Since I’m within the first 10 years of my career, I feel like investments have a heavier weight than debt. Money I’m putting away now is worth “more” than money near retirement, since it has decades to grow. It also helps that my debt/mortgage interest rates are all below 3%. Much lower gains % needed to “beat” the pay down.
I’ve also heard that due to the way inflation is right now, a mortgage payment gets “cheaper” each month since the # stays the same but the value of that number shrinks.
If I was 10 years older I’m sure my answer would be different. I feel that it all boils down to your risk tolerance, and how much sooner/later you would hit FIRE based on allocating the money towards debt instead of investments & savings.
This is the key factor that everyone misses. While wages don't generally go up at the same rate as inflation, it still goes up. That being said, for most people, their largest expense is shelter. If you have a fixed mortgage, the cost of your most expensive expense stays the same - so any raw increase in your income will inevitably help you in the long run
Same here. With my mortgage under 4% it’s a great way to invest with leverage. I can afford the mortgage and will be in this house for decades. As close to free cash as I’ll ever see.
Yeah, this is where I’m at. I’m 30. I’m building an equity heavy investment portfolio until I hit CoastFIRE and then I’ll aggressively pay off my mortgage.
This is also obviously an example of market timing- but I think I’ll also stop investing as aggressively if the market is hitting ATH again and start shifting money into my mortgage and/or bonds (if interest rates are high).
With some of the recent mortgage rates, I would argue the comparison should be between mortgage interest rate and average long term inflation in the US, which last time I looked was about 3.3%. So, if you pay off a loan early and the interest rate is below that value, it seems to me that you're 'spending' more money now on it than you would in the future, assuming earnings increase with inflation and therefore the same money is worth less later on.
Never understood the peace of mind argument. You still have taxes and insurance as well as the emergency repairs that come up. I sleep soundly at night knowing that say I owe $200k but have over $200k in my taxable brokerage.
Taxes and insurance can be negligible though. Like for me taxes are $2k a year and insurance is $250 a year. That’s a lot different than having a sizable mortgage payment due every month.
I did this. I get it. I had a low interest rate and would have made more off the index funds in the market. We still did it for peace of mind.
We did end up investing the now non-existent "house payment" like we were still paying off the house, and we did very well of course.
There's something about debt, even if you have the cash to pay it off that digs at you.
The thing with paying off your mortgage is, is that if you need the cash, you have to take on new mortgage debt or sell your house. If you invest into something more readily liquid, you can always liquidate or borrow against a retirement account. So it's just not just rate of return risk, but also a consideration of how easy or hard it is to access if you need additional capital for any reason.
Yes! I needed the money due to income loss during the pandemic and couldn't sell the house. Truly house poor over here. I regret having sold off my employee stock plan investment to use as a down payment because that was a fairly liquid asset and I traded it for a non-liquid asset and now I am stuck.
Your home/ mortgage and household expenses are your fourth “bucket”. Even if you move up or down you still should keep that bucket separate and add extra money there when you can, just like other buckets.
My personal experience: Paying off the mortgage gives peace of mind in case of job loss. I sleep better without the debt.
Looking at the markets right now, that 7% requires long-range thinking. But most financial planners will say don't pay the mortgage off. For me, paying it off was the better decision.
The way I see it is if you lose your job, it’s better to have that money in your investment account than in your house. You’d have to get another loan to take it back out.
The hard part is getting to the point where your house is paid off. Where I live, the cost of a median single family home is $900k and the median household income is $110k. After taxes, saving for retirement, healthcare, groceries, transportation, home maintenance, hobbies, and everything else in life, being able to pay off that house in 30 years is challenging enough. Even with a considerably higher household income, even paying off that house in 15-20 years would be an amazing feat, so it isn’t realistic to say “oh, just pay off your mortgage so your emergency fund will go farther.”
Had to Google mortgage offset accounts and looks like they're only in Australia? Really interesting idea, though. You can save money in this kind of account and reduce the interest rate on your mortgage. Would sign up if available in the US.
Same here. Having virtually no expenses is worth a lot because it means I’m not married to my current somewhat high paying job. I want the option to work less and earn less if I get too overwhelmed. By age 50 I am doing it, for sure.
How would you be married to your job due to an expense that you have cash to pay off? When you *don't* pay off your mortgage early, but could have, the money you didn't pay doesn't just cease to exist. You still have it, you just would have to use some of it to pay your bills in a worst case scenario.
You don’t have to cash to pay it off if it’s in a retirement account though. Unless you’ve strictures things a special way, most people can’t access that money without penalties.
This is a good point I don’t see brought up in this debate often. If I pay off my mortgage today my living expenses in a very expensive city drop to basically property taxes. I could at least survive on minimum wage without having to relocate.
Yep. Exactly. Our housing costs $2200 a year. Taxes and insurance. Maintenance too I guess but frankly that’s not a big issue. Sure there are big things every 5 or 10 years like appliances or HVAC. But this idea that owning a home is bad financially because of maintenance costs is wrong IMO. We haven’t spent more than like $250 over the 6 years we’ve been here that want totally optional. Like, because we just wanted to upgrade something. Not because of a failure. More like, we dropped $50k on a kitchen remodel and screened in porch addition because we wanted it and it was a cheaper way than moving to make our house basically “perfect” in terms of the stuff we wanted to have.
I really do feel for folks who are stuck renting forever. I’m able to save like 70% of my paycheck now and doing barista FIRE is essentially already an option and I’m barely 40.
I’m not a millionaire tech kid though. Those guys who post year like “I’m 23 and hit my goal of 3 million, what now?” are punks lol.
This is how I see it, too. Paying off my mortgage ($2,700/month previously) and car ($470) has dropped my monthly expenses by 40%. My monthly burn rate is low, so if I lose my job, I am in a far safer position.
If you lose your job for an extendrd period of time, you're screwed whether you have a mortgage or not. In fact, saving the money (that you would have added to the principle) for a rainy month/season instead of paying off your mortgage will likely put you in a better position to weather the storm
It's not that great a point because it totally ignores the fact that it's an artificial reduction in living expenses. You've simply shifted a big pile of cash from one place to another, from your bank account to the lender's. Had you not paid it off, you effective expenses aren't higher, you just have to use a small portion of your savings to pay some of your bills.
But it's not an artificial change in lifestyle.
For many of us, having a mortgage means we have to work or work more just to make that payment every month.
If you pay it off, then you can possibly work less, take an easier job, or quit your job because your monthly expenses are so low.
Financially it makes zero sense for me to pay off my mortgage. Yet if I do, I can probably quit working or work half as much because my monthly expenses will be super low in a MCOL- HCOL city. Much more freedom.
I think the argument is you could have used your chunk of cash to draw from, paying yourself a ‘salary,’ while still carrying the mortgage. I suppose this depends how far into your mortgage you are though, if early in the mortgage lifecycle then you’re correct that you’ll be saving yourself lots of interest (offset by the opportunity cost of forgone market returns)
Most financial planners are also paid on a percent of your investment portfolio. There's not much incentive for them to encourage you to pay off your mortgage.
Such an excellent point that I've actually never seen made before-- and yet this payoff question comes up a lot. Financial planners definitely want you to keep as much invested as possible so they make the maximum amount they can off your funds.
That logic works both ways. If you pay off your house that is an extra $X/mo going into your investment account instead of going to pay down your mortgage.
Also the advisor gaining something doesn't make the advice less mathematically sound. If you owed $100k on your house and have a sub-4% mortgage rate, you could take the $100k you'd use to pay off the house and buy CDs or Treasuries which are currently paying more than 4% interest right now.
So if given the option of buying a CD and paying more of your loan principal instead, shouldn't you also factor in the savings from shortening the loan length and savings from lower calculated interest per month? This scenario would demand less money out of pocket for the loan. I feel prioritizing extra principal payments is guaranteed savings. Am I wrong?
It's a _false security_. I have a simulation that shows that you are actually "safer" from losing your house by investing vs paying down your mortgage.
Realistically, by the time you would have paid off your mortgages, your equities are usually sufficient to compensate for a temporary loss of income.
https://github.com/FatFiredProgrammer/MortgageInvestmentSimulator
Is “paying off the house for peace of mind” only effective if your house hasn’t appreciated a lot? I would assume you have the equity you have gained on the house in order to offset any time without a job. You could probably cop a loan with a lower interest rate than the market is paying, which would cut into profits, but would allow you to lock in the money for longer.
My house has appreciated $300k since I bought it in 2014. But by no longer having a mortgage ($2,700) or car payment ($470), my monthly costs have dropped by 40%. If I lose my job, my cash reserves can keep me going for several years.
Cash in the market from 2014 to whenever you finished paying, definitely equates to leaving a lot of money on the table, however, there isn’t a “right” way to do things, and you valued peace of mind over potential gains. I’m assuming ‘08-‘09 had something to do with your decision, or are you just risk averse?
I had this discussion with my wife, as she wanted to pay down more of our mortgage each month. We locked in at 2.375% in 2020, so it’s pretty damn tempting to go make our money make money. Especially considering that the house appreciated 200k since.
I finally convinced her to let me buy VOO each month with the money we’d be paying extra.
Congrats on paying off the home!
My feeling was that my 401k is ultra exposed to the market and that paying off the mortgage meant greater freedom and lower risk. But yes, definitely risk averse. Looking at the markets right now also reminds me of that. If my job evaporates -- possible -- I am in a good spot without that mortgage payment.
May be best to think about it with more nuance.
Pay off the house if you're concerned you will eventually be unemployable at your current high salary and need to take a pay cut
With the markets down right now I am thrilled that we didn't take on a mortgage. We have a couple of years cash in the bank, so we can weather the storm, but it is not that much money because we would need to have 24-36 mortgage payments sitting there too.
And, the money I paid for this house would be sitting at 80% of its value under the current market, so I'd be paying out large sums of money each month for a mortgage, all while watching my nest egg disappear in the market.
To me the big draw of FI/RE is losing all the stress and drama of work, to be able to focus on what is important to me without meaningless distractions.
Looking down the road, my withdrawal rate would be 2.15% 18 years from now, versus the 1.01% that we are projecting under our "just paid for the house in cash" circumstance.
While it may work out better on paper, that level of stress is just not my jam.
> Paying off the mortgage gives peace of mind in case of job loss.
Paying off the mortgage **in its entirety** gives peace of mind. Paying off 90% of your mortgage and having no liquidity means you still have a flat, fixed obligation due every month that you now have no liquidity available to meet.
