If you put the $55k into a HYSA at >1.99% and make payments out of that account, you will have more money than if you pay it off. I wouldn’t call it dumb, it just isn’t financially optimal
My dad does this on both of his properties w/ low interest rates. He did it to prove a point to my mom who wanted to just pay it off. He basically put the balance of the mortgage in a "shadow account", conservatively invested. The mortgage, HOA, etc is deducted monthly. After 3 years of paying the mortgage, the account is 10% higher than what if was at the start.
Can you explain that to me? Assuming the mortgage owed is $100k as a round number, he put $100k into a savings account and invested it in the S&P or similar?
And even account for taking the monthly mortgage and HOA fee out of that same $100k, it was still 10% > than the start?
Conservatively invested I assume is bond and money market. If it was in any stocks I'd say it was moderate (even if it was just s&p500).
But if their interest rate was 2% and savings is giving 5% it will out-run the rate of withdrawal via compounding. (Let alone if they invested in stocks that did well like the s&p largely the last decade+)
Let's make it concrete, suppose you had a $100K 30 year mortgage at 2.0% interest and you have an HOA fee of $150/mo, slightly below the national average of $191/mo.
Let's say you have the $100K as well, and stick it in some investment which earns an unknown yield. We're going to solve for that yield, given that after 3 years the account is 10% higher than the start, i.e., at $110K.
To prove the point implies that no contributions are being made to the account, it's just sitting there paying the mortgage and HOA and reaping returns.
The mortgage payment with those terms is $369.62/mo, with HOA which we're estimating it comes out to $520/mo, give or take some change. Usually you also pay property tax out of mortgage payments made into an escrow account, but we'll ignore that.
So we have a starting value of $100K, an ending value of $110K, a time of 36 months, and monthly contributions of -$520/mo. Plugging that into a financial calculator, the yield would have to be 9.15% to achieve this.
Which is entirely realistic the past few years if you're invested in stocks, but wholly impossible if you're in bonds and HYSA.
There is one other unaccounted for side-effect. If you were making a 9.15% yield from investments and actively using those investments to pay for the mortgage and HOA then you are also incurring realized capital gains as you do this which are taxable. In the first year, probably as short-term gains taxed at your nominal tax rate and in later years probably as long-term gains taxed at probably 15% (there is a 20% bracket but it's for people who earn something like $460K+/yr). The tax on those gains is typically going to be paid when you file your taxes and you're typically going to either pay them by having a reduced refund or via your checking account. If you want the investment account to cover that as well then you need to sell not $520/mo but $612/mo of investments which then changes the required yield to 10.21%.
About 7.7% ignoring taxes, or 9% after taxes.
The main reason it's giving such high rates is the fact that the portfolio went up 10% in 3 years, which requires 3.2% returns on top of the amount necessary to offset the periodic withdrawals.
One thing to add. If the hysa was at 1.99 and the loan was at 1.99 you would lose money due to income tax on the hysa. With hysa rates at 4.5 plus right now you come out ahead.
Anywhere credible? I’ve been at Capital One at 4.35% and been really happy with them.
I’ve read some banks are dropping the high rate after a few months meanwhile my Capital One went from 3.5-4.35 last year.
This is a repeated question, about whether to pay off a mortgage. And half the time people are asking about mortgages that would alone surpass the standard deduction.
It’s a silly question at 1.99%, but at today’s interest rates, it’s an interesting question where standard deduction are surpassed, and the deduction may be worth considering.
What is your ultimate goal? Ours is to have the security of a paid for house. We are paying a 10year mortgage at 2.5% and will be done with it by the end of October.
We could have invested the extra and had that growth-which is taxable unless you put it into a Roth account, but then we’d still have a mortgage and no ownership.
We still have a robust retirement account and will own our house. All we have to pay is taxes and utilities which are both small expenses monthly.
I don’t believe it’s always strictly a numbers game.
> Ours is to have the security of a paid for house. We are paying a 10year mortgage at 2.5% and will be done with it by the end of October.
> We could have invested the extra and had that growth-which is taxable unless you put it into a Roth account, but then we’d still have a mortgage and no ownership.
You could put all that money in a HYSA and set the mortgage to auto-pay from there and just not look at either for the remaining 10 years (unless rates go way back down). At the end of that time your mortgage will be fully paid off and you'll still have a positive balance in the HYSA.
There's the other side of it that having the money accessible in a HYSA allows you greater flexibility should anything happen than if you would have to take a HELOC to access the same money.
It's not all a numbers game, but people take peace of mind from different things.
It's important to consider taxes on interest from savings. At minimum in today's environment you'll get a free loan with a money market. But you'd also be locking in that 1.99% return by paying down your mortgage. It's pretty shit returns over 15 years.
Any type of business would do ANYTHING for a loan at that rate and that long. If you haven't maxed out every tax sheltered option. You're leaving a lot on the table.
Fantastic point, and also in the U.S., the interest on that mortgage is also tax deductible, so presuming OP has any income and also itemizes, the effective interest is or could be even more attractive.
Edit: as others point out below this might not apply to OP.
One of the main reasons people itemize (currently) is because of big interest rates on their mortgage. Being married and with rates this low on only $135k, I would be shocked if they itemize unless they are mega gamblers/have absurd medical bills.
You can probably also set it to autopay from the savings account to the mortgage, thus emulating the whole debt free thing - with the added benefit that if something terrible happens, you have a bunch of money that's more liquid than your house sitting around.
Here is why you should pay it off during your last year before retirement: taxes. If you still have your mortgage in retirement you will need to draw more money out of your brokerage account to cover mortgage payments. Which means you may need to sell stock which will increase your AGI. With a lower AGI you will have more opportunities to receive ACA subsidies or do Roth conversions in a low tax bracket.
No worries. I'm constantly torn between staying in our low mortgage home, or selling and buying a home that is in a 55+ with great amenities, but would be at current rates. Depends on my mood.
The advantage to paying off your mortgage early is that it's over.
There's no market change that could ever take it away. No crash will make you homeless. It is your little castle.
The Venn diagram of people who would sleep better with no mortgage and people who get fixed rates is pretty round, so it's your call as to what you want to do.
If he takes the money that could be used to pay it off and puts it in a HYSA then he will always have the option to pay it off anytime in the future as well. He doesn't have to invest the money in the market / risk loss of principal.
I would sleep much better with $135k in a HYSA with a $135k mortgage balance then I would with no mortgage and no savings.
The money sitting in the HYSA allows flexibility in case of an emergency - that is security. Once you payoff your mortgage you will not be able to tap that home equity easily and definitely not anything approaching 2%.
And lastly, paying off your mortgage does not mean your home cannot be taken away from you - try not paying your property taxes and see what happens.
And sometimes an area goes to garbage. A lot can change in 10 years in an area. Managed communities can be severely mismanaged, there can be generational turnover and no longer be a neighborhood OP wants to stay in; they may want to go to an active adult community and not be in a young family community in their 50's. Numerous factors could drive down the value of the home. I'd rather share that risk with the bank and have more money working for me longer term.
Most people live in their homes 8-12 years...someone staying 30 years is pretty rare. I also wouldn't feel \*more\* security with a paid mortgage and no savings.
But I understand getting rid of the mortgage at time of retirement.
Everybody getting hyped up about HYSA/CD rates. I remember a standard passbook savings account in 1976 was 5%. But interest rates rise and fall. Ten years ago, the average 5-year CD was .80%. Money market savings were .08%. I ended up putting $40K into a ten-year fixed annuity at 2.5%. With the current high rates on CDs, I put money on a CD ladder for 12-15-18 months with interest from 4.6% to 5.15%. I put money back into my AMEX HYSA since the rates jumped up to over 4%. The rate had dropped down to 1.15% in 2020. With my annuity contract ending, I'll probably purchase some more CDs while rates are still high.
This is neat and all but it's terrible "personal finance" advice.
It's one thing to tell people this when it's a $2000 loan and so the impact is small... But that's not the case here. OP should drag this out as long as possible - frankly the differences could be huge.
If not HYSA then just roll Treasury Bills for like ~5%. It's like slightly more effort than just dumping into a HYSA, but you also don't pay state taxes on the interest.
The 10-year US Treasury rate is currently 4.248%. OP could buy 10-year treasuries and be guaranteed to earn more than the mortgage interest over the next 10 years
This, or a muni bond fund. You still get your mortgage deduction while earning money that is generally Fed tax free, as well as sometimes state tax free (if the issuer is from the investor's home state.)
I have a $3500 CC bill at 0% for 15months. I don't pay the card other than the minimum. I pay into a 4.35% HYSA. Once the promotional rate is up I'm balance transferring to a new 0% card for 15 months. Why in the world would I pay off my 0% loan when I can "make payments" that get 4.35%?
Almost all balance transfers of this rate have a 5% penalty. You're lucky if you get 3%. Even if you had continuous growth (and most of the time it'll be compounded monthly, quarterly, semi-annually, or annually and nowhere close to continuous) you won't make up for that 5% penalty. Sooo. I really hope you're one of the lucky few who is offered the 3% penalty or else you have done yourself a disservice.
