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re: Would it be a bad idea to try to pay off my mortgage at this time?
Posted on 5/24/17 at 7:01 pm to WG_Dawg
Posted on 5/24/17 at 7:01 pm to WG_Dawg
If your rate is 3.8% that means paying extra is a guaranteed 3.8% return. That isn't bad for a guaranteed return, although not no-brainer good.
You didn't mention whether you are itemizing deductions to take advantage of the mortgage interest, or your current tax bracket. If you are doing this and, say, your tax bracket is 25%, then that lowers your effective interest rate to less than 3%. Since inflation has historically been around 2%, suddenly paying it off early becomes much less attractive.
So if all that applies to you I'd say don't pay it off early. If it doesn't and you really are paying the full 3.8% then it becomes more realistic but you might be better off investing in your education, career, etc. in order to boost your income.
You didn't mention whether you are itemizing deductions to take advantage of the mortgage interest, or your current tax bracket. If you are doing this and, say, your tax bracket is 25%, then that lowers your effective interest rate to less than 3%. Since inflation has historically been around 2%, suddenly paying it off early becomes much less attractive.
So if all that applies to you I'd say don't pay it off early. If it doesn't and you really are paying the full 3.8% then it becomes more realistic but you might be better off investing in your education, career, etc. in order to boost your income.
1
Posted on 5/24/17 at 7:45 pm to WG_Dawg
I see both sides of it. Of course no debt is best case scenario. Obviously a big plus without much elaboration.
Side B of the equation: the extra money you're paying towards your mortgage could be making 8-10% daily easily in an established mutual fund. 8-10% is obviously higher than the 3.8% you're paying in interest, so you're looking at an easy 4-6% difference (theoretically).
Happy medium: change mortgage to 15yr/pay 30yr off in 15yr/make bi-weekly payments (2 payments/month) to shave off some time. Essentially, you should explore you options to shorten your mortgage to 15 years to have it paid off before you retire, but you shouldn't strap yourself over the next 6-7 years to pay it off.
Side B of the equation: the extra money you're paying towards your mortgage could be making 8-10% daily easily in an established mutual fund. 8-10% is obviously higher than the 3.8% you're paying in interest, so you're looking at an easy 4-6% difference (theoretically).
Happy medium: change mortgage to 15yr/pay 30yr off in 15yr/make bi-weekly payments (2 payments/month) to shave off some time. Essentially, you should explore you options to shorten your mortgage to 15 years to have it paid off before you retire, but you shouldn't strap yourself over the next 6-7 years to pay it off.
Posted on 5/24/17 at 7:46 pm to foshizzle
Interest rates are so low. In the future your kids will kick you in the balls for not taking advantage of it. You should be able to figure out how to make more than 4% return with your money.
Posted on 5/24/17 at 7:51 pm to Rust Cohle
i may be wrong about this.
Paying off your house note is not the equivalent of a return of the interest rate
A 3.8% compounding return on 100k for 30 years is 306k
30y of Interest on a house note of 100k is 67k
That's a savings return of 1.7%
One is componding and the other decompounding. With the latter you aren't saving any money till the end, it doesn't give you money to invest during to grow. And it may even be worse because you are spending more money that you could be investing
Edit- I already see a problem. We don't have 100k to invest in the beginning. Let's say we do have double the note, so we can pay off in 15 years.
100k for 15 years is 31k in interest, a saving of 36k. if we took that 4500 (2x the note) a year and invested it, it would return 92k over 15 years.
You still would make 300% more by investing it.
Paying off your house note is not the equivalent of a return of the interest rate
A 3.8% compounding return on 100k for 30 years is 306k
30y of Interest on a house note of 100k is 67k
That's a savings return of 1.7%
One is componding and the other decompounding. With the latter you aren't saving any money till the end, it doesn't give you money to invest during to grow. And it may even be worse because you are spending more money that you could be investing
Edit- I already see a problem. We don't have 100k to invest in the beginning. Let's say we do have double the note, so we can pay off in 15 years.
100k for 15 years is 31k in interest, a saving of 36k. if we took that 4500 (2x the note) a year and invested it, it would return 92k over 15 years.
You still would make 300% more by investing it.
This post was edited on 5/24/17 at 8:23 pm
Posted on 5/24/17 at 9:46 pm to notsince98
quote:
I see you are not a free thinker.
It's actually the complete opposite
Posted on 5/24/17 at 10:06 pm to Rust Cohle
quote:
i may be wrong about this.
You're not
Anyone with a brain can figure out that if you're paying 3.8% interest on a mortgage it doesn't make sense to pay it off when you could invest that money and make at least twice what you would after it was paid off even if you have moderate returns
Posted on 5/24/17 at 10:07 pm to kc8876
The problem with paying your mortgage off early comes if you don't save/invest the money you were paying towards your mortgage. All of the sudden you have a bunch of extra money every month so you buy a new car or increase your way of living.
Posted on 5/24/17 at 10:13 pm to Finch
(no message)
This post was edited on 5/24/17 at 10:19 pm
Posted on 5/24/17 at 10:18 pm to kc8876
I get that
I'm trying to give advice to someone who is 30 yrs old and living with a girlfriend who is working to pay off a car, not prove how smart I am.
It's tougher than you think to get both people on the same page of controlled spending.
I'm trying to give advice to someone who is 30 yrs old and living with a girlfriend who is working to pay off a car, not prove how smart I am.
It's tougher than you think to get both people on the same page of controlled spending.
