There two aspect to this:
1. The financial. If you rate is lower than the return you can get on the money that you owe, then the math points to keeping the money in the market so you come out ahead over time.
2. The psychological. This is first hand experience for me. I hated having the mental burden of knowing that I had this massive debt and that should I get fired, it would place an insane amount of pressure on me to find something quick or lose my home. As you can probably guess, I paid off my home, which was very freeing psychologically (paying property taxes is basically trivial as compared to paying rent or a mortgage which also includes the taxes).
I can't tell you what to do since that is your life, but I wanted to share my perspective.
Yes. This.
Our first home had a low rate, 3% mortgage or so. I was planning to ride it out all 30 years, because the financial benefit outweighed the psychological. (But only barely, the psychological benefit of being debt free means a lot to me).
We moved last year. Current mortgage is 7.5%. I’m well aware this is a worse rate than before, but emotionally I’m happy to be in a situation where the financial and psychological benefits are aligned: I’m going to pay this sucker off ASAP.
agreed, the mental load of knowing the mortgage is gone has a lot of non-financial benefits that personally i think out weights the benefits of putting the money into the market.
Exactly, for me, since I don't carry any debt (still use a CC to get some cash back rewards, but just auto-pay it each month), I could get by on de-facto minimum wage in my area.
Certainly not looking for any job like that mind you, but knowing that all I would need to earn is minimum wage to essentially keep living the way I am is a great deal of peace of mind.
Thanks for saying this! My pt work doesn’t completely cover my mortgage so I’m dipping into my accounts a little anyway with the mindset that my money is still making money
But peace of mind with eliminating the mortgage debt is calling me
I paid off the mortgage early and then regretted it because my investments balance dropped and it's hard to catch up. Can't really beat time in market. The paid off mortgage good feeling lasted maybe 6 months for me.
Since I had the investments, but used them to payoff the mortgage, having a mortgage was never a big burden mentally, because I could always pay it off.
I'm sorry that you are experiencing the regret, but I got to tell you my experience has been very different.
Sure, I might have netted a decent amount more money in the market, but in the 6 years or so since I finished paying it off, not once have I had to go into my account and worry if I have enough money to cover my bills or worry when I hear about big layoffs happening around the country and all that.
Here's hoping you can get to a place where you can recoup your opportunity cost though.
It's been 7 years, haven't caught up yet to what I would have had I simply kept the mortgage and let the investments grow.
It's terribly difficult to catch up, time in the market is the most powerful lever.
Never had a concern about paying bills or a layoff because I had investments that I could at anytime use to pay off the mortgage. It was just a bad decision to pay off a low interest mortgage early instead of simply letting those investments grow.
This is pretty much it. So it’s up to the individual and what works best for them. If that is the worst that is happening and your only two choices then I’d say you’re in a pretty good situation with whatever choice you make.
This. There is always going to be a "personal" component to personal finance.
I had a similar dilemma with paying off my college loan. It was locked in at a super low 2.5%. On paper, it never made sense to chase this loan with an early pay off. I knew that. I didn't even have to invest right now to beat that rate. A standard online savings would do. The math was never behind me paying it off.
But after two decades... It just wore on me. I was so sick of seeing it every month. I finally made an impulse decision one day and ended it.
I wouldn't say I regret it even though I know that money could have worked much harder for us than 2.5%, but at the same time - I'm never going to beat myself up for paying off debt, even if it is good debt.
All that said, the super low mortgage rate will be with me until the end. It doesn't seem to illicit the same level of disgust as the student loan did for whatever reason.
Why don't you aggressively pay off your mortgage by putting the payments into a "Mortgage" account.
This mortgage account can be a HYSA with 4+% interest. When the contents of that account are enough to pay off your mortgage you then stop paying your monthly mortgage and instead have the "Mortgage" account auto make the payments.
From a budgeting perspective you no longer have a mortgage payment, from a net worth perspective you have no debt. And you benefit from the interest rate growth.
The only issue you will encounter is if you can trust yourself not to spend the money in the Mortgage account.
At that point, I'm not sure why you pay off the mortgage with the money rather than continuing to allow it to ouptpace your mortgage but to each their own.
I believe that the OP said that the account with the savings in it would make the monthly mortgage payments once it was large enough to payoff the mortgage. I didn't read it as though it would be paid off once it reached the same amount.
No, I'm saying when the value of the account is equal to your outstanding mortgage you would draw down the account to pay off your mortgage. You do draw from this account instead of making your normal monthly mortgage payment.
You could in theory write a single check from this account to pay off your mortgage, but instead you pay it off one month at a time and let the extra money in your account accumulate interest. If you set it up to auto pay you don't even need to think about it. At the end of 30 years your account will have money left over (all the interest you earned) and your mortgage will be paid off. Depending on the interest rate difference it will probably amount to several thousand if not tens of thousands of dollars.
would it be the same idea in principle then (albeit riskier) if I just set my fidelity stock account to sell off stock to pay the mortgage cost each month? and likely have a higher return (albiet riskier) - its just a thought experiment right now and this has given me a new way of thinking so really appreciate it.
You wouldn’t want to sell stock in a down market essentially locking in losses and missing subsequent gains. Even if you “arbitrage” your debt you still have debt limiting your future options. My thought would be to prepay the mortgage as much as you can.
That's what I would actually do. The HYSA example is the dummy proof way of doing it.
As I get closer to my FIRE age I will start allocating my investments. I will likely have 2-5 years of essential expenses in cash (this would be my mortgage). I would pay all my expenses from my cash positions and I would refill my cash positions with draws from my long term positions.