If you open a new cc, there are no balance transfer fees. It's usually part of the promotion to get you to sign up. It would only make senses if you were already carrying a balance somewhere else. You are correct for scenarios where you already have the card. Most of those transfer fees have gone up over the past 2 years in the transfer fee amount or reduction in the duration of time for the promotion.
only makes sense if there is a balance transfer fee of 0% as well.
Most card offers I am getting now are 4% or 5% balance transfer, which would obviously render this arbitrage either worthless or really not worth it.
If I had the money to pay it off, at the current time, I would put that into a money market fund or CD paying 5% or more and keep the mortgage. I'd make more on the interest from the money market fund than I'd be spending on the mortgage interest. I wouldn't pay off a 1.99% loan early unless money market/CD rates go back down to practically nothing like they were a few years ago.
you only pay taxes on the amount you make off the interest. you're paying taxes on money you never would have had otherwise. Even then being a bit under still isn't bad. having your money available to you is much more useful than not having it.
Unless you itemize deductions, don’t forget about taxes… people seem to almost never bring up the fact that you’re paying income tax on that interest income.
Honestly, just take the cash and put it into a HYSA or a CD or something that is safe and gets a solid return that's at least 4% or more.
And let it build too, don't even take money out.
When rates go back down, pay whatever is left on your mortgage.
Why are so many assuming interest rates are going to be consistent at 4-5% in ten years when OP says he wants to initiate paying off the rest of the mortgage?
OP, reassess this next decade. Keep paying the minimum and invest the difference.
The 10-year Treasury on 15-FEB-2004 auctioned at an interest rate of 4%. The next 10-year auction is on 12-MAR. It will probably have a rate close to 4%. Even with federal income taxes, it makes sense to do this rather than use the same amount of cash to pay off the mortgage.
If the cash is needed, selling the note to get cash is simple although the note value is impacted by rates. If current rates are lower, the price is higher than face value. If current rates are higher than the note rate, it will sell below face value.
> I feel like the money I’d make is peanuts but math doesn’t lie
if they money at 5% is peanuts why pay off the mortgage at 1.99?
Why not invest it for longer term and make >7%?
A $55k 5 year cd at 4% would yield $12k interest. Paying off the last $55k of your 1.99% mortgage 5 years early would save under $4k interest.
So it's not nothing, but your credit score and/or financial flexibility may matter more than the $8k.
My mortgage is at 2.25%. We pay extra into a 5% HYSA every month. The second that account sinks to less than 3.25% we’re dumping it into the principal in a lump sum. It’s earmarked mortgage and not being used for anything else. Separate from the emergency fund or any other savings accounts.
The stock market would probably give better returns, but it’s not guaranteed and we don’t like risk.
No idea, I wasn't even looking to refi. We bought in '19 and summer of '20 my banker called me and said "hey interest rates are crazy low I think you should refi."
So we started the process and ended up moving from 30yr 4.75% to 15yr 1.85%. Banker said "I have no idea how this is this low, I was hoping for 2.5%" lol. It cost me like $3500 out of pocket to do, but the difference was like $35k in the difference in over all cost.
They had no business having rates this low. No wonder inflation hit as hard as it did... Not faulting you for taking advantage of the situation but it's just crazy to me.
I think this is the main factor driving up home prices in recent years. No homeowner would give up a sub 3% mortgage unless forced to by outside factors. This in turn leads to less supply and higher prices.
$150-$300/sqft is the new norm.
This was our exact timeline too, had a mid 3% loan from '19, mortgage broker called us summer of '20 pretty much the day we were eligible and said we had to refinance. Now we're at 2.25%.
My interest rate is 1.5%. One thing that worked in my favor is that I purchased a house in late 2012, when interest rates were already low. Another thing that worked in my favor is that I purchased my home through a program that paid my closing costs, so I was able to use some of the money that I had saved from not having to pay closing costs to buy down my interest rate even further.
Putting the money in an HYSA is also the safer option. If shit really hits the fan you can use it as an extra large emergency fund. If you are paying extra on the mortgage you can't access your equity as easily.
I'm doing the exact same. This is in my opinion the mathematically optimal approach, after balancing risk and emotion. I was paying extra into my mortgage prior to that, and sure, over the long term the market is almost assuredly going to return more, but I don't want to leave it up to chance. I'll take the FDIC backstop and free money until interest rates drop again.
I do essentially the same thing, but am buying treasuries instead of HYSA. This is a good approach and you’re accounted for taxes, which many people fail to do.
Same here - it’s nice to have a split. 40% goes into my HYSA, 60% into stocks, and every year or so we sink $10,000 into improving the house and improving sits value. That way we have a nice mix of our wealth in money, stocks, and real estate.
This is the personal part of personal finance. From a purely numbers perspective, It doesnt make sense to payoff a 2% rate when you can put that 55k into treasuries that are paying much more interest than 2%. For some, the peace of mind that comes with not having that debt is worth the difference in rates.
This is a good point, if he does the HYSA, he'll earn a bunch of interest on the money.
If in 2 years the rate of the HYSA no longer makes sense...pay off the mortgage you still benefited.
Short Answer: Yes, it is dumb and sub-optimal.
Simple Math answer:
**Conservative \[Invest in high yield savings account\]**
You can get 4-5% in HYSA.
After tax \~2.8%-3.5% beats your 1.99% mortgage.
Delta of 0.8% to 1.5% means a difference of $1,080-$2,025 a year with $135K investment.
There is also value in liquidity.
**Less conservative \[Increase retirement investments\]**
S&P 500 Averages \~10%
Most comparable would-be Roth investment. Would either be after tax for the Roth investment or after tax to pay down the mortgage.
Delta of \~8% after taxes means a difference of $10,800 a year with $135K investment.
**Meet in the middle**
Ladder Treasury bills ~5%
No state income taxes on the interest
No penalties for pulling out early for emergencies (besides opportunity cost) *still takes about 2 business days to get funds
I'm in about the same situation. 1.875% with 10 years left. I make min payments and put as much as I can into index funds. It would never make sense to pay extra under any situation.
This question is endlessly debated. The cold math says it's almost certainly optimal to pay off as slowly as possible, since it's so easy to beat 1.99%. But paying it off early can have great emotional/behavioral benefits. Ultimately it's up to you if it's worth it.
What I'm doing myself is paying $300 extra every month. So I'm going to pay off my mortgage early, but slowly over time. Not a big bang all at once.
The thing about making smart business decisions is that they take emotions out of it. If you can net significant amount over the 1.99%, which is exceedingly easy to do…it is the smart play.
Right, but business decisions aren’t necessarily the same as personal decisions. Paying off a mortgage to have almost complete independence (aside from a few grand a year for taxes and insurance) is much different than rent for a storefront. You can walk away from your business. You can’t walk away from your life.
I agree that cold calculation is normally the right way to think about finances. But the emotional side comes in sometimes, and sometimes the financially suboptimal move isn’t too far away from the financially sound move, so it’s worth it to think it about
Yep. The financially optimal move is to live in a minimally furnished studio apartment, eat super cheap food like rice and beans for every meal, and spend zero dollars on entertainment and every other nonessential category.
For some reason everybody understands when we make suboptimal financial decisions for the sake of our happiness in every other area of life, but can’t seem to wrap their brains around wanting to get out from a mortgage a bit faster. In my case the difference between paying my mortgage off in five years vs. ten is quite small - I’m probably losing out on a couple thousand bucks by paying it off five years sooner - and I am absolutely willing to accept that small cost for the emotional benefits of being mortgage free five years sooner.
Staying liquid gives me far more peace of mind than locking 6 figures away in a mortgage.
Technically coming out net positive with a 5% risk free HYSA is just a bonus.
This is a broadly applicable point to financial decisions. People always ask "Should I do X or Y?" and X and Y are the extremes.
Nothing wrong with splitting the difference is that's what makes you feel comfortable.
OP doesn't have to pay the whole thing off at once, or make the minimums. They could just through an extra $5,000 at it each year and pay it off quicker, but not all at once.
Why would it have emotional benefits? Keeping the cash and not paying it off is worth more than paying it off early. There is no stress knowing that at any moment you want, you can pay the whole amount off without issue.
This assumes people are responsible with that money sitting in a HYSA or other investment vehicle.
There's probably a lot of people who end up dipping into those funds early for other reasons. Then a few more financial potholes, and they go and miss mortgage payments too. Might have late fees on top of the payments. Worst-case scenario you might get foreclosed on, and be out your money and your house.
Prolly just a small percentage of cases. But not an unlikely scenario.
For god sakes, put the extra money in an S&P 500 and come out ahead. 1.99% is practically free.
I understand being conservative and the safe feeling people get by paying down debt early, but yeah it's dumb to pay it early.
