Would you pay off your mortgage if you could?

[cs1992]

If you had exactly as much savings in the bank as you owed on your house (and provided retirement/investments/ other debts were not in question), would you pay off the mortgage?

I owe $150k on my house and pay 5.5% interest on a 30 year loan with 26 more years to go. Although I do not have near enough money in my bank account to pay it off, I am not so sure I would even if I did.

[bjl584]

No. If I had EXACTLY the amount in my savings that it would take to pay off my mortgage I would not do it. If I did, that would be the end of my savings and my liquidity.

[lgslgs]

Not if my savings were earning more than I was paying in mortgage interest.

I sure would keep the money in a bank savings account earning less then my mortgage interest expense, though!


Lynda

[disneysteve]

I can and no, I wouldn't. Our investment portfolio is around 4 times the balance on our mortgage and I have no plans to pay it off. In a couple of years, I will probably start making some extra payments just as part of our overall financial plan and moving along toward retirement in about 18 years. I'd like it paid off before I retire so I need to trim a few years off the schedule.

[Broken Arrow]

Assuming it's fixed, 5.5% is actually quite good. If I was in that situation, I might increase the size of the payments to pay it off early, but no, I wouldn't pay it off right away even if I could.

[jIM_Ohio]

Originally Posted by cs1992

If you had exactly as much savings in the bank as you owed on your house (and provided retirement/investments/ other debts were not in question), would you pay off the mortgage?

I owe $150k on my house and pay 5.5% interest on a 30 year loan with 26 more years to go. Although I do not have near enough money in my bank account to pay it off, I am not so sure I would even if I did.

NO. I start my mortgage paydown account later this year. I need $1000 to open it (in PRPFX). Instead of paying down the mortgage I will add the paydown funds to this mutual fund.

The best case if the first mortgage is paid off in one month by cashing out a portion of mutual fund, then I retire the next month. The first mortgage is 5.75%.

The second mortgage will be paid off when this fund has the payoff balance plus around 10k in it. This is because I expect to have enough to pay off the second mortgage within 10-15 years, and investing the second mortgage payment for 15-20 years is worth more than keeping the debt at 7.5%.

[vsjhoc]

It would be almost tempting, wouldn't it? To wipe out what is probably your single greatest recurring monthly expense. But I think it is a bad plan to be house rich and cash poor. Better to have liquid assets available.

[am_vanquish]

In terms of Net Present Value, it seems wiser to invest the balance rather than pay off the mortgage. A simple CD or even some money-market accounts will match the 5.5% interest you're paying. I'd place an emergency fund into such a money market and invest the rest. Historically, but not necessarily guaranteed in the future, you would yield much more in equities over that 26 years than you'd get by paying off the mortgage early. It seems like more of a mental issue, which is common in our society. People are risk averse, that's all there is to it, but it isn't the best course of action (for the situation you've described).

Now, if you were financed in a different mortgage with a higher rate and/or further along in your mortgage (<10 years left), that would be a different scenario (especially in today's equity market, which seems volatile in the short-term). Also keep in mind that there are tax advantages to having a mortgage that you give up by paying it off early.

[disneysteve]

Originally Posted by vsjhoc

But I think it is a bad plan to be house rich and cash poor. Better to have liquid assets available.

It isn't just about being cash poor, but also about return on investment. If the mortgage is at 5.5% but your investments are earning 10%, it doesn't make sense to pay off the mortgage. If, of course, your mortgage rate is higher or your money is languishing in a low yield bank account, it might make sense to put it toward the mortgage instead.

Originally Posted by am_vanquish

A simple CD or even some money-market accounts will match the 5.5% interest you're paying.

Also keep in mind that there are tax advantages to having a mortgage that you give up by paying it off early.

Keep in mind that with that CD, your gains are taxable, so your real return is lower.

As for the tax advantages, that's largely a myth. It doesn't make sense to pay interest just to deduct a small portion of that interest on your taxes. You are spending $1.00 to save $0.25. Not a good deal.

