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Fat Bastard
Boston College Fan
Member since Mar 2009
45848 posts

re: Does it ever make sense to pay off your home mortgage early?
All I have is insurance. Homestead exempt for taxes. I practically pay pennies compared to many on property tax. So I don’t even count it. It’s not a major expense. It’s pennies. No HOA. paying off my low balance with high interest rate allowed me to pile tons of money into RE investments that has paid huge dividends. After 18 years? Yeah no reason to keep paying that interest or pay to refinance a small amount left. You’re generalizing that every situation
is the same when it’s not.


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buckeye_vol
Ohio State Fan
Member since Jul 2014
32453 posts
 Online 

re: Does it ever make sense to pay off your home mortgage early?
quote:

In short, there is basically no logical way paying off a mortgage early makes sense. Paying it off early is an emotional response that is irrational.
I don’t think this entirely true. I can think of a number of instances where putting more towards principal. For example, by paying more until one can get rid of PMI means you’re not only getting a guaranteed rate of return, you’re also freeing up cash flow. Or maybe one is planning to sell in year or two, and estimates that they’ll have $400,000 in home equity, leaving an additional $100,000 of tax free profit before capital gains kicks in. So some tax free profit, with a 4% return, didn’t sound too bad, especially since it’s less likely you’ll need to pull anything from a taxable account and miss out on more of those gains and pay taxes on those as well.

In addition, it does have some benefits such as a guaranteed rate of return (no interest rate risk), and unlike most interest received, you’re not paying any capital gains on that return. At the same time, as I pointed out the illiquidity is a unique risk that needs to be considered.

I think if one considers it as part of a broader investment strategy. For example, maybe one could put 80% towards high risk tech growth stocks with no dividends but 12% capital appreciation and no capital gains; put 10% to a risk free rate of return yielding 2% but have to pay capital gains; and put 10% towards mortgage with a 4% guaranteed rate and no capital gains, but no liquidity.


21JumpStreet
Texas Tech Fan
Member since Jul 2012
11341 posts

re: Does it ever make sense to pay off your home mortgage early?
LINK


15 year VS 30 year and invest. Maybe paying your mortgage off faster in a 30 year doesn't make sense, but having a 15 year would maybe make more sense instead.


buckeye_vol
Ohio State Fan
Member since Jul 2014
32453 posts
 Online 

re: Does it ever make sense to pay off your home mortgage early?
quote:

15 year VS 30 year and invest. Maybe paying your mortgage off faster in a 30 year doesn't make sense, but having a 15 year would maybe make more sense instead.

So I was, and still am, annoyed with the return rate for the investment:
quote:

We assume Bob earns 5% on this side fund.
Since that is an abnormally low return for even a safe investment.

But after I found out that he based it on
Vanguard’s 10 year projection for 2019 onward, my annoyance moved from him to Vanguard’s projection estimates since their projections were about as far from what happens as can be.

They predicted FED would get to 2.75 to 3 percent rates in Summer and remain there, when in reality they lowered the rates.

And their 10 year outlook was for the US market to grow about 4% annually with the international markets outpacing it at about 7% annually. Yet through January 2020, the US market was already up about 30.6% and the international market was up 17.4%. And the markets dipped due to the Coronavirus at the very end of the month and have since increased 4-5 percent.

So for their 10 year outlook to hold true, US market has to grow less than 1% annually moving forward and then the International market has to make up considerable ground and grow by a far greater 5.8% annually.

In other words, those returns in your article were absurdly low, and to find out Vanguard’s projections were absurdly low, and the first 13.5 months have only reinforced that (plus being way off on Fed rates). I’m disappointed in Vanguard’s modeling.
This post was edited on 2/12 at 9:52 pm


NC_Tigah
LSU Fan
Carolinas
Member since Sep 2003
96495 posts

re: Does it ever make sense to pay off your home mortgage early?
quote:

Our experience in 11 years of marriage is that we spend about four years in a place and build another one.
Unless one of you is a realtor or builder, those areas of built-in overhead costs make 4yrs a tight turnaround. Glad it's worked for you so far, though.
quote:

We built in the last year and ended up spending about $1.3 million. We paid for it in cash.
Given current low lending rates, an alternative to cash purchase is to deposit that money in an account, and borrow against it either at Libor+, or at standard SJ mortgage rates. Interest payments are written off as a portfolio expense. Meanwhile, your $1.3M is invested in the portfolio and should out earn the home loan costs.


21JumpStreet
Texas Tech Fan
Member since Jul 2012
11341 posts

re: Does it ever make sense to pay off your home mortgage early?
This also assumes 3.5% vs 3%.