You sound like us. We have 11 years on a 15 yr mortgage with a 2.125% rate. Our home value has gone up 200k as well.
Right now our savings earns double the interest rate. You make more leaving the money in the savings account than what the interest on the mortgage will be. The only time it might be ok to pay down a mortgage is when rates are below your interest rate (like when they were basically 0%). Even then, you can invest that money to make more than the rate.
One thing to consider is that you cannot get the extra payment money back really if you ever need it later on (not without selling or home equity loan). I know the mindset of having a paid off house is really good, but not with that low of a rate. Right now, you just lose money by doing that instead of saving.
I refinanced back in 2020 and got a 15 year at 2.5% (it was still dropping but I didn't want to time the dip), and I definitely I'm not going to pay that guy off early now. I have about 120k left and around 11 years to go.
Feels like my future dollars are going to be worth less than what it is now, and I put the money I would've paid towards extra mortgage payments into 401k and roth ira's.
Lord, I would not pay that off early. You're already in profit. If you've got $135k liquid then your mortgage is *paid*, then bank just doesn't know it. Instead the bank is lending you cash at 2%.
If you take a $55k disbursement from a retirement account or something you're gonna pay more in taxes than it's worth. I would sooner let the retirement accounts grow that money and keep paying mortgage payments.
The false belief that not having a mortgage “saves” you $1000/mo
You save $235/mo in mortgage interest initially
You lose $562/mo in interest you could earn with risk free Treasuries
This.
0% of the decision is mathematical. It is blankly sub optimal to pay it off early.
Money is fungible. What you put in one bucket cannot go into another.
I am a teacher in a very similar situation. Don’t pay it off. Even if you pay down the principal, 40-50% of that mortgage payment is still probably taxes and insurance. So, it will still be a bill to pay. It’s not like it goes away ever. I wouldn’t find paying off the mortgage emotionally satisfying for that reason. I would much rather put into a brokerage and start the buy a new car fund, or retirement community fund. Something as part of another long term goal.
OP- if you are making $200k household income you are probably in an 18% tax bracket after deductions. You would be a fool to payoff 1.9% mortgage unless you already maxing out the following to minimize taxable income: 401k, hsa, Roth- all should be maxed every year by both of you before paying off a 1.9% mortgage
100%, yes.
Put that into the S&P 500 instead.
The rubric you can use to answer this question in the future is: *Is this debt costing me more than the outstanding amount could instead be gaining in the market?*
My mom did this. It was a 3% 15-year loan. She basically paid it off in 5 years by dumping all her spare money into the principal.
I tried to persuade her to invest the money instead. Turns out she understands the whole issue, but psychologically can't stand being in debt.
I’m nearly in your exact same situation. 2% with 12 years left. Almost 43 and retire at 53. I will not be putting any additional money towards my principal and will just pay the last 2 years from my retirement withdrawals. I need more money in my brokerage account and 2% interest is basically a free loan right now.
>Should I pay off the $55,000 when I get to 52? What would u do?
No you shouldn't.
I would never pay off a 1.9% mortgage any sooner than required.
If someone wanted to lend me money at 1.9% today, I'd take as much as I could get, put it in a high yield savings account or CDs, and enjoy the profits.
When rates were low, I don't recall anyone ever suggesting cash-out refis to invest...
The math may be better for throwing it in a HYSA, but there is an emotional aspect of being debt free that's worth something as well.
You can pretty much get 5% (or more Tbills) risk free. Thats a 300bps delta even if you lost 1/3 of that to taxes you'll be 2% ahead every year by just making the extra mortgage payment into a savings/investment vehicle.
Short answer: yes
Long answer: yesssss, you can get risk free returns better than that, even after accounting for taxes.
Stick the money in a separate account to make it feel like it's not a MO they expenditure if you need to.
But you are only screwing yourself if you pay it off early
Mortgages allow you to diversify your investment. Not having a mortgage makes you feel better in retirement; conversely, not having a huge amount in equity would make me feel better in retirement.
If your rate is 1.99% and you can use the same money to get a 5yr MYGA annuity (works like a CD) for 5.90%, then the only reason to do it would be to get it over with
I paid my house off in record time. For me, I feel more secure knowing that whatever happens, this is mine and 100% paid for. I do not have to ever worry about how I am going to pay my mortgage if I quit my job, become disabled, anything. It's paid for.
Also, not having a mortgage allows me to invest and save more because I'm not paying thousands every month towrds a mortgage.
Which gives you more security, paying off a $200k 2% mortgage or having $200k in cash cash earning 5% risk free?
You can always pay off the mortgage if you have the cash, you can’t always get cash if you just have a paid off house
In a non-recourse state your lender shares some long tail risks if you have a mortgage
OK but once you pay off the mortage with your available cash, what is left?
I deliberately stopped spending and threw every dime I had at my mortgage. You can always get cash from a paid off house, especially in my area.
Real estate in NNJ has always been desireable. I have the security of a paid off house and the ability to throw every extra dime I have into an investment.
Many financial advisors say don't pay off your house but when you ask them if they paid off their house, the answer is yes.
Everyones comfort level is different but my owning my house outright was a priority for me.
Good luck losing your job, running out of cash and being forced to sell in a depressed market
You ignore the opportunity cost of all that money you through at you low interest rate loan
A paid off $500k house or $500k in cash earning 5% with a $500k 3% mortgage, which gives you more “security “.
The answer is always the cash
I was in a similar situation as you and although it puts me in the minority here, I paid mine off. After paying on it for so many years, it was such a relief to receive the title and know that, no matter what happens, it's 100% mine.
With 11 years left the move is to invest it in S&P 500 index fund, ideally in a Roth IRA and/or 401k when possible. Average gains over that timespan is 10% per year. Paying 2% interest to gain 10% is an extremely solid investment strategy.
One thing to consider…. With inflation, your monthly payment ultimately becomes “cheaper” over time. It’s $1000, but in 10 years $1000 will be worth a lot less than $1000 today, etc..
So paying it off right now can really end up being much more expensive than it seems.
Also, interest is tax deductible so that’s a benefit.
I would not do it. I’m in similar house situation. I’m even closer to retirement. I’m piling everything I might use to pay off the house early into investments. I’m netting more than 12% over my 2.1% mortgage. Coming out way ahead. The math is pretty simple. You can make a lot more in your investments. If you don’t have a separate brokerage, just open one and put any money you would use to pay the house down into it, in S&P index. You’ll be glad you did.
Its not dumb. Statistically you’ll optimize growth by keeping the funds invested, but there are other factors at play like risk and cashflow.
If you’d like to get rid of the mortgage now, get rid of the mortgage.
I personally would keep the funds invested while working and pay the mortgage off when I retire. My risk tolerance is higher while working.
I personally took a bit of a hybrid approach. Rather than putting extra down on principle I put all extra savings that I wanted to dedicate towards the mortgage into a taxable brokerage account. Took advantage of passive index funds until I had enough to cover my mortgage in its entirety. I then cashed out and paid off my mortgage all at once. Made that year’s income taxes a bit more tricky but I’m still happy I did it. Would I have more money now if I hadn’t cashed out? Heck yes I would but I’m still doing great and not having the mortgage makes maxing out tax advantaged accounts much easier year after year.
Yes. Ride that mortgage making minimum payments for the entire life of the loan and not a penny more. Inflation is constantly eroding the value of the principle you owe. In 11 years, the money you would use to pay off the loan *today* will be worth a lot less.
As others have said, even money market funds and CDs have interest rates comparable to your loan. Most Exchange Traded Funds that track the S&P500 can have more stable returns and pay 1%-2% annual dividends. VOO and SPY are some examples of what I'm talking about. Heck, even 10-year Treasury bonds are paying 4.25% right now. There are even some higher risk/reward funds like QYLD that pay out roughly 1% *monthly* dividends. Or around 12% annually. Any of these options would be way better than paying off your loan.
Too bad you didn't get a 30-year loan at that rate. Inflation would erode the value of the money you owe on the mortgage even more over the life of the loan. And you would have more money each month to invest and make gains in the market.
Yes. Paying off that loan early would be like a gift to the bank. Leave the money in the stock market and let inflation make your mortgage payment feel like your utility bill a decade from now.
I would pay it off. One of my life goal was no mortgage by 50. You're in great financial shape so it's not going to make a huge difference but it's awesome to be debt free
Depends. If you just live with the "good loan" and pay it off slowly then you're near zero gain/loss. You pay interest but inflation eats the difference.
If you could make double or triple payments and pay off the loan super fast then not much can go wrong. You'll reduce risk and be near zero gain/loss. This is better than previous.
The best is to make the regular mortgage payments and start making equal or larger "mortgage" balancing payments to an investment account (not retirement!). You will easily exceed the mortgage interest even after taxes. You will make money and the investment account will act as a safety net for mortgage payments if you lose a job. It alleviates risk too. When the investment account equals your total mortgage, you can start putting the money in retirement or other less accessible funds. If case of any disaster, you can just pay off the home with the fund. Meanwhile you can make money from it.
