? Wherever it is, once it’s built, I hope you and Mrs. Razor enjoy a nice glass of iced tea (or an adult beverage, if that’s more your speed) on the deck while you toast your success. I suspect most of us could stand to learn a lot from you.
Anyway — if it were me — and your mileage may vary — here’s how I’d approach it:
I’d write a check and be done with it.
You need $650K total. You already own the land ($100K), and your current home should fetch $275K. So you just need another $275K. And you have it — close to a million in liquid assets. I’d sell the ones that would minimize my tax bill.
And don’t forget, that’s two years from now. That gives you two years to save up, so you might not even need to touch those assets much if at all. You’ve got a rental that (presumably) is kicking off some nice income, and you’re still working, so maybe pile up cash these next two years so you can write that check without touching the million of liquid assets.
No matter how you slice it, in two years, you’ll be sitting on the deck of your dream house, which overlooks the ocean/mountains/forest/wherever it is, with zero debt, a paid-for rental property, north of $700K liquid assets, and what I am guessing is a nice seven figures in retirement funds. Your biggest decision will be whether to open that bottle of Screaming Eagle today, or to leave it for tomorrow while you finish off the Lafite.
No matter what you decide, congrats again on getting to this point!
Razorback 14 says
One more thing: my wife and I will have a combined monthly pension of $7500 per month to help with our income stream too.
Not to mention your Social Security. Congratulations and focus on your health :-). I agree with John.
Razorback 14 says
Oh, and I welcome your advice about this important topic. Seems to have generated a lot of interest——
ESI model makes sense to me, but I want to be even smarter with this important decision as I enter the final phase —— retirement to me is about much more than increasing my NW, but I don’t want to blow it all by making stupid decisions so close to the end.
Does this make sense to you?
Good for you! It’s great to be in a position where you can build your dream home. I just want to caution you, at age 60 — make sure to include accessibility in your plans, i.e. less stairs, ramps for exterior entries, (for visitors/yourself if needed one day) wider door ways to accommodate walker, wheelchair, elevator; bathrooms with grab bars, walk in/roll in showers; if this home is to be what you live in during the “aging process”. I realize those accommodations may not have been part of your “dream home”, but including those now, can keep you living in it for a much longer time. Anything can happen at any time. (as I walk this path with aging parents, and being mid-fifties myself).
This is always a topic I’m passionate about but I think most people here have covered my thoughts/strategies. “Most” people can’t be responsible enough to invest instead of paying off debt. I see it in friends and family who complain about their substantial mortgages; they should tackle the debt because they are definitely not investing extra money (just blowing it).
We did both for a while (paid extra and invested) but in the end, the hatred for debt won out: We hit a very low monthly interest payment and started to back off and let the mortgage resolve on its own, but the market had blown up and I was weary about corrections. That and we realized we had the cash so…
And now that freedom is pretty amazing. As John and Deaner pointed out, you have more options. My wife and I both have explored the possibilities of reducing our work time in ten years (we’re 38 now) and I have considered a PhD sometime in the future.
House rich and cash poor. I’d prefer to invest as much as possible rather than pay my mortgage off early. The reader mentioned that all their tax advantage accounts were fully funded.
I feel that they should put that extra money into brokerage accounts and invest. If they ever needed the money for any sort of reason, it’s much easier to access that than trying to access home equity.
We did some of each; it took us about 20 years from purchasing the first house to pay off the mortgage on the second. While we’ve never maxed out retirement accounts we’ve saved regularly. We are in the odd position of still having a high school student at ages 57 and 63. Given the cost of high school tuition, I’m glad the mortgage is behind us.
As far as the tex benefits of a mortgage, they dissapear long before the mortgage does.
David B says
This is a financial blog. I understand the feel good aspect of paying off a mortgage but it doesn’t make financial sense. Taking the extra money your putting towards mortgage payment and dollar cost averaging that into stocks/bonds that on a conservative basis make 5%. Over time your net worth is growing at a much faster pace then paying down your balance, no matter your age. The goal is to increase your net worth, investing is the better way to do that.
Razorback 14 says
Thanks, David. I appreciate your thoughts—. I’ve always tried to keep my eye on the building of our Net-Worth and I think this makes sense —— continue to invest and let your money work it’s magic and just sit back and pay that ugly monthly mortgage——
Brett Gehringer says
What’s everyone’s thoughts about putting the extra money on the home today, while the market continues to hit all time highs…. and when the maket goes the other way stop the extra house payments and DCA into the market at that time?