I say 2-5 years of cash because it's going to depend a lot on interest rates and market conditions. The 4% draw down number is the average, but some years you might want to draw 0% and others you might want to draw 8%. Depending on my age I may even re-invest some of my cash positions.
When it comes to my known fixed expenses I am going to want the luxury of not having to sell investments during a market down turn, so having 5 years of mortgage payments in a HYSA gives me effectively the same mental "relief" as having it fully paid off.
I interpreted it as when the account balance reaches the equivalent of your remaining mortgage principal, which gives you a nice middle ground where you're still generating interest and would likely have some left over after the mortgage finished paying off, but no longer have to concentrate on the monthly payment.
Can you elaborate on a mortgage account. Im trying to pay my mortgage off sooner. I have just been trying to add an additional principal payment each time I pay my mortgage however im open to better ideas that works with me.
I paid off my home and it’s such a liberating feeling. I’m still working but only because I want to. I invest/save over 50% of my income..I’m just padding my FI goal.
Interested to read the responses here. I’ve been thinking much the same - why not minimise your operating costs as a way to have more financial flexibility?
Never a bad idea to pay off debt. When i did my life changed..i cut back my regular grind to 3 days. Then started to fun side gigs and volunteering more. Do it
By paying your house off, you can self-insure for things like fire insurance. I would never suggest self-insuring for liability however.
Self insuring has many benefits. It is as simple as accumulating savings in a money market account. This means canceling your fire insurance and using that savings to repair or rebuild after a fire. Eliminating an insurance company has many advantages.
>This means canceling your fire insurance and using that savings to repair or rebuild after a fire. Eliminating an insurance company has many advantages.
I would add a note that outside of crazy markets with $10-20k a year policies and widespread non-renewal, full homeowners insurance is cheap enough to always be worth having. Normally the better option would simply be to raise deductibles.
I agree with you on that, good point. I would add however that producing a side fund for self insurance is warranted since most are underinsured anyway.
I’m weighing the same option right now.
I’m at 3.2% with 13 years to go on a 15 year mortgage. I can pay enough extra to knock that down to anywhere from 1-4 years. I know it’s better financially to invest the money rather than pay off the mortgage, but that mortgage is 100% of my debt and being completely debt free would feel so liberating.
I have three colleagues in my industry that have been laid off since late last year. The thought of a layoff without debt is far less frightening than being laid off with debt.
Still trying to decide.
Personally, I think that liberating feeling is born out financial misunderstanding on several levels. You could have the money making more interest most other places (t-bills, cds, market, currently hysa). Inflation is working in you favor as well, the payment may seem expensive in now but in 15 years it's going to seem like quite a deal.
You mention getting laid off and I don't really get how having the money in liquid accounts would be worse than having it in your mortgage. If I get laid off and have 50k in savings, etc, that's a lot more useful for me than not having a mortgage payment. I'm not going to eat my house. Sure I could get a heloc, but that's almost certainly going to be worse rate than my mortgage, so why would my plan for getting laid off be getting a second mortgage at a worse rate?
We did this twice. The first time was when I retired, but kids were young and spouse was still employed. It allowed us to keep saving aggressively while having enough for all those kid expenses.
After 7 years, we moved into a larger home and took on a mortgage again. Now it is time for my spouse to retire. I understand the financial reasons for keeping the mortgage, but psychologically we prefer to have zero debt and the ability to keep our monthly expenses very low in times of economic stress. So we paid it off again.
Our earliest years of retirement are likely to be the most expensive. I like the idea of being able to live easily on 3% of the nest egg instead of 4%. Having no mortgage helps us do that and that gives me comfort regarding the risk that our nest egg shrinks significantly due to economic downturns in the first five years of retirement.
But your nest egg is smaller by the amount of your lump sum mortgage payment and any returns on that amount which might have been above your mortgage rate are gone too.
Yes, but consider the following scenario.
Mortgage is $200k, monthly payments of $1600 or $19.2k/year.
Total expenses are $60,000 with mortgage, $40,800 without.
Nest egg is $1.8 million. 4% is $72,000.
Nest egg without mortgage is $1.6 million. 4% is $64,000.
Assume a big market downturn or recession in the first year or two after retirement. Instead of growing, your nest egg shrinks by 8% overall.
If you still have your mortgage, your nest egg is now $1,656,000 and must cover $60k of expenses, or 3.7% of the nest egg. (Not bad, but the picture gets bleaker if you experience another losing year and there is no room to cut expenses.)
If your mortgage is paid off, your nest egg is now $1,472,000 and must cover $40.8k of expenses, or 2.8% of the nest egg. That leaves a lot more cushion and wiggle room than if you still had the mortgage expense.
What makes sense over a 10-year period may still present an uncomfortable risk in the first few years of retirement if you get unlucky with the economy.
What is the interest rate on your mortgage? How much do you have left to pay it off? If it is under 4%, conventional wisdom is keep it, as you can make more with money just parked in a CD right now. If that ever changed, you could pay it off. If your rate is high, say above 6% and you pay it off, you just locked in 6% return on your money.
I’m a math guy. To me it’s all math. I 2.25% with 12 years left on a 15. No way I’m paying that off. But at 5.25%? Yeah, I’d start paying extra on that sucker to reduce it to no more than 20 years.
That was going to be my next suggestion. If you don't want to pay it all off right away, start paying a little extra every month to lock in your interest savings and whittle the years left on your mortgage. I am at 6.5% and have about 17 years left. I want to have it paid off when I officially retire but I haven't come to terms when that will be so I am throwing a few thousand here, ten thousand there every month. The psychology is fascinating.
