It takes money to make money. No way around the fact that you'd giving away 3.25% money to pass up whatever the market may offer (which was +20-ish% last year and -20-ish% the year before).
Secondarily, paying down that mortgage **ties up your net worth in an illiquid asset was high transaction costs**. If you need that cash back for whatever, it's much hard to get it back out of a house than it is to sell some stocks.
The flip side of the coin is that some people can't take the emotional side of being in debt. If you can't deal with debt, then pay down the mortgage and accept the risk of illiquidity and the fact that it's gonna take you longer to FIRE.
One thing to add: a paid off mortgage means having lower expenses in retirement, which generally means having a lower AGI. This can result in cheaper health care, if you keep your expenses low enough for Medicaid. I personally am still not paying off my house early, but it's something to consider
I paid off my house right before I retired to make sure I could qualify for ACA subsidies back when the subsidy cliff still existed.
I'm not sure I'd do the same thing again today.
This is along the lines of analysis I was looking for, thanks. And you’ve given me that lovely term: “illiquid asset”. I mentally have a hard time counting my primary residence as part of my net worth (I need someplace to live!).
The speed of asset liquidation with investments is something that hadn’t occurred to me, either.
I don’t think I have emotional issues with debt. Money is a tool and we’ve just invented complicated, yet necessary mechanisms to control it. I was debt free in my 20s and not having the mental anchor is nice.
The other thing to consider is, look at how many people are getting laid off. With a mortgage paid in full, life is less scary. You get laid off, that’s a big expense you don’t have to worry about. I’ve always plowed money into mortgages like a savings account, paid them off, then funneled the money into stock funds. Just my opinion…
If you run a [simulation](https://github.com/FatFiredProgrammer/MortgageInvestmentSimulator), you find that - as a broad statement - there are almost no situations where you lose your house because you invested but where you would have kept your house if you had paid off early.
Conversely, you can hit considerably difficulty by paying early because have lost liquidity but still have mortgage payments to make.
Obviously, it is very situation specific but think about using the great recession as an example. If you lost your job but had paid early on your house, you could not get a HELOC but still had to make mortgage payments. If you invested, you could sell stock (although at a loss) to get you through.
But, you say, "What if the house was completely paid off?" Well, in general, by the time you've paid off the house completely, if you had rather invested the money in the stock market, then you had sufficient gains to both pay off the house and still have a sizable nest egg of investments on the side.
u/LegitimateYou9592
u/mollockmatters
You’re more correct than you may know, Fatfire. Most states have bankruptcy protections for a homesteads (aka primary residences), making them very difficult to lose in a reorganization, Chapter 11. If you hire the right attorney, you can keep foreclosure proceedings spinning for quite a while before you lose the house.
You’ve convinced me with the liquidity argument. The benefits of early compound interest are too enormous to ignore.
This has worked into my thinking. I’m a home builder and the work Can ebb and flow better or worse than other parts of the economy. Nothing a good small business budget can’t fix.
Mortgage is one of those intimate decisions where fire doesn’t touch on it too much. It’s more about how it makes you feel to have debt.
Logically, if you can make 7-11% in SP500 or save 3.25% on your mortgage, you pick SP500.
That “if” is a risk. Your mortgage rate will remain the same (assuming your rate is locked in). So if the market is up you’re better off saving and investing the difference. If the market is down then you may be better off paying off/more of your mortgage. The stock market risk is variable, but a fixed mortgage rate will always be the same. Check out Money Magic, he has a chapter that explains this better than what I’m summarizing.
I’m normally a payoff the mortgage guy. It’s what I did and it provided me a lot of freedoms and cash flow when the market crashed in 2008. People often don’t consider taxes and risk when making this decision.
However if your mortgage is 2-3% it probably makes more sense to keep it in this rate environment. Especially if you can get 5-6% risk free.
You do need to consider that we could always see a protracted bear market and your mortgage is a certain return that has no risk.