Posted on 5/24/17 at 10:21 pm to Finch
quote:
Finch
I read it wrong, my fault
Posted on 5/24/17 at 10:23 pm to kc8876
No worries
Posted on 5/25/17 at 7:14 am to WG_Dawg
I'd need about $10 million to retire at 50 years old. Say you live to 90 years old, that's 40 years of no active income. That's gotta be worth $4 million right there. For most people they spend twice as much as they normally do when not working.
I fall into the camp that thinks paying off a mortgage is a bad decision. I'd take that extra money and buy another place. I'd rent out the first place and let someone else pay they mortgage, interest, taxes, and insurance. I wouldn't care how long the place stayed under mortgage cause I'm not paying it.
I have a place I'm refinancing that I don't live in. It's going to bring my monthly costs down to where 60% of the rent I collect is profit.
I'm just not a debt adverse guy, I don't mind having lots of mortgages.
I fall into the camp that thinks paying off a mortgage is a bad decision. I'd take that extra money and buy another place. I'd rent out the first place and let someone else pay they mortgage, interest, taxes, and insurance. I wouldn't care how long the place stayed under mortgage cause I'm not paying it.
I have a place I'm refinancing that I don't live in. It's going to bring my monthly costs down to where 60% of the rent I collect is profit.
I'm just not a debt adverse guy, I don't mind having lots of mortgages.
Posted on 5/25/17 at 7:27 am to Jp1LSU
quote:
The problem with paying your mortgage off early comes if you don't save/invest the money you were paying towards your mortgage. All of the sudden you have a bunch of extra money every month so you buy a new car or increase your way of living.
I paid off my mortgage two years ago (36 y/o) and you're exactly right. It's tough not to spend but I invest my mortgage amount each month.
Posted on 5/25/17 at 7:46 am to WG_Dawg
I'd pay off the mortgage ASAP. Nothing like living without a house note. Think you're saving good now, just wait until that note is gone. What a feeling.
Posted on 5/25/17 at 8:18 am to Popths
quote:
I'd pay off the mortgage ASAP. Nothing like living without a house note. Think you're saving good now, just wait until that note is gone. What a feeling
Made over 20% in SEP IRA last year and didn't pay a dime over my 3.75% interest rate. I also wrote off a chunk of the interest on that 3.75%
Emotionally your statement has merit. In times where returns in retirement accounts were 6-7% and interest rates were similar if not more, I would 100% agree with you.
To each his own, but I would never base my financial decisions on emotion. I will always use data.
Posted on 5/25/17 at 8:36 am to Popths
quote:
Nothing like living without a house note. Think you're saving good now, just wait until that note is gone. What a feeling.
I would say getting 5k a month from investments is a lot better than not having a 1k house note.
Posted on 5/25/17 at 8:41 am to Rust Cohle
quote:
Anyone with a brain can figure out that if you're paying 3.8% interest on a mortgage it doesn't make sense to pay it off when you could invest that money and make at least twice what you would after it was paid off even if you have moderate returns
Some people think that paying off a note, even if it's at 10% loan is the equivalent of a 10% return. What I am finding out crunching numbers is that it's not, it's more like half. You're not saving any money until the moment that the balance is zero. While during that time could've been investing the money and very soon covering the interest of the note, and more.
Posted on 5/25/17 at 8:51 am to Rust Cohle
My issue with trying to pay a house off early at these low interest rates is that until you pay the house off, you won't see the benefit. You will have all your money tied up in the equity of your house so if you have an investment opportunity, you won't be able to take advantage of it without getting a second loan like a HELOC.
Posted on 5/25/17 at 9:22 am to LSU1018
I completely disagree with the idea that someone is going to put the same amount of money into investing as they would into paying off their house. Sure some do, but I think most people would be more likely to put any extra money into paying off a house. If someone wants to do that, they absolutely should. Furthermore, paying off a house is a very safe thing to do long term.
Ideally certainly invest everything you can, but in the real world most don't. Paying off a house is a goal most could do in 10 years with determination. Retirement for most will be a longer term goal. So I think it's more realistic to pay off the mortgage as a goal, then have a goal to invest all that into retirement. One goal at a time, I hate to say it but I do agree with Dave Ramsey on that aspect. Either way though, taking extra money to one of those is definitely better than not.
I would also bet 30 year mortgages are rarely paid off. That's a long freaking time, I would bet most people with a 30 eventually refinance into a shorter term before they pay it off or never pay it off in the first place. It's certainly possible to retire with a mortgage, but the majority of people that retire successfully don't have a mortgage. Once you lose that burden, you can really make some lifestyle changes financially.
Ideally certainly invest everything you can, but in the real world most don't. Paying off a house is a goal most could do in 10 years with determination. Retirement for most will be a longer term goal. So I think it's more realistic to pay off the mortgage as a goal, then have a goal to invest all that into retirement. One goal at a time, I hate to say it but I do agree with Dave Ramsey on that aspect. Either way though, taking extra money to one of those is definitely better than not.
I would also bet 30 year mortgages are rarely paid off. That's a long freaking time, I would bet most people with a 30 eventually refinance into a shorter term before they pay it off or never pay it off in the first place. It's certainly possible to retire with a mortgage, but the majority of people that retire successfully don't have a mortgage. Once you lose that burden, you can really make some lifestyle changes financially.
Posted on 5/25/17 at 9:55 am to kc8876
quote:
It's actually the complete opposite
Incorrect. Freedom is free thinking. Going mortgage free is a way to protect against unknown future.
Not everyone wants to work for that 15-30 years doing the same thing to maintain the same income that allows you to invest that money, pay the mortgage and still have discretionary spending available.
Freedom comes at a cost. For many, that cost should be seriously considered. Getting the absolute most for your money isn't always the best financial decision.
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