This is my strategy at this moment, we’ve just found this thing called FI/RE (I am 40) and are both investing and paying our mortgage with monthly double payments. I’m aware we cannot time the market but it feels good to see the mortgage payments stack up and lowering the outstanding balance. It also feels good putting money to work at the stock market and watching it grow and making dividends.
Due to health issues we’re trying to lower our monthly expenses for the future. With self-employment I have no pension and thus need to save for this as well.
I have the plan to stop the double monthly mortgage payments when the market tanks and will dca every payment in the market.
Steve (NWOutlier) says
your money invested pays you indefinitely, dividends, interest, growth (sometimes decline)…. the benefit of paying down a mortgage has only a short term impact… ‘the interest your paying’ or the drag it places on your net worth.
I’ve struggled with this; my take is; if the investment is in a taxable account and is as large or larger than your debt…. keep growing the taxable account… pay enough over your mortgage that makes you comfortable.. 100/mo? 250/mo? I have enough in my taxable account to pay off my house… but if I liquidate, I pay taxes and I’ve lost the cash flow from the dividends and growth….
the interest you pay is finite… and you can control it by ‘overpaying’…. you should overpay… but you need increased passive cashflow and net worth.
Razorback 14 says
Thanks, Steve. Makes sense to me ——- even though I’m a debt hater, I do understand your position here and it’s helpful.
Ray Levesque says
The THIRD Option – The HELOC
If you use a HELOC, you can not spend any extra money at all and still your principal will decrease more quickly. So whether you want to pay extra principal payments or invest money elsewhere, you really ought to use a HELOC to get that balance down! I can answer questions offline, but I’m surprised I didn’t see the HELOC mentioned at all. Thanks for listening!
Razorback 14 says
Ray —- how can I reach you offline? I have a few questions?
Ray Levesque says
Russ Maney says
Here’s one question that hasn’t been asked (so far) of those who advocate putting extra cash in the markets vs. paying off their mortgages:
Suppose you owned a house mortgage free. And, you could get a mortgage (or a home equity line of credit) for, say 2.75%. If the average long term stock market return is (so several articles say) around 7%, wouldn’t it then be wise to take out a mortgage/home equity loan and invest it the market?
Essentially, every time you put your extra money into the market vs. against your mortgage, are you not making this same decision? Other than for people approaching (or in) retirement, whose investment horizons are therefore much shorter and for whom capital preservation matters more than growth, wouldn’t the correct decision ALWAYS be to maximise mortgage debt to maximise cash available for investments, so long as your ‘cost of capital’ (mortgage interest rate) is lower than expected long term market returns? Or, put more bluntly, wouldn’t the right advice for younger people be to NEVER pay extra on their mortgages, if their mortgage interest rates are significantly lower than their expected long term market returns?
This logic is sound, but it still doesn’t feel right to me.
FYI, I’m currently one of those ‘on the fence’ – I’m not willing to sell investments to pay off my $300K mortgage early (which I could do in full tomorrow) – partly because I don’t want to pay the capital gains taxes those sales would create. But, I am putting my extra cash against my mortgage each month vs. adding it to my investment account.
Russ – yes, you would be wise to take out the mortgage and invest it under those circumstances, with a few caveats. First, you shouldn’t put it in high-risk investments that have a significant chance of a major loss. Second, you should be in a financial position such that that you can afford to keep paying the mortgage even if you were unable to liquidate the investment (or unwilling due to a decline in its value). Note that this goes for a mortgage. A HELOC is a slightly different animal, because often the lender has the ability to call a HELOC to be paid off, or paid down for a period of time, or the HELOC may expire. You can still invest HELOC money, but be aware of (and have a plan for) the additional risks.
Retired at 54 with no debt and a comfortable nest egg. We are both professionals with advanced degrees. Our chosen career paths pay enough, but we are not high-earners by any stretch. We live carefully in an expensive area of Southern California. Here is our experience:
Background: We were born into families with careful spending habits. Always maxed out our 401K and IRA contributions, back to when we were in our late 20s. Bought our current house in 2000 with a 30-year mortgage at 8.25% interest rate. Refinanced a few years later to a 15-year mortgage at 5% interest rate.
Probably would have never considered paying the mortgage off earlier than the 15 years, UNTIL the Great Recession. Felt fairly confident that our jobs were secure, but we were definitely impacted by watching various friends and others suffer job losses. In 2009 we aggressively started paying off our mortgage and paid off the remaining $158,000 balance in 41 months, while still contributing the max to our 401ks/IRAs.