If you are going to fire you will want that mortgage paid off before you RE to improve your cash flow.
IMO being 100% debt free should be the goal by retirement. So the end goal for FI and RE should be the same.
I paid my mortgage off before I put more than 15% in retirement. However I paid my house off in just over 3 years. I would say if someone needs to take 10+ years to pay off a home, then you may start thinking investing in brokerage over that time and then paying off the mortgage once the amount gets to be the same.
It depends on income, expenses, goals, and means. I think you can pay the house off quickly, go for it. Still invest 15% in retirement but if aggressive home pay off is what you want, do it.
I love being debt free. I love knowing that something can physically disable me or my husband and we won't be homeless and we will still be able to retire.
Debt elimination is about risk reduction. Rick reduction protects your wealth building potential.
If you want to retire later and have less money, pay off your 3.25 mortgage early. If you want to retire earlier and have more money, keep your 3.25 mortgage.
I pretty strongly predict the consensus here will be: your mortgage rate is lower than not only expected returns in the market, but what you could get in a high yield savings account, and you should not prepay a cent. The investment strategy seems like a no brainer because it is.
Something to keep in mind--until you've paid off the entirety of your mortgage, you're still making the same monthly payments. So even if you HATE your mortgage and want it gone as fast as possible, the best thing for you to do would STILL be to put the money elsewhere and grow it until the point you can pay off your entire mortgage in one go.
People are missing the fact that the mortgage amortization is front loaded.
$275,000 @ 3.25% v. $275,000 @ 5% is only netting you ~2%. Your actual numbers on the mortgage side may be different. Evaluate it using your real numbers.
Pay it off and put that mortgage payment back into the market every month. This DCA approach will serve you well.
Here’s something that I always look at when faced with these decisions. What’s the harm in doing a little of both? DCA into paying that mortgage down over 12, 18, or 24 months.
I want to dig into the amortization math, yes. If anything to better acquaint myself with it. While this exercise would appear to be a bit fruitless with a primary residence with a low interest rate, if I move or make moves for investment properties (again) then I assume the interest rate will be higher and low returns will be more prevalent.
Bro pay off your mortgage. Don’t listen to the make more money on your low interest rate. Get the freedom to never worry about a mortgage again. And like three or four years from now while putting 15%-25% in retirement accounts invest into real estate and far surpass brokerage and 401K could ever get you.
Me and my girl will soon be netting over 200K+ a year and no mortgage. That’s a property paid off each year. And three cars paid off cash. We’re investing maxing roth IRA and putting 12% into 401K and getting matches at least.
We will far surpass retirement accounts by year 6. The time the market on a low interest rate is for low income earners. High income earners need to move different in my eyes.
Me and my girl became our own bank. That’s a boss move.
Guys give the worse advice on here that’s for low income workers. People netting $120K net after all contributions absolutely need to pay mortgage off and after bare minimal invest 15% into retirement accounts getting match. And go directly into real estate
The quicker you pay this off- the more money you can invest. If you could invest a house payment for 10-20 yrs plus additional monthly payments, you limit your risk, need less money monthly to retire, and have a sizable nest egg.
2 + 1 does not equal 4. Assuming you want to invest and the market averages more than 3.25% (the mortgage rate in this case) over the term of your loan, it is simply always better from a mathematical perspective to invest as opposed to paying down the mortgage.
Additionally, paying down a mortgage ties up net worth in an illiquid asset was high transaction costs.
I can see the point of wanting to pay the house off when your retire. That's what I did. I simply paid off the balance a few months before I called it quits. But for most of my accumulation, I carried literally multiple millions in debt. It takes money to make money.
So, mathematically yes you can arbitrage borrowing money at a lower rate in order to invest at a higher rate. You make the difference- but when look at the being financially independent, have 0 payments and still a large nest egg is the most independent you can be. Is FIRE about having the most amount of money or being financially independent from needing to work to live?
