Should I pay off my house?

[cs1992]

We have been in our house for 5 years now and have a 30yr mortgage at 5.75%. The remaining balance is $82k (We have $84k in our money market account). We have a a $15k car loan but no other debts. Our house has a market value of $410k.

I am very conservative with my money and I try to place at least 40% of our income into my bank's Money market account. However, like most MMAs, it's earnings are now very low ~3.0%.

We have an emergency fund beyond the money in MMA, retirement accounts and an IRA. I am 35 and we do not plan on moving in the next 5-7 years.

Normally, I would not mind carrying the mortgage, but I am so frustrated at the minimal returns that money markets are currently earning (and I doubt that will change any time in the near future). I feel like I am throwing money away due to the mortgage interest. Any thoughts?

[maat55]

Due to the economy, I would suggest that you payoff the car and hold on to the rest for a larger EF. I would then take the car payment funds and pay down the house. Later if the smoke clears, you may choose to payoff the house or invest in an possible market upward trend.

[disneysteve]

Due to the economy, I would suggest that you payoff the car and hold on to the rest for a larger EF. I would then take the car payment funds and pay down the house.

I agree. I'd get rid of the car loan before the home loan. At least the home loan has some tax advantages. Then, start putting most of the former car payment toward the home if you really want to prepay and put the rest into savings designated for the next car purchase so you won't have to borrow so much or maybe even pay cash for you next car.

[MYOM]

I debated this issue with other Financial Advisors for a long time so I will make a couple of statements. There is a cost to live under a roof. If your home is paid in full, the cost is the use of money that could be invested elsewhere. Equity in the house could be invested in bonds to produce the income needed to pay rent. So that is both sides of the issue. You can argue net rates of return, tax benefits, upkeep, and all the rest.

The big benefit to being debt free is that it frees up cash flow for a grander life style or money that can be invested. The part of this equation that no one wants to talk about is the wasted dollars that are not deductible going down the interest rate rat hole. If your net average tax bracket is 20% then you are throwing away 80 cents of a dollar paid in interest. I personally believe in wasting no dollars.

I prefer debt free period and that includes mortgages on your home. I have long held that your home is where you live and Wall Street is where you make your money if you know what you are doing.

No business or individual has ever declared bankruptcy with zero debt on his or her balance sheet. My vote is to pay off the house and continue to invest the amount of your house payment in something that will pay you more than money market accounts and CD’s. My next step for you would be to learn all you can about individual bonds. If you do invest in bonds, keep your maturity to one year or less.

Dan Clemons, author and retired Certified Financial Planner

[jIM_Ohio]

You need to share more information.

You said you are a conservative investor. How much is invested? 401k, IRAs and taxable accounts? How are these accounts invested?

With the 84k you have liquidity- you can use that money for anything you want- which can bring peace of mind by providing choices. Once you pay off the mortgage you lose that liquidity.

I would vote OK to pay off mortgage early if retirement funds are 60% equities and on track for replacing 80% of income by age 65.

LIst the amount invested, current age and retirement age for a more detailed answer.

[tripods68]

I tend to agree in general paying off the car loan. However, in this case, i would pay off the house since you it cost you more money to hold this debt over time. With only a car loan to pay off after this, you could choose to pay the remaining balance within a year at very least amount of interest cost. Its the smartest approach in my opinion, unless the car loan interest its so outrageous above 7% then reserve to change my mind. I agree the MMA interest rate won't recover my guess in a year.

I would also agree in today's economy credit squeezed, cash is king. And hoarding cash for now is better options at least for the moment until the overall economic condition improves.

If you are putting 40% of your money into the MMA which assume this is the rest of your disposable income tells me that you are the few extreme people who live well below their means. I don't even care how much is your income with that savings rate. Having this strict principle in handling your financial affairs tells me you are way ahead amongst your peers towards reaching your retirement goal(s) faster than anyone. For this I applaud you. Congrats!

[FrugalFish]

We were prepaying our mortgage, but stopped this year. With the economic difficulties right now, we decided that a bird in the hand is worth 2 in the bush. There is something to be said for having easily accessible money around in times like these. With it being so difficult to get loans right now, and perhaps for a long time to come, I wouldn't tie up all that equity in the house.

We are saving until we have enough money to pay off the house, plus a one year emergency fund (in addition to retirement savings), and if the economic climate feels right, we will pay off the house at that point. The difference for us in paying additional now versus paying in whole in a couple of years is only a few thousand dollars; a small sum to assure we have money on hand for any emergencies that come up in the next few years.

That's just my personal take on it, FWIW, but cash is indeed king.