I don’t know if it was the smartest choice (vs. more investing), but we think it was the right decision for us. We were both 46 years old when we started and 50 years old when we finished, just in time to start contributing more in catch-up contributions toward our 401ks/IRAs. This was in 2012/2013, and those around us were having to live a more frugal life out of necessity. So it was easy to continue our “austerity plan” for the next few years and we invested any excess funds into the market via taxable accounts.
While neither of us got laid off during the downturn, we were asked to make salary concessions. And while we were grateful we had jobs, changes caused by the downturn made these jobs more challenging and less fulfilling. So, having a paid-off mortgage was HUGE for us mentally. While our jobs sort of sucked during this time, neither of us felt “trapped.” In fact, it made it easier to get up and go into work just knowing that we had a paid-off house, while watching our savings grow.
We now have a comfortable retirement, and have enough so that we travel and spend more freely.
It took some time for us to feel comfortable spending more freely, especially after getting used to spending so little during that period of austerity. If given the chance, we would do it the same way all over again, and are happy we took the approach we did.
Mike B says
I can identify with some here. I despise being in debt and as a result would regularly fight the urge to pay my mortgage off early even though I could have long ago. At this point, I am pretty far along in the amortization of a 15-year loan @ 2.875% interest rate so it’s easier to overcome this urge to pay it all off by seeing how much of my monthly payment now goes toward principle paydown. At least it feels like I’m making more progress each month.
It was clear to me I can do better by investing my surplus cash elsewhere so instead of paying down my mortgage, I put that $ toward my first rental. When that worked well, I bought 2 more. After those were leased I opened a HELOC to buy more (gasp!). Once those were all leased I took out a fixed-rate commercial loan and payed-off the HELOC balance. From a purely financial standpoint my investment returns were far, far better using this approach. It wasn’t easy for me; I moved slowly and methodically to get to this point. Today I have more debt, which is way out of character for me. However, I’m now more comfortable with using “good” debt to increase my returns and definitely won’t pay off our mortgage early.
Paper Tiger (aka MI 27) says
As all have noted, every situation is different so there really is no “one size fits all” answer to this question but I will give you my two cents. I would run an amortization schedule on your remaining mortgage payments and see how much you are actually having to pay in remaining interest. Since mortgages are set up with accelerated interest paid out in the early years and decelerating interest in the later years (less principal early, more principal later), the numbers can give you some pause for thought.
Here is my situation:
60 years old and 6.5 years left on a mortgage balance currently at 540K
Started as a 15-year fixed-rate mortgage at 3.5%
Paying bi-weekly so making 26 equal payments per year vs. 24
169 payments left (26 per year x 6.5 years)
Doing the calculations says if I keep doing what I am doing I will make payments of 603K during this time (540K Principal and 63K in interest)
Total interest is 12% higher than the principal spread out over 6.5 year which is about 1.8% on an annualized basis before applying any mortgage deduction for taxes.
I have the 540K to pay off my balance now but it is in a mix of CDs and Savings Bonds averaging about 3% interest per year.
540K at 3% per year over 6.5 years grows to 654K.
654K in interest earned is 51K more than the interest I will pay if I do nothing with the mortgage and just keep making my payments, as is, until the debt is retired.
Summary, for me it seems better to stay liquid and keep the money invested and just pay off the mortgage over time. If you would like to run your own numbers, this is a great calculator for that:
When I inherited some money in my mid fifties, I asked my adviser what was better, paying off my mortgage and credit card or investing it. He said, “what ever makes you feel better.” Well, we decided to pay off the mortgage and credit card. The weight that was lifted off my shoulders is almost indescribable. We invested the monthly house and credit card payment amounts. The math might not be right, but the feeling of freedom and quality of life you get from being debt free can’t be beat.
You said it much mote concisely than I did :-).
But you are dead right, the sense of freedom is undescribable!!! Surely there are associated health benefits that might not be easily quantifiable.
I view my mortgage contributions to
Be a portion of my asset allocation, namely the safe portion equivalent to bond purchases (assuming of course you have liquidity covered). So I pay my mortgage at a rate to equal that allocation including any needed rebalance. I might buy bonds or cds instead if their rate minus taxes exceeded my mortgage rate. They currently are not quite there at a ten year rate. (The equivalent of asset liability matching)
How does the second guy max out Roth IRAs he is way over the income limits…
I pay 1 extra payment per year on my mortgage, and make extra payments if I can’t see myself getting a better return somewhere else.
