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Pay Off Mortage

Started by surpass, November 02, 2018, 07:37:42 AM

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surpass

I started with a 30 year mortgage on my primary residence about 15 years ago at 5.5%... and refinanced to a 15 year 4.5% and then a 10 year 2.4% interest rate.  I have a great rate and about 5 years left on the loan with about 100k balance.  I also have cash sitting in a money mark account earning about 2.2% that I could use right now to pay off the loan completely.

I could technically pay off the loan right now, but with rates going up I could surpass the loan rate at some point just in a money market.  I know I can earn more with a CD 1 year 2.5%, which is over my loan rate (not factoring in taxes).  I already have money in the market and don't want to invest anymore at this time.

This loan is my only outstanding debt.  So would you pay off the mortgage for piece of mind, keep the loan because of the great rate and being more liquid?  Is the feeling of being totally debt free worth more?  Thanks

Cheezus

#1
Me, personally?  I just paid off my mortgage.  I think it's worth paying it off.  You need to determine if you NEED the liquidity or not.  If you don't, then I would pay that mortgage off in a heart beat in your scenario.  I come from the "no debt" school.  And I don't know anyone who has no debt and a paid off mortgage that regrets having a paid off mortgage.

Think of it the other way.  You have a paid off house.  Would you take an equity loan on your house at 2.4% and invest that money in a CD at 2.5%?  A lot of people talk about keeping low interest mortgages and investing instead, yet none of them are pulling equity out of their house and investing it in the stock market.

I also like having the mortgage paid off because I value monthly cash flow.  You can then reinvest if you want and you should do that.  But you also have an extra level of comfort and security with a much lower monthly nut to crack.  If something does go wrong, paying a small amount of bills is a lot easier with no mortgage.

I'm not sure where you live, but in Florida, we have homestead protection.  You can get sued but nobody can touch the house.  So having that $100k in your house is financially safer than having it in a bank account.  Bank accounts can be frozen, taken with a judgment, etc.

So yes, I'd pay off the mortgage.  Then you should be thinking about investing the savings in to higher yield ventures.  If you are concerned about liquidity, then pay off the mortgage and get approved for an equity line.  You can access it in an emergency if you want.

surpass

#2
Thanks for the input.  I live in NY state.  I had ask the same question to my account during tax time.  The home is a multi-family home, so I do rent out part of it, so idk if that makes a difference in this scenario?  I've been able to write off half of my mortgage interest, but the accountant said its probably not worth paying off since most of the loan is principle at this point. 

I don't have a need for liquidity at this point barring any major unforeseen life event.  I could always tap my stock portfolio if I had to in a pinch to raise funds.  What if the Fed raises raise another 4 times between now and the end of next year and I can get 3% on a money market account?  At what interest rate would you say don't pay it off it worth having the debt and making more on it almost risk free?

From my current bank a home equity line of credit is about 4.25%

Cheezus

This is really a matter of personal comfort.  Meaning, yes, you can get a higher return by not paying the house off.  If you truly value that more than paying your house off, then keep it invested.  I personally like not having debt.  The "smart money" move, historically, would be to keep your mortgage and invest instead of paying off the house.  But as I said, you have the "no debt" school or thought and the "invest first" school.  I don't crave a slightly higher return over having no debt.  I'd much prefer getting rid of debt first then putting that extra money in to investments.

You do have a VERY low interest rate on that mortgage, however, so it does make the decision a little harder.  I had a 4.125% on mine, which is quite low still, and I was happy to knock it out.  Guaranteed 4% return, no debt, more cashflow and financial security.  Now I'm investing what would have been my mortgage payment.

If you are merely looking for the "smart money" move, then keep the debt and invest.  That may suit your personality better and it's totally fine!  In other words, there really is no wrong or right answer here.

surpass

Thanks and that's why its a dilemma albeit a good one to have, because the rate is so low.  If it was over 4% like yours was, I'd write the check today and just bang it out of the way.  Right now it seems like a wash to me.  I may just start throwing extra payments at it for another 6 months and see where rates are at. 

I'm thinking of possibly moving (i'd rent out the rest of the home if I do) and/or changing jobs next year.  Since that's a big unknown, for now having that extra cash cushion may give me some piece of mind.  I do like your thinking of having no debt... I feel like I got such as good rate that I should leverage that more somehow.  I'm sure the bank would be happy if I just paid it off.   ;D

polama

I was aggressive about paying off my mortgage at 5.5%, but stopped putting anything extra once I refinanced to 3.5%. I think 4-5% is the range where it cuts over for me, although I should probably factor in the 10 year treasury yield or something more explicitly.