[parafly]

I don't currently have a mortgage, but that will probably change within the next two years.

My plan is to make one extra payment per year, reducing the length of the mortgage from 30 years to 23 years. Other than that, I don't see the point of becoming house rich instead of cash rich.

[rebeccae55]

Absolutely! At age 52 with (ideally) 13 years to retirement, I'd love to be able to pay off my house. Then I'd increase my 401K contribution $1037 per month (amount of my house payment) from now until retirement. Come to think of it, I'd increase it even more since the contribution would be pre-tax. An extra $12,500+ per year would go a long way to build my nest egg.

I know I possibly could earn a better return elsewhere. However, paying off a house is a 6% (in my case) risk-free investment. I think the peace of mind that comes with a paid for house would be priceless.

This scenario assumes I have an emergency fund of 6 months expenses.

But since I don't have a lump sum to pay off the house, I am adding an extra $400 per month so my pay off date will be 12/15 vs. 7/21. That gives me 5 years to sock the extra payments into my 401K.

One thing I know for sure, having a paid for house in retirement is way better than having a mortgage in retirement. And having enough in retirement savings is WAY better than relying on family or a reverse mortgage to get by.

[disneysteve]

Originally Posted by rebeccae55

But since I don't have a lump sum to pay off the house, I am adding an extra $400 per month so my pay off date will be 12/15 vs. 7/21. That gives me 5 years to sock the extra payments into my 401K.

Have you run the numbers on what that strategy could be costing you? Your 6% mortgage really only costs you about 4.5% when you factor in the interest deduction. Your 401K money grows tax-free (though the withdrawals are taxed). So if you can have your 401K invested in something that is earning more than 4.5%, you'd be better off putting the money into the 401K.

Stuffing money into the 401K within a few years of retirement is fine, but you won't get the benefit you would get now through the magic of compounding. The longer you can have your money growing tax-free, the better off you'd be come retirement, even if you still have a mortgage to deal with.

[am_vanquish]

Originally Posted by disneysteve

Have you run the numbers on what that strategy could be costing you? Your 6% mortgage really only costs you about 4.5% when you factor in the interest deduction. Your 401K money grows tax-free (though the withdrawals are taxed). So if you can have your 401K invested in something that is earning more than 4.5%, you'd be better off putting the money into the 401K.

Stuffing money into the 401K within a few years of retirement is fine, but you won't get the benefit you would get now through the magic of compounding. The longer you can have your money growing tax-free, the better off you'd be come retirement, even if you still have a mortgage to deal with.

I believe the key for rebecca was the risk free part. There seems to be a pretty decent age difference between her and OP. 13 years is close to the borderline to me. She has less time to recover from drastic swings in the market than the OP (I'm assuming he's younger with 26 years left on the mortgage). Beforehand, I'd say it's a no-brainer - invest the lump sum. However, cases like this (especially those with less than 10 years to retirement) put me on the fence, I could see going either way.

However, she should be able to beat the 4.5% mortgage rate (as steve derived) using an investing strategy that moderates the risk level by focusing on bonds with small amounts in equities. I'd even suggest a target-date fund that will automatically adjust your risk level as you approach retirement in this case (although the expense ratios might be higher, I dunno).

[big_dippin]

I wouldn't unless I had some extra saved up.

[disneysteve]

Originally Posted by am_vanquish

She has less time to recover from drastic swings in the market than the OP (I'm assuming he's younger with 26 years left on the mortgage). Beforehand, I'd say it's a no-brainer - invest the lump sum. However, cases like this (especially those with less than 10 years to retirement) put me on the fence, I could see going either way.

One thing that is very important to keep in mind is that investing doesn't end on the day you retire. You need to plan for another 20-30 years after that, even more if you retire early. So even if you only have 10 years left until retirement, you still need to maintain some exposure to equities and growth instruments because you could have another 40 years ahead of you. That's plenty of time to ride out market swings.