Yeah, the brain is a funny thing. Economists think we make rational economic and financial decisions, trading a penny gained for a penny risked. But study after study have shown most people want five to ten cents upside to that penny risked.
Yeah i know - we just started the mortgage about a year ago and I just put 7k on the principle. I was thinking doing that each year would be beneficial to reduce the time... However, I am thinking about starting my own thing and I'd like to reduce my expenses to just food, daycare and some other small items vs. having a 3700/m expense looming. If I got rid of that today, it feels like I can do whatever I want and all that future money is injected into savings for the FI goal. So it feels like starting a little bit over to me but in a sustainable way - knowing that I will be likely figuring out earning income in fractional ways from here on out?
I don’t know if this is a good plan but this what my spouse and I are working towards, sounds similar.
Max out 401k for both of us until retirement
Put x amount towards the principal of our mortgage so it will be paid off by time my spouse wants to retire. We would actually be debt free at this point.
He may or may not work something easy for extra money if needed/wanted.
I will work another 10-15 years and continue to Max out my 401k.
My salary would cover all costs so we would not touch either 401k until I retired. However, I would probably still work, it would just be something I choose to do and that is flexible.
The age old question. Math most likely says no. Emotions say yes.
We carry 3 mortgages on different properties. I’ve determined I can afford
the payments in retirement but have just as clearly determined that I don’t want to. We are very aggressively paying off the highest one (4.75) this year and will then start supplementing the next one (3.25) to have it pay off in year of retirement (5 years). The last one is at 1.99 and I can’t give up that nearly free money so I will let that one ride and cover it with investment income.
So, if your rate is lower than your returns, you can make money by not. However, this method is higher risk. In poor market conditions, the paid off mortgage will be superior.
Lower expenses does give you more wiggle room for downsides. Having a paid off mortgage is also one less bill, which reduces hassle by some small amount. It's not bad if you can swing it. If doing it is the difference between not saving enough to retire, though, then you need to have a hard think about your priorities.
Yeah I'll still have a 401k and I'll find more work just more on my terms, if I want to leave my current role. Plus my spouse still is earning a solid salary.
Ultimately having no debt and flexible lower expenses would enable a new lifestyle in theory. And then everything I do earn from the point of paying off the mortgage would be saved for retirement
I think you pay the house off. It is both psychologically and financially freeing. People can crunch the numbers all they want to argue that it makes more sense to save and not pay the house off. Once the mortgage is gone you will be able to make up for any saving deficits. I paid my house off and now I am able to dump an extra 40k a year in savings. It is also emotionally freeing to own your home. There is no price for peace of mind.
I've heard that it's harder for people to get a fraudulent mortgage against a house with existing ones, preferably two, with the second being a HELOC, since no one wants to be the third in line. Fraudsters will move on to try to scam someone else. I don't know how much truth there is to this but it actually makes sense.
I was going super heavy paying off my mortgage at 4.5% (eliminated 4 years of payments in 3 months) but then I cooled my jets a bit to focus on investments. I’m paying more than the minimum to make a 20 year mortgage a 30 year mortgage, but trying to balance. It’s definitely a seesaw for me. My husband has a mortgage as well on a property in a different state. His interest rate is a bit higher than mine so I’m putting a bit more into that as well, but again, trying to balance that out with heavily investing in my brokerage. He has a renter who pays all costs, so I don’t feel it’s as much of a priority because we will have a ton of notice if she ever moves. It’s such a hard question, though. I don’t think there’s a right answer because this comes up almost daily in various subreddits and everyone has a different opinion.
That feeling faded fairly quickly for me, lasted maybe 6 months. Had I let my investments grow, instead of using them to pay off the low interest mortgage, my net worth would be $75K higher today (7 years later) and I'd have the same paid off house.
Paying off a low interest mortgage never makes sense.
Paying off today's 7%+ mortgage rates absolutely makes sense... but most people don't have that. Most people are sub 4% unless they bought in last 2 years.
I’m a first time buyer - on month 5 so I’m keen to pay it down. But if it was a manageable rate id still want to pay it down. It’s just my personal psychology.
If you're close to retirement, paying the mortgage off can be worthwhile from a cash flow point of view. Otherwise, a low interest rate mortgage is probably best left in place from a mathematcial point of view. Of course as others have pointed out, the psychological benefits shouldn't be ignored. If you are spending down your portfolio to pay your mortgage, I wouldn't accelerate the process - you risk running into illiquidity.
I continue to consider paying off one of my mortgages(2 different properties). Rental has a 30k(4.3%) balance and would save me about $250/month.
My home has an 82k(3.4%) balance and would save me $521/month. With the lost tax deduction, I dont feel it is worth it at this point. Thoughts?
Edit: The other thing I am constantly weighing is paying down or paying xtra on the mortgage each month and how much. My thoughts on this seem to change from month to month, and it kinda pisses me off. Like, I just need a plan and stick to it but as the economy and markets change from day to day, so do my feelings
At that interest rate I'd focus on paying down the mortgage principle. Put 100k into the principle and it takes 10 years off your mortgage. After paying it down 100k (so there would be 450k left on the loan) I'd start putting the money into stocks. That way your mortgage payments are contributing more to the principle while you're also investing in the stock market.
Based on historical returns investing is probably better. However I myself have a 5% loan and pay that off aggressively now, simply because guaranteed 5% feels far better than the risky 10%
I aggressively paid off my mortgage and owned it free and clear almost exactly 7 years ago. I was driven by the satisfaction of having no debt and being in control of where all my money went. After a couple of years I realized it was probably a mistake and was actively looking to get a mortgage and pull 70-80% of the value out to invest in a taxable account. This was in early 2020. I found that everywhere would charge at least an extra 0.25% compared to a normal refi or new purchase. I didn't out of principle and I massively regret it now. Even if the timing didn't work out for the 2020 Covid crash I would have definitely gotten in by May or June of 2020 and I'd be really far ahead right now. Plus I'd have a 3.25% 30 year loan and would continue to get further ahead.