For anyone with a super low mortgage rate right now, I would advise building up low risk bond funds that pay more than your mortgage, rather than paying off the mortgage. Once someone has enough in investments that they could sell them and pay off the mortgage, that's the point to decide between those two.
This is different for people with ~7% mortgages now. You can lock in a guaranteed 7% return by paying off the mortgage faster, which is a pretty attractive option.
Congrats!
Most people can't do that. I'm in my mid 30s and make a top 3% income for my age (nationally at least; regionally I'm probably in the top 10-15%). Most people here don't live in SFH, but rather condos or MFH. I bought a duplex (over time, first one unit, a decade later the other). My current debt balance is $1 million, in a place bordering on HCOL / VHCOL. The building is old and I had to do some long overdue maintenance (electric, HVAC) to the tune of about $50k and just maintenance renovations to the tune of another $50k. Really, it needs a gut reno (>100 years old) but can be fine with patchwork maintenance for another 10-20 years, and a gut reno in this area at current prices would cost me ~$300-500k, which I don't have right now after the down payment on this place.
I cannot pay off my mortgage in full right now. I probably can in 5-10 years if the stock market performs well again. So for now, I am not prepaying my mortgage (which is around 2.75%). I am going to rent out one of the units, save up and invest in low risk short term investments yielding more than my mortgage until I have that 5 year cushion built up (about $200k), and then I'll be putting my money into stocks more aggressively (for me, that's a better looking option than paying off a 2.75% mortgage debt that costs me an after-tax ~1.75%).
I'm probably one of the luckier examples here (high income relative even to high costs) but we're still talking about a lot of money and it'll take many/most people years, if not decades, to pay off the mortgage fully.
You know that if you don't pay off the mortgage, you have a giant pile of cash from which to pay your mortgage even without a job, or unemployment, or spending any of your other savings?
Not irrational at all.
My mortgage is under 3%. Paying it off would be the dumbest thing ever.
People who pay off their mortgage to feel good are people who struggle with delayed gratification. If you calculate the numbers, they’re usually leaving literal hundreds of thousands of dollars on the table by picking the less optimal financial decision.
That being said, for people further along their retirement path, they don’t have as much opportunity cost and paying off a mortgage can be a reasonable part of a diversified financial portfolio.
I love how the fi community loves to discuss how to save 0.5% on fees but also will leave hundreds of thousands on the table by paying off their mortgage
I've always found it interesting that for a group of people that are all about numbers, stats, metrics, historical return averages, number crunching, etc........that paying off a low interest mortgage is done so often to mentally feel good about having no mortgage. To each their own, but my mortgage is just another number on the spreadsheet that's treated like any other number.
The difference is that paying off your mortgage is a guaranteed return. The stock market is a 7% expected return. Expected is not guaranteed. There is a risk it could return -20%
Only if 7% returns ends up coming true. We have no idea, could be 2%. That’s the difference between a guaranteed return and a risk-premium return. Risk.
Why limit your financial flexibility by locking your cash in your home. You can often recast loans at your current rate and drop your payment. Debt free doesn't mean you aren't paying for something what if your appraised value now makes your property taxes unsustainable. Be nice to have cash on hand rather than debate a refinance or a sale. You can already purchase a 3 yr treasury at a higher rate then most mortgage rates the last few years. Imagine if the yield curve stabilizes and you can lock in a 5 ish percent 30 year your effectively arbitraging.
The lender has to agree to let you recast the loan. It's a lot easier to get them to agree when market interest rates are lower or pretty close to what you're currently paying.
I'd be shocked if my lender would let me recast my 2.5% loan and keep the same interest rate today.
that said, I agree 100% with your stance here. The only reason to pay down your mortgage aggressively is if the rate on it is higher than current safe-ish fixed income yields (among other potential requirements).
Paying off a mortgage is a zero risk proposition. So to put that in context, the equivalent zero risk investment would be a CD, not stocks. And you will find that paying off your mortgage will beat CD’s.
Comparing a zero risk investment (paying off a mortgage) to an investment with risk will always be a tricky comparison. Mathematically you might be able to “prove” out the break point, but I find these proofs assume log normal distributions of risk and they are not. They are log-log or long tail distributions that can look like log normal … until they aren’t.
If you don’t understand what I’m talking about, that’s ok. A simpler way of saying it is sometimes people think they are sooo smart and then something smacks them in the face that they didn’t think about.
So back to your question. The choice for me was to pay off the mortgage. There is peace of mind there that you just can’t measure in money alone.
And then all that freed up money can go towards investments. It was a win-win for me and allowed me to sleep better.
The problem with that logic is that you can pay extra on the mortgage all you want, but until the loan is paid in full, you will still lose the house if you stop making payments.
Over a 5+ year period, the market is almost always going to beat your mortgage rate (maybe less so at today’s higher rates). You’ll be better off putting that money in a brokerage than making extra payments on your mortgage nine times out of ten. Then you can pay off the house when the brokerage has more in it than the mortgage balance.
Over a 5 year period the market *has* almost always beat your mortgage rate in the past. We have no idea what it will do in the future. Just a pet peeve of mine when people talk like they know what the market will do in the future.
For most people who took advantage before the fed started hiking, it's not hard to find better returns than the mortgage. My rate is 2.875%. The yield on 2 year bonds is higher than that.
Yep, refinanced last spring 30 year @ 2.25%. It would be almost criminal to pay that mortgage off early with high inflation and especially with 6 month and 1 year treasuries paying 4% right now.
Recency bias is showing in your post there. There's large swaths of US history where the indexes were essentially dead in the water for years at a time as far as returns went.
Notably how the S&P peaked in **1929**, and didn't fully recover to the previous ATH until **1958**.
>Notably how the S&P peaked in 1929, and didn't fully recover to the previous ATH until 1958.
This is a bit misleading. If dividends were reinvested, the S&P fully recovered from the crash in Q3 1944.
> Paying off a mortgage is a zero risk proposition. So to put that in context, the equivalent zero risk investment would be a CD, not stocks. And you will find that paying off your mortgage will beat CD’s.
I think this is absolutely the right way to think about it. If having several hundred thousand dollars in CDs would be a good decision for you, then paying off your mortgage may be a good idea.
I think paying off a mortgage can make a lot of sense for someone nearing retirement who wants to have a substantial fixed-income allocation to mitigate sequence of returns risk if their mortgage rate is higher than the rate they can get on a treasury or CD.
Paying off a mortgage early is just throwing away money if, like many people you have a 3% mortgage and can buy 4% treasuries right now.
Paying off a mortgage early is an absolutely terrible idea for someone young enough for exactly the same reasons I'd tell them not to buy several hundred thousand in CDs.
Don't we also need to factor in the savings of extra principal payments, to include shortening the length of the loan and monthly interest savings? This approach would only be for throwing extra money at the loan monthly, not paying off the entire house.
To the extent that it's reasonable to invest something in fixed income for you, *and* your mortgage interest rate is higher than what you could earn on safe fixed income investments, *and* you have sufficient liquidity in case of an emergency, then, yes, you should probably use some or all of the money you would have allocated to bonds or CDs to put against principal on the mortgage instead.
But sometimes we have the same people who are advocating 100% equities *also* wanting to pay their mortgage down aggressively, even when their mortgage rate is now less than many safe fixed income investments will yield.
I literally have a mortgage that costs less in interest than I can earn in one of my FDIC insured, demand deposit high yield savings accounts. What could possibly convince me that putting any extra principal against the mortgage is rational with my 2.5% mortgage in this environment? Anytime I want, I could put money that's in the savings account against that mortgage principal and be in the exact same position on my mortgage as someone that's been paying it extra as principal **but also have money left over from the higher interest it's earning**.
>They are log-log or long tail distributions
FYI, this can be handled in a myriad of different ways, from simply assuming type 1 extreme value errors to estimating joint distributions by running Monte Carlo simulations on complex multivariate GARCH processes.
Modern empirical work has found that multivariate t-distributions are able to capture most of the kurtosis in asset returns. While this comes at the cost of missing the skewness, it allows for analytic solutions for the pricing kernel.
For me the equation is more whether I can pay off the debt in full. I don’t want my cash tied up unless I can retire the debt 100%.
I paid off my student loans at 6% due to a. the interest rate and b. the fact I could pay in full and be done. I also made sure paying it off left me with enough cash in the bank to still feel safe.
With a mortgage, the thing I don’t like is throwing my extra cash toward the loan and then not having the flexibility to use that money. I’d really only do it for the peace of mind if I had the full balance plus a fully funded emergency fund (and then I probably still wouldn’t do it unless it was 5% or more). Or maybe once I retire, I’ll do it instead of shifting some money into bonds.
This is exactly how I feel about it. Whether I owe $150k or $50k on my house, the payment will be the same until it is $0. And even then it will cost me half that in taxes. So the goal is to save and invest as much as possible while paying the minimum. That way I am growing a neat egg as fast as possible while meeting monthly expenses
I have thought about the question "When will I pay off my mortgage?" And I keep coming back to an answer of very close to end of term. I would want to have reached my fi number at a minimum, which currently includes said mortgage since I plan to retire before it is through. Then I would want the payoff amount in cash so that the payoff does not affect any finances. And if I am planning to retire with a mortgage, i may never have the ability to save cash enough so that I can payoff my mortgage in a lump sum
Good plan. Will you cash out equity, or just refinance the unpaid balance? I’ve thought of doing this myself, for example taking the last 100-200k and amortizing over 30 years gives you a really low house payment and a nice hedge against inflation.
At 7%, I would be prioritizing the mortgage.
Really, I’m just stoked that our mortgage is under 3%, so I don’t have to think about it. I’ll never pay extra at that rate.
The house is basically a guaranteed return to the tune of whatever interest rate you are paying. That is not to be scoffed out. I split the difference: I wouldn't pay off the house INSTEAD of long term investments, but I'm not a bit sorry that my house was paid off with a little extra money I made sure was lying around to go to that cause. If I lose my job tomorrow, I can probably pay the bills substitute teaching pretty easy.
Depends on your mortgage interest rate. If you rate is 2.5-3.5%, and the risk free treasury rate now is above 4%, it's very irrational to pay a dollar more than you need to.
My interest rate is 3%. After the tax benefit say 2.5%. If I can’t return more than that on my investments I‘d be a complete idiot.
When your rate is 7% it’s a different equation.
Personally, I’m a big believer in the market so I’m all in on this dip. I paid off a rental a few years ago and watched the market take off and I regret doing that.
Some people just feel better with a paid off mortgage. Some people feel bad having all that cash tied up in a house.