Right now i'm weighing the option on a 15 year at 2.625%(NO PMI option as well) and a 30 year at 3.5%


notsince98
Missouri Fan
KC, MO
Member since Oct 2012
11505 posts

re: Does it ever make sense to pay off your home mortgage early?
quote:

Exactly. It’s not like if you lose your job you can’t use those $s to pay the note in the interim


People tend to lose jobs during a down economy. During a down economy, you are pulling money out of investments at the absolute wrong time.

There is a risk with those higher earning potentials.


jclem11
Rice Fan
Houston, Texas
Member since Nov 2011
3570 posts

re: Does it ever make sense to pay off your home mortgage early?
quote:

People tend to lose jobs during a down economy. During a down economy, you are pulling money out of investments at the absolute wrong time.

There is a risk with those higher earning potentials.


True. However, I agree with other posters that the liquidity risk during the "pay off the mortgage" phase is undervalued because no matter how far ahead you are on the amortization schedule, that fixed payment is still due next month.

If all your extra cash is tied up in your house, you are fricked if you lose your job or need cash quick.

You could firesale your house but that has a whole separate set of problems.


bod312
LSU Fan
Member since Jul 2015
90 posts

re: Does it ever make sense to pay off your home mortgage early?
quote:

True. However, I agree with other posters that the liquidity risk during the "pay off the mortgage" phase is undervalued because no matter how far ahead you are on the amortization schedule, that fixed payment is still due next month.


It is possible to recast/re-amortize your loan if you are ahead. This would lower your monthly note if you fell on hard times. I have never done it so I don't know difficulties or barriers that might pop up. I am not recommending this scenario as there is still more liquidity with money outside of your mortgage.


RedHawk
Army Fan
Baton Rouge
Member since Aug 2007
6942 posts

re: Does it ever make sense to pay off your home mortgage early?
I was recently faced with this same conundrum. I did the first five baby steps from Ramsey and was on number six to pay off the mortgage. I decided to put half of my extra money into my retirement investment account and the other half of my extra money on the principal of the house. I couldn't make my mind up on what I wanted to do so figured I would split the difference and do both.


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NYNolaguy1
LSU Fan
Member since May 2011
17183 posts

re: Does it ever make sense to pay off your home mortgage early?
Financial security is worth more than dollar signs.


iAmBatman
USA Fan
The Batcave
Member since Mar 2011
9441 posts

re: Does it ever make sense to pay off your home mortgage early?
quote:

Financial security is dollar signs.



FIFY


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80
L.A.
New Orleans Saints Fan
Los Angeles
Member since Aug 2003
52299 posts
 Online 

re: Does it ever make sense to pay off your home mortgage early?
We paid off a 30 year mortgage after 18 years, in 2012. I've heard all the arguments pro and con. Al I can say is that we've never regretted the decision.


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61
I B Freeman
Member since Oct 2009
23019 posts

re: Does it ever make sense to pay off your home mortgage early?
I understand completely the finance math of maintaining a mortgage. I kept one myself until this past year and I could have paid it off 15 or 20 years ago. However, all things equal out of the debt is a good thing.

A mortgage is one thing your spouse or kids have to deal with with when you die. Why put that on them?

If you can pay it off I say pay it off.

I have a rule I try my best to follow—only borrow money for things that produce income or appreciate in value. Houses generally appreciate but you are not going to make money on a house unless something about the location makes it more valuable. Interest, upkeep, taxes and insurance will eat up your appreciation.

It is not a mistake to live modestly and debt free. No employer will ever own you because the market crashes for few years and the money you could have paid your mortgage off with is gone.

Those adults that lived through the eighties in Louisiana can tell about mortgages secured by depressed real estate and very tough job markets. (I hired a guy in 87 that had once made $100k a year offshore for $25000 a year and he was very glad to have a job. He had a $150000 mortgage at about 10% which was a large mortgage at that time. Like tens of thousands others he simply gave house back to the lender.) The lesson of this story is do not under estimate risk.
This post was edited on 2/15 at 11:04 am


LSUFootballLover
USA Fan
BR
Member since Oct 2008
2465 posts

re: Does it ever make sense to pay off your home mortgage early?
JumpStreet,

May I ask where you are getting 2.625?


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iAmBatman
USA Fan
The Batcave
Member since Mar 2011
9441 posts

re: Does it ever make sense to pay off your home mortgage early?
quote:

only borrow money for things that produce income or appreciate in value.