That said, I agree that everyone's risk tolerance is different and everyone's overall situation is different, so there is no one size fits all answer to the question.

[PrincessPerky]

if I had exactly enough no, but if I had a decent retirement fund and EF, yes..because it is my house, and I actually have a back of the mind, yes I know it is silly, fear that the dollar will not work for my whole life time...if the dollar stops working having 10million in the bank but no house makes you way poorer than barely any in the bank and a house (preferably with land to garden)

Yeah fine, so it is mostly silly, and mostly mute (I haven't even got a decent EF) but still the issue is there.

[rebeccae55]

Disney Steve, I appreciate your input. Definitely something there to consider.

Here's some more info:

I made $55,000 last year. For the last several years until October of this year, I put 17% of my income into my 401K and Roth IRA. My employer matches dollar for dollar up to 5% so the total contribution last year was 23% of income, $12,650. I am getting a really late start on retirement. My total is currently $92,000. With the exception of about $2,800 in bond funds, this is all invested pretty aggressively in the market (primarily funds, only about $5,000 in individual stocks).

Not that I can count on it, I except to inherit somewhere around $300,000 from my dad. When and whether I receive that will determine when and whether I retire. God willing, I will work as long as needed. But if things go well, I'd like to retire at 65 and then possibly work part time.

In October, I decided to reduce my 401K contribution to pay the extra $400/month on the mortgage. This year IRA contributions go up $1,000 so my contributions haven't changed much. 15.5% to Roth and 401K, 20.5% including employer contribution for $11,275. This assumes no raise. While I can't count on a raise, I've received one every year since I started and plan to raise my 401K contribution once I do.

So I feel like I'm putting about as much as I should at this point, taking into account that I don't have a crystal ball. I think since I am getting a late start, one of the most important things I can do is lower my expenses. That way, if I have to stop working or cut back on it, I can sell this house (currently worth about $275,000 and I owe $117,000) and use cash to buy something substantially less expensive. The less I owe on it, the more I have available for something else. Who knows where the market will be when I'm ready to downsize?

Thoughts, anyone?

[mrvirgo]

My tax guy told me paying my mortgage off would not make any difference in lowering my taxes if I paid it off. So I did so in 1992. I've been saving my mortgage money ever since. I have not been sorry for a moment.

[FrugalFish]

No, I would not pay off the mortgage and leave myself without a cushy emergency fund.

There's a lot of talk about the tax benefits of deductible mortgage interest, but there are probably a few people, like myself, who have very few deductible expenses and don't pay enough in property taxes and mortgage interest to take itemized deductions- actually, we're not quite there this year, but next year we likely will be. Still, I have to agree that a lot of folks got such great mortgage rates over the past few years, that you really can do better in the market than in paying off your mortgage; OTOH though it isn't a bad guaranteed investment. As interest rates go up in the coming years, I suspect there will be a lot of talk about the benefits of prepaying a mortgage.

We're doing a little of everything- main focus is saving for retirement, but we also focus on prepaying our mortgage. Our life would be a lot simpler if we had no mortgage.

[TBH]

I go back and forth on whether it's a good idea to prepay, which is silly. Since I don't have a whole lot of extra cash to prepay with, it's a purely intellectual excercise.

My mortgage balance is pretty low ($47K). I don't have that much in cash, but I could probably scare it up, or most of it. However, that would leave me with no emergency fund whatsoever, which would be foolish since a.) my income fluctuates and b.) I have medical problems.

But say somebody handed me $47K tomorrow, and I still had my healthy EF balance as well. Would I pay off the mortgage?

I really don't know. I think I'd have to buy a 3 month CD with the money so I could think about it. But I'll tell you this--it would be a question of which was the best for me psychologically, not a question of whether I'd make a couple percentage points more if I invested the money. I'm not confident enough in my investing skills to let that be my main reason for NOT paying off my mortgage.