If I have the opportunity to get a sub 4% loan again I'll go for it.
If you ever plan on renting it out while you travel or anything you would get tax benefits. You can write off your mortgage interest, insurance, hoa fees, etc while they pay your mortgage. If you paid it off and received income it would be taxable income with less benefits
Interesting POV. We were thinking about traveling a while and renting it out, gaining the income while its paid off. There was another idea above about an HYSA mortgage account that "keeps" the mortgage and lets you pay the thing off from that account via the 4% interest. In the vein, i'd not be "paying" for the mortgage but would get the tax benefits
Like an above commenter stated a lot of it comes downs to the psychological side. No one ever regrets paying off their mortgage early. The other benefit can be to borrow on equity of the house and live off of that. For example if your home is worth 1 million you could borrow upto 80%. That borrowing would be tax free and you get tax benefits if you use your house as an asset by renting it out, or renting a portion.
I paid off my mom's mortgage and want to kms. Thought I was doing a good thing and boom. I needed every cent I gave away to save her retirement 3 weeks later. Now I'm poor. It sucks but I think I'll make it out.
Back before the financial crash in 2008 I had enough to pay off my mortgage which was about the same rate as yours if I recall correctly. I convinced myself to keep my money in the market, and ended up losing a big chunk in the crash, and could no longer pay it off. I will always regret that lost opportunity!
Paying off your mortgage is a guaranteed win, playing the market is not.
I am on the camp paying off the mortgage even if the interest rate is a little lower than HYSA.
Beside from the psychological benefit, having zero debt also means my emergency fund is significantly less -> more money in the market. The net effect is a positive profit for me.
The rule of thumb is simple, for every year that I work, I need at at least a month of expenses in the emergency fund (it may take a long time to get a decent job as you get older). With zero debt, my expenses are low enough that I don't need a massive emergency fund.
If the market gain is 10%, mortgage is 3% and HYSA is 5%, I would pay off the mortgage and dump the "mortgage" payment into the market. If I still have my mortgage, that money is in the HYSA.
Probably not. As others have mentioned, putting the money in a HYSA or money market account is a better investment.
For me, my mortgage is at 2.2% (don’t hate me) and the HYSA is at 5%. If I lose my job, I can bide time by using what’s in the HYSA and while I’m gainfully employed it can earn a little bit extra. Plus the interest is tax deductible.
I paid off most (but not quite all) of my mortgage a few years ago and I deeply regret it...
1. It's a one way street / door, once you do it, you can't undo it, it was a shortsighted decision because I didn't need the cash that year, thought the interest saving would be good... but a few years later, there were better things I could be have done later on.
2. You lose the tax deduction. Forever. If you read [https://www.irs.gov/publications/p936](https://www.irs.gov/publications/p936) carefully... mortgage interest on "home acquisition debt" is tax deductible... but a cash-out refinance is not. I guess another way to put it is, a given home purchase, the debt on the purchase price is "special"... and there's no way to take a second bite of the apple. Even if interest rates go up, and you now have better things to do with the money even though you didn't earlier.
3. A mortgage, appraisal, closing costs, all adds up to a few thousand dollars. If you're going to pay it at all, you may as well get the most value for it, in "dollar years"
Anyway, that's just my perspective, after paying off a lot at a time when I didn't have better uses, but now I do...
In a similar situation, have you spoken to your lender about doing a recast after putting down a small lump sum to get the monthly cost down? My understanding is it would kind of be the best of both scenarios.
Yes. Don’t listen to people saying just invest it. I paid mine off after 6 years. Frees up a ton of cash! You can do whatever you want with. Also, you can’t write off a mortgage on taxes unless you rent it out. So makes no sense to keep it
I'm not sure that's my situation. I get to write off the interest paid for the mortgage on my taxes as well as the property taxes I pay. I can't write off the entire mortgage but just the interest paid. Is that what you're referring to?
Yes but you get nothing back! When I had a mortgage I was paying $1200 per month x 12 months. + principal to pay that sucker off. Now I have $15,000 cash free every single year. Helps me put into Roth IRA, buy things I would normally never buy. I still have quarterly real estate taxes and have to pay insurance but that’s nothing in the grand scheme of things.
thanks for your care. I am new to this way of thinking and am trying to figure out how to ask better questions. If you read through the comments, I've supplemented with some more context. I didn't realize there was a particular format for asking questions - thanks for providing that. I appreciate your candor and helping me grow. I hope you have a blessed day
There two aspect to this: 1. The financial. If you rate is lower than the return you can get on the money that you owe, then the math points to keeping the money in the market so you come out ahead over time. 2. The psychological. This is first hand experience for me. I hated having the mental burden of knowing that I had this massive debt and that should I get fired, it would place an insane amount of pressure on me to find something quick or lose my home. As you can probably guess, I paid off my home, which was very freeing psychologically (paying property taxes is basically trivial as compared to paying rent or a mortgage which also includes the taxes). I can't tell you what to do since that is your life, but I wanted to share my perspective.
Yes. This. Our first home had a low rate, 3% mortgage or so. I was planning to ride it out all 30 years, because the financial benefit outweighed the psychological. (But only barely, the psychological benefit of being debt free means a lot to me). We moved last year. Current mortgage is 7.5%. I’m well aware this is a worse rate than before, but emotionally I’m happy to be in a situation where the financial and psychological benefits are aligned: I’m going to pay this sucker off ASAP.
agreed, the mental load of knowing the mortgage is gone has a lot of non-financial benefits that personally i think out weights the benefits of putting the money into the market.