I was wondering the same exact thing wrt the Roth IRAs!
Brett Gehringer says
Google “back door Roth IRA”. Funding a non deductible IRA and Roth converting.
michael williams says
1. For an FHA loan, pay it down enough so you can tell them to drop the mortgage insurance, that’s money down the drain.
2. I decided to retire early, which meant a big cut in income. So I paid off my mortgage, which reduced my monthly expenses by $2000, allowing me to live on my smaller income.
While paying off your mortgage is great for peace of mind, it’s not the best thing for your net worth. If you have the temperament and time horizon your much better off in the market. Even with the market at all time highs – the secret is that the market is at all time highs more often than not. You can put the money into your mortgage but know that you are costing yourself in the long run.
With an interest rate and income like that it’s a no brainier to invest. The only reason to pay off the mortgage early would be to if there was concern that he may lose his income since his wife doesn’t work and he is commissioned based. But with a commission income like that he is clearly very good at what he does. If I was making that kind of money I’d be investing in real estate big time.
I’m in a very similar situation as the author with the dilemma. He owes $150k and I owe $167k. Both of our homes are valued at $400k. His interest rate is 2.75%, mine is 2.80%. I placed an amount equal to my mortgage balance in an online high yield savings account that pays 2.00% so now my effective yield I’m paying for the mortgage is reduced to .80% and I keep investing. He should do the same thing and he’ll only be paying .75% to the mortgage lender. These figures are pre-tax deduction. Factor8ng in his deductible interest and he’s paying about .60%!
With all due respect, I’m not seeing your position.
First: you’re ignoring taxes. If you’re getting 2% (which is a bit dubious, at current market rates, but let’s go with that number), you’re going to owe taxes on it. Let’s keep the math simple and say that you’re in the 25% bracket — that reduces your real rate of return to 1.5%.
Second: the value of the interest deduction has changed, thanks to last year’s tax law changes. For all but a small number of taxpayers, it will now be smarter to take the standard deduction instead of itemizing. So the real interest rate doesn’t change. (And even if you do itemize, the deduction is valuable only to the extent that it exceeds the standard deduction.)
Third: so if your real rate of gain on the savings is 1.5%, and you’re paying 2.8% on the mortgage … how are you not giving 1.3% away? Aren’t you pretty much paying 1.3% to keep an overly large emergency fund?
Your approach is an interesting one, but I’m just not getting how it leaves you better off. Can you expand on it some more?
Let me dummy this down. I’m earning 2% on my savings (amount equal to mortgage payoff) or about $278/mo. My mortgage rate is 2.80% of $394/mo. Subtracting mortgage interes from savings interest I’m only paying an effective mortgage rate on my primary residence of .80%. This is the advice that my CPA provided me. She advised against paying off the mortgage. Her actual words; “I have some ultra high net worth clients,. Do you want to know what wealthy people do? They finance their mortgages long term at low interest rates and invest their cash in other things.”
Her point is for me to remain “liquid.” I have peace of mind that on any given morning I can pay my only debt off at the stroke of a pen, but with lots of cash I am extremelyliquid. YOu bring up tax rates/deductions, etc. I’m not concerned about that. I have a lot in taxes anyway you look at it. TX property taxes on my residence alone runs me $10k/year. If I was that concerned about taxes I’d live somewhere else.
(On one point I did not bring up but I will now is that I pay additional $900/mo. Toward principal so I’m on track to pay this off in a few years while maintaining that large savings balance)
Paper a Tiger aka MI 27 says
Getting 2% these days is not that hard. Synchrony Financial has a 14 month CD paying 2.5% and even their HY Davings rate is 1.8%. There are a handful of 5 yr CDs out there paying 3%.
Dr. Mikhail says
As a general rule in life: Do Not allow someone to be in control of your money. The someone in your case is the lender and simply if you pay off your mortgage, the lender will be in control of your assets. In case of any future financial need and you need to get out some of your money by refinancing, now the lender in control of your money by saying yes or no looking to qualify you and that will be based on some factors like income, credit score and many more.
If we say reroute the funds from paying off mortgage to investing the funds, I am sorry that will be not enough thoughts into answering your question.
Factors to consider when you reroute your funds like:
1- Try to find investment account with no downside market potential.
2- Try to find investment account with no downside time lose potential.
And many more factors to consider when you reroute your money.
