Paying off the home versus investing?

[LivingAlmostLarge]

I've been having a discussion by the writer of this post. Paying Off Your Mortgage Is a No-Brainer

I explained that I don't pay off my home also because it has been skewing my net worth. I have too much home equity and not enough in investments.

This guy keeps saying that I should only be using 5% returns which I'm willing to consider and consider 4.5% real mortgage interest (6% but 25% bracket), so how where do you guys stand on investing versus mortgage payoff?

And does anyone else consider it a net worth diversification?

I mean honestly is it stupid to consider paying off my home and having $600k in home investment and no retirement savings stupid? Or very minimal investments outside of my home?

In my net worth I only consider home equity and equities, no cars, no clothes, etc. I think those things are stupid.

I also pointed out that our economic numbers are going to be skewed because you can't look at the bear market between 1901 to 1921 and 1929 to 1939 because not as many people invested. Also technology has changed the type of economic investment.

[ksluis62]

You need assets that can generate income for retirement, IMO. I think you're right, you need investments to do this. No matter how expensive your house is, it can't generate income. I suppose you could plan on downsizing in retirement and converting some of that equity into income producing investments. But in that case, you wouldn't be so much worried about paying off the house. In fact, in that case, you probably want more leverage in the house, not less. So again, it seems you're right to build up the investment side.

[grand_canyon]

I believe paying off the mortgage is a good thing to do just as long as it's not in lieu of something like your 401(K). When you bought your house, the financing showed you how much you'll be paying in interest. By paying it off, you just guaranteed yourself a return. Now I could see using that money instead to invest but realistically how much can expect to make in the stock market a year and is it worth the risk. We paid our mortgage off a few years ago and we saw how quickly we accrued more dollars for investments. Then again, we're conservative investors since we both were burned by a "financial advisor" when we were younger before we met.

[maat55]

I believe in having a house paid for and an retirement fund. It depends on your age and income as to how much you invest and how much you pay towards the house, and the price of house is very important in this senario.

[disneysteve]

I think you should enter retirement with a paid off home, not a mortgage. If that requires making extra principal payments, that's what you should do. However, I think having a paid off home and little to no retirement savings is foolish since you can't live off your home's value unless you borrow against it or sell it and downsize. When I do my net worth, I don't include home equity as that is dead money to me.

I think paying extra on the mortgage can be part of an overall savings plan. I currently send an extra $100/month to the mortgage. That is in addition to maxing Roths for each of us, my wife putting the max allowed in her 401k, taxable investments, a 529 plan, etc. The extra going to the mortgage is just a small part of the overall plan.

[LivingAlmostLarge]

No the argument if you read is that it's a no brainer to pay off the mortgage. His argument is investing even in retirement accounts isn't worth it because he barely made 5% over the past 10 years investing.

Thus he would have made more if he had put all that savings into paying off his home. Which was a mistake. So his advice is to pay off the home and not save even in retirement accounts because you get the guaranteed 6% return on $$$.

I'm not sure that's a great idea. I can't imagine have a paid for home and no money outside of it either in retirement accounts or taxable accounts.

I'm 29 and if we focused we could pay off the home in 8 years or less and be like late 30s. But I don't think it would be worth throwing the $30-35k/year at the mortgage?

[disneysteve]

I agree with you. Just because the market has done poorly the past 10 years is not a valid justification for not investing going forward. If anything, just the opposite is true. With the market down 40-50% off its highs, that's a great time to be investing if you have a long-term outlook.

Nothing terrible about a 6% return but I don't think it's a great long-term plan.

[LivingAlmostLarge]

He says though that if you read the link, most of us DPOH are putting too much stock into returns higher than 6%. It's ridiculous. But I'm not sure, what do most people return?

My own returns are usually pretty high but it's because we actively diversify. But I thought even just normal index investing might yield 8%. I typically use 8% number in my assumptions.

Now where is jim when I need him? To help me crunch more numbers.

This is his response to paying off the mortgage.

You are correct in that you should first make sure you maximize your 401(k) contributions, at least to the point of your employer match, before prepaying your mortgage. But anything over that is not a sure bet. If you don’t believe me, just ask a lot of people who, after many years of making the minimum mortgage payments, what their 401(k) plan is worth today.