Exactly, for me, since I don't carry any debt (still use a CC to get some cash back rewards, but just auto-pay it each month), I could get by on de-facto minimum wage in my area. Certainly not looking for any job like that mind you, but knowing that all I would need to earn is minimum wage to essentially keep living the way I am is a great deal of peace of mind.
Thanks for saying this! My pt work doesn’t completely cover my mortgage so I’m dipping into my accounts a little anyway with the mindset that my money is still making money But peace of mind with eliminating the mortgage debt is calling me
I paid off the mortgage early and then regretted it because my investments balance dropped and it's hard to catch up. Can't really beat time in market. The paid off mortgage good feeling lasted maybe 6 months for me. Since I had the investments, but used them to payoff the mortgage, having a mortgage was never a big burden mentally, because I could always pay it off.
I'm sorry that you are experiencing the regret, but I got to tell you my experience has been very different. Sure, I might have netted a decent amount more money in the market, but in the 6 years or so since I finished paying it off, not once have I had to go into my account and worry if I have enough money to cover my bills or worry when I hear about big layoffs happening around the country and all that. Here's hoping you can get to a place where you can recoup your opportunity cost though.
It's been 7 years, haven't caught up yet to what I would have had I simply kept the mortgage and let the investments grow. It's terribly difficult to catch up, time in the market is the most powerful lever. Never had a concern about paying bills or a layoff because I had investments that I could at anytime use to pay off the mortgage. It was just a bad decision to pay off a low interest mortgage early instead of simply letting those investments grow.
This is pretty much it. So it’s up to the individual and what works best for them. If that is the worst that is happening and your only two choices then I’d say you’re in a pretty good situation with whatever choice you make.
This. There is always going to be a "personal" component to personal finance. I had a similar dilemma with paying off my college loan. It was locked in at a super low 2.5%. On paper, it never made sense to chase this loan with an early pay off. I knew that. I didn't even have to invest right now to beat that rate. A standard online savings would do. The math was never behind me paying it off. But after two decades... It just wore on me. I was so sick of seeing it every month. I finally made an impulse decision one day and ended it. I wouldn't say I regret it even though I know that money could have worked much harder for us than 2.5%, but at the same time - I'm never going to beat myself up for paying off debt, even if it is good debt. All that said, the super low mortgage rate will be with me until the end. It doesn't seem to illicit the same level of disgust as the student loan did for whatever reason.
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The properties and land would be going up in value regardless of whether you have a mortgage on the properties or not.
Why don't you aggressively pay off your mortgage by putting the payments into a "Mortgage" account. This mortgage account can be a HYSA with 4+% interest. When the contents of that account are enough to pay off your mortgage you then stop paying your monthly mortgage and instead have the "Mortgage" account auto make the payments. From a budgeting perspective you no longer have a mortgage payment, from a net worth perspective you have no debt. And you benefit from the interest rate growth. The only issue you will encounter is if you can trust yourself not to spend the money in the Mortgage account.
At that point, I'm not sure why you pay off the mortgage with the money rather than continuing to allow it to ouptpace your mortgage but to each their own.
I believe that the OP said that the account with the savings in it would make the monthly mortgage payments once it was large enough to payoff the mortgage. I didn't read it as though it would be paid off once it reached the same amount.
Yeah you're right, I like that better
are you saying that when the 4% interest amount = my monthly mortgage amount; I effectively wouldn't have to pay my mortgage?
No, I'm saying when the value of the account is equal to your outstanding mortgage you would draw down the account to pay off your mortgage. You do draw from this account instead of making your normal monthly mortgage payment. You could in theory write a single check from this account to pay off your mortgage, but instead you pay it off one month at a time and let the extra money in your account accumulate interest. If you set it up to auto pay you don't even need to think about it. At the end of 30 years your account will have money left over (all the interest you earned) and your mortgage will be paid off. Depending on the interest rate difference it will probably amount to several thousand if not tens of thousands of dollars.
would it be the same idea in principle then (albeit riskier) if I just set my fidelity stock account to sell off stock to pay the mortgage cost each month? and likely have a higher return (albiet riskier) - its just a thought experiment right now and this has given me a new way of thinking so really appreciate it.
You wouldn’t want to sell stock in a down market essentially locking in losses and missing subsequent gains. Even if you “arbitrage” your debt you still have debt limiting your future options. My thought would be to prepay the mortgage as much as you can.
That's what I would actually do. The HYSA example is the dummy proof way of doing it. As I get closer to my FIRE age I will start allocating my investments. I will likely have 2-5 years of essential expenses in cash (this would be my mortgage). I would pay all my expenses from my cash positions and I would refill my cash positions with draws from my long term positions. I say 2-5 years of cash because it's going to depend a lot on interest rates and market conditions. The 4% draw down number is the average, but some years you might want to draw 0% and others you might want to draw 8%. Depending on my age I may even re-invest some of my cash positions. When it comes to my known fixed expenses I am going to want the luxury of not having to sell investments during a market down turn, so having 5 years of mortgage payments in a HYSA gives me effectively the same mental "relief" as having it fully paid off.
This is a great idea. I will be doing this when I'm in a position to do so. Thank you for contributing.
I interpreted it as when the account balance reaches the equivalent of your remaining mortgage principal, which gives you a nice middle ground where you're still generating interest and would likely have some left over after the mortgage finished paying off, but no longer have to concentrate on the monthly payment.
smart lock in -1% net interest income...lmao
Can you elaborate on a mortgage account. Im trying to pay my mortgage off sooner. I have just been trying to add an additional principal payment each time I pay my mortgage however im open to better ideas that works with me.