I kind of see the point you’re trying to make, but I have to disagree with the details. The asset is the house. Once you pay off the mortgage you are in complete control of the asset. Up until the point you pay off the mortgage, the lender has control. Build up enough funds to never need a home equity loan and you are in complete control.
Assuming low interest (sub-6%) debt, I’m fully in the “invest” camp. There are several reasons why:
– Higher returns can be expected (though not generally assured)
– Saving the cash (i.e. while waiting for an appropriate investment opportunity) leaves you open to seizing opportunities when they arise
– Mortgage interest is tax deductible
– Paying down debt is quite illiquid
– Paying down debt does not change the monthly payment requirement until it’s fully paid off
– Interest rates seem to have nowhere to go but up (or flat), so if you are a real estate investor who uses mortgages, best to lock up as much long-term, low-interest debt as possible
If you have a saver/investor mindset, such that cash is always seen as an opportunity for investment rather than an opportunity for consumption, there’s little reason to be afraid of debt.
Johnathon makes great points on the advantages of the Investment option. “Use other peoples money” is a financial lever that investors use to gain wealth and increase net worth. Besides the arbitrage differential advantage of a low cost mortgage (3-4 %) versus 6-10% investment returns over a long period, one must also remember that one pays off the future payments with ever decreasing dollars as inflation over time happens. A $1000 mortgage payment now is a piece of cake in 20 years. I have used home equity to major advantage over my life. 41 years ago I bough my rental duplex at the age of 27 when I refinanced my home mortgage and took out $11000 equity of my home for the down payment. Now that $11000 investment has a value of $200k and has provided a positive after tax cashflow over the years of $130k, and is providing income in my retirement. Also I have had to move 3 times due to job transfers. My company paid the buying and selling cost, but each time I bought a new home, I put only 20% down and invested the remainder in the market. Same for when I refinanced after the Great Recession and interest rates were low. I refinanced several times on my 2 homes at no cost and took out the max amount mortgage possible, using other peoples money. Why not with such low interest rates and tax deductibility which I will still have even with the new tax laws. Also with any extra income I had with tax refunds, bonuses, etc I invested most of it in the market in taxable accounts. These steps provided me with a networth of $4.2 million, and now in retirement the optionality to pull funds from considerable taxable accounts, tax deferred accounts and Roth funds, so that I can manage to pay no tax on capital gains and dividends.
Razorback 14 says
Thanks for posting this question!! It seems you’ve hit a nerve with the two camps
Camp 1. Pay off mortgage
Camp 2. Invest – and carry debt
Of all the people who responded, I think it would be interesting to see how each camp landed —-
Which camp had the highest % of followers. Maybe a survey of some sort would be of interest to your followers—
Just a thought —- probably something others are not interested in knowing.
I’ll add it to my list — you know, the one with 1,742 ideas that I’ve yet to find time for. 🙂
That said, I do have some additional thoughts on this topic so we’ll probably discuss it again.
Razorback 14 says
Donnie m. says
I read through about half of the comments. Everyone that says paying off the mortgage is a bad financial decisions are discounting RISK to 0$. We pay for insurance to reduce risk..insurance companies charge more for risk..banks charge more for risk..why do we then give risk a 0$ value on a mortgage?
1. If you have slide off the road and have a bad car wreck with no one else involved and then become disabled…and let’s say the tarriffs cause the stock market to drop 10 or 20 percent eating your 401k and ira in the short term. If you have a mortgage you may have to sell your investments at a loss to keep from foreclosure.
2. If your home is paid off..no big deal. Can’t take your house if you own it. The cost of living you have is lower and the house is a tangible asset that you can sell. Also, people don’t need stocks to live…but they do need a roof over their head. Housing and real estate have intrisic value that investments don’t.
TL:DR. Having a mortgage means you are at risk of losing your home if you don’t pay due to circumstances outside your control. Stock markets can be bear and bull..hope you don’t have to sell in a bear market.
Don’t forget about property taxes. You never truly own your property free and clear.
I don’t think reasonable people discount the risk – it’s part of the equation. In my case, my mortgages are all on rental properties but it would take a complete decimation of my financial position before I would be unable to pay the regular monthly payments. The rewards of investing have been high, and in case the riskiness wins out, I have many levers I can pull to keep paying the payments on schedule.
