thinking paying off house makes more sense?

[KTP]

I have had quite a few discussions on here about our plans (save 70k a year, retire early sell house and sail around the world in 8 years or so). I had just about decided on a plan, based on our needs and using some suggestions on here about how to allocate savings and risk. For the "safe" investment, other than our 6 month emergency fund, I had been considering several options which would at least keep up with inflation, if not earn a percent or so.

I recently refinanced our house to 5.125%, with a 230k balance owed on it (house appraised at 400k for refi). We deduct the interest on the home loan on our taxes, which brings the "real" rate down to 3.something%.

Still...when you look at it, getting a guaranteed "return" of 5.125% (or call it a tax free return of 3.something) is not that bad for the safe (like cash) portion of our investment. We absolutely are going to sell the house in 8 years or less, and thus we owe that 230k even if the housing market brings our 400k house down to 100k. So I consider this a rock solid guaranteed investment (paying off the house loan) equivalent to a CD or similar.

So what do you think? Pay an extra $35k a year on our home loan and put the other 35k into our higher risk options (like an S&P500 index). Does this make any sense at our 5.125% rate?

[b4freedom]

Take advantage of any tax favorable investment, like an IRA.
After that, beef up any potential long term savings goals. Maybe up your 6 month EF to 12 months. Then invest.

Although a lot of people on this forum would disagree with me, having debt, like house debt, isn't all that bad. Consider the impact of inflation over time. My numbers might be a little off, but let’s assume the following: $230,000 mortgage @ 5.125% over 30 years means you’re paying about $1252.32/month. Over the life of the loan you pay ~$220,835 in interest for a total of ~$450,835.

But… tax break?

Assuming your in the 25% tax bracket, your rate drops to ~3.84% with a total interest payment of $165,626.42 of the life of the loan.

But… inflation?

Let’s assume that the next 30 years we will see a steady rate of 3% inflation per year. Historically, it’s 3% over time. But, to make the math easier, we’ll assume a steady rate.

In 30 years @ 3% inflation $1.00 will be worth ~$0.41. That means, your total payment in today dollars will be ~$297,495. Of that, in today dollars you will have paid ~$161,965 in interest and ~$135,529 in principle.

The net result is that you only pay a rate of 0.07150% in today’s dollar, after taxes and after you factor in inflation (using the above assumptions).

If you think that’s a good deal. I’ll tell you about a better deal. My wife’s student loans were locked in at a fixed rate of 2.25% for 20 years. The net result is a negative rate. Meaning, after inflation and taxes, we pay less in today dollars then we borrowed.

Of course, the same is true about your future earnings in the market. However, because they compound positively for you, you’re still most likely to come out ahead.

[EEinNJ]

If you pay "only" 35K/yr in extra principal, it will be several years before you see the benefit, depending on the amortization of your loan. It also ties up the money in an illiquid asset.

A little known option is to "recast" the loan, make a big principal pre-payment and have them re-amortize the loan based on the new balance. Last time I did it 3 years ago it cost $250.
The number of remaining payments stays the same, but your payment will go down.

[Merch]

As far as this question in general, I am on the fence but lean towards paying off the house. Since you are only going to be there for 8 years, I would probably invest the money in a conservative allocation.

If you were planning to live there for 20 years, I would probably say pay off the house and then snowball the extra and mortgage into investments.