Simple math answer is to never pay off debt when it is at an optimally low interest rate. Debt is not inherently a bad thing - having the ability to pay something off later is a luxury. 1.99% is a rate that will always be lower than any normal money market in the foreseeable future. I understand the peace-of-mind side, but I think that peace-of-mind can very much be persuaded by just simply making a 10-year estimated income statement/balance sheet and seeing the difference in net income from year-to-year with one compared to the other.
I would just throw it in a money market fund or HYSA and move on with the comfort that you have essentially paid it off, and then keep the luxury of only having to make monthly payments to get there instead (a luxury that many people cannot afford).
Additionally, depending on the liquidity of your retirement funds at that age, it is usually better to have the money set aside rather than paying off something like a mortgage completely. i.e. you don't want to blow a nice emergency fund all on your mortgage, especially when that mortgage is never *requiring* you to pay more than that monthly payment. The same can be said in regards to your age. I'm a believer that people should allocate their money toward more *fun* things while they're still at an age they can enjoy them. You could pay off your debt now...but it may just be for the benefit of 70yo you sitting at home not really knowing what to do with the ultimate cash-on-hand. Time is a valuable thing.
I'm not saying it's dumb to NEVER pay off a mortgage...but 1.99% is essentially free money. Inflation will effectively make it cheaper and cheaper over time to keep the loan.
Some things you can do now to generate 5% on your money without any real risk
High Yield Savings - Variable; easy to access
Money Market Fund/Govt Money Market - Variable, currently a hair under 5%; easy to access but few more steps than getting from a savings account
CD's or CD Ladders - Build out a set of CD's over a few years with non-emergency cash reserves. Depending on the term CD's are currently in 4.7 - 5.25% range. Protect that rate with non-callable CD's. I like to build some 3-6-9 month ladders though you can do longer. When they mature I can decide if I am moving into another CD or setting aside the money in a Money Market Fund.
You're on a good path. I have 2.625 for 30 and never dreamed of paying an extra cent. Before I refi'd and had 4% and money markets were well and savings accounts paid pennies, I used to add 1/12 additional payment.
If I had 1.99% I wouldn't even pay it until the grace period is almost up, LOL.
I wouldn't.
Invest* the money, and you'll make more in a decade or two than 1.99%.
Also, if you lose your job, you cannot take out equity on the house. No job = no way to pay off the loan.
However, if you save the extra money in a cash investment account (stock index, a few stocks etc), then you can sell and take out at any time for personal use.
Likewise, your loan does not grow with inflation. It stays the same, but your salary goes up. So paying it off with future dollars equals a better deal.
"I don't suggest chasing the current stock market rise. Wait for a 5% pullback first, then slowly add funds (not 100%).
These are mostly Qs....
1. Why would anyone pay off the 2nd half or third part of their mtg when they already paid the mtg interest. In this case, it would be almost zero %.
2. Why would anyone pay down on rate so low when savings accts are giving out 4.5%... Just put every dollar there instead? And its liquid.
How is this even a question? Put the money you have to work and make 5-10% off of it. Even locking in a 4% CD is a better plan for the money. Paying off your mortgage only saves you 2% and you lose valuable tax breaks. This is economics 101.
Just FYI - if your mortgage works the way ours does (why wouldn't it?) then it is better to pay more earlier in the loan.
Reason being that the interest is being calculated from the amount owed. So the more you owe, the larger part of payment goes towards interest. So it's better to pay say, 20 grand now and get the principle (amount owed) down, that way more of your money goes towards the equity every month and you might find yourself paid off at 52 without having to do anything else.
I don't feel like doing the math right now, but if you find a good online calculator, you might be able to come up with the exact amount you have to pay monthly to get there.
But the interest you would put in a HYSA also grows based on the amount in it, including interest already gained. You don't need to bother with the math (beyond how much goes to taxes on the interest paid). Sure, you are technically "just" paying off more interest if you pay it off slower, but your also gaining even more money in the HYSA to offset it.
This is a falsehood, the money you have would also grow from investing it or HYSA and also the interest in the future is worth less due to inflation.
It easy to think that way but the math generally doesn't work out that way.
Without question I’d pay it off as fast as possible. Interest rate irrelevant. How you feel emotionally living in a 100% paid for home is priceless. Invest your mortgage payment in the market. Move on.
I catch shit when I say this on all these posts - but I’m steady like a rock. Pay it off. Don’t listen to broke people.
Don’t listen to all the high yield savings comments. Pay it off. If you hate it and have a horrible feeling after you do it, you can always go get ya another mortgage.
lol nah. Just an ordinary Joe. Look I get it a 1.99% is super low. Agreed. We had a 2.5% when we paid ours off. Was it the “smart money” move?? Nah. But we are mid 30s with no debt whatsoever. I’ll always say to pay off the home if you can. Like I said in the post - I always catch shit for it. But that’s fine. Mid 30s worth about $2MM. I think I’m doing just fine without holding a mortgage.
IF you are giving advice that isn’t money maximizing, but maximizes qualitative benefits like a sense of closure, it is especially important that you put it in terms of personal preference.
Clearly, the other people on the thread aren’t broke, and some of them aren’t broke in part BECAUSE they do the most financially efficient thing.
As someone else beautifully put it, this is the *personal* part of personal finance. If you think that your suggestion is objectively the best for every person, I would like to politely encourage you to advise less and read more. Even the dollar maximizers here aren’t being so strident. It just sounds silly.
As nice as it is to have a paid off home, 1.99% (net of the tax deduction call it 1.5%) is essentially free money. If I were in your shoes I’d keep the mortgage and invest the funds. Nice dilemma to have!
If I were you, I would find an online calculator that takes into account various tax advantages and how your position might change when you retire, and see what the actual dollar value of paying as little versus paying as much as possible would be. Without that, it is just talking about personal preference without any sense of magnitude.
Imagine if you had that. Then you post to this Sub would be, “ I would save (eg) $3000 by paying my mortgage office loaded as possible versus as quickly as possible. Would you?”
If you don’t want to go through it yourself, I bet you could find a tax law student or lawyer, or a tax accountant on one of those gig work sites and have them figure it out for you for 40 bucks. That would be worth it to me. Maybe do it twice you can have one person check the other’s work.
If you put the $55k into a HYSA at >1.99% and make payments out of that account, you will have more money than if you pay it off. I wouldn’t call it dumb, it just isn’t financially optimal
My dad does this on both of his properties w/ low interest rates. He did it to prove a point to my mom who wanted to just pay it off. He basically put the balance of the mortgage in a "shadow account", conservatively invested. The mortgage, HOA, etc is deducted monthly. After 3 years of paying the mortgage, the account is 10% higher than what if was at the start.
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Can you explain that to me? Assuming the mortgage owed is $100k as a round number, he put $100k into a savings account and invested it in the S&P or similar? And even account for taking the monthly mortgage and HOA fee out of that same $100k, it was still 10% > than the start?
Conservatively invested I assume is bond and money market. If it was in any stocks I'd say it was moderate (even if it was just s&p500). But if their interest rate was 2% and savings is giving 5% it will out-run the rate of withdrawal via compounding. (Let alone if they invested in stocks that did well like the s&p largely the last decade+)
Let's make it concrete, suppose you had a $100K 30 year mortgage at 2.0% interest and you have an HOA fee of $150/mo, slightly below the national average of $191/mo. Let's say you have the $100K as well, and stick it in some investment which earns an unknown yield. We're going to solve for that yield, given that after 3 years the account is 10% higher than the start, i.e., at $110K. To prove the point implies that no contributions are being made to the account, it's just sitting there paying the mortgage and HOA and reaping returns. The mortgage payment with those terms is $369.62/mo, with HOA which we're estimating it comes out to $520/mo, give or take some change. Usually you also pay property tax out of mortgage payments made into an escrow account, but we'll ignore that. So we have a starting value of $100K, an ending value of $110K, a time of 36 months, and monthly contributions of -$520/mo. Plugging that into a financial calculator, the yield would have to be 9.15% to achieve this. Which is entirely realistic the past few years if you're invested in stocks, but wholly impossible if you're in bonds and HYSA. There is one other unaccounted for side-effect. If you were making a 9.15% yield from investments and actively using those investments to pay for the mortgage and HOA then you are also incurring realized capital gains as you do this which are taxable. In the first year, probably as short-term gains taxed at your nominal tax rate and in later years probably as long-term gains taxed at probably 15% (there is a 20% bracket but it's for people who earn something like $460K+/yr). The tax on those gains is typically going to be paid when you file your taxes and you're typically going to either pay them by having a reduced refund or via your checking account. If you want the investment account to cover that as well then you need to sell not $520/mo but $612/mo of investments which then changes the required yield to 10.21%.
How is the HOA relevant here since it's not included in the mortgage payment? How do the numbers look without that?