If there’s one thing I’ve learned, many times the hard way, it’s that you need to keep emotions out of your financial decisions. Another thing to consider is that one answer does not work for everyone and at all times; you need to find what’s right for you at this time. For me, this really boils down to math, even if we just look at the relative numbers and not hard calculations. I’m paying 3.75% for a 15 year fixed mortgage on a SFH in a very hot market (Denver suburbs). The house is appreciating in value considerably (over 5% per year… way over!) but that could turn around at any time; the only thing that matters is what the market will support when I go to sell it, but things are looking good so far. I’m also making way more than 3.75% on my other investments (I’m an experienced investor but even a roboinvestor can do better than 3.75% right now). Once again the market can change, but I can control those losses by using stop losses and selling those equities should the market turn around… and it will. So in general it just makes more sense for me to keep the mortgage and invest elsewhere. I look at the 3.75% as a necessary evil, that enables me to grow more net worth through equities, while also watching the market appreciate the value of my house. Should things turn around an the numbers work out differently, I can adjust at any time. Nothing is set in stone.
It’s basic math. Look at historical averages. Money is so cheap to borrow. Keep the mortgage and invest any extra. Leave the emotions out of it.
But if the debt really gives you that much anxiety, pay off the mortgage.
There’s not really a bad option either way; one option is just better.
Obviously you shouldn’t consider paying off the mortgage unless you already max 401k or other deferred accounts and have any other non deductible loans paid off – credit cards or car loans etc.
You’re in your mid 30s and the house can be paid off in 25 months!
A GREAT problem to have! You’re taking about barely 2 years and then you can put that income to work. You can elevate your lifestyle some and also save more, once its gone. If you’re going to stay in the home, I’d pay it off.
Calculate what that house payment will be worth if you invest it in a growth stock mutual fund at 8-12% per year until the age you want to retire.
You’ve done very well. Be proud of your effort so far.
I’m 29 and my husband’s 33 he’s active duty military and I stay home with our 2 kids. Our only debt is our house which we bought for 225k last year (put 20%down) now owe 160k. We put all our tax return on it plus $1k a month on principle. My husband retires in 9 years so my goal is to have it paid off by then. We move in2 years so this will be an income property. He brings home $60k a year after taxes and we save $8,400k a year between our 2 roths for retirement. Seems like we should be saving more but my reasoning is peice of mind. In 9 years im hoping my husband can dowhatever makes him happy. With a paid for house, some savings, and a small pension i think we will have some freedom.
Your age and opportunity cost drive this decision in my opinion. As long as you are in a position of actively seeking investment returns post tax greater than your tax adjusted mortgage interest rate than it makes sense to seek those returns. I am 44, with a high income and high network, so for me, I would not pay off my 400k mortgage at a 3.5% rate unless I ceased seeking returns of that level. If I retire on 6-10 years, I may shift that position as my risk profile will change. But for now, I’d rather take that 400k and put it to work. The debt free piece of mind concept has never resonated with me as I am too aware of what I can be earning with that cash. So I view the mortgage as an opportunity.
Very much agree. The short answer is there is no right answer to this question.
It is personal and depends on all sorts of factors. Your age, your mortgage balance and interest rate, current risk free interest rates, how long until your retirement, if you plan on staying in that residence and for how long, and your investment balance etc.,. I probably missed more than a few other factors that could figure into this.
Another consideration for those with a 30 year mortgage in the early years is to take liquid cash on hand and use to “pay down” enough of the principal to qualify for a 10 or 15 year loan at possibly a lower interest rate than the 30 year loan. Of course, this option is rapidly going away. This will allow you to pay off the mortgage sooner, likely at not much more or even less of a monthly payment depending on interest rate reduction and you can still decide at a later time to pay additional principal. Gives you greater flexibility if the refinance fee is low enough to justify.
Personally, I’ve come to realize the “desire” and “common phrase” of being mortgage free in retirement is not as practical or necessary given the low interest rates of many fixed rate mortgages today. If you have a adjustable rate mortgage, now is the time to pay it off or refinance if you haven’t already done so. Whether or not going into retirement and especially if going into retirement when a fixed income will mean any increase in mortgage results in lower discretionary spending and a risk of insufficient income.
I agree with that. I did something similar two years ago. We purchased our home 3 1/2 years ago @ 3.87% with a 15-year mortgage (20% down payment to avoid PMI) and within 10 months my Merrill Lynch advisor refinanced us on a 7-year ARM @ 2.80%.
Every payment I make an additional principal payment of $800./mo. This has really chewed down the principal balance and I’ll have the mortgage paid off on a much sooner schedule.