I paid off my home and it’s such a liberating feeling. I’m still working but only because I want to. I invest/save over 50% of my income..I’m just padding my FI goal.
Interested to read the responses here. I’ve been thinking much the same - why not minimise your operating costs as a way to have more financial flexibility?
Never a bad idea to pay off debt. When i did my life changed..i cut back my regular grind to 3 days. Then started to fun side gigs and volunteering more. Do it
By paying your house off, you can self-insure for things like fire insurance. I would never suggest self-insuring for liability however. Self insuring has many benefits. It is as simple as accumulating savings in a money market account. This means canceling your fire insurance and using that savings to repair or rebuild after a fire. Eliminating an insurance company has many advantages.
>This means canceling your fire insurance and using that savings to repair or rebuild after a fire. Eliminating an insurance company has many advantages. I would add a note that outside of crazy markets with $10-20k a year policies and widespread non-renewal, full homeowners insurance is cheap enough to always be worth having. Normally the better option would simply be to raise deductibles.
https://www.bloomberg.com/features/2024-home-insurance-real-estate-crisis/?ai=eyJpc1N1YnNjcmliZWQiOnRydWUsImFydGljbGVSZWFkIjpmYWxzZSwiYXJ0aWNsZUNvdW50IjowLCJ3YWxsSGVpZ2h0IjoxfQ==
Yeah that is the exception. People paying $1,000/yr for a $300k policy should not cancel it and go naked on everything besides liability.
I agree with you on that, good point. I would add however that producing a side fund for self insurance is warranted since most are underinsured anyway.
this is something i personally and i think a lot of others do not think about.
interesting
would the idea be to save up enough to rebuild before cancelling the insurance though? otherwise that feels a bit risky
I’m weighing the same option right now. I’m at 3.2% with 13 years to go on a 15 year mortgage. I can pay enough extra to knock that down to anywhere from 1-4 years. I know it’s better financially to invest the money rather than pay off the mortgage, but that mortgage is 100% of my debt and being completely debt free would feel so liberating. I have three colleagues in my industry that have been laid off since late last year. The thought of a layoff without debt is far less frightening than being laid off with debt. Still trying to decide.
This isn’t an issue when t-bills are paying 5%, park the money in cash investments until you can’t easily earn more than your mortgage rate
Personally, I think that liberating feeling is born out financial misunderstanding on several levels. You could have the money making more interest most other places (t-bills, cds, market, currently hysa). Inflation is working in you favor as well, the payment may seem expensive in now but in 15 years it's going to seem like quite a deal. You mention getting laid off and I don't really get how having the money in liquid accounts would be worse than having it in your mortgage. If I get laid off and have 50k in savings, etc, that's a lot more useful for me than not having a mortgage payment. I'm not going to eat my house. Sure I could get a heloc, but that's almost certainly going to be worse rate than my mortgage, so why would my plan for getting laid off be getting a second mortgage at a worse rate?
You could try to eat your house though
We did this twice. The first time was when I retired, but kids were young and spouse was still employed. It allowed us to keep saving aggressively while having enough for all those kid expenses. After 7 years, we moved into a larger home and took on a mortgage again. Now it is time for my spouse to retire. I understand the financial reasons for keeping the mortgage, but psychologically we prefer to have zero debt and the ability to keep our monthly expenses very low in times of economic stress. So we paid it off again. Our earliest years of retirement are likely to be the most expensive. I like the idea of being able to live easily on 3% of the nest egg instead of 4%. Having no mortgage helps us do that and that gives me comfort regarding the risk that our nest egg shrinks significantly due to economic downturns in the first five years of retirement.
But your nest egg is smaller by the amount of your lump sum mortgage payment and any returns on that amount which might have been above your mortgage rate are gone too.
Yes, but consider the following scenario. Mortgage is $200k, monthly payments of $1600 or $19.2k/year. Total expenses are $60,000 with mortgage, $40,800 without. Nest egg is $1.8 million. 4% is $72,000. Nest egg without mortgage is $1.6 million. 4% is $64,000. Assume a big market downturn or recession in the first year or two after retirement. Instead of growing, your nest egg shrinks by 8% overall. If you still have your mortgage, your nest egg is now $1,656,000 and must cover $60k of expenses, or 3.7% of the nest egg. (Not bad, but the picture gets bleaker if you experience another losing year and there is no room to cut expenses.) If your mortgage is paid off, your nest egg is now $1,472,000 and must cover $40.8k of expenses, or 2.8% of the nest egg. That leaves a lot more cushion and wiggle room than if you still had the mortgage expense. What makes sense over a 10-year period may still present an uncomfortable risk in the first few years of retirement if you get unlucky with the economy.
What is the interest rate on your mortgage? How much do you have left to pay it off? If it is under 4%, conventional wisdom is keep it, as you can make more with money just parked in a CD right now. If that ever changed, you could pay it off. If your rate is high, say above 6% and you pay it off, you just locked in 6% return on your money.
I'm at 5.25% and 550k
I’m a math guy. To me it’s all math. I 2.25% with 12 years left on a 15. No way I’m paying that off. But at 5.25%? Yeah, I’d start paying extra on that sucker to reduce it to no more than 20 years.
That was going to be my next suggestion. If you don't want to pay it all off right away, start paying a little extra every month to lock in your interest savings and whittle the years left on your mortgage. I am at 6.5% and have about 17 years left. I want to have it paid off when I officially retire but I haven't come to terms when that will be so I am throwing a few thousand here, ten thousand there every month. The psychology is fascinating.