To me and those who think like me, a home is not an investment. It is a place to live. Whatever money I make on it when I finally decide to sell, is a fringe benefit. That’s all.

I look at it this way: If I choose to pay off my mortgage early and the world economy goes in the tank, I still have a rent-free place to live that I can always call home.

I think maat, I should ask you, because this sort of sounds like something you might say to be debt free. But why pay off the home just to live in debt free?

[Goldy1]

I don't think there is a black and white answer to this question. The past years, we have been fortunate enough to make enough money to pay toward retirement and extra home equity.
Now with my dh laid off and me having to cut down at work due to baby on the way things are different(baby needs to be watched), but I can say money in the bank AND having not a lot owed on the home bring me comfort.
My neighbor has his house paid off b/c he inherited it, but he lost his store he owned and he cries about needing money. He can't afford things he needs and his paid off home do not pay for his needs.

[MonkeyMama]

Well, put it this way, when we had a high interest rate (8%+) we were motivated to pay it down. We also had considerably more income though.

I am considerably less motivated now that our interest rate is below 5%, AND our income is considerably less.

I was less motivated when we had a lot of equity for a time. Agreed there.

Most people don't seem to understand how inflation works. I am young in my career and we are living on one income. We never neglected our retirement, but in our 20s we only put away 10% because so much of our income went into our home. The reason being so we could drop to one income and have a low mortgage, around age 25. WE accomplished that.

As I grow in my career and inflation (& lower interest rates) eat at the mortgage we are making retirement a priority. We are putting away 15% right now with a goal of 25% to max out our ROTHs & employer retirement plans. (I am 31).

I expect we will revisit mortgage pre-payments in our 40s. Income should be higher and inflation will work its magic. A second income (or any large windfall) would be devoted to paying off the mortgage fast.

I expect to have a paid off home WELL before retirement and ample retirement savings as well. I probably won't spend any time in my 30s prepaying a dime. Particularly with our low interest rate right now.

I know our parents were excited to pay off their mortgages in their mid-50s, but what was once a daunting payment (particularly the high interest rates and prices my parents bought at in their early 30s, over 50% of their income to mortgage payments) was just pennies to them at the point they paid it off (about age 53).

I've always been extremely motivated to have a paid for house. But knowing the best way to go about it takes more than just putting all your assets and resources to ONE thing. That doesn't make any sense to me.

[MonkeyMama]

P.S. My pet peeve is how people look at a paid off house as some sure thing that can never be taken away. Um, it's not. I would feel uncomfortable having all my eggs in any one basket. A paid off house with no other assets is not a good place to be if your house is destroyed. Or if you lose your job, etc., etc. Balance is really the key.

[simpleyme]

seems unlikely that someone who has the means to pays off their home would have no other assets

not having your house paid for would be much worse if it were "destroyed " not sure how your house is "taken away " but if it was it would be better to have it paid for I am assuming you still have to make payments when it is "taken away"

[jIM_Ohio]

The blog poster is an idiot. IMO anyway.

First he refinanced a 20 year note into a 30 year note. No discussion ensued on the interest paid on old note to new note (that discussion should preface any pay down discussion). His analysis is not comparing apples to monkeys, apples to oranges or apples to apples- meaning scenario a and b for him are two vectors with very little in common.

Paying off a mortgage early depends on following factors:
1) tax bracket
2) interest rate on mortgage
3) retirement date
4) other portions of financial picture in order (meaning EF is fully funded, retirement is on track and other financial goals are met without issue- like new cars, vacations and similar).

[maat55]

Even Dave Ramsey does not advocate paying off the house before investing. He advises investing 15% then apply extra towards the mortgage.

[Bernz]

All I can say is I still have a mortgage although I could have easily paid it off.

[disneysteve]

Originally Posted by Bernz

All I can say is I still have a mortgage although I could have easily paid it off.

Same here. We have more than enough in savings to pay off our mortgage. We choose not to because it doesn't make sense financially.