The other factor is since I'd been aggressively paying down the loan, added years back to a 30, plus got the better rate, I'm down to about $400 in principal+interest a month. That means the extra cash I need in an emergency fund is relatively low, and if I have to take a big pay cut in a recession I could still cover it. If the mortgage payment was a bigger portion of my salary, regardless of how much was interest, I'd more inclined to pay it off.

Cheezus

Quote from: polama on November 02, 2018, 01:59:20 PM
I was aggressive about paying off my mortgage at 5.5%, but stopped putting anything extra once I refinanced to 3.5%. I think 4-5% is the range where it cuts over for me, although I should probably factor in the 10 year treasury yield or something more explicitly.

The other factor is since I'd been aggressively paying down the loan, added years back to a 30, plus got the better rate, I'm down to about $400 in principal+interest a month. That means the extra cash I need in an emergency fund is relatively low, and if I have to take a big pay cut in a recession I could still cover it. If the mortgage payment was a bigger portion of my salary, regardless of how much was interest, I'd more inclined to pay it off.

At $400/mo I would probably keep it, too :)

Mine was $5,000 p & i.  Which is a substantial cash flow hit.  Plus I strongly value the security in having a nest egg stashed in my homestead.  Again, in Florida, nobody can touch your primary residence.  Get in to an at-fault car accident and you could have your bank account wiped clean.

I did have second thoughts about paying off such a large 4.125% loan but the more I thought about it, the more it made sense for many reasons.

Something that always appealed to me on an emotional level was having a house paid off that I could continue to live in even if I had to take a low paying job.  There was something relaxing about the thought of that.  If anything were to happen, I could bartend or whatever and be just fine.  I like the security of a paid off house a LOT.  Reducing monthly expenses and removing that anxiety.  Not everyone feels that way, which is why you'll get both types of responses.  Pay it off or don't pay it off and invest!

Dami

There is no wrong answer here. My first comment is <3% in interest payments is really low and great so it makes a decision much tougher. I paid off my loan 2 years ago and that was running at ~4% in interest. If I could go back, I would do the exact same thing because I felt a lot better emotionally and have a much clearer mind when I have zero debt. Now, all I have to worry about is excess cash flow and where to allocate them.

Cheezus

Quote from: Dami on November 03, 2018, 02:47:45 PM
Now, all I have to worry about is excess cash flow and where to allocate them.

You can't understate the impact of this.  Less anxiety could also mean less health issues as you get older, live longer, etc.  The emotional impact of being more financially secure is important.  And having excess cash flow is a much, much nicer place to be in.

Jon Sharpe

You're good either way, but I'm with Cheezus on this one. I would pay it off to free up monthly cash flow. That's a major life and financial milestone and I would go for it!

deific

I am looking to pay off my mortgage to time with with my retirement. I am considering paying an additional $1000 a month to my mortgage, does it matter if I submit this with my payment or if I submit as "principal only"? I'm also considering paying this as $500 on a biweekly schedule which would shorten it up even more I'd assume.

Money Ronin

In this question, there is a math problem and there is a personal comfort problem.  I've had many types of loans; you'll never get a a better loan than your primary residence.

Since this is a site about retiring early and building wealth, I'm advocating the "mathematical answer".  Even if your interest rate were a little higher, given the tax deduction and opportunity to invest the money for a higher return (e.g., stock market), the mathematical answer is to NOT pay off your mortgage.

With regard to personal comfort, many people do what "feels good" with respect to money and they do what lets them "sleep better at night".  Examples include:
1. Putting their money under the mattress instead of investing it
2. Selling investments when the market is tanking
3. Spending rather than investing

All these things might "feel good," but they are counterproductive for building wealth.

On a philosophical level, I've given up on owning my home or anything else.  Whether it says my name or the bank's on the deed makes no difference to me.  We used to buy DVDs, then we rented DVDs, now we stream what we want whenever we want.  The important thing is having access to your home and your cash while maximizing your wealth.

Everything we have is on loan in this life, including borrowed time. 

Cheezus

Remember the warning when it comes to investing... "Past Performance Is Not Indicative Of Future Results"

So the mathematical answer is essentially still a matter of comfort, unless you can see the future :)

I would say again.  I don't know anyone taking out low interest equity lines and loading it up on VOO.  Historically, that would have been a GREAT move.  But nobody is doing that or advocating for it.

Money Ronin

Quote from: Cheezus on November 05, 2018, 04:59:10 PM
Remember the warning when it comes to investing... "Past Performance Is Not Indicative Of Future Results"

So the mathematical answer is essentially still a matter of comfort, unless you can see the future :)

I would say again.  I don't know anyone taking out low interest equity lines and loading it up on VOO.  Historically, that would have been a GREAT move.  But nobody is doing that or advocating for it.