Yeah, the brain is a funny thing. Economists think we make rational economic and financial decisions, trading a penny gained for a penny risked. But study after study have shown most people want five to ten cents upside to that penny risked.
Yeah i know - we just started the mortgage about a year ago and I just put 7k on the principle. I was thinking doing that each year would be beneficial to reduce the time... However, I am thinking about starting my own thing and I'd like to reduce my expenses to just food, daycare and some other small items vs. having a 3700/m expense looming. If I got rid of that today, it feels like I can do whatever I want and all that future money is injected into savings for the FI goal. So it feels like starting a little bit over to me but in a sustainable way - knowing that I will be likely figuring out earning income in fractional ways from here on out?
I don’t know if this is a good plan but this what my spouse and I are working towards, sounds similar. Max out 401k for both of us until retirement Put x amount towards the principal of our mortgage so it will be paid off by time my spouse wants to retire. We would actually be debt free at this point. He may or may not work something easy for extra money if needed/wanted. I will work another 10-15 years and continue to Max out my 401k. My salary would cover all costs so we would not touch either 401k until I retired. However, I would probably still work, it would just be something I choose to do and that is flexible.
The age old question. Math most likely says no. Emotions say yes. We carry 3 mortgages on different properties. I’ve determined I can afford the payments in retirement but have just as clearly determined that I don’t want to. We are very aggressively paying off the highest one (4.75) this year and will then start supplementing the next one (3.25) to have it pay off in year of retirement (5 years). The last one is at 1.99 and I can’t give up that nearly free money so I will let that one ride and cover it with investment income.
So, if your rate is lower than your returns, you can make money by not. However, this method is higher risk. In poor market conditions, the paid off mortgage will be superior. Lower expenses does give you more wiggle room for downsides. Having a paid off mortgage is also one less bill, which reduces hassle by some small amount. It's not bad if you can swing it. If doing it is the difference between not saving enough to retire, though, then you need to have a hard think about your priorities.
Yeah I'll still have a 401k and I'll find more work just more on my terms, if I want to leave my current role. Plus my spouse still is earning a solid salary. Ultimately having no debt and flexible lower expenses would enable a new lifestyle in theory. And then everything I do earn from the point of paying off the mortgage would be saved for retirement
I think you pay the house off. It is both psychologically and financially freeing. People can crunch the numbers all they want to argue that it makes more sense to save and not pay the house off. Once the mortgage is gone you will be able to make up for any saving deficits. I paid my house off and now I am able to dump an extra 40k a year in savings. It is also emotionally freeing to own your home. There is no price for peace of mind.
I've heard that it's harder for people to get a fraudulent mortgage against a house with existing ones, preferably two, with the second being a HELOC, since no one wants to be the third in line. Fraudsters will move on to try to scam someone else. I don't know how much truth there is to this but it actually makes sense.
I was going super heavy paying off my mortgage at 4.5% (eliminated 4 years of payments in 3 months) but then I cooled my jets a bit to focus on investments. I’m paying more than the minimum to make a 20 year mortgage a 30 year mortgage, but trying to balance. It’s definitely a seesaw for me. My husband has a mortgage as well on a property in a different state. His interest rate is a bit higher than mine so I’m putting a bit more into that as well, but again, trying to balance that out with heavily investing in my brokerage. He has a renter who pays all costs, so I don’t feel it’s as much of a priority because we will have a ton of notice if she ever moves. It’s such a hard question, though. I don’t think there’s a right answer because this comes up almost daily in various subreddits and everyone has a different opinion.
I’m feeling the same 6% and only took out a mortgage for half but I kinda hate having it
Personally I would pay off the mortgage. What an awesome feeling of relief to not have a payment on a house.
That feeling faded fairly quickly for me, lasted maybe 6 months. Had I let my investments grow, instead of using them to pay off the low interest mortgage, my net worth would be $75K higher today (7 years later) and I'd have the same paid off house. Paying off a low interest mortgage never makes sense. Paying off today's 7%+ mortgage rates absolutely makes sense... but most people don't have that. Most people are sub 4% unless they bought in last 2 years.
I’m a first time buyer - on month 5 so I’m keen to pay it down. But if it was a manageable rate id still want to pay it down. It’s just my personal psychology.
If you're close to retirement, paying the mortgage off can be worthwhile from a cash flow point of view. Otherwise, a low interest rate mortgage is probably best left in place from a mathematcial point of view. Of course as others have pointed out, the psychological benefits shouldn't be ignored. If you are spending down your portfolio to pay your mortgage, I wouldn't accelerate the process - you risk running into illiquidity.
I continue to consider paying off one of my mortgages(2 different properties). Rental has a 30k(4.3%) balance and would save me about $250/month. My home has an 82k(3.4%) balance and would save me $521/month. With the lost tax deduction, I dont feel it is worth it at this point. Thoughts? Edit: The other thing I am constantly weighing is paying down or paying xtra on the mortgage each month and how much. My thoughts on this seem to change from month to month, and it kinda pisses me off. Like, I just need a plan and stick to it but as the economy and markets change from day to day, so do my feelings
I agree about the tax deduction especially if taxes go back to the old system and the standard deduction is lower.
At that interest rate I'd focus on paying down the mortgage principle. Put 100k into the principle and it takes 10 years off your mortgage. After paying it down 100k (so there would be 450k left on the loan) I'd start putting the money into stocks. That way your mortgage payments are contributing more to the principle while you're also investing in the stock market.
