Payoff a mortgage

**MonkeyMama** · 08-18-2010, 06:13 AM

Definitely a worn out discussion!

But, I say it depends. I think if you can pay off your mortgage in a few years - go for it. (Talking more to when you have a newer mortgage). Otherwise, forget it. I don't think the majority of people understand the trade off when they put a majority of their assets to their mortgage.

But I am very in the middle. On one income, 30 year mortgage all the way. Rather save the difference - makes more financial sense. My investments will grow longer in the long run - it is easy to beat the effective 4% interest on my mortgage. You don't have to invest aggressively (long term) to beat 4%.

However, when my spouse works, we put 100% of his income to the mortgage. Doing so, we could pay it off in just a few years. If we aren't tying up those extra payments for decades, why not. (But the point is I can still put plenty of money into savings - win-win). We put most his income to a large down payment on our home, and I imagine will pay it off pretty fast when he returns to work.

At the end of the mortgage's life is another story. You most likely no longer have a tax deduction. BUT, more importantly, most of the payments you are paying are principal. I don't think it makes much sense to pay extra at that point (if you are saving what you would put to the principal). As for me, I'd probably pay down the mortgage to the point where principal is a bulk of the payment, with extra cash, and then let the mortgage run its course.

My experience in a case like yours is that it really doesn't matter. My parents bit the bullet and paid the last $30k or so on their mortgage (as did my in-laws). My dad was unexpectedly disabled this past year and many people said, "Good thing their mortgage was paid." Sure, like the $400/month payment amounted to a hill of beans??? They would be the first to tell you it really didn't make much difference one way or another. What was important was that they never borrowed more against their house and didn't buy up past age 30 or so. Their savings was 10 times more important than their paid off mortgage, with the loss of income. Inflation had eaten a once VERY large house payment down to a very small amount. They could easily afford the mortgage on disability or social security - they don't really have any other expenses.

I had elderly clients who paid off their last $20k or so this year. I was surprised, because my clients run pretty conservative or aggressive. Not much in between. Either they have 3 mortgages or 0, when they retire. So, I asked these clients if it felt nice to have the house paid off. They told me, "Eh. Didn't make much difference." That's pretty much what I hear, with people who tend to be conservative. (Their mortgage payment might have been $200/month - very small fraction of income). Though most people get a little bit more emotional satisfaction from paying off their mortgage.

**GREENBACK** · 08-18-2010, 07:09 AM

I see your point MM. I think my biggest issue is in giving extra money (even a small amount) to some bank so they can make money off of it when I could be making money off of it. Just bugs the hell out of me to do that.

**snshijuptr** · 08-18-2010, 07:19 AM

I think it is important to avoid debt payment in retirement. This might mean you pay your mortgage off or move to a smaller house using your equity. This also means that a mortgage should be secondary to hefty retirement contributions.

MonkeyMama, I'm confused as to why you would pay more earlier than later. Early payments will reduce the amortized interest, but at the end of your payments, the tax benefit might be no more than the standard deduction. At that point I would start making extra payments.

I guess it depends on many factors, but always aim to retire without a mortgage.

**GREENBACK** · 08-18-2010, 08:34 AM

Originally posted by snshijuptr View Post

I guess it depends on many factors, but always aim to retire without a mortgage.

I agree somewhat but you might still be investing pretty heavily into retirement, pariticularly if you retire young. I think it's ok to have a mortgage in retirement if you have the means to pay it off if push comes to shove for whatever reason. I see no advantage to handing over a large sum of money at one time if it can be better used elsewhere. This assumes that it is somewhat accesible if needed

**Seeker** · 08-18-2010, 05:52 PM

Originally posted by GREENBACK View Post

I have had this debate with others and was wondering what folks on this site think about this. Do you think it's best to pay off your mortgage as quickly as possible or should you invest the money now for future growth? I know it's nice to live in a paid for home but in my opinion you're only making a banker rich when you send them extra money.

My logic for this is that a mortgage is a very low interest rate (nowadays!), long term, tax deductible loan that can't begin to match what you can potentially earn in the market with wise investing. Why pay a bank when you can pay yourself?