[anonymous_saver]

You state that you already have an emergency fund in addition to this $84,000. So to be honest, I highly see no reason at all for you to not pay off your debts.

I see two options:

(1) Pay off your car in full. This will leave you with $69,000. Then use this to pay down your mortgage. This will leave you with "only" a $14,000 mortgage. Use what you used to pay for your car payment to pay down the mortgage, in addition to the 40% you typically add to your MMA. This will surely pay off your house fairly quickly. Sounds like maybe within a year or so?

(2) Pay off your house entirely. With all of the extra money you will have each month (in addition to the $2,000 extra in your MMA), pay off your car fastly.

I think either of these two options are good ones.


Now after that, I would re-evaluate why you save 40% in your MMA, when you already have an emergency fund, and if you do one of the above options, you also would have no debts. I would fully fund your 401(k)'s at work, and IRAs as well. Are you already doing this?

Out of curiosity, how much is your household income?

Good job by the way, great situation to be in. I still strongly feel that you shouldn't have a MMA with that much money. There are other things that you could be doing with that money that would save you much more money in the long run.

[jIM_Ohio]

You state that you already have an emergency fund in addition to this $84,000. So to be honest, I highly see no reason at all for you to not pay off your debts.

I see two options:

(1) Pay off your car in full. This will leave you with $69,000. Then use this to pay down your mortgage. This will leave you with "only" a $14,000 mortgage. Use what you used to pay for your car payment to pay down the mortgage, in addition to the 40% you typically add to your MMA. This will surely pay off your house fairly quickly. Sounds like maybe within a year or so?

(2) Pay off your house entirely. With all of the extra money you will have each month (in addition to the $2,000 extra in your MMA), pay off your car fastly.

I think either of these two options are good ones.


Now after that, I would re-evaluate why you save 40% in your MMA, when you already have an emergency fund, and if you do one of the above options, you also would have no debts. I would fully fund your 401(k)'s at work, and IRAs as well. Are you already doing this?

Out of curiosity, how much is your household income?

Good job by the way, great situation to be in. I still strongly feel that you shouldn't have a MMA with that much money. There are other things that you could be doing with that money that would save you much more money in the long run.

I would modify this slightly- if the mortgage was reduced to 14k, would it be paid in full at years end (within 12 months)?

I would pay down car as indicated, then keep the 69k until the amount owed on mortgage was 69k.

Or figure out when 5k extra per month would pay off mortgage in exactly 12 months. The logic being in this market you want liquidity first and paid off debts second. If you lose a job you need to be able to make the next several mortgage payments, so if you liquidate the 69k to leave only 14k of debt, what would you do if you lost your job the next month.

Think worst case, leave money in bank until the amount in the bank pays the mortgage in full.

If you need to figure out the timing, download an ammortization table, plug in your amounts (owed, interest rate, current payment) then plug in the extra payments to see where that sweet spot is (where the 69k pays off mortgage balance when combined with current payments).

This will cost you a couple months (meaning if you put all 69k down now, you will get payoff in month X, if you pay 5k extra in month X-12, then 5k extra in month X-11etc...), you might be taking an extra month or two to payoff, but you will always have the liquidity to maintain the payments if you lose a job.

[tripods68]

I would modify this slightly- if the mortgage was reduced to 14k, would it be paid in full at years end (within 12 months)?

No doubt he can pay the car loan if he wanted to. He already mentioned his saving rate is 40% of his income a month after expenses. The only point i make is that if he doesn't pay off his mortgage this year, it will cost him about $4687.00 on interest. We don't know the interest on his car loan. But I would guess around 6% with a balance of $15K that's $806.95 interest cost based on 48 month payment. That's all I have to say.

[jIM_Ohio]

No doubt he can pay the car loan if he wanted to. He already mentioned his saving rate is 40% of his income a month after expenses. The only point i make is that if he doesn't pay off his mortgage this year, it will cost him about $4687.00 on interest. We don't know the interest on his car loan. But I would guess around 6% with a balance of $15K that's $806.95 interest cost based on 48 month payment. That's all I have to say.

I was not in disagreement on the car loan. My issue was whether it makes sense to go "all in" on a loan which cannot be paid off (the mortgage).

[tripods68]

Sorry...I meant mortgage. The answer is still YES!

[zetta]

I am concerned that you are 35 and placing 40% of your income in a Money Market account. By being too conservative with your money, you could be putting yourself at great risk of inflation eating away your buying power.

Are you fully funding your 401k and ROTH accounts? What sorts of investments do you have in these accounts? What is the current balance?

At your age I would rather see the money invested in a mutual fund that is balanced between stocks and bonds.

[Johansen8]

Pay it off! Debt free is the way to be. No debt = no master...freedom...less pressure.