https://www.morningstar.com/articles/991262/should-you-pay-off-your-mortgageI found the discussion of this issue in the linked M* article pertinent to my situation. I realized I have been twisting my knickers every way to Friday trying to get some yield out of my cash holdings at Schwab, with little luck. I did put a chunk into TMSRX, but I do think it's time to stop paying Chase 3% on our mortgage and pay ourselves the savings.
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Now the other side of the coin. Had I taken all that money and invested it in the stock market in 2010, I would be way ahead by comparison. But I was wary of taking too much risk at that time and was already heavily invested in equities. So, peace of mind was my goal and I simply look at that move as a portion of my FI portfolio. Plus, no one can forecast the future. And I suspect that the stock market will not do as well in the next 10 years as it did in the last 10 years. But, that is pure speculation. I think trading a guaranteed 3% savings for money that is earning almost nothing is not a bad idea. Provided you are unwilling to take risk with those funds.
Good luck with your decision.
It’s true some parts of your (or my) diversified portfolio aren’t earning anywhere near 3% today, I choose to look only at the portfolio as a whole. That includes everything: the good, the bad and the ugly portions. That portfolio (100% either tax deferred or exempt) is viewed in my eyes as one singular entity with individual parts working together. Based on the past 25 years in which I’ve kept reliable records it has produced more than 3% annually (averaged out) by a good margin. (Keep in mind that the overall return includes the cash and bond positions.) That’s not braggadocio. Hell, most of the people who visit this board could lay claim to an average return greater than 3% over recent decades.
Now - if one has both the discipline and the psychological make-up to run a portfolio in which his paid off mortgage is included as a “cash” holding (which you’ve converted it to by paying it off), than it’s probably a good decision. The difficulty is one’s more visible “paper” assets (funds, stocks, etc.) will have to be more aggressively invested than that individual may be accustomed to since the portion of the portfolio formerly invested in cash or lower risk bonds is now being occupied by that paid-off mortgage. I’d have a hard time adjusting to that. In addition, I feel I can do a better job of diversifying investments across the asset spectrum with a somewhat larger investable sum. So, while my mortgage (a refi used for adding living space) could easily be paid off with invested money, I’ve chosen to let it run for the time being.
Some other considerations - Currently you control that sum of money that’s owing on the mortgage and invested elsewhere. Once you tender that sum to the mortgage lender they take control of that money. You’ve surrendered control. You’ve also surrendered liquidity. Some of this question relates to how actively and enthusiastically you invest. If you enjoy the game and are very actively engaged, you might like having some “opportunity money” on hand to grab up bargains when they arise - even if carrying that low yielding cash is costing you a couple extra percent a year.
Here’s two respectable truisms that are diametrically opposed, yet both are IMHO accurate and fit your situation.
1) You can’t go wrong by paying off debt. (true)
2) It’s always better to keep your options open. (true)
Mind you, both of the above are true. Yet, the first statement would favor paying off the mortgage while the second would support hanging on to that cash.
It really all has to do with the hard but slightly flexible reality of monthly cashflow and the softer but serious variable of sleep-at-night, does it not? Unless you watch Orman all day. Plus time, as LB notes, and by implication debt as a percentage of total.
I have two mortgages, one a heloc actually, both under $100k, both cheap, and am tempted every so often to reduce further, till I ask myself why? The conventional mortgage is so small no one is willing to redo it cheaper, so far as I can determine.
We are in our late 70’s and have 10 years to go on a 15-year mortgage at 3%. Our situation is hardly typical in that we up-sized to our current home in 2007-8 because our fortunes improved considerably. We were able to get a very desirable property that has increased a lot in value since then. Our large family of 5 daughters, ages 49 to 22, and 3 grandchildren, has required us to have a large place. So far our health is good and we do all our own housework, yard work, and routine maintenance. Many of our friends have moved to condos, but we’re not ready for that yet (knock on wood...).
One development of importance is that when the COVID crisis hit this spring, I purposely raised quite a lot of cash in our taxable account, partly out of a fear that our two youngest daughters (single) might have lost their employment and would have had to be supported. That fear appears to be unfounded now. Even though I stopped my TIAA RMDs, we do not have a cash flow problem because we haven’t traveled since January, nor have we needed a new vehicle or a major home project done. In short, there’s ample cash to pay off the mortgage without altering our current lifestyle. My thinking is to retire the debt because it seems a good way to use the cash that’s sitting idle now. Please comment. Thanks in advance.
I myself (if it were I) would leave everything alone, unless peace of mind does not permit that. 10y / 3%, wow.
Derf
Pretty much OK for him and his friends, though, because they get to play by different rules.
The next month comes along, and your outstanding balance is less than before, because you paid off some of the principal in the previous month. You still pay 3% on the now smaller outstanding balance. So less of your monthly payment than before is interest. You wind up reducing the balance at a faster and faster pace. Each month you pay less and less interest, but it's still 3% interest on the ever shrinking outstanding balance. If the interest is deductible, then paying it off is equivalent to putting the money in the bank at that same rate of interest. For example, if your interest rate is 4% and your tax rate is 25%, then you're really paying only 3% (3/4 of 4%) after counting the value of the deduction. That's the same after tax return you get from a 4% bank account, once you subtract the taxes.
OTOH, if the interest is not deductible, you should compare the nominal rate of the mortgage with the after tax rate of a savings investment. For example, if your mortgage rate is 3% but you can't deduct it, and you're in the 25% bracket, then this is equivalent to a 4% rate at a bank. If you put money in a bank at 4%, you net 3% after taxes, which is what you'd save by paying off the mortgage.
Seem like they should make a calculator for this. Oh yeah, they do.
Thought this link might help you run some scenarios:
https://mortgagecalculator.org/calculators/what-if-i-pay-more-calculator.php