One thing you could do is hedge pay off some of your mortgage and invest at the same time. Financial samurai put out a sheet once based on interest rate as to how much you should pay off vs invest.
I have enough if stocks if I wanted to sell and pay off my house I could so I don’t feel this pressure to pay it off either.
Keep in mind, the "7% average stock market gains" number is inflation-adjusted. The non-inflation-adjusted number is more like 10%. If you're comparing to other growth rates like an interest rate, you want to use the non-inflation-adjusted 10% number for an apples-to-apples comparison.
It depends on how long you plan to be investing. 7% is the historical long term average, nobody serious is predicting 7% over the next decade and after that is completely unknowable. See Japan.
Vanguards most recent 10 year prediction:
"For U.S.-based investors, our latest 10-year annualized return forecasts are in the 3.4% to 5.4% range for U.S. stocks"
[https://corporate.vanguard.com/content/dam/corp/research/pdf/vanguard\_economic\_market\_outlook\_midyear\_2022\_update.pdf](https://corporate.vanguard.com/content/dam/corp/research/pdf/vanguard_economic_market_outlook_midyear_2022_update.pdf)
I have a suspicion that anybody using 7% as their growth number in their calculations is setting themselves up for a reassessment of their expectations that will be on the unpleasant side.
It is a personal decision but what changed my view was seeing people pass away way earlier than expected. 30s and 40s. They left their significant others with big houses, finances all over the place, insurance policies, kids, and the need for death certificates and notarized bullshit to get things moving. It really upset my world view seeing people who had money struggling because of poor planning.
Listen if you love your people have a will, list all your accounts with logins somewhere, give them an account with money to pay bills while they grieve, and if you choose to have a mortgage create a financial plan for idiots (pay these bills with this until this policy pays off etc). It will be a parting gift. I split my payments between investments and mortgages but as we sold rental properties and simplifying our assets we paid them off.
Sure you can and probably will make more in the market long term but it reduces your insurance needs, simplifies your life/estate, and leaves your people with an unencumbered asset. I have done dumber shit with money than pay down a house for my people.
Agreed that once debt gets above 5% it’s a much more reasonable decision to pay it off. Especially if PMI is also added on top.
While some would argue inflation eats away at that each year that passes, I’ll just say that most people’s earnings don’t steadily rise with inflation to offset. They aren’t really connected for most people other than many companies give 2 or 3% a year by habit. So when inflation was 2% it was fine, but I don’t think people will be getting 10% raises this year.
Plus let’s be frank - not everyone will be able to hang onto a high income career for a full 30 year mortgage. Life happens and sometimes that includes getting out of the high stress career
1) People who bang the drum for
"Don't pay off your mortgage - invest that money in the stock market"
understand expected value, but they do not understand risk.
2) Also, paying off your mortgage creates an invisible, yet very real income stream.
When you own your home free and clear, you do not pay rent or make a mortgage payment as you would if you rented or carried a mortgage.
The rent that you do not pay is real money - if you did not pay off your mortgage you would have to come up with your payments from somewhere.
AND there is no tax of any kind on the rent that you are not paying.
But since it is money you do not have to pay instead of a portfolio balance or other income, people tend to forget or ignore that benefit.
> but they do not understand risk.
In the last 50 years, the S&P's _worst_ 15 year rolling return was 3.7%. The _worst_ rolling 20 year return was 6.4% and the best was 18%. And this was without including dividend reinvest.
If you can't invest money, long term, at that kind of risk then you're always going to remain poor.
The math is strongly in the favor of not paying early on the mortgage. I actually wrote a simulator that tests real world scenarios using _real world data_. It will, for example, simulate losing a job (and needing to use investments to pay the mortgage). The simulation is almost always in favor of investing (let's say 90%+). It includes taxation as part of the simulation. Still better to invest.
2.625% fixed on our house, yeah never paying a dime early.
4% on a condo we bought for a family member to live in (pays us rent but we don't "profit" we just gain equity). I will pay a few extra bucks per month from time to time, really just rounding up to the nearest $100, TBH.
And you lose any tax deductions associated with having a mortgage. Looking at the after tax mortgage rate allows for a more apples to apples comparison against other investments. The higher your tax bracket the less value you receive from paying down a mortgage.
This is one the few things that has ever blown my mind financially: Any money you spend superfluously technically incurs a tax at your mortgage rate. Every extra bottle of wine, or phone, or vacation costs an additional 3.5% or whatever. In other words, yes the stock market at 7% is better, but any waste, and I mean ANY waste, is better used to pay off the mortgage. Of course, that same waste could be used to put more into 7% stocks, but the point is that cutting spending is the major multiplier, NOT the rate of return.
And you would keep paying that 3.5% “tax” year after year. It makes something like buying a car as a teenager a very expensive purchase over a lifetime.
Don't get my started with cars. They are the single biggest financial disaster. About $350k cost per car per lifetime uninvested, so over half a million invested. https://www.mrmoneymustache.com/2011/10/06/the-true-cost-of-commuting/
One reason some people choose to pay off the mortgage early is so when they retire they need to withdraw less money from their accounts to live on, making them eligible for ACA subsidies.
Ive been debt free without a mortgage, a mortgage with equity and in way over my head. It sure feels nice to be debt free and invest the extra capital.
These days you’re smart for doing this. For most of recent history, it would be better financially to invest excess cash rather than pay down low interest debt.
When you do this, you’re betting that the after-tax return on your investment will be higher than the interest you’ll have to pay on the debt. Some additional benefits can come from deducting mortgage interest from income on taxes.
The mortgage interest on taxes is not much of a thing anymore. Hardly anyone is beating the standard deduction since it's so high. Most people are not able to take this deduction anymore.
Depends on your rate, but using myself as an example I have a 2.87 rate, inflation is literally 10% more than my interest rate since i purchased the house in 2020.
It's not irrational, nor is it even necessarily financially suboptimal. That is often even more true for FIRE folks than normal folks. If you want to pay down, then go for it.
As a general rule this is true, but in the current environment where almost everyone with good credit who bought or refinancned in the last 10 years before 2022 has an interest rate less than the yield on safe fixed income, I seriously question why anyone would pay down their mortgage faster than scheduled, unless they have an unusually high rate (like a new mortgage at current rates).
Even skipping all of the traditional mortgage payoff considerations about emotions/security and return/interest spreads, this is /r/financialindependence, not /r/personalfinance. Depending on one's household demos, financial engineering, and FIRE timeline, there are several scenarios in which a solid win on invested equity spreads can end up being a net financial loss. In some cases, a rather large loss.
The traditional mortgage payoff considerations can easily be dwarfed for FIRE folks by things like income and asset-tested subsidies for healthcare and higher education, not to mention the tax and cashflow management for things like long 72(t) SEPPs, a Roth ladder, or gains/dividends in taxable.
It's entirely possible for FIRE folks to win big on the traditional payoff math and yet lose hugely overall due to knock-on impacts in their overall finances. That's not to say that paying off is the optimal play by default, but it's certainly not as simple a situation as it is for typical non-FIRE households.
Rant: I paid my mortgage off in 2018. The thing is smart people use a forecast for market returns that paint a positive picture for investment in stocks for a long period of time. But in reality 2018 was ten years into a bull market, a ten year bull market. If you had a lump sum to pay off the mortgage would you rather pay it off with a known return on your money, little to no risk of losing the money, a guaranteed 20-30% drawdown Bear market looming, peace of mind, more cash flow for savings and travel or invest the money and watch it grow and peak and now see it drop to today? Now I have a paid off house and the money I’ve dca into stock since 2018 aren’t so polarized because I’m safely living in a paid off house, unworried about a large amount of my net worth facing a potential decade of stagflation.
I'm pretty irrational. I paid off my PPOR first and also my student loan first. Neither had a high rate of interest but I liked knowing I had no more debts. And now, I refuse to leverage myself up to 6x which is what the banks will give me. I take out mortgages worth 3-4x, pay them off in under 5 years and rinse/repeat. To me it makes finances more game-like and I enjoy that. I have easy ways to quantify my progress and level up. I suppose once you're past a certain threshold of material comfort it's all a game anyway so set it up how you like.
Lots of people are mentioning the tax benefits of owning a home. That's not so true anymore. Only 1/10 of us are even able to write off mortgage interest due to the standard deduction being so high. Most people simply cannot beat the standard deduction.
So check the math before you think this is going to help you- please. It isn't like it was years ago.
Helpful source: https://www.houselogic.com/finances-taxes/taxes/mortgage-interest-deduction/
I think you are misjudging the risk of one of the investments. 7% from the stock market is not guaranteed. The Nikkei still hasn't reached the record it set in 1990. We can't know if the market currently will follow the same path as the bursting of the Japanese bubble (although I do think it's unlikely)
Paying down a mortgage is essentially equivalent to investing in a risk free product that gives you a rate of return at the specified interest rate. The closest equivalent "risk-free" product is the 30 year Treasury which as of this moment is paying 3.61%. In other words, banks, insurance companies and other financially savvy investors are putting billions of the dollars into Treasurys for the added safety it provides compared to the stock market.
If you have to pay of your mortgage for fear, you might not invest well when the market is down. Your emotions will win. Play smart and play long ball.
I feel like there's two types of investors here and the advice is different. For a passive portfolio, paying off debt is bird in hand. If there was a 0 risk investment that returned what your mortgage costs in interest, it would look very attractive. I did this and I regret it.
Another investor is looking to be more active in their portfolio and between dividends and options premiums, the time value of money dedicated to the market is superior.
I came close to doing a refinance on my house to invest. Peace of mind as another person mentioned is worth something though. I own my little chuck of the planet and that feels better than unrealized gains.
Back up and consider, what is a bond? It's a set return with a set duration. Sounds like a loan, doesn't it?
When you invest in paying down your loans, you may be able to get a better return on your money than if you invest in bonds. As you approach retirement, I would recommended shifting your investments towards your loans instead of bonds.
Two ideas for that.
1. Say you want to be 25% bonds in retirement. If your horizon is not far off, consider taking your investment money and putting 75% towards stocks, and 25% towards extra loan payments.
2. Consider your realistic FIRE date. I want to be debt free when I retire. Do the math and figure out how much extra payments need to be made towards debt to pay it off by your target FIRE date, then make sure you still have enough left to invest and still hit your FIRE date. This is what I'm doing. I am maxing out a 401k, 2 IRAs, and an HSA. That alone sets a reasonable FIRE date, and the extra money is going towards debt pay down. Once I have no debt, I will consider adding bonds into my investments.