I have about 30k left on my mortgage and I could pay it off today but see no reason to do so when I can buy funds with that money that will grow exponentially when this market fully recovers.

I'm curious about the other side of this discussion. Are you paying your mortgage off as quickly as you can or are you holding back a bit and investing for the future? I know this isn't a new discussion but I believe it's an important topic so roll your eyes if you think it's worn out but please reply anyway

The bolded part above is the key Greenback. If you can make more money by not paying off your mortgage, then there is absolutely no reason to pay it off.

If on the other hand, your investments aren't doing as well as you'd like, and there are other side issues that concern you for your personal security and future (employment, medical/illness etc.), then it's not a bad idea to pay it off and not worry about that one payment anymore.

It just really depends, and everyone's personal needs and goals are different.

I choose to payoff as much as I could early on in the property, but I was not getting any tax deductions due to having a huge DP and borrowing less than 33% of the total agreed price. This was in the 90's when interest rates were commonly 7%-8% or so, which also brings up my second reason for early payoff, which is the fact that I really wanted the loan to be done before it got to the seven year rate renegotiation period. It was a fixed loan, but subject to rate reneg at the end of 7 years. I knew nothing about investing at that point in time either... so I just did whatever I thought to be best.... while working all too much.

**LuxLiving** · 08-19-2010, 04:43 AM

At my house we had MANY 'cussins & dis-cussins' over this topic. He wanted $$s in the house & I wanted it out - to a point. We wanted to retire w/o a mortgage and we were getting down to his retirement time & I'm a SAHM. We had the money and the economy was pointing dead south...we took the cash & paid it off. There were no interest tax savings to be had for us at that point in time. For the longest I agreed w/the advisors on keeping the $$s out of the house and into investments, but at one point I equated it with the fact that we didn't want to be holding useless 'confederate dollars after the war was over'. IOW, with such a weak economy? A paid for house in retirement? LOOKED MIGHTY SWEET IN DEED! And guess what? It is. It is.

Now, we are looking to relocate in retirement and the thought of mortgaging again? Ehhhh, not so inticing. If the economy were better? I'd sell ours and invest it and make the mortgage payments on a new house in a heart beat. In this down trending economy? We're paying cash for the next house hopefully, and at worst, a small SHORT TERM $10-15 thousand mortgage to get the upgrades we're wanting - low outside maintenance & minimal grounds-keeping. Another factor for us is the age difference between us. My husband is near 65ish and I'm 50ish. If I were to be widowed, my income would be slashed in half. Do I want to be holding a mortgage if God forbid he should pass before me (which is the most likely to happen scenario)? NOT REALLY. If I want to stay at home & care for my 2 disabled sons instead of going back to work? I need our life insurance proceeds to live on until I reach full SS widow age (which I believe is 60), not to pay off a mortgage. We want to keep our retirement savings in tact for as long as possible before we or I have to tap into them. At present we live on his SS & a small pension.

Investing works in theory, but not all household situations & world economies are the same and the economy could bottom out on you at any moment or be a long time in rebounding. The question is, "Where would you rather be standing?" Risk aversion is a BIG BIG factor.

I personally think you'd be much richer financially over the long haul keeping $s invested if times are booming and trending upward AND you are on the 40 or below year age side AND you have life insurance &/OR retirement SAVINGS to cover your family. When times are bad and unemployment is so high and the dollar so weak and you're much closer to retirement? It's much nicer standing over here in a paid for house.

Just my two cents and YMMV and all other standard disclaimers apply. Learn from our mistakes (we debted way too long) & live WELL BELOW your means & start heavy (15-25%) RETIREMENT SAVINGS early!!

P.S. An FYI, we're shopping for that next house at this very moment in time and getting our final sprucing up done to get ready for listing ours this week. Thoughts going forward are to highest energy efficiency we can get, low outside maintenance & small to no yard, low real estate taxes & minimal insurance rates - we're hoping to pay all cash and essentially just make a swap. Can it be done? We'll see. I personally think we're going to have to throw about $15 thousand (either ours from savings or a short-term mortgage) into the pot to make it happen w/realtor fees & all OR lower our expectations considerably.