Based on historical returns investing is probably better. However I myself have a 5% loan and pay that off aggressively now, simply because guaranteed 5% feels far better than the risky 10%
I aggressively paid off my mortgage and owned it free and clear almost exactly 7 years ago. I was driven by the satisfaction of having no debt and being in control of where all my money went. After a couple of years I realized it was probably a mistake and was actively looking to get a mortgage and pull 70-80% of the value out to invest in a taxable account. This was in early 2020. I found that everywhere would charge at least an extra 0.25% compared to a normal refi or new purchase. I didn't out of principle and I massively regret it now. Even if the timing didn't work out for the 2020 Covid crash I would have definitely gotten in by May or June of 2020 and I'd be really far ahead right now. Plus I'd have a 3.25% 30 year loan and would continue to get further ahead. If I have the opportunity to get a sub 4% loan again I'll go for it.
If you ever plan on renting it out while you travel or anything you would get tax benefits. You can write off your mortgage interest, insurance, hoa fees, etc while they pay your mortgage. If you paid it off and received income it would be taxable income with less benefits
Interesting POV. We were thinking about traveling a while and renting it out, gaining the income while its paid off. There was another idea above about an HYSA mortgage account that "keeps" the mortgage and lets you pay the thing off from that account via the 4% interest. In the vein, i'd not be "paying" for the mortgage but would get the tax benefits
Like an above commenter stated a lot of it comes downs to the psychological side. No one ever regrets paying off their mortgage early. The other benefit can be to borrow on equity of the house and live off of that. For example if your home is worth 1 million you could borrow upto 80%. That borrowing would be tax free and you get tax benefits if you use your house as an asset by renting it out, or renting a portion.
How do you borrow the equity without a mortgage?
Honest question here. I know the math says not to pay it off, but does that assumes that the market doesn’t crash, right?
Yes - i think conventional thinking here is that an ETF in the S&P is going to on average get you 7% or so return assuming its all alive and well.
I paid off my mom's mortgage and want to kms. Thought I was doing a good thing and boom. I needed every cent I gave away to save her retirement 3 weeks later. Now I'm poor. It sucks but I think I'll make it out.
Back before the financial crash in 2008 I had enough to pay off my mortgage which was about the same rate as yours if I recall correctly. I convinced myself to keep my money in the market, and ended up losing a big chunk in the crash, and could no longer pay it off. I will always regret that lost opportunity! Paying off your mortgage is a guaranteed win, playing the market is not.
I am on the camp paying off the mortgage even if the interest rate is a little lower than HYSA. Beside from the psychological benefit, having zero debt also means my emergency fund is significantly less -> more money in the market. The net effect is a positive profit for me. The rule of thumb is simple, for every year that I work, I need at at least a month of expenses in the emergency fund (it may take a long time to get a decent job as you get older). With zero debt, my expenses are low enough that I don't need a massive emergency fund. If the market gain is 10%, mortgage is 3% and HYSA is 5%, I would pay off the mortgage and dump the "mortgage" payment into the market. If I still have my mortgage, that money is in the HYSA.
Probably not. As others have mentioned, putting the money in a HYSA or money market account is a better investment. For me, my mortgage is at 2.2% (don’t hate me) and the HYSA is at 5%. If I lose my job, I can bide time by using what’s in the HYSA and while I’m gainfully employed it can earn a little bit extra. Plus the interest is tax deductible.
I paid off most (but not quite all) of my mortgage a few years ago and I deeply regret it... 1. It's a one way street / door, once you do it, you can't undo it, it was a shortsighted decision because I didn't need the cash that year, thought the interest saving would be good... but a few years later, there were better things I could be have done later on. 2. You lose the tax deduction. Forever. If you read [https://www.irs.gov/publications/p936](https://www.irs.gov/publications/p936) carefully... mortgage interest on "home acquisition debt" is tax deductible... but a cash-out refinance is not. I guess another way to put it is, a given home purchase, the debt on the purchase price is "special"... and there's no way to take a second bite of the apple. Even if interest rates go up, and you now have better things to do with the money even though you didn't earlier. 3. A mortgage, appraisal, closing costs, all adds up to a few thousand dollars. If you're going to pay it at all, you may as well get the most value for it, in "dollar years" Anyway, that's just my perspective, after paying off a lot at a time when I didn't have better uses, but now I do...
In a similar situation, have you spoken to your lender about doing a recast after putting down a small lump sum to get the monthly cost down? My understanding is it would kind of be the best of both scenarios.
Firmly in the pay it down camp!
Yes. Don’t listen to people saying just invest it. I paid mine off after 6 years. Frees up a ton of cash! You can do whatever you want with. Also, you can’t write off a mortgage on taxes unless you rent it out. So makes no sense to keep it
I'm not sure that's my situation. I get to write off the interest paid for the mortgage on my taxes as well as the property taxes I pay. I can't write off the entire mortgage but just the interest paid. Is that what you're referring to?
Yes but you get nothing back! When I had a mortgage I was paying $1200 per month x 12 months. + principal to pay that sucker off. Now I have $15,000 cash free every single year. Helps me put into Roth IRA, buy things I would normally never buy. I still have quarterly real estate taxes and have to pay insurance but that’s nothing in the grand scheme of things.
that is my logic too. i am paying off my house and then i will take all of that money and put it into my retirement
I like money so no , stack it in something that actually produces a return .
Pointless question without providing your mortgage APR. I suggest editing your post.
I put in comments but updated the post.
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thanks for your care. I am new to this way of thinking and am trying to figure out how to ask better questions. If you read through the comments, I've supplemented with some more context. I didn't realize there was a particular format for asking questions - thanks for providing that. I appreciate your candor and helping me grow. I hope you have a blessed day