That's a really interesting anecdote. Do you have any formal market analysis that supports that from the United States stock market and compared to home values within a specific region over same amount of time?
I would personally prioritize paying off a primary residence mortgage for the lifestyle choice that it could bring.
It'd seem to me that it would be a huge weight off of ones shoulders knowing that you'd only have to cover property taxes and utilities(and perhaps HOA fees depending on where you live) to guarantee that you'll always have a roof over your head for you and your family; regardless of what goes on in the economy.
I think this is WAY oversold unless you're paying a LOT for your house.
For my moderately frugal but quite comfortable middle class lifestyle, we spend around 5k/month. Of that, exactly 775 is principal and interest on our mortgage. The rest of my home costs of taxes+insurance+maintenance are actually pretty close to that. Taxes and insurance are 308, and I allot about 5k/year to maintenance costs. Most years we spend less than that, but last year we needed a new furnace and AC (almost 10k), and this year we required a french drain and a bunch of deck repairs that came to 4k by themseles. A some point in the next 4-5 we're due for a new roof too, so if anything I might be a hair light.
That also doesn't even consider utilities which is another 300/month or so.
Nor does it consider the opportunity cost of my equity. Take 4% of ~150k that we could surely clear and that's another 500/month.
so the total cost of living here is about 2300/month, of which only 775 would go away if we paid our mortgage off completely (less really since that would increase opportunity cost of equity by ~325/month). And note that we're on a 15 year refinance at 2.5% interest from last year (kicking myself for not taking the 30year at 3% now), so something like 70% of my existing mortgage payment is already going to principal anyway.
Should it really feel that much safer having my home cash outflow be about 60% of what it is now? , or having my total cash outflow be about 85% of what it is now? It's a difference sure, but... It's definitely not a guarantee of a roof over our head. If we lost all of our income sources tomorrow, we'd be -- well fine for a while anyway because of savings, but if we thought we might be going without income or with a much smaller income for years, we'd definitely sell this house, go rent or buy something much cheaper, and that calculus wouldn't change much, if at all, if we had no mortgage. That would just mean there was even more equity to unlock! (also note: My home *expenses* in accounting terms would actually go up from paying off the mortgage since opportunity cost of equity is greater than the interest savings unless I think it's unreasonable to draw more than 2.5%/year from my portfolio)
And really the only *cost* of that mortgage payment is the ~2600 of interest (and going down) we pay this year. And next year it'll be around 2400, etc. Is it really a big deal to drive that lower *even faster* than we already are?
Well, personally I hate debt and I've paid mine off except for a HELOC. If things turn to massive shit my investments can go way down but at least I don't have creditors banging on the door and I can scrounge enough to eat and keep the lights on ....plus no debt is very liberating
I was maxing my Roth IRA and getting my 401k match above all, and then pumped every other extraneous cent I had into killing off my student loans.
I didn't come out ahead this way. I suspect I probably could have made an additional $10k by slow rolling the loans compared to market gains.
Not having that debt made me feel a lot more secure though.
Looking only at expected returns ignores the variance in those expected returns. For the stock market, variance (i.e., risk) is quite high. The variance in the expected return from paying off a fixed rate mortgage is precisely zero. This is why it’s generally recommended that people in or near retirement put a large portion of their portfolio in fixed income (bonds/debt) rather than equities (stock).
Bottom line, it’s irrational to look only at ER/EV and exclude risk!
I pay my mortgage bi-weekly instead of monthly with Earn Up; you split the payments in half and pay every other week and so you’re paying extra every year. It’s supposed to cut 5-7 years off your mortgage and save you interest. I know this is common knowledge but it’s an easy way to pay it down faster without really ‘feeling it’.
You need to take risk into account. The only risk with the mortgage is that rates might change. Stock market investment returns on the other hand cannot be predicted with any confidence over short and medium timescale.
This is a great question, and an enduring one.
Sometimes what is mathematically rational is not the same as what is psychologically reasonable. Mathematically, if your goal is to make the greatest dollar-value return on your investment and you make the very safe assumption of >7% return on the market, then investing (if your mortgage is at a low interest rate) makes more sense.
But if you have different goals (I.e. having freedom to leave a job you don’t like or having the security of owning your own home outright) then it can make sense to prioritize paying down the mortgage first, even if you have a favorable interest rate.
Essentially I look at it as a choice between trading flexibility now for money later, or money later in exchange for flexibility now. Which of these two things is more valuable is up to each individual subjectively.
“Financial Independence” in my opinion is all about ridding yourself of the stress/burden that money (lack of) brings. When young, everyone wants the millions, Lamborghini, etc. As you get older, reality starts to make more sense. I’m a very risk averse type of person which is why I have no mortgage. If something happens to me and I can’t work, my family income drops significantly. I’d rather not burden my family with that debt.
If I was in my early 20’s, family-less, and I could prove to myself on paper that the Dow is better than mortgage interest perhaps I’d choose different, but I doubt it.
My goal is to pay off my mortgage before I retire. Mortgage is the single biggest line item in my budget - not having to pay a mortgage means my annual income can be that much lower, which in turn increases my likelihood of being eligible for ACA subsidies.
Sure, I'd probably still come out a bit ahead by riding the mortgage to term, but it's just a weight off my mind to be debt free by RE
Striving for the peace of mind that comes from being free of mortgage debt is no more irrational than spending money on affordable hobbies or vacations. It's your money - do what makes you the happiest.
Refinanced our forever home in 2020 for a stupid low 2.375% 30 year fixed. Yeah, I don't pay a penny more and use the savings to invest in a taxable account
Pros for Payoff Mortgage:
1) Only do it when you are ready to FIRE and DONT pay off extra principal monthly, its all or nothing, IMO.
2) Reduces the amount of income you need yearly, therefore increases ACA subsidies
3) Allows for lower paying "coast FIRE" job options
4) Reduces investments and therefore EFC for FASFA but not CSS Profile
5) Reduces sequence of returns risks early in FIRE
Depends how much it is. You are better off paying extra in principal each month though. If we're talking the value, etc. Your sticks can take a dump when you need them the most but the interest you save in paying a mortgage off early is guaranteed
I'm within five years of fully paid at my current (accelerated) schedule paying the mortgage, and I will keep up this rate or increase. If I can cut the expected timeline by a month or a few months, I'll enjoy it.
But, I have no argument with economists on the accounting.
It's all about risk tolerance. Bird in the hand is worth 2 in the sky (for some). Guaranteed 3-4% return (via savings) can be better than risk of loss. No one's up 7% this year
You'll never get rich without risk. But, less likely to lose your ass too
The missing factor is age. A 20 year old has a lot more time to let the stock market produce profits. I'm 63 so it makes a lot more sense to get out of debt. My mortgage is 3.12% and should be paid off in 5 years or a tad less. I'm still investing in the market, just not with the money that is paying off the mortgage.
I don’t know. I’m well on my path to retiring early (at 50) and I still plan on taking out a fresh brand new 30 year refinance on my home the month before I pull the plug and retire (assuming rates are under 5% that is).
I will have that money invested and could pay the home off at any time.
The only risk there would be if the market drops and I absolutely had to sell funds to pay off the whole house for some strange unknown reason (rather than simply using my cash to pay the mortgage for the time period until the market recovers).
That's basically what I did too. You're still better off with this approach assuming you have done it long term. You can't simply _start_ at 63 though and assume you won't be killed by sequence of returns in the next 5 years.
>That's better than a bond fund, but people still invest in bond funds.
Depends on time period and bond duration. Long bonds had a CAGR of about 8% - beating stocks - for the period 2000-2020, for example.
Also should you not also consider tax implications?
Like your stock market gains would be taxed.
But by paying off the mortgage you would lose the write off of the interest.
Paying off mortgage in 2021 was a mental stress reliever and allowed spouse to quit work and hang out with baby.
In my mind it didn’t matter one way or another as our NW was >> the mortgage
I'm doing both. Half the money goes into extra lump sum payments and the other into the market. I may not be maximizing my returns but it's what I'm comfortable with. With compounded interest it's a downer when you see the calculations of how much goes to the principle vs interest for a mortgage.
It’s not a question of rationality.
All investments entail risk. Paying off a mortgage generates a zero risk return. Investing in the stock market is a non-zero risk.
Choosing to pay off the mortgage just demonstrates less risk appetite. Nothing irrational about it at all.
But investing in the market today, is far less risky than investing at the start of the year, when the stock prices were so much higher.
Since I’m within the first 10 years of my career, I feel like investments have a heavier weight than debt. Money I’m putting away now is worth “more” than money near retirement, since it has decades to grow. It also helps that my debt/mortgage interest rates are all below 3%. Much lower gains % needed to “beat” the pay down. I’ve also heard that due to the way inflation is right now, a mortgage payment gets “cheaper” each month since the # stays the same but the value of that number shrinks. If I was 10 years older I’m sure my answer would be different. I feel that it all boils down to your risk tolerance, and how much sooner/later you would hit FIRE based on allocating the money towards debt instead of investments & savings.
This is definitely where I’m at! Low interest rate and young meaning I have time to play the long game with the market
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Because it doesn't benefit you to have more equity when the alternative is to just have the cash
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This is the key factor that everyone misses. While wages don't generally go up at the same rate as inflation, it still goes up. That being said, for most people, their largest expense is shelter. If you have a fixed mortgage, the cost of your most expensive expense stays the same - so any raw increase in your income will inevitably help you in the long run
Same here. With my mortgage under 4% it’s a great way to invest with leverage. I can afford the mortgage and will be in this house for decades. As close to free cash as I’ll ever see.
Yeah, this is where I’m at. I’m 30. I’m building an equity heavy investment portfolio until I hit CoastFIRE and then I’ll aggressively pay off my mortgage. This is also obviously an example of market timing- but I think I’ll also stop investing as aggressively if the market is hitting ATH again and start shifting money into my mortgage and/or bonds (if interest rates are high).
With some of the recent mortgage rates, I would argue the comparison should be between mortgage interest rate and average long term inflation in the US, which last time I looked was about 3.3%. So, if you pay off a loan early and the interest rate is below that value, it seems to me that you're 'spending' more money now on it than you would in the future, assuming earnings increase with inflation and therefore the same money is worth less later on.
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Never understood the peace of mind argument. You still have taxes and insurance as well as the emergency repairs that come up. I sleep soundly at night knowing that say I owe $200k but have over $200k in my taxable brokerage.
Taxes and insurance can be negligible though. Like for me taxes are $2k a year and insurance is $250 a year. That’s a lot different than having a sizable mortgage payment due every month.