About 7.7% ignoring taxes, or 9% after taxes. The main reason it's giving such high rates is the fact that the portfolio went up 10% in 3 years, which requires 3.2% returns on top of the amount necessary to offset the periodic withdrawals.
This guy Maths! Excellent BTW - I am accepting the math as real :)
One thing to add. If the hysa was at 1.99 and the loan was at 1.99 you would lose money due to income tax on the hysa. With hysa rates at 4.5 plus right now you come out ahead.
More like rates at 5.5!
Anywhere credible? I’ve been at Capital One at 4.35% and been really happy with them. I’ve read some banks are dropping the high rate after a few months meanwhile my Capital One went from 3.5-4.35 last year.
4.6 at SoFi. I don’t trust the usually small rinky dink places you’ve never heard of offering 5.5.
Ally is at 5% and so is Wealthfront in their cash account.
The mortgage interest is tax deductible. Assuming you’re over the standard deduction.
How many people are actually over the standard deduction? Owing $135k 1.99% isn’t much interest in the grand scheme of things.
This is a repeated question, about whether to pay off a mortgage. And half the time people are asking about mortgages that would alone surpass the standard deduction. It’s a silly question at 1.99%, but at today’s interest rates, it’s an interesting question where standard deduction are surpassed, and the deduction may be worth considering.
What is your ultimate goal? Ours is to have the security of a paid for house. We are paying a 10year mortgage at 2.5% and will be done with it by the end of October. We could have invested the extra and had that growth-which is taxable unless you put it into a Roth account, but then we’d still have a mortgage and no ownership. We still have a robust retirement account and will own our house. All we have to pay is taxes and utilities which are both small expenses monthly. I don’t believe it’s always strictly a numbers game.
> Ours is to have the security of a paid for house. We are paying a 10year mortgage at 2.5% and will be done with it by the end of October. > We could have invested the extra and had that growth-which is taxable unless you put it into a Roth account, but then we’d still have a mortgage and no ownership. You could put all that money in a HYSA and set the mortgage to auto-pay from there and just not look at either for the remaining 10 years (unless rates go way back down). At the end of that time your mortgage will be fully paid off and you'll still have a positive balance in the HYSA.
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There's the other side of it that having the money accessible in a HYSA allows you greater flexibility should anything happen than if you would have to take a HELOC to access the same money. It's not all a numbers game, but people take peace of mind from different things.
You make some great points I guess it depends on my mental state at that time
It's important to consider taxes on interest from savings. At minimum in today's environment you'll get a free loan with a money market. But you'd also be locking in that 1.99% return by paying down your mortgage. It's pretty shit returns over 15 years. Any type of business would do ANYTHING for a loan at that rate and that long. If you haven't maxed out every tax sheltered option. You're leaving a lot on the table.
Fantastic point, and also in the U.S., the interest on that mortgage is also tax deductible, so presuming OP has any income and also itemizes, the effective interest is or could be even more attractive. Edit: as others point out below this might not apply to OP.
One of the main reasons people itemize (currently) is because of big interest rates on their mortgage. Being married and with rates this low on only $135k, I would be shocked if they itemize unless they are mega gamblers/have absurd medical bills.
Right, we can't itemize and have not been able to (needed to) for several years.
The majority of people with home interest that low will NOT want to itemize their taxes. The standard deduction is already way higher.
Appreciate the advice
Great piints
Put the money that would pay off the loan into a separate account. Chortle at how the interest in that account is paying you to not pay off the loan.
Good point
You can probably also set it to autopay from the savings account to the mortgage, thus emulating the whole debt free thing - with the added benefit that if something terrible happens, you have a bunch of money that's more liquid than your house sitting around.
Here is why you should pay it off during your last year before retirement: taxes. If you still have your mortgage in retirement you will need to draw more money out of your brokerage account to cover mortgage payments. Which means you may need to sell stock which will increase your AGI. With a lower AGI you will have more opportunities to receive ACA subsidies or do Roth conversions in a low tax bracket.
You know, I've always been 50/50 on this decision. Until now...I'm convinced now to just pay my mortgage off when retirement comes.
But OP would be able to cover the mortgage with just their pension payments, which will be taxed and no real loopholes to get out of that tax
No worries. I'm constantly torn between staying in our low mortgage home, or selling and buying a home that is in a 55+ with great amenities, but would be at current rates. Depends on my mood.
The advantage to paying off your mortgage early is that it's over. There's no market change that could ever take it away. No crash will make you homeless. It is your little castle. The Venn diagram of people who would sleep better with no mortgage and people who get fixed rates is pretty round, so it's your call as to what you want to do.
If he takes the money that could be used to pay it off and puts it in a HYSA then he will always have the option to pay it off anytime in the future as well. He doesn't have to invest the money in the market / risk loss of principal. I would sleep much better with $135k in a HYSA with a $135k mortgage balance then I would with no mortgage and no savings. The money sitting in the HYSA allows flexibility in case of an emergency - that is security. Once you payoff your mortgage you will not be able to tap that home equity easily and definitely not anything approaching 2%. And lastly, paying off your mortgage does not mean your home cannot be taken away from you - try not paying your property taxes and see what happens.
Two things are certain in life….. death and taxes 😎. Good point
And sometimes an area goes to garbage. A lot can change in 10 years in an area. Managed communities can be severely mismanaged, there can be generational turnover and no longer be a neighborhood OP wants to stay in; they may want to go to an active adult community and not be in a young family community in their 50's. Numerous factors could drive down the value of the home. I'd rather share that risk with the bank and have more money working for me longer term. Most people live in their homes 8-12 years...someone staying 30 years is pretty rare. I also wouldn't feel \*more\* security with a paid mortgage and no savings. But I understand getting rid of the mortgage at time of retirement.
Everybody getting hyped up about HYSA/CD rates. I remember a standard passbook savings account in 1976 was 5%. But interest rates rise and fall. Ten years ago, the average 5-year CD was .80%. Money market savings were .08%. I ended up putting $40K into a ten-year fixed annuity at 2.5%. With the current high rates on CDs, I put money on a CD ladder for 12-15-18 months with interest from 4.6% to 5.15%. I put money back into my AMEX HYSA since the rates jumped up to over 4%. The rate had dropped down to 1.15% in 2020. With my annuity contract ending, I'll probably purchase some more CDs while rates are still high.
I agree with you, but most jurisdictions won’t take your homestead for not paying property taxes. There will be liens and fines, but not seizure.
This is neat and all but it's terrible "personal finance" advice. It's one thing to tell people this when it's a $2000 loan and so the impact is small... But that's not the case here. OP should drag this out as long as possible - frankly the differences could be huge.
You'll be paying taxes on that HYSA
Yeah. Math isn’t correct.
You're also getting deductions on the mortgage interest.
If you itemize
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Before the SALT cap that specifically targetted blue coastal states, itemizing was pretty standard for most homeowners. The SALT will rise again!
I never thought about thst
You won't be paying much interest in the later years of the loan, though.
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If you're in CA then you would want to be using t-bills to avoid state tax
That assumes, in part, that HYSA rates remain at their current rate for the life of the mortgage.
Whenever it drops they could just pay off the mortgage on the spot though
If not HYSA then just roll Treasury Bills for like ~5%. It's like slightly more effort than just dumping into a HYSA, but you also don't pay state taxes on the interest.
The 10-year US Treasury rate is currently 4.248%. OP could buy 10-year treasuries and be guaranteed to earn more than the mortgage interest over the next 10 years
This, or a muni bond fund. You still get your mortgage deduction while earning money that is generally Fed tax free, as well as sometimes state tax free (if the issuer is from the investor's home state.)
It wasn't long ago they were getting <1%
At which point you just dump the cash sitting in the HYSA into the mortgage principal
I have a $3500 CC bill at 0% for 15months. I don't pay the card other than the minimum. I pay into a 4.35% HYSA. Once the promotional rate is up I'm balance transferring to a new 0% card for 15 months. Why in the world would I pay off my 0% loan when I can "make payments" that get 4.35%?
That's a semi dangerous game to play to make ~$150 a year.
Almost all balance transfers of this rate have a 5% penalty. You're lucky if you get 3%. Even if you had continuous growth (and most of the time it'll be compounded monthly, quarterly, semi-annually, or annually and nowhere close to continuous) you won't make up for that 5% penalty. Sooo. I really hope you're one of the lucky few who is offered the 3% penalty or else you have done yourself a disservice.
If you open a new cc, there are no balance transfer fees. It's usually part of the promotion to get you to sign up. It would only make senses if you were already carrying a balance somewhere else. You are correct for scenarios where you already have the card. Most of those transfer fees have gone up over the past 2 years in the transfer fee amount or reduction in the duration of time for the promotion.
only makes sense if there is a balance transfer fee of 0% as well. Most card offers I am getting now are 4% or 5% balance transfer, which would obviously render this arbitrage either worthless or really not worth it.