Because you don’t understand opportunity cost and the time value of money


Double Oh
Louisiana
Member since Sep 2008
9537 posts

re: Does it ever make sense to pay off your home mortgage early?
quote:

This on the Dave Ramsey front. I used his process to get out of debt, and it worked well.

But as far as paying off the mortgage, it's a huge peace of mind to not have a mortgage, and that is worth some amount of money.





Bingo we have a winner............


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Jjdoc
Columbia Fan
Cali
Member since Mar 2016
25595 posts

re: Does it ever make sense to pay off your home mortgage early?
I'm going with the opposite view.

1- Paying off: LINK

Markets and economy go up and down. The first priority of a man (yep... old school and still believe it's his place) is to secure the home.

Remember, you should be setting aside for investments regardless. So let's work with facts based on a hypothetical family.

1- 250K home on 30 years, 80K income for the family. 250K at 5% interest is 483K paid over 30 years. That's 233K in interest and everything can happen during that time. a 2008 or worse could happen. The pay off date is 2049

2- He is saying take 15% of your income and invest, THEN pay off the house with extra. That's 12K per year investing.

A simple fund that yields 8% will turn 2.6 million over 30 year period should nothing change.

3- With 68K per year left in income, paying an extra 20K still leaves the family enough to live on. The total cost of the home becomes 305K and is paid off in 2028.

The home is secure, you now have from your investing:

- 170K with a yearly divi of 11K. You, at that point, can take the house payment PLUS the 20K per year, PLUS the 12k and invest. That's roughly 50K per year. Remember year 8.. Now factor into that 30 year plan, it leaves 22 years. That now increases your divi (30 years total) to 410K with 6 million in investments.

vs

-You can combine the 12K investment plus the 20K and place that into investing from the start, and end up with 7 million and 500K in dividends.



That's not a lot of difference in the scheme of things... the HUGE difference is protecting you and your family in the short term should major issues in the economy arise.... and THEY WILL!



I agree with him in that your first job is to secure the family. NOBODY thought 2008 would do what it did. NOBODY thought that NAFTA would gut the rust belt... IT DID.

10 years ago, jobs were HARD to come by.

This post was edited on 2/15 at 7:06 pm


Jjdoc
Columbia Fan
Cali
Member since Mar 2016
25595 posts

re: Does it ever make sense to pay off your home mortgage early?
quote:

I completely understand this POV, and personally think that provided that all benefits and drawbacks of the various alternatives are considered, there is no “wrong” answer for a person who decides one is better than the other.

I agree with you that while having no debt absolutely reduces stress and risk, especially if there is financial hardship (e.g., job loss) which favors getting rid of it as quickly as possible.

However, what I think gets overlooked is that in that repayment phrase before its paid off, the opposite holds true and there is increased risk and the stressors or financial hardship are heightened if paying off early due to illiquidity and an inability (unless a mortgage can be recasted) or a fixed payment loan no matter how much extra has been paid off.

For example, if you had a $300,000 loan with a 4% interest rate ($1432.25 fixed payment) and put an extra $800 per month toward the principal, you would basically pay it off in 15 years and save over $98,500 in interest. But what if a financial hardship occurred 125 months into repayment after you put $100,000 extra towards repayment? You’re still on the hook for $1,400 per month, and despite having almost $124,000 in extra equity, it’s illiquid and you have access to it, unless maybe you take out a home equity loan or line of credit, which is counter to the point of getting rid of debt. So for those 15 years until it’s paid off, all of that extra $ put towards the principal is extra $ you don’t have access to in an emergency while still having to pay the original payment amount.

So in the risk (and potential problems) you’re trying to avoid by getting rid of the debt, is elevated until that debt is gone. Again, nothing wrong with choosing that option, but I think people who talk about those benefits of getting rid of debt need to be aware that the illiquidity of that decision has its own problems.



Nope... because that is not what he advocates. He is advocating that you set aside 15% of your income per year for investing. Based on that, in 125 months, or 10 years, you would have more than enough in investments to pay it off in you scenario.



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Jjdoc
Columbia Fan
Cali
Member since Mar 2016
25595 posts

re: Does it ever make sense to pay off your home mortgage early?
quote:

One of the best posts I’ve seen on this board on this topic. Preach on!

In short, there is basically no logical way paying off a mortgage early makes sense. Paying it off early is an emotional response that is irrational.


No it's not. It's BS.

Tell that to the people in 2008. Their investments went to shit, jobs lost and unemployment sky rocketed.

It's people have forgotten the past decade. It's financial responsibility.





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