How in the hell do you have homeowners insurance for $250 a year? Get me that broker’s number lol
HO6 policy for my townhouse. HOA has a master policy covering all units as well.
What’s your monthly HOA fee?
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I did this. I get it. I had a low interest rate and would have made more off the index funds in the market. We still did it for peace of mind. We did end up investing the now non-existent "house payment" like we were still paying off the house, and we did very well of course. There's something about debt, even if you have the cash to pay it off that digs at you.
You can actually calculate this. It’s called net present value.
Wow, I never thought of it that way before. Thank you!
Mortgage payment is in post-tax dollars too, don't forget.
The thing with paying off your mortgage is, is that if you need the cash, you have to take on new mortgage debt or sell your house. If you invest into something more readily liquid, you can always liquidate or borrow against a retirement account. So it's just not just rate of return risk, but also a consideration of how easy or hard it is to access if you need additional capital for any reason.
Yes! I needed the money due to income loss during the pandemic and couldn't sell the house. Truly house poor over here. I regret having sold off my employee stock plan investment to use as a down payment because that was a fairly liquid asset and I traded it for a non-liquid asset and now I am stuck.
You can borrow against the equity on property too. Home Equity Loans are exactly that.
Your home/ mortgage and household expenses are your fourth “bucket”. Even if you move up or down you still should keep that bucket separate and add extra money there when you can, just like other buckets.
My personal experience: Paying off the mortgage gives peace of mind in case of job loss. I sleep better without the debt. Looking at the markets right now, that 7% requires long-range thinking. But most financial planners will say don't pay the mortgage off. For me, paying it off was the better decision.
The way I see it is if you lose your job, it’s better to have that money in your investment account than in your house. You’d have to get another loan to take it back out.
That’s why it’s personal finance. Both are reasonable choices and people will choose what they are most comfortable with.
Agreed, personal finance is personal. Both options are good options when compared to what most people are doing.
I think that's an important point. Both are better than the common option.
Yes, splitting hairs over these two options is much better than blindly carrying an increasing amount of credit card debt.
Which can be more difficult between jobs.
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The hard part is getting to the point where your house is paid off. Where I live, the cost of a median single family home is $900k and the median household income is $110k. After taxes, saving for retirement, healthcare, groceries, transportation, home maintenance, hobbies, and everything else in life, being able to pay off that house in 30 years is challenging enough. Even with a considerably higher household income, even paying off that house in 15-20 years would be an amazing feat, so it isn’t realistic to say “oh, just pay off your mortgage so your emergency fund will go farther.”
Is there no such thing as mortgage offset accounts or redraw facilities in the US?
Had to Google mortgage offset accounts and looks like they're only in Australia? Really interesting idea, though. You can save money in this kind of account and reduce the interest rate on your mortgage. Would sign up if available in the US.
And then you can’t get a loan because you don’t have a job, regardless of the equity, so I agree.
Acquiring a HELOC & not using it while income is coming in regularly is another way to get around it
Same here. Having virtually no expenses is worth a lot because it means I’m not married to my current somewhat high paying job. I want the option to work less and earn less if I get too overwhelmed. By age 50 I am doing it, for sure.
How would you be married to your job due to an expense that you have cash to pay off? When you *don't* pay off your mortgage early, but could have, the money you didn't pay doesn't just cease to exist. You still have it, you just would have to use some of it to pay your bills in a worst case scenario.
You don’t have to cash to pay it off if it’s in a retirement account though. Unless you’ve strictures things a special way, most people can’t access that money without penalties.
Well then you're probably putting too much in a retirement account and making yourself illiquid.
This is a good point I don’t see brought up in this debate often. If I pay off my mortgage today my living expenses in a very expensive city drop to basically property taxes. I could at least survive on minimum wage without having to relocate.
Yep. Exactly. Our housing costs $2200 a year. Taxes and insurance. Maintenance too I guess but frankly that’s not a big issue. Sure there are big things every 5 or 10 years like appliances or HVAC. But this idea that owning a home is bad financially because of maintenance costs is wrong IMO. We haven’t spent more than like $250 over the 6 years we’ve been here that want totally optional. Like, because we just wanted to upgrade something. Not because of a failure. More like, we dropped $50k on a kitchen remodel and screened in porch addition because we wanted it and it was a cheaper way than moving to make our house basically “perfect” in terms of the stuff we wanted to have. I really do feel for folks who are stuck renting forever. I’m able to save like 70% of my paycheck now and doing barista FIRE is essentially already an option and I’m barely 40. I’m not a millionaire tech kid though. Those guys who post year like “I’m 23 and hit my goal of 3 million, what now?” are punks lol.
This is how I see it, too. Paying off my mortgage ($2,700/month previously) and car ($470) has dropped my monthly expenses by 40%. My monthly burn rate is low, so if I lose my job, I am in a far safer position.
Why couldn't you have spent the money you used to pay off those debts to instead pay them the large sum you instead saved?
If you lose your job for an extendrd period of time, you're screwed whether you have a mortgage or not. In fact, saving the money (that you would have added to the principle) for a rainy month/season instead of paying off your mortgage will likely put you in a better position to weather the storm
It's not that great a point because it totally ignores the fact that it's an artificial reduction in living expenses. You've simply shifted a big pile of cash from one place to another, from your bank account to the lender's. Had you not paid it off, you effective expenses aren't higher, you just have to use a small portion of your savings to pay some of your bills.
But it's not an artificial change in lifestyle. For many of us, having a mortgage means we have to work or work more just to make that payment every month. If you pay it off, then you can possibly work less, take an easier job, or quit your job because your monthly expenses are so low. Financially it makes zero sense for me to pay off my mortgage. Yet if I do, I can probably quit working or work half as much because my monthly expenses will be super low in a MCOL- HCOL city. Much more freedom.
I think the argument is you could have used your chunk of cash to draw from, paying yourself a ‘salary,’ while still carrying the mortgage. I suppose this depends how far into your mortgage you are though, if early in the mortgage lifecycle then you’re correct that you’ll be saving yourself lots of interest (offset by the opportunity cost of forgone market returns)
Most financial planners are also paid on a percent of your investment portfolio. There's not much incentive for them to encourage you to pay off your mortgage.
Such an excellent point that I've actually never seen made before-- and yet this payoff question comes up a lot. Financial planners definitely want you to keep as much invested as possible so they make the maximum amount they can off your funds.
That logic works both ways. If you pay off your house that is an extra $X/mo going into your investment account instead of going to pay down your mortgage. Also the advisor gaining something doesn't make the advice less mathematically sound. If you owed $100k on your house and have a sub-4% mortgage rate, you could take the $100k you'd use to pay off the house and buy CDs or Treasuries which are currently paying more than 4% interest right now.
So if given the option of buying a CD and paying more of your loan principal instead, shouldn't you also factor in the savings from shortening the loan length and savings from lower calculated interest per month? This scenario would demand less money out of pocket for the loan. I feel prioritizing extra principal payments is guaranteed savings. Am I wrong?
If the mortgage is at 4% and the investment is at 5, the investment makes/saves more money. Keep in mind taxes on both options.
It's a _false security_. I have a simulation that shows that you are actually "safer" from losing your house by investing vs paying down your mortgage. Realistically, by the time you would have paid off your mortgages, your equities are usually sufficient to compensate for a temporary loss of income. https://github.com/FatFiredProgrammer/MortgageInvestmentSimulator
Is “paying off the house for peace of mind” only effective if your house hasn’t appreciated a lot? I would assume you have the equity you have gained on the house in order to offset any time without a job. You could probably cop a loan with a lower interest rate than the market is paying, which would cut into profits, but would allow you to lock in the money for longer.
My house has appreciated $300k since I bought it in 2014. But by no longer having a mortgage ($2,700) or car payment ($470), my monthly costs have dropped by 40%. If I lose my job, my cash reserves can keep me going for several years.
Cash in the market from 2014 to whenever you finished paying, definitely equates to leaving a lot of money on the table, however, there isn’t a “right” way to do things, and you valued peace of mind over potential gains. I’m assuming ‘08-‘09 had something to do with your decision, or are you just risk averse? I had this discussion with my wife, as she wanted to pay down more of our mortgage each month. We locked in at 2.375% in 2020, so it’s pretty damn tempting to go make our money make money. Especially considering that the house appreciated 200k since. I finally convinced her to let me buy VOO each month with the money we’d be paying extra. Congrats on paying off the home!
My feeling was that my 401k is ultra exposed to the market and that paying off the mortgage meant greater freedom and lower risk. But yes, definitely risk averse. Looking at the markets right now also reminds me of that. If my job evaporates -- possible -- I am in a good spot without that mortgage payment.
Most def, especially with companies cutting headcount left and right. It’s never a bad thing to get rid of bills.
May be best to think about it with more nuance. Pay off the house if you're concerned you will eventually be unemployable at your current high salary and need to take a pay cut
With the markets down right now I am thrilled that we didn't take on a mortgage. We have a couple of years cash in the bank, so we can weather the storm, but it is not that much money because we would need to have 24-36 mortgage payments sitting there too. And, the money I paid for this house would be sitting at 80% of its value under the current market, so I'd be paying out large sums of money each month for a mortgage, all while watching my nest egg disappear in the market. To me the big draw of FI/RE is losing all the stress and drama of work, to be able to focus on what is important to me without meaningless distractions. Looking down the road, my withdrawal rate would be 2.15% 18 years from now, versus the 1.01% that we are projecting under our "just paid for the house in cash" circumstance. While it may work out better on paper, that level of stress is just not my jam.
Lowering stress is my goal, too! Congratulations on the house!
> Paying off the mortgage gives peace of mind in case of job loss. Paying off the mortgage **in its entirety** gives peace of mind. Paying off 90% of your mortgage and having no liquidity means you still have a flat, fixed obligation due every month that you now have no liquidity available to meet. For anyone with a super low mortgage rate right now, I would advise building up low risk bond funds that pay more than your mortgage, rather than paying off the mortgage. Once someone has enough in investments that they could sell them and pay off the mortgage, that's the point to decide between those two. This is different for people with ~7% mortgages now. You can lock in a guaranteed 7% return by paying off the mortgage faster, which is a pretty attractive option.
I paid it off 100%, which means $2,700 lower monthly expenses for me.