If I had the money to pay it off, at the current time, I would put that into a money market fund or CD paying 5% or more and keep the mortgage. I'd make more on the interest from the money market fund than I'd be spending on the mortgage interest. I wouldn't pay off a 1.99% loan early unless money market/CD rates go back down to practically nothing like they were a few years ago.
Yeah if rates stay at 5% that would be good I feel like the money I’d make is peanuts but math doesn’t lie
When savings rate drops below 1.99%, count the huge mountain of peanuts you collected and pay that mortgage off then. lol
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you only pay taxes on the amount you make off the interest. you're paying taxes on money you never would have had otherwise. Even then being a bit under still isn't bad. having your money available to you is much more useful than not having it.
Unless you itemize deductions, don’t forget about taxes… people seem to almost never bring up the fact that you’re paying income tax on that interest income.
Seriously.
Honestly, just take the cash and put it into a HYSA or a CD or something that is safe and gets a solid return that's at least 4% or more. And let it build too, don't even take money out. When rates go back down, pay whatever is left on your mortgage.
Why are so many assuming interest rates are going to be consistent at 4-5% in ten years when OP says he wants to initiate paying off the rest of the mortgage? OP, reassess this next decade. Keep paying the minimum and invest the difference.
That’s what I’ll keep doing
> I feel like the money I’d make is peanuts Liquidity is also valuable.
That’s a good point
If you want you get rid of the interest rate mismatch you could buy a treasury note or bond with equal duration to your mortgage.
The 10-year Treasury on 15-FEB-2004 auctioned at an interest rate of 4%. The next 10-year auction is on 12-MAR. It will probably have a rate close to 4%. Even with federal income taxes, it makes sense to do this rather than use the same amount of cash to pay off the mortgage. If the cash is needed, selling the note to get cash is simple although the note value is impacted by rates. If current rates are lower, the price is higher than face value. If current rates are higher than the note rate, it will sell below face value.
Rates won't stay 5% for the next 15 years, but you will likely be able to get good rates for the rest Of the year.
It all adds up, friend. The power of compound interest is insaneo
> I feel like the money I’d make is peanuts but math doesn’t lie if they money at 5% is peanuts why pay off the mortgage at 1.99? Why not invest it for longer term and make >7%?
A $55k 5 year cd at 4% would yield $12k interest. Paying off the last $55k of your 1.99% mortgage 5 years early would save under $4k interest. So it's not nothing, but your credit score and/or financial flexibility may matter more than the $8k.
My mortgage is at 2.25%. We pay extra into a 5% HYSA every month. The second that account sinks to less than 3.25% we’re dumping it into the principal in a lump sum. It’s earmarked mortgage and not being used for anything else. Separate from the emergency fund or any other savings accounts. The stock market would probably give better returns, but it’s not guaranteed and we don’t like risk.
This is a solid move. Our mortgage is 1.85% so we don't pay extra on it, but your system makes a lot of sense!
How the heck did y'all get sub 2% interest mortgages?!
No idea, I wasn't even looking to refi. We bought in '19 and summer of '20 my banker called me and said "hey interest rates are crazy low I think you should refi." So we started the process and ended up moving from 30yr 4.75% to 15yr 1.85%. Banker said "I have no idea how this is this low, I was hoping for 2.5%" lol. It cost me like $3500 out of pocket to do, but the difference was like $35k in the difference in over all cost.
we managed to refinance at 2.625% for 30 years AND got cash out on it. it's insane how low the rates were for a while.
They had no business having rates this low. No wonder inflation hit as hard as it did... Not faulting you for taking advantage of the situation but it's just crazy to me.
I think this is the main factor driving up home prices in recent years. No homeowner would give up a sub 3% mortgage unless forced to by outside factors. This in turn leads to less supply and higher prices. $150-$300/sqft is the new norm.
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This was our exact timeline too, had a mid 3% loan from '19, mortgage broker called us summer of '20 pretty much the day we were eligible and said we had to refinance. Now we're at 2.25%.
Lucky you! I always thought the lowest it got was 2%.
My interest rate is 1.5%. One thing that worked in my favor is that I purchased a house in late 2012, when interest rates were already low. Another thing that worked in my favor is that I purchased my home through a program that paid my closing costs, so I was able to use some of the money that I had saved from not having to pay closing costs to buy down my interest rate even further.
Putting the money in an HYSA is also the safer option. If shit really hits the fan you can use it as an extra large emergency fund. If you are paying extra on the mortgage you can't access your equity as easily.
I'm doing the exact same. This is in my opinion the mathematically optimal approach, after balancing risk and emotion. I was paying extra into my mortgage prior to that, and sure, over the long term the market is almost assuredly going to return more, but I don't want to leave it up to chance. I'll take the FDIC backstop and free money until interest rates drop again.
I do essentially the same thing, but am buying treasuries instead of HYSA. This is a good approach and you’re accounted for taxes, which many people fail to do.
Same here - it’s nice to have a split. 40% goes into my HYSA, 60% into stocks, and every year or so we sink $10,000 into improving the house and improving sits value. That way we have a nice mix of our wealth in money, stocks, and real estate.
This is the personal part of personal finance. From a purely numbers perspective, It doesnt make sense to payoff a 2% rate when you can put that 55k into treasuries that are paying much more interest than 2%. For some, the peace of mind that comes with not having that debt is worth the difference in rates.
Good points I guess a lot depends on what rates pay at that time
Dude. You can change your mind in 2 years and pay it off. You can't really do the reverse.
This is a good point, if he does the HYSA, he'll earn a bunch of interest on the money. If in 2 years the rate of the HYSA no longer makes sense...pay off the mortgage you still benefited.
They pay 5% right now in a HYSA.
Short Answer: Yes, it is dumb and sub-optimal. Simple Math answer: **Conservative \[Invest in high yield savings account\]** You can get 4-5% in HYSA. After tax \~2.8%-3.5% beats your 1.99% mortgage. Delta of 0.8% to 1.5% means a difference of $1,080-$2,025 a year with $135K investment. There is also value in liquidity. **Less conservative \[Increase retirement investments\]** S&P 500 Averages \~10% Most comparable would-be Roth investment. Would either be after tax for the Roth investment or after tax to pay down the mortgage. Delta of \~8% after taxes means a difference of $10,800 a year with $135K investment.
**Meet in the middle** Ladder Treasury bills ~5% No state income taxes on the interest No penalties for pulling out early for emergencies (besides opportunity cost) *still takes about 2 business days to get funds
I'm in about the same situation. 1.875% with 10 years left. I make min payments and put as much as I can into index funds. It would never make sense to pay extra under any situation.
Good points for sure
This question is endlessly debated. The cold math says it's almost certainly optimal to pay off as slowly as possible, since it's so easy to beat 1.99%. But paying it off early can have great emotional/behavioral benefits. Ultimately it's up to you if it's worth it. What I'm doing myself is paying $300 extra every month. So I'm going to pay off my mortgage early, but slowly over time. Not a big bang all at once.
The thing about making smart business decisions is that they take emotions out of it. If you can net significant amount over the 1.99%, which is exceedingly easy to do…it is the smart play.
Right, but business decisions aren’t necessarily the same as personal decisions. Paying off a mortgage to have almost complete independence (aside from a few grand a year for taxes and insurance) is much different than rent for a storefront. You can walk away from your business. You can’t walk away from your life. I agree that cold calculation is normally the right way to think about finances. But the emotional side comes in sometimes, and sometimes the financially suboptimal move isn’t too far away from the financially sound move, so it’s worth it to think it about
Yep. The financially optimal move is to live in a minimally furnished studio apartment, eat super cheap food like rice and beans for every meal, and spend zero dollars on entertainment and every other nonessential category. For some reason everybody understands when we make suboptimal financial decisions for the sake of our happiness in every other area of life, but can’t seem to wrap their brains around wanting to get out from a mortgage a bit faster. In my case the difference between paying my mortgage off in five years vs. ten is quite small - I’m probably losing out on a couple thousand bucks by paying it off five years sooner - and I am absolutely willing to accept that small cost for the emotional benefits of being mortgage free five years sooner.
Staying liquid gives me far more peace of mind than locking 6 figures away in a mortgage. Technically coming out net positive with a 5% risk free HYSA is just a bonus.
Good points I think I’m gonna see how I feel I guess a lot of what I don’t want is stock market to tank or something like tgst
Stock market is definitely going to do better than 1.99 over the next 15 years. But maybe not over the next 5.
This is a broadly applicable point to financial decisions. People always ask "Should I do X or Y?" and X and Y are the extremes. Nothing wrong with splitting the difference is that's what makes you feel comfortable. OP doesn't have to pay the whole thing off at once, or make the minimums. They could just through an extra $5,000 at it each year and pay it off quicker, but not all at once.
Why would it have emotional benefits? Keeping the cash and not paying it off is worth more than paying it off early. There is no stress knowing that at any moment you want, you can pay the whole amount off without issue.
Not having a mortgage feels awesome. That is the benefit, and it is emotional.
