Pros and Cons of paying off house early

[jpg7n16]

I lurk from time to time. Your posts are always great jp[letters and numbers]. I appreciate your input and would like to pick your brain if you don't mind.

It's my initials "JPG" and my 2 fav numbers 7 'n' 16 . Thanks for the props!

You still have confidence in long term average 7-11% returns (on broad indexed stock funds)?

Of course I do. What reason would I have not to? I'm talking long term returns. And since the thread is comparing paying off your mortgage, pros and cons, you can use 30 year time periods (like a standard mortgage). When evaluating the compounded average of all the possible 30 year period since the market opened in 1871 (n=112), the minimum compounded return is 5.09%/year and the max 13.82%. Over a 30 year time horizon, the market has never been below 5% on average. And 87 of those 112 times (78%) it has returned an average over 7%/year. The average 30 year period yielded 9.4%.

Those timeframes include the Great Depression, the 2008 market fall, a few world wars, etc. And still, never worse than 5% so far. Why should I lose my confidence about 7-11% returns? Because the media is creating drama so you'll tune in? Or because politicians are creating fear so you'll vote for them? History tells me there's nothing to worry about.

CAGR of the Stock Market: Annualized Returns of the S&P 500

Regarding liquidity, when I paid off the mortgage (very recently) I figured I'd open up a HELOC and pull if need be (I still have an EM).

I'm not too familiar with HELOCs so I could be wrong on this - it was my understanding that there may be points charged up front, minimum balances required to be kept out, possible annual fees, closing costs, etc. for just getting a HELOC. Also subject to credit approval at the time of origination. Meaning that you'd have to get approved while you weren't in need of the funds (and would pay interest and fees for something you didn't need). But if you lost your job and needed it, you would be subject to credit based on your income when applying, and may not even qualify for a HELOC at that time.

Now if you could get a line of credit against your equity with no fees, no interest, while having your current income, and a good interest rate - that certainly reduces/eliminates two of my main cons.

From: What You Should Know About Home Equity Lines of Credit

Costs of establishing and maintaining a home equity line

Many of the costs of setting up a home equity line of credit are similar to those you pay when you buy a home. For example:

• A fee for a property appraisal to estimate the value of your home;
• An application fee, which may not be refunded if you are turned down for credit;
• Up-front charges, such as one or more "points" (one point equals 1 percent of the credit limit); and
• Closing costs, including fees for attorneys, title search, mortgage preparation and filing, property and title insurance, and taxes.

In addition, you may be subject to certain fees during the plan period, such as annual membership or maintenance fees and a transaction fee every time you draw on the credit line.

You could find yourself paying hundreds of dollars to establish the plan. And if you were to draw only a small amount against your credit line, those initial charges would substantially increase the cost of the funds borrowed. On the other hand, because the lender's risk is lower than for other forms of credit, as your home serves as collateral, annual percentage rates for home equity lines are generally lower than rates for other types of credit. The interest you save could offset the costs of establishing and maintaining the line. Moreover, some lenders waive some or all of the closing costs.

Basically, I see keeping a mortgage while having the money invested as borrowing to invest. Didn't want to do that (wasn't overly optimistic on market returns over the next 7-10 years -time remaining on my mortgage- and decided to bank the interest savings).

I'd just refer to DS's response to this, because he said everything I was thinking.

[thekid]

It's my initials "JPG" and my 2 fav numbers 7 'n' 16 . Thanks for the props![/QUOTE]

Nice to meet you.

Of course I do. What reason would I have not to? I'm talking long term returns. And since the thread is comparing paying off your mortgage, pros and cons, you can use 30 year time periods (like a standard mortgage). When evaluating the compounded average of all the possible 30 year period since the market opened in 1871 (n=112), the minimum compounded return is 5.09%/year and the max 13.82%. Over a 30 year time horizon, the market has never been below 5% on average. And 87 of those 112 times (78%) it has returned an average over 7%/year. The average 30 year period yielded 9.4%.

Those timeframes include the Great Depression, the 2008 market fall, a few world wars, etc. And still, never worse than 5% so far. Why should I lose my confidence about 7-11% returns? Because the media is creating drama so you'll tune in? Or because politicians are creating fear so you'll vote for them? History tells me there's nothing to worry about.

CAGR of the Stock Market: Annualized Returns of the S&P 500

Ah, this is the stuff I wanted when I asked the question. To get me some optimism (I'm naturally fairly conservative with my investments and the past years have tested my couch potato resolve -although I have stayed the course).

I guess my main concern is not so much while looking back at past performance of the US economy, but future performance. Past 15 years, CAGR is at 6.5%. Past decade it's 1.5%. This while rates have generally been low and inflation in check (usually good for stock market performance). My (generally uninformed) opinion is that growth in the future may not be as high as in the past. Could well just be a bad stretch, could be the US economy won't grow at the same rate it did til now.