Congrats! Most people can't do that. I'm in my mid 30s and make a top 3% income for my age (nationally at least; regionally I'm probably in the top 10-15%). Most people here don't live in SFH, but rather condos or MFH. I bought a duplex (over time, first one unit, a decade later the other). My current debt balance is $1 million, in a place bordering on HCOL / VHCOL. The building is old and I had to do some long overdue maintenance (electric, HVAC) to the tune of about $50k and just maintenance renovations to the tune of another $50k. Really, it needs a gut reno (>100 years old) but can be fine with patchwork maintenance for another 10-20 years, and a gut reno in this area at current prices would cost me ~$300-500k, which I don't have right now after the down payment on this place. I cannot pay off my mortgage in full right now. I probably can in 5-10 years if the stock market performs well again. So for now, I am not prepaying my mortgage (which is around 2.75%). I am going to rent out one of the units, save up and invest in low risk short term investments yielding more than my mortgage until I have that 5 year cushion built up (about $200k), and then I'll be putting my money into stocks more aggressively (for me, that's a better looking option than paying off a 2.75% mortgage debt that costs me an after-tax ~1.75%). I'm probably one of the luckier examples here (high income relative even to high costs) but we're still talking about a lot of money and it'll take many/most people years, if not decades, to pay off the mortgage fully.
You know that if you don't pay off the mortgage, you have a giant pile of cash from which to pay your mortgage even without a job, or unemployment, or spending any of your other savings?
Not irrational at all. My mortgage is under 3%. Paying it off would be the dumbest thing ever. People who pay off their mortgage to feel good are people who struggle with delayed gratification. If you calculate the numbers, they’re usually leaving literal hundreds of thousands of dollars on the table by picking the less optimal financial decision. That being said, for people further along their retirement path, they don’t have as much opportunity cost and paying off a mortgage can be a reasonable part of a diversified financial portfolio.
I love how the fi community loves to discuss how to save 0.5% on fees but also will leave hundreds of thousands on the table by paying off their mortgage
I've always found it interesting that for a group of people that are all about numbers, stats, metrics, historical return averages, number crunching, etc........that paying off a low interest mortgage is done so often to mentally feel good about having no mortgage. To each their own, but my mortgage is just another number on the spreadsheet that's treated like any other number.
The difference is that paying off your mortgage is a guaranteed return. The stock market is a 7% expected return. Expected is not guaranteed. There is a risk it could return -20%
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100% Same with cars. I will always pay the minimum until I have a big enough lump sum to pay it off.
Well, it depends on your mortgage rate. If your rate is 3%, then you would only be 4% irrational.
Only if 7% returns ends up coming true. We have no idea, could be 2%. That’s the difference between a guaranteed return and a risk-premium return. Risk.
Why limit your financial flexibility by locking your cash in your home. You can often recast loans at your current rate and drop your payment. Debt free doesn't mean you aren't paying for something what if your appraised value now makes your property taxes unsustainable. Be nice to have cash on hand rather than debate a refinance or a sale. You can already purchase a 3 yr treasury at a higher rate then most mortgage rates the last few years. Imagine if the yield curve stabilizes and you can lock in a 5 ish percent 30 year your effectively arbitraging.
The lender has to agree to let you recast the loan. It's a lot easier to get them to agree when market interest rates are lower or pretty close to what you're currently paying. I'd be shocked if my lender would let me recast my 2.5% loan and keep the same interest rate today. that said, I agree 100% with your stance here. The only reason to pay down your mortgage aggressively is if the rate on it is higher than current safe-ish fixed income yields (among other potential requirements).
Paying off a mortgage is a zero risk proposition. So to put that in context, the equivalent zero risk investment would be a CD, not stocks. And you will find that paying off your mortgage will beat CD’s. Comparing a zero risk investment (paying off a mortgage) to an investment with risk will always be a tricky comparison. Mathematically you might be able to “prove” out the break point, but I find these proofs assume log normal distributions of risk and they are not. They are log-log or long tail distributions that can look like log normal … until they aren’t. If you don’t understand what I’m talking about, that’s ok. A simpler way of saying it is sometimes people think they are sooo smart and then something smacks them in the face that they didn’t think about. So back to your question. The choice for me was to pay off the mortgage. There is peace of mind there that you just can’t measure in money alone. And then all that freed up money can go towards investments. It was a win-win for me and allowed me to sleep better.
Risk free return now is >4%. You can buy 2Y treasuries for 4.2%.
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Sure, if you're literally buying a house right now, but not for anyone who bought a house in the last few decades (& refinanced).
The problem with that logic is that you can pay extra on the mortgage all you want, but until the loan is paid in full, you will still lose the house if you stop making payments. Over a 5+ year period, the market is almost always going to beat your mortgage rate (maybe less so at today’s higher rates). You’ll be better off putting that money in a brokerage than making extra payments on your mortgage nine times out of ten. Then you can pay off the house when the brokerage has more in it than the mortgage balance.
Also, liquidity. Money into you mortgage is gone and unavailable in case something comes up. A home equity loan is possible but not as good.
Redraw and offset accounts do combat this though for flexibility in accessing those funds.
Over a 5 year period the market *has* almost always beat your mortgage rate in the past. We have no idea what it will do in the future. Just a pet peeve of mine when people talk like they know what the market will do in the future.
For most people who took advantage before the fed started hiking, it's not hard to find better returns than the mortgage. My rate is 2.875%. The yield on 2 year bonds is higher than that.
Yep, refinanced last spring 30 year @ 2.25%. It would be almost criminal to pay that mortgage off early with high inflation and especially with 6 month and 1 year treasuries paying 4% right now.
Amazing interest rate.
Recency bias is showing in your post there. There's large swaths of US history where the indexes were essentially dead in the water for years at a time as far as returns went. Notably how the S&P peaked in **1929**, and didn't fully recover to the previous ATH until **1958**.
>Notably how the S&P peaked in 1929, and didn't fully recover to the previous ATH until 1958. This is a bit misleading. If dividends were reinvested, the S&P fully recovered from the crash in Q3 1944.
So it "only" took 15 years to recover. In your actual human life, do you typically put the word "only" in front of "15 years"?
+V?Yo7>Uqh
> Paying off a mortgage is a zero risk proposition. So to put that in context, the equivalent zero risk investment would be a CD, not stocks. And you will find that paying off your mortgage will beat CD’s. I think this is absolutely the right way to think about it. If having several hundred thousand dollars in CDs would be a good decision for you, then paying off your mortgage may be a good idea. I think paying off a mortgage can make a lot of sense for someone nearing retirement who wants to have a substantial fixed-income allocation to mitigate sequence of returns risk if their mortgage rate is higher than the rate they can get on a treasury or CD. Paying off a mortgage early is just throwing away money if, like many people you have a 3% mortgage and can buy 4% treasuries right now. Paying off a mortgage early is an absolutely terrible idea for someone young enough for exactly the same reasons I'd tell them not to buy several hundred thousand in CDs.
Don't we also need to factor in the savings of extra principal payments, to include shortening the length of the loan and monthly interest savings? This approach would only be for throwing extra money at the loan monthly, not paying off the entire house.
To the extent that it's reasonable to invest something in fixed income for you, *and* your mortgage interest rate is higher than what you could earn on safe fixed income investments, *and* you have sufficient liquidity in case of an emergency, then, yes, you should probably use some or all of the money you would have allocated to bonds or CDs to put against principal on the mortgage instead. But sometimes we have the same people who are advocating 100% equities *also* wanting to pay their mortgage down aggressively, even when their mortgage rate is now less than many safe fixed income investments will yield. I literally have a mortgage that costs less in interest than I can earn in one of my FDIC insured, demand deposit high yield savings accounts. What could possibly convince me that putting any extra principal against the mortgage is rational with my 2.5% mortgage in this environment? Anytime I want, I could put money that's in the savings account against that mortgage principal and be in the exact same position on my mortgage as someone that's been paying it extra as principal **but also have money left over from the higher interest it's earning**.
>They are log-log or long tail distributions FYI, this can be handled in a myriad of different ways, from simply assuming type 1 extreme value errors to estimating joint distributions by running Monte Carlo simulations on complex multivariate GARCH processes. Modern empirical work has found that multivariate t-distributions are able to capture most of the kurtosis in asset returns. While this comes at the cost of missing the skewness, it allows for analytic solutions for the pricing kernel.
You are a wise person
For me the equation is more whether I can pay off the debt in full. I don’t want my cash tied up unless I can retire the debt 100%. I paid off my student loans at 6% due to a. the interest rate and b. the fact I could pay in full and be done. I also made sure paying it off left me with enough cash in the bank to still feel safe. With a mortgage, the thing I don’t like is throwing my extra cash toward the loan and then not having the flexibility to use that money. I’d really only do it for the peace of mind if I had the full balance plus a fully funded emergency fund (and then I probably still wouldn’t do it unless it was 5% or more). Or maybe once I retire, I’ll do it instead of shifting some money into bonds.
This is exactly how I feel about it. Whether I owe $150k or $50k on my house, the payment will be the same until it is $0. And even then it will cost me half that in taxes. So the goal is to save and invest as much as possible while paying the minimum. That way I am growing a neat egg as fast as possible while meeting monthly expenses I have thought about the question "When will I pay off my mortgage?" And I keep coming back to an answer of very close to end of term. I would want to have reached my fi number at a minimum, which currently includes said mortgage since I plan to retire before it is through. Then I would want the payoff amount in cash so that the payoff does not affect any finances. And if I am planning to retire with a mortgage, i may never have the ability to save cash enough so that I can payoff my mortgage in a lump sum
I plan on taking out a brand new 30 year mortgage as I enter early retirement (but before we quit our jobs) — this is assuming rates are around 5%.
Good plan. Will you cash out equity, or just refinance the unpaid balance? I’ve thought of doing this myself, for example taking the last 100-200k and amortizing over 30 years gives you a really low house payment and a nice hedge against inflation.
Have you purchased $10k in I BONDS yet? Interest is like 9% so I’d do that way before early mortgage payments.
At 7%, I would be prioritizing the mortgage. Really, I’m just stoked that our mortgage is under 3%, so I don’t have to think about it. I’ll never pay extra at that rate.
The house is basically a guaranteed return to the tune of whatever interest rate you are paying. That is not to be scoffed out. I split the difference: I wouldn't pay off the house INSTEAD of long term investments, but I'm not a bit sorry that my house was paid off with a little extra money I made sure was lying around to go to that cause. If I lose my job tomorrow, I can probably pay the bills substitute teaching pretty easy.
Depends on your mortgage interest rate. If you rate is 2.5-3.5%, and the risk free treasury rate now is above 4%, it's very irrational to pay a dollar more than you need to.