Just found this website, very good debate. I’m in the pay it off camp. I’m 43 and haven’t made a mortgage payment for 6+ years. We moved 3 years ago and I wrote a check for the new place. Others seem to not be bothered by debt, but for me there is no peace of mind like being debt free. It’s very liberating. Just now catching onto the FIRE community and I’m making plans to have the option to retire at 50.
Ruben Aceves says
Try airbnb, for a single home you can make upwards of 5 to 6k on average.
So clearly there is a mix of opinions on this.. and personally I don’t see one right or wrong answer…
However- do the answers change when thinking about a 3% car loan?
Great point. I recently purchased a New (not a preowned, like most in the FIRE community) 2018 Honda Accord. I put $10kbcash down and financed remaining balance of $25k thru Honda Finance at 2.74%.
The KEY here is that my company pays me a $550./mo car allowance. This pays my car payment and justifys not only financing the car but also justifies purchasing a new car. In my mind I’m driving a “company car.”
Nope, I wouldn’t do that either. Then again, I wouldn’t take out a car loan for any reason, whether using the money to invest or otherwise.
I’m fine with what I’m doing in my “company car.”
If ainwere to lose my job or change jobs I’d pay it off immediately. But as long as company is making the payment I’ll keep the loan, it’s for 48 mo’s.
For what it’s worth, I wouldn’t have the car loan had I not had this arrangement with my company.
Not for me. I took out a 3% loan for a car so I could keep my cash invested. When climate changes and I was holding on to some new cash, I paid off the loan. Take the thread a step further – how much debt do you carry vs. emergency fund/spare cash? You could argue that your financing your emergency fund by maintaining both.
Calling it a “company car” is akin to bucketing your expenses against income and often leads to poor financial decisions. I’m not saying it has in this case but that in general this is a bad practice as it leads to emotional decisions rather than logical decisions. The other thing to consider is if you get a “car allowance” if that is a cash payment to you whether or not you have a car loan, then that is no different than looking at your total salary and deciding to take on a car loan. If you didn’t have the car loan the money could be spent elsewhere, whether or not transportation related. Just some things to consider.
Also in the end, any time one uses cash on hand to invest, they are technically borrowing money to invest which is hazardous. However, there is something to be said about liquidity. After all, cash is king and pulling equity out of property (real or otherwise) is not liquid. Although, if you are investing in individual stocks or high volatility funds, that isn’t so liquid either as you might be forced to liquidate when value is down. All things that have to be weighed in the decision.
For me, carrying a large mortgage payment into retirement is a good financial decision as it affords me the ability to keep my investments where they are (earning and diversified) including sufficient cash liquidity to ride out shorter term (less than 3 years) market turbulence without requiring selling assets. Also, now that I am in retirement, to get a mortgage on the property at this level would be difficult given the fixed income is lower than my working year’s income, and as my age increases that also makes a mortgage more difficult to acquire, and given the extremely low fixed interest rate, that became a no brainer for me to hang onto that relatively cheap liquidity. In the end the monthly mortgage payment is just another bill that is built into the annual budget just like the property taxes and insurance on the property are also annual expenses built into the annual budget.
My car allowance is deposited into my ck’ing a/c on the 15th, preciselybwhen my car payment is debited and paid to Honda finance automatically. Neither allowance nor payment is ever noticed by me since they’re both automatic.
On liquidity, my bills are so low in relation to my net income that’s i have a surplus of over $4000 per mo which is saved. My cash balances are well into 6-figures because Im guilty of hoarding cash and underinvesting in equities. I’m very risk averse and loss avoidance is more important than opportunity costs of underinvesting in equities. To me, my personal savings rate trumps investment returns. As long as I’m saving 35% of my income each month why be concerned with stuff like a car loan, etc. there’s a method to my madness. I promise!
sounds like you have found that balance that works for you. thanks for sharing.
If you have to ask the question which one is better, it probably means that you don’t have the skills and / or discipline to do what it would take to benefit from not paying off the mortgage.
My recommendation every time I have been asked is to pay off your debt as soon as possible, including the mortgage. Apart from the debt cost avoidance, your cash flow will increase and you can then focus on investing that cash flow.
I know people that decided to invest rather than pay off the mortgage and it has ended up costing them more because they missed something (tax implications, fees, investments can go bad, unexpected events etc.)
If you think you have the skills and discipline, then own your finances and invest. If you don’t feel you are there yet, then the sure thing is to pay the mortgage off.