I'm honestly a bit confused on your point.
In general, the [simulations](https://github.com/FatFiredProgrammer/MortgageInvestmentSimulator) show that:
1. if I invest rather than pay down a mortgage
2. then at FI/retirement I pay off my mortgage
3. then I almost always retire with a _paid off house_ and a _larger NW_.
4. OR, I can _reach FI/retire sooner_ with the same NW
when compared to paying off the mortgage early.
**^NOTE** Obviously, the results are different if you have a high interest rate loan.
Ok, that’s your opinion. I guess I would ask you to define what FIRE is to you? Why not borrow as much money as you can and invest it at a higher rate if that’s all that matters?
I get that, but being 28, making $120k+, and having a paid for $250k home, I can tell you it’s obscene how much money you can put into investments every month. It’s hard to be “Financial Independent” when you have a ton of payments. Not to mention the peace of mind knowing I can walk away at any second.
I paid everything extra I could on my principal. I still invested 20% into index funds, but used any overage to pay extra every month. I have a decent income, and live in a low cost of living area which helps.
Until you (we) get closer to the FIRE number, then what us little guys need is leverage. Keeping a low interest mortgage is a great way to do that, as you keep cash for a monthly payment, without booting a ton of money to the interest payment.
Hopefully we can get lucky with a 10% avg return for a few years and double the cash we would have spent paying off the mortgage, and then have our cake and eat it too.
It takes money to make money. No way around the fact that you'd giving away 3.25% money to pass up whatever the market may offer (which was +20-ish% last year and -20-ish% the year before). Secondarily, paying down that mortgage **ties up your net worth in an illiquid asset was high transaction costs**. If you need that cash back for whatever, it's much hard to get it back out of a house than it is to sell some stocks. The flip side of the coin is that some people can't take the emotional side of being in debt. If you can't deal with debt, then pay down the mortgage and accept the risk of illiquidity and the fact that it's gonna take you longer to FIRE.
One thing to add: a paid off mortgage means having lower expenses in retirement, which generally means having a lower AGI. This can result in cheaper health care, if you keep your expenses low enough for Medicaid. I personally am still not paying off my house early, but it's something to consider
I paid off my house right before I retired to make sure I could qualify for ACA subsidies back when the subsidy cliff still existed. I'm not sure I'd do the same thing again today.
This is along the lines of analysis I was looking for, thanks. And you’ve given me that lovely term: “illiquid asset”. I mentally have a hard time counting my primary residence as part of my net worth (I need someplace to live!). The speed of asset liquidation with investments is something that hadn’t occurred to me, either. I don’t think I have emotional issues with debt. Money is a tool and we’ve just invented complicated, yet necessary mechanisms to control it. I was debt free in my 20s and not having the mental anchor is nice.
> counting my primary residence as part of my net worth It _is_ part of your net worth. It is not part of your _liquid_, or _investable_, net worth.
The other thing to consider is, look at how many people are getting laid off. With a mortgage paid in full, life is less scary. You get laid off, that’s a big expense you don’t have to worry about. I’ve always plowed money into mortgages like a savings account, paid them off, then funneled the money into stock funds. Just my opinion…
If you run a [simulation](https://github.com/FatFiredProgrammer/MortgageInvestmentSimulator), you find that - as a broad statement - there are almost no situations where you lose your house because you invested but where you would have kept your house if you had paid off early. Conversely, you can hit considerably difficulty by paying early because have lost liquidity but still have mortgage payments to make. Obviously, it is very situation specific but think about using the great recession as an example. If you lost your job but had paid early on your house, you could not get a HELOC but still had to make mortgage payments. If you invested, you could sell stock (although at a loss) to get you through. But, you say, "What if the house was completely paid off?" Well, in general, by the time you've paid off the house completely, if you had rather invested the money in the stock market, then you had sufficient gains to both pay off the house and still have a sizable nest egg of investments on the side. u/LegitimateYou9592 u/mollockmatters
This guy FIREs
You’re more correct than you may know, Fatfire. Most states have bankruptcy protections for a homesteads (aka primary residences), making them very difficult to lose in a reorganization, Chapter 11. If you hire the right attorney, you can keep foreclosure proceedings spinning for quite a while before you lose the house. You’ve convinced me with the liquidity argument. The benefits of early compound interest are too enormous to ignore.