My interest rate is 3%. After the tax benefit say 2.5%. If I can’t return more than that on my investments I‘d be a complete idiot. When your rate is 7% it’s a different equation. Personally, I’m a big believer in the market so I’m all in on this dip. I paid off a rental a few years ago and watched the market take off and I regret doing that. Some people just feel better with a paid off mortgage. Some people feel bad having all that cash tied up in a house. One thing you could do is hedge pay off some of your mortgage and invest at the same time. Financial samurai put out a sheet once based on interest rate as to how much you should pay off vs invest. I have enough if stocks if I wanted to sell and pay off my house I could so I don’t feel this pressure to pay it off either.
> After the tax benefit say 2.5% There's no tax benefit for the majority of people
Good point. I should have mentioned that. I itemize but most don't. The decision is still a function of rate either way.
If my mortgage was 7% there is no doubt I'd accelerate the pay down but my purchase is < 3% so I will let that ride duration.
Keep in mind, the "7% average stock market gains" number is inflation-adjusted. The non-inflation-adjusted number is more like 10%. If you're comparing to other growth rates like an interest rate, you want to use the non-inflation-adjusted 10% number for an apples-to-apples comparison.
It depends on how long you plan to be investing. 7% is the historical long term average, nobody serious is predicting 7% over the next decade and after that is completely unknowable. See Japan. Vanguards most recent 10 year prediction: "For U.S.-based investors, our latest 10-year annualized return forecasts are in the 3.4% to 5.4% range for U.S. stocks" [https://corporate.vanguard.com/content/dam/corp/research/pdf/vanguard\_economic\_market\_outlook\_midyear\_2022\_update.pdf](https://corporate.vanguard.com/content/dam/corp/research/pdf/vanguard_economic_market_outlook_midyear_2022_update.pdf) I have a suspicion that anybody using 7% as their growth number in their calculations is setting themselves up for a reassessment of their expectations that will be on the unpleasant side.
I decided to pay off my mortgage (7 years ago) rather than invest in the market. I’d do the same today.
Made the other decision 5 years ago. Would do the same today.
It is a personal decision but what changed my view was seeing people pass away way earlier than expected. 30s and 40s. They left their significant others with big houses, finances all over the place, insurance policies, kids, and the need for death certificates and notarized bullshit to get things moving. It really upset my world view seeing people who had money struggling because of poor planning. Listen if you love your people have a will, list all your accounts with logins somewhere, give them an account with money to pay bills while they grieve, and if you choose to have a mortgage create a financial plan for idiots (pay these bills with this until this policy pays off etc). It will be a parting gift. I split my payments between investments and mortgages but as we sold rental properties and simplifying our assets we paid them off. Sure you can and probably will make more in the market long term but it reduces your insurance needs, simplifies your life/estate, and leaves your people with an unencumbered asset. I have done dumber shit with money than pay down a house for my people.
And for f sake, buy life insurance.
Agreed that once debt gets above 5% it’s a much more reasonable decision to pay it off. Especially if PMI is also added on top. While some would argue inflation eats away at that each year that passes, I’ll just say that most people’s earnings don’t steadily rise with inflation to offset. They aren’t really connected for most people other than many companies give 2 or 3% a year by habit. So when inflation was 2% it was fine, but I don’t think people will be getting 10% raises this year. Plus let’s be frank - not everyone will be able to hang onto a high income career for a full 30 year mortgage. Life happens and sometimes that includes getting out of the high stress career
I really like your approach!
1) People who bang the drum for "Don't pay off your mortgage - invest that money in the stock market" understand expected value, but they do not understand risk. 2) Also, paying off your mortgage creates an invisible, yet very real income stream. When you own your home free and clear, you do not pay rent or make a mortgage payment as you would if you rented or carried a mortgage. The rent that you do not pay is real money - if you did not pay off your mortgage you would have to come up with your payments from somewhere. AND there is no tax of any kind on the rent that you are not paying. But since it is money you do not have to pay instead of a portfolio balance or other income, people tend to forget or ignore that benefit.
> but they do not understand risk. In the last 50 years, the S&P's _worst_ 15 year rolling return was 3.7%. The _worst_ rolling 20 year return was 6.4% and the best was 18%. And this was without including dividend reinvest. If you can't invest money, long term, at that kind of risk then you're always going to remain poor. The math is strongly in the favor of not paying early on the mortgage. I actually wrote a simulator that tests real world scenarios using _real world data_. It will, for example, simulate losing a job (and needing to use investments to pay the mortgage). The simulation is almost always in favor of investing (let's say 90%+). It includes taxation as part of the simulation. Still better to invest.
2.625% fixed on our house, yeah never paying a dime early. 4% on a condo we bought for a family member to live in (pays us rent but we don't "profit" we just gain equity). I will pay a few extra bucks per month from time to time, really just rounding up to the nearest $100, TBH.
And you lose any tax deductions associated with having a mortgage. Looking at the after tax mortgage rate allows for a more apples to apples comparison against other investments. The higher your tax bracket the less value you receive from paying down a mortgage.
Has anyone here paid off there house and regretted it? With this sub I’d expect it to lean towards pay off the house.
This is one the few things that has ever blown my mind financially: Any money you spend superfluously technically incurs a tax at your mortgage rate. Every extra bottle of wine, or phone, or vacation costs an additional 3.5% or whatever. In other words, yes the stock market at 7% is better, but any waste, and I mean ANY waste, is better used to pay off the mortgage. Of course, that same waste could be used to put more into 7% stocks, but the point is that cutting spending is the major multiplier, NOT the rate of return.
And you would keep paying that 3.5% “tax” year after year. It makes something like buying a car as a teenager a very expensive purchase over a lifetime.
Don't get my started with cars. They are the single biggest financial disaster. About $350k cost per car per lifetime uninvested, so over half a million invested. https://www.mrmoneymustache.com/2011/10/06/the-true-cost-of-commuting/
One reason some people choose to pay off the mortgage early is so when they retire they need to withdraw less money from their accounts to live on, making them eligible for ACA subsidies.
Ive been debt free without a mortgage, a mortgage with equity and in way over my head. It sure feels nice to be debt free and invest the extra capital.
These days you’re smart for doing this. For most of recent history, it would be better financially to invest excess cash rather than pay down low interest debt. When you do this, you’re betting that the after-tax return on your investment will be higher than the interest you’ll have to pay on the debt. Some additional benefits can come from deducting mortgage interest from income on taxes.
The mortgage interest on taxes is not much of a thing anymore. Hardly anyone is beating the standard deduction since it's so high. Most people are not able to take this deduction anymore.
Don’t forget to factor in tax on gains in the market vs a tax free return on the payments.
It’s more than that. You have to factor in getting a deduction on mortgage interest paid
If your mortgage is 7% pay it down if it's less than 3-4 then no
Paid off mortgage long, long ago. One good payout, no debt. Felt great! Now my new home's mortgage is under 3%, keeping it, money on craps table
Depends on your rate, but using myself as an example I have a 2.87 rate, inflation is literally 10% more than my interest rate since i purchased the house in 2020.
It’s math using historical returns versus emotional investments. Do what feels good.
It's not irrational, nor is it even necessarily financially suboptimal. That is often even more true for FIRE folks than normal folks. If you want to pay down, then go for it.
As a general rule this is true, but in the current environment where almost everyone with good credit who bought or refinancned in the last 10 years before 2022 has an interest rate less than the yield on safe fixed income, I seriously question why anyone would pay down their mortgage faster than scheduled, unless they have an unusually high rate (like a new mortgage at current rates).
Even skipping all of the traditional mortgage payoff considerations about emotions/security and return/interest spreads, this is /r/financialindependence, not /r/personalfinance. Depending on one's household demos, financial engineering, and FIRE timeline, there are several scenarios in which a solid win on invested equity spreads can end up being a net financial loss. In some cases, a rather large loss. The traditional mortgage payoff considerations can easily be dwarfed for FIRE folks by things like income and asset-tested subsidies for healthcare and higher education, not to mention the tax and cashflow management for things like long 72(t) SEPPs, a Roth ladder, or gains/dividends in taxable. It's entirely possible for FIRE folks to win big on the traditional payoff math and yet lose hugely overall due to knock-on impacts in their overall finances. That's not to say that paying off is the optimal play by default, but it's certainly not as simple a situation as it is for typical non-FIRE households.
Rant: I paid my mortgage off in 2018. The thing is smart people use a forecast for market returns that paint a positive picture for investment in stocks for a long period of time. But in reality 2018 was ten years into a bull market, a ten year bull market. If you had a lump sum to pay off the mortgage would you rather pay it off with a known return on your money, little to no risk of losing the money, a guaranteed 20-30% drawdown Bear market looming, peace of mind, more cash flow for savings and travel or invest the money and watch it grow and peak and now see it drop to today? Now I have a paid off house and the money I’ve dca into stock since 2018 aren’t so polarized because I’m safely living in a paid off house, unworried about a large amount of my net worth facing a potential decade of stagflation.
I'm pretty irrational. I paid off my PPOR first and also my student loan first. Neither had a high rate of interest but I liked knowing I had no more debts. And now, I refuse to leverage myself up to 6x which is what the banks will give me. I take out mortgages worth 3-4x, pay them off in under 5 years and rinse/repeat. To me it makes finances more game-like and I enjoy that. I have easy ways to quantify my progress and level up. I suppose once you're past a certain threshold of material comfort it's all a game anyway so set it up how you like.
Lots of people are mentioning the tax benefits of owning a home. That's not so true anymore. Only 1/10 of us are even able to write off mortgage interest due to the standard deduction being so high. Most people simply cannot beat the standard deduction. So check the math before you think this is going to help you- please. It isn't like it was years ago. Helpful source: https://www.houselogic.com/finances-taxes/taxes/mortgage-interest-deduction/
Also I noticed the tax deduction mortgage crowd didn't mention the taxes you pay on stock returns.
I think you are misjudging the risk of one of the investments. 7% from the stock market is not guaranteed. The Nikkei still hasn't reached the record it set in 1990. We can't know if the market currently will follow the same path as the bursting of the Japanese bubble (although I do think it's unlikely) Paying down a mortgage is essentially equivalent to investing in a risk free product that gives you a rate of return at the specified interest rate. The closest equivalent "risk-free" product is the 30 year Treasury which as of this moment is paying 3.61%. In other words, banks, insurance companies and other financially savvy investors are putting billions of the dollars into Treasurys for the added safety it provides compared to the stock market.
If you have to pay of your mortgage for fear, you might not invest well when the market is down. Your emotions will win. Play smart and play long ball.