I paid off my mortgage by age 24. Thanks to an interest free loan from my mom. I was saving for a forever home when the housing market crashed. Homes were so cheap I bought my forever home and a rental. My tenant pays the mortgage and I’m making extra principal payments. I’m contributing to 401k but my main focus is being debt free. My goal is to pay off the mortgage by 2020.
I gave my 1st home to my daughter when her husband got out of the military. It’s nice being able to help them and have my grandsons nearby.
I was a stay at home mom for several years. I actually enjoy working. I’m 46 and plan to work for another 20 years if my health continues to be good. If baby boomers exiting the housing market cause a price decline, I’ll buy more rental. After my mortgage is paid off, I’m thinking about investing in peer to peer lending. Risky but no real danger if it doesn’t go well.
I don’t think people take taxes into consideration when building wealth. The numbers look good on paper but when you go get your money the govt gets a large portion.
Dan Murray says
I paid my mortgage off 4 years ago because I couldn’t think of a better risk-free alternative to earn 5.5% on that capital. I’m 59 now and have no regrets with that decision because I have plenty of other investments earning higher returns with market risk.
I’m 2 years into a 7 year ARM with a rate of 2.80% and a payment of only $390/mo. I’m mak8ng payments of $1250/mo to accelerate principal payments and I don’t plan on paying off the balance until the end of the ARM period. No rush since the rate is so low and payment is so affordable.
Hey! HH income is variable (100% commission) the past few years it has ranged from anywhere between 200k and 325k.
GARY sherrill says
I have 100k equity in my home, is it worth taking some of that out and invest it into an IRA
Why finance / take money out of your home for that? Just invest the money and be done with it. Cash flow it.
First off, that’s already a great achievement! But I wouldn’t tap into that. Taking on more debt is never a good move unless it’s to build equity. You’ll have to take out a home equity loan to get that money and that will cost you in interest, probably around 5%. Look at amortization calculation for more details – it’s ugly. Why would you pay 5% to use money that’s already yours? You’re already paying mortgage interest now you want to pay even more interest? Not a sound investment. And what will the money do on an IRA? Historic averages for the market are 7% annually and we’ve blown that away for almost a decade. I suspect we have some leaner years coming up so the timing may be all wrong to get into the market. I recommend finding another source for finding your IRA (preferably a Roth IRA). Cut the cable and cancel SiriusXM subscription. Read more about finance and watch less TV. Meal plan, bring lunch to work and stop eating out for dinner. Carpool. Live lean and mean with your dollars and sock away everything you can. Create a budget and look for opportunities. INVEST WISELY! It might even be fun. Slow and steady wins the race. Good luck!!
Kansas Grain Trader says
I am in a similar situation with a little over $100K in equity in my home.
I should be able to re-fi into a conventional 30yr fixed at a much lower rate than a HELOC. I am currently about year 5 in a conventional 30yr fixed at 3.8%…thinking current rates are similar??
I am curious what the math says if you did this (re-fi) then take the $100K equity and invest it in several low cost ETF’s that follow Dow, S&P & Nasdq? FWIW due to income i do not qualify for mortgage interest deduction.
Yeah that still sets you back 5 more years in interest payments. The calculation is fairly easy to do the comparison, but you’ll also have to make some assumptions. And that’s where it gets tricky. No clue what the housing market or stock market are going to do over the next decade.
One other though. Have you considered moving to a 15 year fixed? You shift much more of your monthly payment to principal and away from interest. Then Maybe take out the equity and use a portion (placed in a high interest savings account) to help with mortgage payments and invest the rest. I haven’t run the numbers but I’m thinking that could be a better long term play. I’ll see if I can run some numbers tonight and repost.
Although I might be inclined to put ‘new’ money into investments instead of paying off a low interest mortgage, I would NOT take a loan against your equity to buy more investments. That to me would be crazy. If we get another major correction in Realestate/Market- your investments from the equity could be lost, but worse that that you’d be upside down in your mortgage. Bad, bad, bad. Honestly- unless your house is worth $150K, $100K in equity is not that much. Not enough to mess with IMO.
Since this post originated- I’m swinging more to paying off mortgage before investing more. Piece of mind….
Correction and clarifications:
typo – funding you IRA not finding
The 7% average return is inflation adjusted. It’s actually 7-8%.
Average HEL rate right now is 5.76%. That’s expensive money.
GARY sherrill says
I have 100k in equity and I’m looking to re-fi payoff some bills and some extra $ to invest in IRA’s. good idea or not?