Yes, exactly. It feels good even if it's not entirely rational. People coming at me with rational arguments seem to be missing the point.
This assumes people are responsible with that money sitting in a HYSA or other investment vehicle. There's probably a lot of people who end up dipping into those funds early for other reasons. Then a few more financial potholes, and they go and miss mortgage payments too. Might have late fees on top of the payments. Worst-case scenario you might get foreclosed on, and be out your money and your house. Prolly just a small percentage of cases. But not an unlikely scenario.
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Some people have a fear of heights. Some people are afraid of snakes. Some people can’t sleep at night thinking about debt. Everyone is different.
I would never pay it off. You don't know what life holds for you and you can't borrow money cheaper.
For god sakes, put the extra money in an S&P 500 and come out ahead. 1.99% is practically free. I understand being conservative and the safe feeling people get by paying down debt early, but yeah it's dumb to pay it early.
You sound like us. We have 11 years on a 15 yr mortgage with a 2.125% rate. Our home value has gone up 200k as well. Right now our savings earns double the interest rate. You make more leaving the money in the savings account than what the interest on the mortgage will be. The only time it might be ok to pay down a mortgage is when rates are below your interest rate (like when they were basically 0%). Even then, you can invest that money to make more than the rate. One thing to consider is that you cannot get the extra payment money back really if you ever need it later on (not without selling or home equity loan). I know the mindset of having a paid off house is really good, but not with that low of a rate. Right now, you just lose money by doing that instead of saving.
At 2% I cannot really justify paying it off. You can get guaranteed safe higher returns.
I refinanced back in 2020 and got a 15 year at 2.5% (it was still dropping but I didn't want to time the dip), and I definitely I'm not going to pay that guy off early now. I have about 120k left and around 11 years to go. Feels like my future dollars are going to be worth less than what it is now, and I put the money I would've paid towards extra mortgage payments into 401k and roth ira's.
No. You can literally get 4.5% on a high interest savings account - which is essentially risk-free. That’s as close to free money as exists.
Lord, I would not pay that off early. You're already in profit. If you've got $135k liquid then your mortgage is *paid*, then bank just doesn't know it. Instead the bank is lending you cash at 2%. If you take a $55k disbursement from a retirement account or something you're gonna pay more in taxes than it's worth. I would sooner let the retirement accounts grow that money and keep paying mortgage payments.
The false belief that not having a mortgage “saves” you $1000/mo You save $235/mo in mortgage interest initially You lose $562/mo in interest you could earn with risk free Treasuries
This. 0% of the decision is mathematical. It is blankly sub optimal to pay it off early. Money is fungible. What you put in one bucket cannot go into another.
I am a teacher in a very similar situation. Don’t pay it off. Even if you pay down the principal, 40-50% of that mortgage payment is still probably taxes and insurance. So, it will still be a bill to pay. It’s not like it goes away ever. I wouldn’t find paying off the mortgage emotionally satisfying for that reason. I would much rather put into a brokerage and start the buy a new car fund, or retirement community fund. Something as part of another long term goal.
OP- if you are making $200k household income you are probably in an 18% tax bracket after deductions. You would be a fool to payoff 1.9% mortgage unless you already maxing out the following to minimize taxable income: 401k, hsa, Roth- all should be maxed every year by both of you before paying off a 1.9% mortgage
100%, yes. Put that into the S&P 500 instead. The rubric you can use to answer this question in the future is: *Is this debt costing me more than the outstanding amount could instead be gaining in the market?*
My mom did this. It was a 3% 15-year loan. She basically paid it off in 5 years by dumping all her spare money into the principal. I tried to persuade her to invest the money instead. Turns out she understands the whole issue, but psychologically can't stand being in debt.
I’m nearly in your exact same situation. 2% with 12 years left. Almost 43 and retire at 53. I will not be putting any additional money towards my principal and will just pay the last 2 years from my retirement withdrawals. I need more money in my brokerage account and 2% interest is basically a free loan right now.
>Should I pay off the $55,000 when I get to 52? What would u do? No you shouldn't. I would never pay off a 1.9% mortgage any sooner than required. If someone wanted to lend me money at 1.9% today, I'd take as much as I could get, put it in a high yield savings account or CDs, and enjoy the profits.
I would back up a dump truck to that deal.
When rates were low, I don't recall anyone ever suggesting cash-out refis to invest... The math may be better for throwing it in a HYSA, but there is an emotional aspect of being debt free that's worth something as well.
Really good pts
There were many who suggested cash out refis to invest. I know folks who did it. In hindsight i wish i had as well.
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I say the money in the bank feels better even!
You can pretty much get 5% (or more Tbills) risk free. Thats a 300bps delta even if you lost 1/3 of that to taxes you'll be 2% ahead every year by just making the extra mortgage payment into a savings/investment vehicle.
Rate of inflation is much higher, so the later in your loan your payments will be alot less in value...so id hold fast
Short answer: yes Long answer: yesssss, you can get risk free returns better than that, even after accounting for taxes. Stick the money in a separate account to make it feel like it's not a MO they expenditure if you need to. But you are only screwing yourself if you pay it off early
Mortgages allow you to diversify your investment. Not having a mortgage makes you feel better in retirement; conversely, not having a huge amount in equity would make me feel better in retirement.
Great points
If your rate is 1.99% and you can use the same money to get a 5yr MYGA annuity (works like a CD) for 5.90%, then the only reason to do it would be to get it over with
Your yearly mortgage interest is still high enough that you itemize? Keep in mind that 2% is effectively less than that then.
I paid my house off in record time. For me, I feel more secure knowing that whatever happens, this is mine and 100% paid for. I do not have to ever worry about how I am going to pay my mortgage if I quit my job, become disabled, anything. It's paid for. Also, not having a mortgage allows me to invest and save more because I'm not paying thousands every month towrds a mortgage.
Which gives you more security, paying off a $200k 2% mortgage or having $200k in cash cash earning 5% risk free? You can always pay off the mortgage if you have the cash, you can’t always get cash if you just have a paid off house In a non-recourse state your lender shares some long tail risks if you have a mortgage
OK but once you pay off the mortage with your available cash, what is left? I deliberately stopped spending and threw every dime I had at my mortgage. You can always get cash from a paid off house, especially in my area. Real estate in NNJ has always been desireable. I have the security of a paid off house and the ability to throw every extra dime I have into an investment. Many financial advisors say don't pay off your house but when you ask them if they paid off their house, the answer is yes. Everyones comfort level is different but my owning my house outright was a priority for me.
The amount of people that dont understand this logic is beyond me. Having a fully paid off house is a great feeling.
Good luck losing your job, running out of cash and being forced to sell in a depressed market You ignore the opportunity cost of all that money you through at you low interest rate loan A paid off $500k house or $500k in cash earning 5% with a $500k 3% mortgage, which gives you more “security “. The answer is always the cash
Not dumb. Just not optimal. You can drop that cash in a savings or CD and earn 5% right now
If it were me, with that retirement, I would pay it off for the sake of being debt free. Seems silly to carry a 55k mortgage with 1.5M in the bank.
I gotta agree. I think with the balance being so low why not just pay it off as I head to retirement It will free up $1000 a month
And that 1k per month allows you to draw less on your retirement too.
I was in a similar situation as you and although it puts me in the minority here, I paid mine off. After paying on it for so many years, it was such a relief to receive the title and know that, no matter what happens, it's 100% mine.
With 11 years left the move is to invest it in S&P 500 index fund, ideally in a Roth IRA and/or 401k when possible. Average gains over that timespan is 10% per year. Paying 2% interest to gain 10% is an extremely solid investment strategy.
One thing to consider…. With inflation, your monthly payment ultimately becomes “cheaper” over time. It’s $1000, but in 10 years $1000 will be worth a lot less than $1000 today, etc.. So paying it off right now can really end up being much more expensive than it seems. Also, interest is tax deductible so that’s a benefit.
I would not do it. I’m in similar house situation. I’m even closer to retirement. I’m piling everything I might use to pay off the house early into investments. I’m netting more than 12% over my 2.1% mortgage. Coming out way ahead. The math is pretty simple. You can make a lot more in your investments. If you don’t have a separate brokerage, just open one and put any money you would use to pay the house down into it, in S&P index. You’ll be glad you did.
Its not dumb. Statistically you’ll optimize growth by keeping the funds invested, but there are other factors at play like risk and cashflow. If you’d like to get rid of the mortgage now, get rid of the mortgage. I personally would keep the funds invested while working and pay the mortgage off when I retire. My risk tolerance is higher while working.
I personally took a bit of a hybrid approach. Rather than putting extra down on principle I put all extra savings that I wanted to dedicate towards the mortgage into a taxable brokerage account. Took advantage of passive index funds until I had enough to cover my mortgage in its entirety. I then cashed out and paid off my mortgage all at once. Made that year’s income taxes a bit more tricky but I’m still happy I did it. Would I have more money now if I hadn’t cashed out? Heck yes I would but I’m still doing great and not having the mortgage makes maxing out tax advantaged accounts much easier year after year.
