Paying off Mortgage

[coolbeans330]

I'm thinking of paying off mortgage - I owe just over $100K and have the money to do so, plus emergency money set aside. Has anyone else paid off their mortgage? Can you tell me what life was like afterwards? Was it worthwhile? I just paid almost 5K in interest last year so I am thinking of biting the bullet and finally paying it off.

[disneysteve]

I'm thinking of paying off mortgage - I owe just over $100K and have the money to do so,

I just paid almost 5K in interest last year

What is your interest rate and are you able to deduct it?

You need to think about what else you could do with that money. For example, the S&P 500 was up about 13% last year so investing that 100K would have earned you a lot more than the 5K you paid in interest (and deducted so the net cost was less than that).

Certainly there is peace of mind in having it paid off. We're approaching that tipping point as we owe $50,000 on ours but we're not quite there yet. Plus we have a small car loan (under $10,000) that we have to get rid of first.

[coolbeans330]

Our interest is 3.75% We are able to deduct it, but since we have no other deductions we are forced to take the standard deduction each year even with paying mortgage interest. It doesn't really seem to help us.

[greenskeeper]

I'm thinking of paying off mortgage - I owe just over $100K and have the money to do so, plus emergency money set aside. Has anyone else paid off their mortgage? Can you tell me what life was like afterwards? Was it worthwhile? I just paid almost 5K in interest last year so I am thinking of biting the bullet and finally paying it off.

pay it off and then use some of the old mortgage payment to rebuild the money you used to pay off the loan.

A mortgage is the largest monthly expense for most people....imagine what you could do with that money every month

[disneysteve]

Our interest is 3.75%

pay it off and then use some of the old mortgage payment to rebuild the money you used to pay off the loan.

A mortgage is the largest monthly expense for most people

Paying off the mortgage gives you a guaranteed 3.75% return on your money. So you need to decide if that's a bid enough payoff for you. Like I said, last year the S&P had a 13% return. No guarantee there of course. And I had investments that did far better than that. In hindsight, committing 100K to a 3.75% return would have been a bad move, but we don't have a crystal ball. Will the market be up more than 3.75% this year? I'm betting it will but I could be wrong.

[corn18]

How much longer do you owe on the loan? If you are 25 years into a 30 year mortgage, your effective interest rate is much lower than the APR on the loan. That's because the interest is heavily front loaded. Let's look at a $100,000 mortgage, 30 years, 3.5%:

$34,197 First 10 years interest paid
$20,633 Second 10 years interest paid
$6,826 last 10 years interest paid

So, if you are on the last 10 years of a 30 year mortgage, you are much better off just making payments and investing the cash. You are only paying $682/year average on a starting balance of $41,222 (at year 20). That's only 1.65% and the effective rate goes down each year after that. That is a wicked awesome deal.

Now if you are in year 2 of a 30 year mortgage, then paying off the mortgage could make sense, especially if you plan to move in less than 5 years. You're paying mostly interest and you will get the cash back when you sell.

Tom

[disneysteve]

the interest is heavily front loaded.

This isn't quite right but I know what you mean.

In year one, most of your payment goes toward interest and very little goes toward principal.
In year 25, most goes to principal and little goes to interest.

But that isn't because the rate has changed. You are still paying the same 3.75% rate but you are paying it on a much smaller balance.

The interest each month is calculated based on the outstanding balance at that time. So 3.75% of $100,000 is numerically more than 3.75% on $10,000 but in both cases you are paying the same 3.75% rate. Anytime you make an extra payment, whether in year 1, 5, 10, or 25, you save yourself 3.75% on that amount.

[sblatner]

We paid ours off and it feels great! To think we own our home and only owe property taxes each year is very satisfying. We are using our mortgage payment to pay our kids' college fees.

[TheMom]

We paid ours off a year ago and wouldn't go back. Our last payment was only $6000, but we had paid in chunks over a year and paid $50,000 or so in that last year. Yes, we could make more investing, but we really like not having debts. We are saving our payment for college and that is increasing quickly.

[snafu]

We paid off our mortgage with a specific plan to re-direct those payments to an investment portfolio. It's more comfortable for us to DCA [Dollar Cost Average] to a pre determined specific investment [than to dump a large sum at one time]. It's worked out well and it was easy to make adjustments the few times we wanted to divert sums to another priority.

We really liked the fact that when we sold the house the proceeds less realtor and lawyer was ours. We've since bought another house in a bad market so cash got us a great deal; sold that house and bought a condo for cash to facilitate a new career path. To us, paying off the mortgage opened doors we'd not considered. I suggest you make a specific plan for the sum no longer used for mortgage expense before paying off your mortgage.