What??? I've done that before!

Going back to work looks horrid to me!!

**GREENBACK** · 08-19-2010, 10:43 AM

Thanks for the alternative points of view. I can see where paying it off would make sense under some circumstances. I also know the joy of having large ticket items finally paid for. For me,in my circumstance, it's probably a psychological issue with banks. They do all they can to get as much money from their beloved clients as they can. Frankly, they have no problem screwing you over. I really hate playing their game so I hold onto as much as possible as long as it's to my advantage.

If I had many years to go til retirement( I Don't) I wouldn't be overly concerned about today's economic conditions. It will turn around at some point. I'd be more concerned with positioning(investing wisely) while prices are still fairly low. I.E., if I was young and had a mortgage I'd worry less about paying it off and more about putting that money in the game.

**James00** · 09-10-2010, 01:45 AM

It is advisable to avoid to be debt off after retirement.a mortgage should be secondary to hefty retirement contributions

**littleroc02us** · 09-10-2010, 05:27 AM

What my wife and I are doing is contributing 15% a year each into retirement, while putting as much money towards our mortgage as possible. You can do both if you have a large amount of disposable cash and no debt.

**EEinNJ** · 09-10-2010, 06:24 AM

If you can pay off your mortgage today with only $30K, what the He!! are you waiting for?

Then take the money you'll save in interest every month, and DCA into suitable investments. Do that through pre-tax IRA and you'll save yourself the tax hit of losing the mortgage interest deduction.

Otherwise, it's entirely possible that your investments WILL NOT beat the guaranteed return of not paying mortgage interest. I hope it's not the case, but we could have another 10 years of poor or negative returns on equities.

**GREENBACK** · 09-10-2010, 07:34 AM

Originally posted by EEinNJ View Post

I hope it's not the case, but we could have another 10 years of poor or negative returns on equities.

Certainly anything can happen in the next ten yrs but what about the next 20 or 30?. It's not critical for me either way. It will be paid in about 6 yrs. if I don't do anything different. I wonder though about those who are, say, 30 yrs out. I really don't get the logic(except the psychological part) of sending in extra payments. Based on my experience, I never have given anymore than required to the bank and have done well investing the extra money. It's certainly what they would have done with it.

**tulog** · 09-16-2010, 10:07 AM

Why not do a little of both. You can split your investment dollars in percentages appropriate for the moment.

**GREENBACK** · 09-16-2010, 12:04 PM

Originally posted by tulog View Post

Why not do a little of both. You can split your investment dollars in percentages appropriate for the moment.

Not to be a broken record but why do both? We are still in a recovering market and stock prices are still relatively low. Interest rates are rock bottom right now. Stock prices will go up and who knows when. With that stated, My position remains that why not invest when your dollars are still able to buy things relatively cheap. Right now, paying down a 4-5% mortgage even without the tax deduction included doesn't seem to make much sense to me.

If the stock market gets hot again (I know it will) Will you be glad you paid a few extra dollars to the bank versus earning 10-15-20% on things you could have currently bought at a reduced rate. Things look bleak now which is why many are holding on to their money or are trying to pay for things but a few years down the road(or 20)is it a wise move?

**GREENBACK** · 09-16-2010, 12:26 PM

Originally posted by EEinNJ View Post

Then take the money you'll save in interest every month, and DCA into suitable investments. Do that through pre-tax IRA and you'll save yourself the tax hit of losing the mortgage interest deduction.

I looked at this again. If I pay the 30 k right now it's gone. My banker will be smiling like pig in slop though(proper analogy huh?). The very small interest rate payments I'll save (3% maybe) aren't worth it. I can DCA most of that 30k now and buy into a low market and reap potentially large benefits down the road. That portion of the 30k I invest today may earn 20% down the road or certainly more than the 3 or 4% savings I'll get by paying the mortgage off today. I'm maxed on the IRA so that's not an option for me.

Payoff a mortgage