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Should You Pay Off Your Mortgage?

https://www.morningstar.com/articles/991262/should-you-pay-off-your-mortgage

I 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.

Comments

  • @BenWP Funny you mention that. Discussing same option with my wife. Our mortgage is at 2.625%. I still think there are opportunities to beat that rate through equity returns on long term basis. I recently added 2 new funds: Fidelty emerging asia and CHIQ which is a China etf fund focused on the domestic consumer...
  • edited October 2020
    Back in 2010 when faced with a similar dilemma, CDs coming due and a dearth of good fixed income options I decided to pay off my mortgage. At that time my fixed rate mortgage was 5 3/8%. Refinancing might've gotten me to around 4 1/4% with around $2000 in costs at that time. Instead I used the CD proceeds, my MMF balance and some misc other investments to pay off the mortgage. Saving 5 3/8% with zero additional cost was a good deal I figure.

    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.
  • With DrVenture on this one.
  • edited October 2020
    There is no “right” answer on that one - unless you’re confident you can predict the future.

    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.:)

  • The crucial factor left out is time. How many years are left on the mortgage? Also, liquidity is not to be underestimated. A house is an illiquid asset. If you have an emergency and need cash you can sell your stocks quickly. A house you’re stuck with for a while before you can sell at a fair price.
  • If I understand it correctly, when the mortgage is new, then the mortgage payments are mostly interest. But if this is a fixed rate 30 years old mortgage, and only few years left to pay it out, then most of the monthly payment are for the principal. In other words, the effective interest you pay is maximal at the beginning and it is getting smaller and smaller at the end. Therefore it may be less advantageous to refinance during the last few years. A more detailed calculations is required, what I said is just a guess.
  • edited October 2020
    MikeW said:

    Discussing same option with my wife. Our mortgage is at 2.625%. I still think there are opportunities to beat that rate through equity returns on longterm basis....

    What he said. I cannot imagine, even today, paying off any mortgage under <4%, which you should be able to outdo over time.
    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.
  • Thanks to all for your valuable comments. I didn’t know if the subject held interest for the group so I did not provide personal info that could have informed the advice offered.

    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 was fortunate to pay off my mortgage early (in my early 40s). I understand the whole rate of return thing, but it's really nice knowing I don't have that payment anymore, esp if anything happened and no one could pay it, and that, aside from taxes, this is my property and I hold the deed to it.
  • @BenWP,
    I myself (if it were I) would leave everything alone, unless peace of mind does not permit that. 10y / 3%, wow.
  • Let's say we're having this discussion in 2000. You'd be staring ahead at a lot of pain for 10 years, while your home and those interest payments are secure. Just sayin'.
  • One other point. Is interest payments still tax deductible ?
    Derf
  • Not to the extent that it was before you-know-who's tax plan to "help the middle-class."

    Pretty much OK for him and his friends, though, because they get to play by different rules.

  • finder said:

    If I understand it correctly, when the mortgage is new, then the mortgage payments are mostly interest. But if this is a fixed rate 30 years old mortgage, and only few years left to pay it out, then most of the monthly payment are for the principal. In other words, the effective interest you pay is maximal at the beginning and it is getting smaller and smaller at the end. Therefore it may be less advantageous to refinance during the last few years. A more detailed calculations is required, what I said is just a guess.

    You're paying the same rate, say 3%, on the amount of the loan outstanding each month. What is happening is that as you make your monthly payment, you're reducing the outstanding balance - part of your monthly payment goes toward paying down the loan. The rest of the payment is the 3% interest on the outstanding balance.

    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.
    Derf said:

    One other point. Is interest payments still tax deductible ?

    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.
  • beebee
    edited October 2020
    @BenWP

    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
  • Think of it as the inverse of investing in a bond and combine that with your current financial situation and you should figure out whether it's worth paying off. If you were the debtor instead of creditor, how would you think about the 30-year bond where you're paying 6% versus a ten year bond where you're also paying 6%. The investor wants more yield the longer the maturity of the bond as his capital is locked up longer, preventing him from buying alternatives and exposing him to the vagaries of interest rates. The debtor will often--but not always--want the opposite. If your financial position is strong, you wouldn't mind paying off the debt's principal sooner. If it's weak or just OK, stretching it out might make more sense, even if you have more interest to pay. Figuring out how exactly your finances will look after paying it off is critical. How much do you have left over? Is it enough for most emergencies, expensive illnesses insurance doesn't completely cover such as Alzheimer's perhaps? Your children's own finances which might be strong or precarious--those kinds of things.
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