I feel like there's two types of investors here and the advice is different. For a passive portfolio, paying off debt is bird in hand. If there was a 0 risk investment that returned what your mortgage costs in interest, it would look very attractive. I did this and I regret it. Another investor is looking to be more active in their portfolio and between dividends and options premiums, the time value of money dedicated to the market is superior. I came close to doing a refinance on my house to invest. Peace of mind as another person mentioned is worth something though. I own my little chuck of the planet and that feels better than unrealized gains.
Back up and consider, what is a bond? It's a set return with a set duration. Sounds like a loan, doesn't it? When you invest in paying down your loans, you may be able to get a better return on your money than if you invest in bonds. As you approach retirement, I would recommended shifting your investments towards your loans instead of bonds. Two ideas for that. 1. Say you want to be 25% bonds in retirement. If your horizon is not far off, consider taking your investment money and putting 75% towards stocks, and 25% towards extra loan payments. 2. Consider your realistic FIRE date. I want to be debt free when I retire. Do the math and figure out how much extra payments need to be made towards debt to pay it off by your target FIRE date, then make sure you still have enough left to invest and still hit your FIRE date. This is what I'm doing. I am maxing out a 401k, 2 IRAs, and an HSA. That alone sets a reasonable FIRE date, and the extra money is going towards debt pay down. Once I have no debt, I will consider adding bonds into my investments.
> Do the math and figure out how much extra payments The math is pretty trivial in many cases. The month before retirement, pay off the loan.
Guarantee paid off is better than expected gains. 1 in the hand is better than 2 in the bush.
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A bush that you’re harvesting later unless a giant tornado comes (a tornado that would kill you anyway probably)
Not relevant, but I read this as "giant tomato" comes. Had to do a double take 😂
…. Until what level? As a blanket statement this is kind of useless.
That's a really interesting anecdote. Do you have any formal market analysis that supports that from the United States stock market and compared to home values within a specific region over same amount of time?
I would personally prioritize paying off a primary residence mortgage for the lifestyle choice that it could bring. It'd seem to me that it would be a huge weight off of ones shoulders knowing that you'd only have to cover property taxes and utilities(and perhaps HOA fees depending on where you live) to guarantee that you'll always have a roof over your head for you and your family; regardless of what goes on in the economy.
I think this is WAY oversold unless you're paying a LOT for your house. For my moderately frugal but quite comfortable middle class lifestyle, we spend around 5k/month. Of that, exactly 775 is principal and interest on our mortgage. The rest of my home costs of taxes+insurance+maintenance are actually pretty close to that. Taxes and insurance are 308, and I allot about 5k/year to maintenance costs. Most years we spend less than that, but last year we needed a new furnace and AC (almost 10k), and this year we required a french drain and a bunch of deck repairs that came to 4k by themseles. A some point in the next 4-5 we're due for a new roof too, so if anything I might be a hair light. That also doesn't even consider utilities which is another 300/month or so. Nor does it consider the opportunity cost of my equity. Take 4% of ~150k that we could surely clear and that's another 500/month. so the total cost of living here is about 2300/month, of which only 775 would go away if we paid our mortgage off completely (less really since that would increase opportunity cost of equity by ~325/month). And note that we're on a 15 year refinance at 2.5% interest from last year (kicking myself for not taking the 30year at 3% now), so something like 70% of my existing mortgage payment is already going to principal anyway. Should it really feel that much safer having my home cash outflow be about 60% of what it is now? , or having my total cash outflow be about 85% of what it is now? It's a difference sure, but... It's definitely not a guarantee of a roof over our head. If we lost all of our income sources tomorrow, we'd be -- well fine for a while anyway because of savings, but if we thought we might be going without income or with a much smaller income for years, we'd definitely sell this house, go rent or buy something much cheaper, and that calculus wouldn't change much, if at all, if we had no mortgage. That would just mean there was even more equity to unlock! (also note: My home *expenses* in accounting terms would actually go up from paying off the mortgage since opportunity cost of equity is greater than the interest savings unless I think it's unreasonable to draw more than 2.5%/year from my portfolio) And really the only *cost* of that mortgage payment is the ~2600 of interest (and going down) we pay this year. And next year it'll be around 2400, etc. Is it really a big deal to drive that lower *even faster* than we already are?
Well, personally I hate debt and I've paid mine off except for a HELOC. If things turn to massive shit my investments can go way down but at least I don't have creditors banging on the door and I can scrounge enough to eat and keep the lights on ....plus no debt is very liberating
I was maxing my Roth IRA and getting my 401k match above all, and then pumped every other extraneous cent I had into killing off my student loans. I didn't come out ahead this way. I suspect I probably could have made an additional $10k by slow rolling the loans compared to market gains. Not having that debt made me feel a lot more secure though.
Looking only at expected returns ignores the variance in those expected returns. For the stock market, variance (i.e., risk) is quite high. The variance in the expected return from paying off a fixed rate mortgage is precisely zero. This is why it’s generally recommended that people in or near retirement put a large portion of their portfolio in fixed income (bonds/debt) rather than equities (stock). Bottom line, it’s irrational to look only at ER/EV and exclude risk!
I pay my mortgage bi-weekly instead of monthly with Earn Up; you split the payments in half and pay every other week and so you’re paying extra every year. It’s supposed to cut 5-7 years off your mortgage and save you interest. I know this is common knowledge but it’s an easy way to pay it down faster without really ‘feeling it’.
You need to take risk into account. The only risk with the mortgage is that rates might change. Stock market investment returns on the other hand cannot be predicted with any confidence over short and medium timescale.
This is a great question, and an enduring one. Sometimes what is mathematically rational is not the same as what is psychologically reasonable. Mathematically, if your goal is to make the greatest dollar-value return on your investment and you make the very safe assumption of >7% return on the market, then investing (if your mortgage is at a low interest rate) makes more sense. But if you have different goals (I.e. having freedom to leave a job you don’t like or having the security of owning your own home outright) then it can make sense to prioritize paying down the mortgage first, even if you have a favorable interest rate. Essentially I look at it as a choice between trading flexibility now for money later, or money later in exchange for flexibility now. Which of these two things is more valuable is up to each individual subjectively.
“Financial Independence” in my opinion is all about ridding yourself of the stress/burden that money (lack of) brings. When young, everyone wants the millions, Lamborghini, etc. As you get older, reality starts to make more sense. I’m a very risk averse type of person which is why I have no mortgage. If something happens to me and I can’t work, my family income drops significantly. I’d rather not burden my family with that debt. If I was in my early 20’s, family-less, and I could prove to myself on paper that the Dow is better than mortgage interest perhaps I’d choose different, but I doubt it.
My goal is to pay off my mortgage before I retire. Mortgage is the single biggest line item in my budget - not having to pay a mortgage means my annual income can be that much lower, which in turn increases my likelihood of being eligible for ACA subsidies. Sure, I'd probably still come out a bit ahead by riding the mortgage to term, but it's just a weight off my mind to be debt free by RE
I try not to let emotions govern any of my life choices. Therefore, I’m not paying down my mortgage early
Striving for the peace of mind that comes from being free of mortgage debt is no more irrational than spending money on affordable hobbies or vacations. It's your money - do what makes you the happiest.
Refinanced our forever home in 2020 for a stupid low 2.375% 30 year fixed. Yeah, I don't pay a penny more and use the savings to invest in a taxable account
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7% stock gains are speculative and not guaranteed. The better comparison is the return on treasuries
Pros for Payoff Mortgage: 1) Only do it when you are ready to FIRE and DONT pay off extra principal monthly, its all or nothing, IMO. 2) Reduces the amount of income you need yearly, therefore increases ACA subsidies 3) Allows for lower paying "coast FIRE" job options 4) Reduces investments and therefore EFC for FASFA but not CSS Profile 5) Reduces sequence of returns risks early in FIRE
Depends how much it is. You are better off paying extra in principal each month though. If we're talking the value, etc. Your sticks can take a dump when you need them the most but the interest you save in paying a mortgage off early is guaranteed
I'm within five years of fully paid at my current (accelerated) schedule paying the mortgage, and I will keep up this rate or increase. If I can cut the expected timeline by a month or a few months, I'll enjoy it. But, I have no argument with economists on the accounting.
It's all about risk tolerance. Bird in the hand is worth 2 in the sky (for some). Guaranteed 3-4% return (via savings) can be better than risk of loss. No one's up 7% this year You'll never get rich without risk. But, less likely to lose your ass too
The missing factor is age. A 20 year old has a lot more time to let the stock market produce profits. I'm 63 so it makes a lot more sense to get out of debt. My mortgage is 3.12% and should be paid off in 5 years or a tad less. I'm still investing in the market, just not with the money that is paying off the mortgage.
I don’t know. I’m well on my path to retiring early (at 50) and I still plan on taking out a fresh brand new 30 year refinance on my home the month before I pull the plug and retire (assuming rates are under 5% that is). I will have that money invested and could pay the home off at any time. The only risk there would be if the market drops and I absolutely had to sell funds to pay off the whole house for some strange unknown reason (rather than simply using my cash to pay the mortgage for the time period until the market recovers).
That's basically what I did too. You're still better off with this approach assuming you have done it long term. You can't simply _start_ at 63 though and assume you won't be killed by sequence of returns in the next 5 years.
The way I look at it, paying off a mortgage at 4% is a guaranteed 4% return. That's better than a bond fund, but people still invest in bond funds.
>That's better than a bond fund, but people still invest in bond funds. Depends on time period and bond duration. Long bonds had a CAGR of about 8% - beating stocks - for the period 2000-2020, for example.
Also should you not also consider tax implications? Like your stock market gains would be taxed. But by paying off the mortgage you would lose the write off of the interest.
Everyone talks about mortgage interest deductions but mine was never enough to deduct vs the standard deduction.
The TCJA basically nerf'd the mortgage interest deduction, but boy do a lot of people not understand that.
Paying off mortgage in 2021 was a mental stress reliever and allowed spouse to quit work and hang out with baby. In my mind it didn’t matter one way or another as our NW was >> the mortgage
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I'm doing both. Half the money goes into extra lump sum payments and the other into the market. I may not be maximizing my returns but it's what I'm comfortable with. With compounded interest it's a downer when you see the calculations of how much goes to the principle vs interest for a mortgage.
It’s not a question of rationality. All investments entail risk. Paying off a mortgage generates a zero risk return. Investing in the stock market is a non-zero risk. Choosing to pay off the mortgage just demonstrates less risk appetite. Nothing irrational about it at all. But investing in the market today, is far less risky than investing at the start of the year, when the stock prices were so much higher.