[LivingAlmostLarge]

Jim, I was considering that but he said that using home equity as part of net worth made it a bad argument because I'm comparing it to stocks. But i can't figure out how saving cash is bad.

Maat, here's an interesting point. I heard Dave Ramsey tell that to a couple who wanted to pay off their home instead of saving for retirement on a show once, flipping through. He was really impressed by their dedication but he said you still have to pay insurance, property taxes, maintenance on the home. So it's not a free home.

The couple said but it's debt. And he said that it real estate still costs money. He's a big real estate fan, by the way, but he was explaining all this crap about houses and depreciation, etc. They wanted to buy a rental after they paid off their home as a retirement investment.

His answer was it's not easy and all this crap about cash on hand and landlording. I was impressed because I thought he'd say great idea it's no debt instead of telling them that RE can be risky. He made a fortune in RE before.

[jIM_Ohio]

Originally Posted by LivingAlmostLarge

He says though that if you read the link, most of us DPOH are putting too much stock into returns higher than 6%. It's ridiculous. But I'm not sure, what do most people return?

My own returns are usually pretty high but it's because we actively diversify. But I thought even just normal index investing might yield 8%. I typically use 8% number in my assumptions.

Now where is jim when I need him? To help me crunch more numbers.

This is his response to paying off the mortgage.

You are correct in that you should first make sure you maximize your 401(k) contributions, at least to the point of your employer match, before prepaying your mortgage. But anything over that is not a sure bet. If you don’t believe me, just ask a lot of people who, after many years of making the minimum mortgage payments, what their 401(k) plan is worth today.

To me and those who think like me, a home is not an investment. It is a place to live. Whatever money I make on it when I finally decide to sell, is a fringe benefit. That’s all.

I look at it this way: If I choose to pay off my mortgage early and the world economy goes in the tank, I still have a rent-free place to live that I can always call home.

I think maat, I should ask you, because this sort of sounds like something you might say to be debt free. But why pay off the home just to live in debt free?

I chimed in already, reading some of these posts for the first time.

Putting only 4%-8% into retirement plans is a joke. That really accomplishes very little.

Knowing the tax implications of the mortgage is important- advising anyone in 35% or 33% bracket to give up their largest tax deduction is foolish (the goal should be highest after tax return on money used to pay down mortgage, the goal should NOT be to get debt free fastest or pay the least amount of interest possible).

The author came to a conclusion without stating what the goal is (best return. least interest paid, lower taxes, best after tax return, lowest risk, highest reward, earliest retirement date, highest net worth now, highest net worth in 10 years).

Each of those goals has a different investment profile and pay down mortgage profile.

[jIM_Ohio]

Originally Posted by LivingAlmostLarge

Jim, I was considering that but he said that using home equity as part of net worth made it a bad argument because I'm comparing it to stocks. But i can't figure out how saving cash is bad.

I did not read the replies to the blog, only the blog itself. Like I said- the blogger is a big ID 10 T type.

He did not state his objective, only his conclusion.

He refinanced a 20 year note to a 30 year note. He needs to still send the original payment just to prevent a 40-50 year mortgage payoff timeline (and that was not in the blog entry anywhere).

He is such an idiot that I will not stoop to his level to argue with him- his mind is already made up. I'll deal with a higher class of people here.

[EEinNJ]

Philosophically this comes down to 2 questions, do you think you can get a better rate of return by investing, and would you rather be debt free. Paying down/off your mortgage may not have the best potential return, but it is a very safe investment. Sort of like putting money in bonds, to reduce risk and generate income. Paying off a mortgage saves all those interest payments, which is like guaranteed savings!
A couple of years ago, in order for us to live on just my income, I sold some investments and made a big principal payment and re-cast the mortgage. This is a little known way to save big without refinancing- it simply lowers your payment by re-amortizing the loan over the remaining term, at the same rate. I now have 2/3rds the payment, and almost half that is taxes anyway. In my view, paying extra principal monthly only works as 1) forced savings at no interest 2) if you are staying in the house until you pay it off.

Sometimes with investing we lose sight of what we would do if we already had the money. For some people, one answer is pay off the house!