I am in fact doing just that.  Throughout my 15 years of home ownership, I have repeatedly refinanced my home with two goals 1) lower the interest rate and 2) cash out to reinvest.  I have reinvested those extra funds quite successfully in the stock market and real estate.  I have done quite well.  My most recent mortgage is 30 years at 3.5%.  For my apartments, I regularly refinance as well--most recently 5 years for 4.25%.  Sometimes, while I am waiting for a refinance to process, I will use an equity line (at 4.5% variable) as a temporary down payment for a new deal or a stock investment.   

Businesses borrow when money is cheap and invest in the business.  I treat my investments like a business whether it's my primary residence or apartment.  Using the appreciation in real estate to reinvest is a proven way to build wealth.  It's not for everybody, but it's also not uncommon or unconventional.  Far smarter (and richer) people have been doing it for longer, so I am thankful to at least participate. 

Past performance is no guarantee of future results but if one is trying to build wealth, one must have a certain faith in long-term performance of investments.  People make choices between wealth preservation or wealth creation all the time.  My point is that if you are still in wealth creation mode, paying down low interest debt might be a low risk/low reward investment that you really can't afford if you want to achieve your financial goals.

Cheezus

I think there is a big difference between leveraging your primary residence and rental apartments.  I would strongly suggest to leverage real-estate investments when it makes sense.

You do what works for you and that's cool.  But the idea of pulling money out of your primary like crazy and reinvesting is a minority opinion for sure.

AdamJane

Surpass,

We had a 30 year mortage at 9.5% in 1991. After 2 years, we refi to 15 years 6.75%. We paid extra principle every month and paid off the loan in a total of 11 years. We were done by 2002 and it was just a relief to be debt free.

Now, in your case since your interest rate is so low and you are mainly paying principle now, I would take the 100K and buy an individual NY municiple bond with a 4% coupon or greater and with YTW > 4%. It will generate 4K a year tax free. We also live in NY and we have 2.5M in individual NY munis that will generate 89K tax free this year and it will generate 104K next year and beyond.

Adam

Money Ronin

Quote from: Cheezus on November 07, 2018, 07:49:17 AM
I think there is a big difference between leveraging your primary residence and rental apartments.  I would strongly suggest to leverage real-estate investments when it makes sense.

You do what works for you and that's cool.  But the idea of pulling money out of your primary like crazy and reinvesting is a minority opinion for sure.

Agreed, increasing debt isn't for everyone.  My main point is that if one is going to incur more debt or pay down debt, focus on the cost of borrowing and not whether it is attached to your primary residence or some other investment.  For me, if I didn't borrow against my home, I would have obtained the money some other way (e.g., sell stocks or get bigger apartment loan) but at a higher cost (due to interest rate or capital gain taxes) which can include opportunity cost (missed gains from last bull run).

Many years ago, my mother had a mortgage on her primary residence and another on her apartment.  She came into some money and decided to pay off the mortgage on her primary residence.  That made her feel better.  However, her primary mortgage had a lower interest rate and was fixed for 30 years.  Her apartment loan had a higher interest rate and needs to be refinanced every 5 years due to its variable rate.  With increasing interest rates (which is no surprise to me), there was a better financial choice but she made the one that made her feel better. 

I hope that some people will think twice if faced with a similar situation.

Cheezus

Isn't "feeling better" the point of money, in a sense?  While I don't typical advocate for emotions, there is an undeniable correlation between money and emotions when it comes to debt and financial security.

I think paying off a primary is a very important goal.  Paying off rentals, vacation homes, etc... not so much.  I would tell you that it's easy to suggest leveraging the heck out of your residence when the economy is going well, but I know people who got virtually wiped out in 2008 when they were way over leveraged doing roughly what you are suggesting.  They were way upside down, rising interest rates, rents weren't covering the costs, and they couldn't earn enough at their day job to cover the difference.  It was a disaster.

Of course, you can do it better than they did.  You can also do it worse.  Maybe some people are in the right place at the right time and get to take advantage of a boom.  But there is absolutely an inherent risk in any investment, real estate included.  And ultimately, there are just too many factors in play to decide what is the right decision based on minimal information obtained in a forum.

I would point out that the OP was talking about keeping funds in low interest money markets which were only slightly higher interest vs paying off the mortgage.  In that case, I would highly advocate for eliminating debt and paying off the mortgage.

jekamom

With the new standard deduction amount and 10K cap on state taxes including real estate, are you still itemizing for 2018? If you are NOT itemizing, you are not getting an actual deduction for mortgage interest on your primary residence.  (the rental unit interest is still deductible). 

As for paying it off early, you want the interest to end more than you want to reduce the balance.  Your monthly payment is the same until you are DONE with the loan.  So either pay it off or don't pay extra and put that money somewhere it makes sense until there is enough to be done with the loan.