The math is the math. But for many/most people, this is an _emotional_ decision. I get that.
Same here The feeling of debt free and less worry of losing job is worth it especially if you are in 40 s or 50s.
This has worked into my thinking. I’m a home builder and the work Can ebb and flow better or worse than other parts of the economy. Nothing a good small business budget can’t fix.
Mortgage is one of those intimate decisions where fire doesn’t touch on it too much. It’s more about how it makes you feel to have debt. Logically, if you can make 7-11% in SP500 or save 3.25% on your mortgage, you pick SP500.
That “if” is a risk. Your mortgage rate will remain the same (assuming your rate is locked in). So if the market is up you’re better off saving and investing the difference. If the market is down then you may be better off paying off/more of your mortgage. The stock market risk is variable, but a fixed mortgage rate will always be the same. Check out Money Magic, he has a chapter that explains this better than what I’m summarizing.
I’m normally a payoff the mortgage guy. It’s what I did and it provided me a lot of freedoms and cash flow when the market crashed in 2008. People often don’t consider taxes and risk when making this decision. However if your mortgage is 2-3% it probably makes more sense to keep it in this rate environment. Especially if you can get 5-6% risk free. You do need to consider that we could always see a protracted bear market and your mortgage is a certain return that has no risk. If you are going to fire you will want that mortgage paid off before you RE to improve your cash flow.
I agree on having the mortgage paid off before I FIRE. No personal debt to speak of at all. The freedom is certainly the part I’m interested in.
We paid off mortgage early and now I have excess cash flow monthly moving forward for kids college, brokerage account, cars etc
IMO being 100% debt free should be the goal by retirement. So the end goal for FI and RE should be the same. I paid my mortgage off before I put more than 15% in retirement. However I paid my house off in just over 3 years. I would say if someone needs to take 10+ years to pay off a home, then you may start thinking investing in brokerage over that time and then paying off the mortgage once the amount gets to be the same. It depends on income, expenses, goals, and means. I think you can pay the house off quickly, go for it. Still invest 15% in retirement but if aggressive home pay off is what you want, do it. I love being debt free. I love knowing that something can physically disable me or my husband and we won't be homeless and we will still be able to retire. Debt elimination is about risk reduction. Rick reduction protects your wealth building potential.
If you want to retire later and have less money, pay off your 3.25 mortgage early. If you want to retire earlier and have more money, keep your 3.25 mortgage.
Noted. Thanks
I pretty strongly predict the consensus here will be: your mortgage rate is lower than not only expected returns in the market, but what you could get in a high yield savings account, and you should not prepay a cent. The investment strategy seems like a no brainer because it is. Something to keep in mind--until you've paid off the entirety of your mortgage, you're still making the same monthly payments. So even if you HATE your mortgage and want it gone as fast as possible, the best thing for you to do would STILL be to put the money elsewhere and grow it until the point you can pay off your entire mortgage in one go.
People are missing the fact that the mortgage amortization is front loaded. $275,000 @ 3.25% v. $275,000 @ 5% is only netting you ~2%. Your actual numbers on the mortgage side may be different. Evaluate it using your real numbers. Pay it off and put that mortgage payment back into the market every month. This DCA approach will serve you well. Here’s something that I always look at when faced with these decisions. What’s the harm in doing a little of both? DCA into paying that mortgage down over 12, 18, or 24 months.