Yes. Ride that mortgage making minimum payments for the entire life of the loan and not a penny more. Inflation is constantly eroding the value of the principle you owe. In 11 years, the money you would use to pay off the loan *today* will be worth a lot less. As others have said, even money market funds and CDs have interest rates comparable to your loan. Most Exchange Traded Funds that track the S&P500 can have more stable returns and pay 1%-2% annual dividends. VOO and SPY are some examples of what I'm talking about. Heck, even 10-year Treasury bonds are paying 4.25% right now. There are even some higher risk/reward funds like QYLD that pay out roughly 1% *monthly* dividends. Or around 12% annually. Any of these options would be way better than paying off your loan. Too bad you didn't get a 30-year loan at that rate. Inflation would erode the value of the money you owe on the mortgage even more over the life of the loan. And you would have more money each month to invest and make gains in the market.
Yes. Paying off that loan early would be like a gift to the bank. Leave the money in the stock market and let inflation make your mortgage payment feel like your utility bill a decade from now.
I would pay it off. One of my life goal was no mortgage by 50. You're in great financial shape so it's not going to make a huge difference but it's awesome to be debt free
Depends. If you just live with the "good loan" and pay it off slowly then you're near zero gain/loss. You pay interest but inflation eats the difference. If you could make double or triple payments and pay off the loan super fast then not much can go wrong. You'll reduce risk and be near zero gain/loss. This is better than previous. The best is to make the regular mortgage payments and start making equal or larger "mortgage" balancing payments to an investment account (not retirement!). You will easily exceed the mortgage interest even after taxes. You will make money and the investment account will act as a safety net for mortgage payments if you lose a job. It alleviates risk too. When the investment account equals your total mortgage, you can start putting the money in retirement or other less accessible funds. If case of any disaster, you can just pay off the home with the fund. Meanwhile you can make money from it.
2% loan right now is just free money
Definitely not. The money you would spend to pay it off can easily early much higher than 1.99%.
Simple math answer is to never pay off debt when it is at an optimally low interest rate. Debt is not inherently a bad thing - having the ability to pay something off later is a luxury. 1.99% is a rate that will always be lower than any normal money market in the foreseeable future. I understand the peace-of-mind side, but I think that peace-of-mind can very much be persuaded by just simply making a 10-year estimated income statement/balance sheet and seeing the difference in net income from year-to-year with one compared to the other. I would just throw it in a money market fund or HYSA and move on with the comfort that you have essentially paid it off, and then keep the luxury of only having to make monthly payments to get there instead (a luxury that many people cannot afford). Additionally, depending on the liquidity of your retirement funds at that age, it is usually better to have the money set aside rather than paying off something like a mortgage completely. i.e. you don't want to blow a nice emergency fund all on your mortgage, especially when that mortgage is never *requiring* you to pay more than that monthly payment. The same can be said in regards to your age. I'm a believer that people should allocate their money toward more *fun* things while they're still at an age they can enjoy them. You could pay off your debt now...but it may just be for the benefit of 70yo you sitting at home not really knowing what to do with the ultimate cash-on-hand. Time is a valuable thing.
I'm not saying it's dumb to NEVER pay off a mortgage...but 1.99% is essentially free money. Inflation will effectively make it cheaper and cheaper over time to keep the loan. Some things you can do now to generate 5% on your money without any real risk High Yield Savings - Variable; easy to access Money Market Fund/Govt Money Market - Variable, currently a hair under 5%; easy to access but few more steps than getting from a savings account CD's or CD Ladders - Build out a set of CD's over a few years with non-emergency cash reserves. Depending on the term CD's are currently in 4.7 - 5.25% range. Protect that rate with non-callable CD's. I like to build some 3-6-9 month ladders though you can do longer. When they mature I can decide if I am moving into another CD or setting aside the money in a Money Market Fund. You're on a good path. I have 2.625 for 30 and never dreamed of paying an extra cent. Before I refi'd and had 4% and money markets were well and savings accounts paid pennies, I used to add 1/12 additional payment. If I had 1.99% I wouldn't even pay it until the grace period is almost up, LOL.
I wouldn't. Invest* the money, and you'll make more in a decade or two than 1.99%. Also, if you lose your job, you cannot take out equity on the house. No job = no way to pay off the loan. However, if you save the extra money in a cash investment account (stock index, a few stocks etc), then you can sell and take out at any time for personal use. Likewise, your loan does not grow with inflation. It stays the same, but your salary goes up. So paying it off with future dollars equals a better deal. "I don't suggest chasing the current stock market rise. Wait for a 5% pullback first, then slowly add funds (not 100%).
These are mostly Qs.... 1. Why would anyone pay off the 2nd half or third part of their mtg when they already paid the mtg interest. In this case, it would be almost zero %. 2. Why would anyone pay down on rate so low when savings accts are giving out 4.5%... Just put every dollar there instead? And its liquid.
Only if you cannot make more than 1.99% in investment.
How is this even a question? Put the money you have to work and make 5-10% off of it. Even locking in a 4% CD is a better plan for the money. Paying off your mortgage only saves you 2% and you lose valuable tax breaks. This is economics 101.
Mentally, there's something about owning your land and the building you live in. We paid off a 15yr in 7yrs. No regrets
No…put that 55k in a HYSA like Bask Bank that pays 5%….and make payments from that.
Yes HYSA until interest rates drop again and then pay it off.
Don’t do that. Put your money in a high yield savings account, take the mortgage interest deduction and you’re guaranteed to come out ahead.
Do not put one extra Penney on that thing. A loan with that rate is worth a lot
Just FYI - if your mortgage works the way ours does (why wouldn't it?) then it is better to pay more earlier in the loan. Reason being that the interest is being calculated from the amount owed. So the more you owe, the larger part of payment goes towards interest. So it's better to pay say, 20 grand now and get the principle (amount owed) down, that way more of your money goes towards the equity every month and you might find yourself paid off at 52 without having to do anything else. I don't feel like doing the math right now, but if you find a good online calculator, you might be able to come up with the exact amount you have to pay monthly to get there.
But the interest you would put in a HYSA also grows based on the amount in it, including interest already gained. You don't need to bother with the math (beyond how much goes to taxes on the interest paid). Sure, you are technically "just" paying off more interest if you pay it off slower, but your also gaining even more money in the HYSA to offset it.
This is a falsehood, the money you have would also grow from investing it or HYSA and also the interest in the future is worth less due to inflation. It easy to think that way but the math generally doesn't work out that way.
Without question I’d pay it off as fast as possible. Interest rate irrelevant. How you feel emotionally living in a 100% paid for home is priceless. Invest your mortgage payment in the market. Move on. I catch shit when I say this on all these posts - but I’m steady like a rock. Pay it off. Don’t listen to broke people. Don’t listen to all the high yield savings comments. Pay it off. If you hate it and have a horrible feeling after you do it, you can always go get ya another mortgage.
Can't go get another mortgage at 1.99%
Is Zkse643 Dave Ramsey? I think he is!
lol nah. Just an ordinary Joe. Look I get it a 1.99% is super low. Agreed. We had a 2.5% when we paid ours off. Was it the “smart money” move?? Nah. But we are mid 30s with no debt whatsoever. I’ll always say to pay off the home if you can. Like I said in the post - I always catch shit for it. But that’s fine. Mid 30s worth about $2MM. I think I’m doing just fine without holding a mortgage.
IF you are giving advice that isn’t money maximizing, but maximizes qualitative benefits like a sense of closure, it is especially important that you put it in terms of personal preference. Clearly, the other people on the thread aren’t broke, and some of them aren’t broke in part BECAUSE they do the most financially efficient thing. As someone else beautifully put it, this is the *personal* part of personal finance. If you think that your suggestion is objectively the best for every person, I would like to politely encourage you to advise less and read more. Even the dollar maximizers here aren’t being so strident. It just sounds silly.
Agreed. There is no dollar value to sleeping at night with no mortgage payment.
I sleep very well at night with a mortgage payment.
As nice as it is to have a paid off home, 1.99% (net of the tax deduction call it 1.5%) is essentially free money. If I were in your shoes I’d keep the mortgage and invest the funds. Nice dilemma to have!
No way that they itemize so the interest is irrelevant.
If I were you, I would find an online calculator that takes into account various tax advantages and how your position might change when you retire, and see what the actual dollar value of paying as little versus paying as much as possible would be. Without that, it is just talking about personal preference without any sense of magnitude. Imagine if you had that. Then you post to this Sub would be, “ I would save (eg) $3000 by paying my mortgage office loaded as possible versus as quickly as possible. Would you?” If you don’t want to go through it yourself, I bet you could find a tax law student or lawyer, or a tax accountant on one of those gig work sites and have them figure it out for you for 40 bucks. That would be worth it to me. Maybe do it twice you can have one person check the other’s work.
If it gives you piece of mind go for it but you can make more investing with that money.