I guess where I really wanted to pick your brain is regarding what you anticipate as future US growth. Similar to past?

I'm not too familiar with HELOCs so I could be wrong on this - it was my understanding that there may be points charged up front, minimum balances required to be kept out, possible annual fees, closing costs, etc. for just getting a HELOC. Also subject to credit approval at the time of origination. Meaning that you'd have to get approved while you weren't in need of the funds (and would pay interest and fees for something you didn't need). But if you lost your job and needed it, you would be subject to credit based on your income when applying, and may not even qualify for a HELOC at that time.

Now if you could get a line of credit against your equity with no fees, no interest, while having your current income, and a good interest rate - that certainly reduces/eliminates two of my main cons.

When I shopped HELOCs prior to prepaying, I was offered no fees (opening or standby) or closing costs. Rates (applicable on drawings) where generally prime -0.5%. I didn't actually open one. Still have good EF and other out of retirement account savings and my savings rate is great (like 40-50% of net pay) with the free cash flow opened up by not having mortgage payments.

Still, I get your point. If there are costs, those have to be priced in.

[Petunia 100]

The terms of my last HELOC included a $50 fee to open, no minimum amounts to draw, and interest on any outstanding balance was prime minus .5%. Not too shabby at all.

However, I would not want to rely on a HELOC as my EF. The lender can freeze it, reduce your limit, or even close it altogether at any time for any reason. Cash in an FDIC (or NCUA) insured account is the best EF.

[thekid]

However, I would not want to rely on a HELOC as my EF. The lender can freeze it, reduce your limit, or even close it altogether at any time for any reason. Cash in an FDIC (or NCUA) insured account is the best EF.

I agree.

[LivingAlmostLarge]

So are you on track to have enough saved for retirement with a pension? Rule of thumb is 4%=$40k a year pension for $1 million annuity. So if you get $48k/year it's something like $1.2million annuity for life or you saved $1.2M. At least that's how i explained it to my mom.

[ecoadapt]

One of the most controversial subjects around the family finances is the decision to payoff the mortgage early. Some say you should keep the mortgage around as long as possible, citing low interest rates and tax deductions as opportunities you are giving up by paying it off early. Others enjoy the freedom that comes from no mortgage payment, and the huge amounts of disposable, monthly cash that comes along with being mortgage-debt free.

[snafu]

I made the decision to pay off the mortgage purely based on the numbers. I ran the figures to determine how many dollars would clear the mortgage in it's 15 year [180 months] contract. It was a no brainer due to the way amortization payments work. Lump sum payments were credited to the principal and that act alone saved huge sums.

We have two sons currently in university [bad family planning 20 years ago]. We require them to pay their own tuition from summer and p/t work so that they have 'skin in the game' and understand the value of an education. They have some awards, grants, an allowance from us, birthday and bonuses [provided by late grandparents] and now are nearly able to cover their costs by providing tekkie services.

[I was so reluctant to allow them take p/t work at a nearby restaurant while in high sch. but it had unexpected benefits as they worked with the guys as dishwashers and realized without an education, this could be the best they would get. Marks and attitude picked up smartly as a result]

Nearly half of the people who live in our older condo complex are retirees. They complain a lot but live comfortably on about 45% of pre-retirement income. I'm pretty sure they don't carry mortgages or car loans and the place nearly empties out as snow-birds fly off to warmer climes after Christmas.

[Hector]

It’s great that you guys are putting money into college accounts for your kids. Just make sure that you are funding your retirement account with the amount which is necessary before funding kids’ college accounts. The reason behind doing this is kids would make sure to go to college if that is something they really want to do. Even though they might not be eligible to get scholarship because of your income level, they can get part time jobs and some student loans and will make it somehow. But you won’t have many options in your retirement if you are short of money.

If I need to save $2,000 a month for my retirement and I can save only $2,200 a month, I would put $2,000 into retirement accounts and put only $200 into kids college accounts.

You mentioned that you are not fully funding your retirement accounts, fully funding your retirement accounts should bring down your adjusted gross income. I am not sure that would be enough to qualify for scholarships or not.

[PetMom]

I will share one aspect of what not owning your house does: enforces discipline on what you need.

When a bank tells you to have insurance - you have no choice.

Property taxes also have to be paid - no question.

When you have paid off your home those things become technicially optional with some people.

[vitalogist]

There's nothing better than paying off your debt as soon as possible. You will end up paying the actual price for the purchase instead of being tied down by interest rates. With one debt out of the way, your credit rating will look good assuming that you want to get another loan. This will help a lot in the college education for your kids when the time comes. The down side is (although not much) is that in the process of paying of your debts quickly you will not be liquid for your daily expenses. You will live on a budget until your debt is cleared.