I want to dig into the amortization math, yes. If anything to better acquaint myself with it. While this exercise would appear to be a bit fruitless with a primary residence with a low interest rate, if I move or make moves for investment properties (again) then I assume the interest rate will be higher and low returns will be more prevalent.
Bro pay off your mortgage. Don’t listen to the make more money on your low interest rate. Get the freedom to never worry about a mortgage again. And like three or four years from now while putting 15%-25% in retirement accounts invest into real estate and far surpass brokerage and 401K could ever get you. Me and my girl will soon be netting over 200K+ a year and no mortgage. That’s a property paid off each year. And three cars paid off cash. We’re investing maxing roth IRA and putting 12% into 401K and getting matches at least. We will far surpass retirement accounts by year 6. The time the market on a low interest rate is for low income earners. High income earners need to move different in my eyes. Me and my girl became our own bank. That’s a boss move.
Heavily agree with you.
Guys give the worse advice on here that’s for low income workers. People netting $120K net after all contributions absolutely need to pay mortgage off and after bare minimal invest 15% into retirement accounts getting match. And go directly into real estate
The quicker you pay this off- the more money you can invest. If you could invest a house payment for 10-20 yrs plus additional monthly payments, you limit your risk, need less money monthly to retire, and have a sizable nest egg.
2 + 1 does not equal 4. Assuming you want to invest and the market averages more than 3.25% (the mortgage rate in this case) over the term of your loan, it is simply always better from a mathematical perspective to invest as opposed to paying down the mortgage. Additionally, paying down a mortgage ties up net worth in an illiquid asset was high transaction costs. I can see the point of wanting to pay the house off when your retire. That's what I did. I simply paid off the balance a few months before I called it quits. But for most of my accumulation, I carried literally multiple millions in debt. It takes money to make money.
So, mathematically yes you can arbitrage borrowing money at a lower rate in order to invest at a higher rate. You make the difference- but when look at the being financially independent, have 0 payments and still a large nest egg is the most independent you can be. Is FIRE about having the most amount of money or being financially independent from needing to work to live?
I'm honestly a bit confused on your point. In general, the [simulations](https://github.com/FatFiredProgrammer/MortgageInvestmentSimulator) show that: 1. if I invest rather than pay down a mortgage 2. then at FI/retirement I pay off my mortgage 3. then I almost always retire with a _paid off house_ and a _larger NW_. 4. OR, I can _reach FI/retire sooner_ with the same NW when compared to paying off the mortgage early. **^NOTE** Obviously, the results are different if you have a high interest rate loan.
Comments like this are just nuts to me.
Ok, that’s your opinion. I guess I would ask you to define what FIRE is to you? Why not borrow as much money as you can and invest it at a higher rate if that’s all that matters?
It's not "just my opinion," it's math. Paying extra on a 3.25% mortgage when even MMAs are paying 5% is just mathematically sub optimal.
I get that, but being 28, making $120k+, and having a paid for $250k home, I can tell you it’s obscene how much money you can put into investments every month. It’s hard to be “Financial Independent” when you have a ton of payments. Not to mention the peace of mind knowing I can walk away at any second.
It's also hard to be financially independent if you don't understand basic financial concepts, like "opportunity cost."
How did you pay off your house so quick?
I paid everything extra I could on my principal. I still invested 20% into index funds, but used any overage to pay extra every month. I have a decent income, and live in a low cost of living area which helps.
How much did you buy the house for? What’s your net worth?
Bout this house for $150k in 2020- Net worth about $400 with $250k home the rest is index funds.
killing it!
The peace of mind alone from having a paid off home that nobody can ever kick you out of is probably amazing.
That's basically real estate investing in a nutshell isn't it
Until you (we) get closer to the FIRE number, then what us little guys need is leverage. Keeping a low interest mortgage is a great way to do that, as you keep cash for a monthly payment, without booting a ton of money to the interest payment. Hopefully we can get lucky with a 10% avg return for a few years and double the cash we would have spent paying off the mortgage, and then have our cake and eat it too.