Pay off mortgage or make monthly payments and invest the rest?

[texag10]

When you don't have a mortgage bill, your family has more money. The less bills you have, the less need you have for money.

Want to explain the math on that for me?

Mortgage paid off, we have $180k in bank and brokerage accounts and $3800/mo of expenses. (47 months of runway)

Not paying off mortgage, we have $540k in bank and brokerage accounts and $6000/mo of expenses. (90 months of runway)

Assuming I don't have an event that requires me to use savings, and I can invest either 180k + $2200/mo, or $540k with no additions (over simplistic, we are still saving) at 7% annual rate of return:

Pay off mortgage, then invest the payment would leave me with $3327210 at my mortgage maturity date in 28 years. Invest and continue to pay is $3590373 in 28 years.

I intentionally assumed a lower rate of return that historical averages for my asset mix AND did not assume a refi from my current rate of 6.375 for that 28 years. Both of these create a headwind for my position and I still have more runway and higher net worth over time.

 

[Ucsdryder]

Maybe you can and maybe you can't.

A lot of guys all over, but I am going to pick on a lot of the retirement community crowd, sold houses worth $700,000 to move into apartments and wait until things settle down. That never happened. Now they can't get into a retirement house for $700,00 and their McMansion would have brought $1.2 million.

Yep I know a few guys that sold “at the top” and watched their sold house continue to appreciate while they rented on the sidelines.

My point was that I have 500k in equity with a 400k loan at 3%. If we decide to sell in 20 yards and downsize when the kids are gone, the house will almost be paid off and with well over a million in equity by then, I assume, we will be able to buy a smaller house with cash and go into retirement with no mortgage.

I think have a paid off house in retirement is important emotionally.

 

[bridgerbenson]

I’ve been contemplating a move along these lines as well. Difference is, I finished a remodel/refinance and got locked in at 8% with our piece of shit small town local bank. I’ve got two rental properties that cash flow positive about $1500/month that are almost paid down to the point of if I sold them, I could clear out my personal mortgage (not taking taxes into consideration for the sale) I hate to lose money making assets but I’d also be getting rid of a $2700/month mortgage.


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[Ucsdryder]

No.

Keep your money invested elsewhere and earn the spread.

BUT if you aren’t investing that extra and instead spending you might benefit from the forced savings of paying off your mortgage.


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This is the second time I saw this mentioned and I think it’s a valid point!

 

[hoooogan]

Sounds like you're doing great.

Being able to come up with cash instantly affords you a lot of opportunity also. You never know when you'll stumble a Real Estate or Business opportunity for 30-50% off because you can toss cash in their face right then and there. Almost everyone has a few of those stories but only a few can take advantage of it. Just remember high yield savings essentially matches inflation so it really does not build wealth.

Thanks for the feedback. I do have a retirement fund, so it's not all HYSA. I have a couple decent investment mentors in my circle, so they help prevent me from becoming a complete mess.

 

[TaperPin]

Many financial decisions to not pay off mortgages are made when times are good and the added income from investments is appealing - actually pencils out to increase quality of life in retirement. However, way too many old folks have pushed the payoff date further and further down the road with refinancing and it makes a perfectly valid argument, until some unexpected event comes up and it’s now a significant issue. It’s easy to pay off a house when times are good, and nearly impossible when having to live off a minimal fixed income.

Unexpected events aren’t just falling down and breaking a hip, but if the surgery is messed up and has to be redone, that’s it - insurance isn’t going to pay for a third, so do you pay lawyers to sue the doctor, sue the insurance company, or pay out of pocket to get fixed. I’ve paid for a family member to have that third surgery for something smaller than a hip and it was crazy expensive.

Thinking clearly is a given as we plan and work and invest and use our big brains to make smart decisions. When a big brain slowly turns to mush, the odds of a house being at greater risk if it isn’t paid off goes up. There’s no law against making bad decisions when some relative or rando dude calls and talks you into investing in stupid stuff. I don’t know how many miles of border wall our parents thought they were buying from Steve Bannon, but it tapped them out with nothing to show for it.

Addiction, stroke, dementia, or just reconnecting with an old flame that makes you feel young, has tanked the best laid financial plans. When things get messy, the simplest things are a blessing. A paid off house is a blessing.

 

[pods8 (Rugged Stitching)]

Do you know of good tool to figure out how far ahead we are? Like input rate, principal payment due, balance, etc?

Here is an excel one you can download:

Download Microsoft Excel Mortgage Calculator Spreadsheet: XLSX Excel Loan Amortization Schedule Template With Extra Payments

www.mortgagecalculator.org

 

[180ls1]

Maybe you can and maybe you can't.

A lot of guys all over, but I am going to pick on a lot of the retirement community crowd, sold houses worth $700,000 to move into apartments and wait until things settle down. That never happened. Now they can't get into a retirement house for $700,00 and their McMansion would have brought $1.2 million.

You are describing a different concept focused around market timing.

OP was speaking to leveraging a larger asset to his advantage to downsize later.

Similar to real estate investors buying 10 houses with leverage, once they hit 50% equity, sell 5, own 5 paid off and live off the cash-flow those 5 produce.

 

[Ross]

It is a balancing act and what you feel is best for your mindset, family and long term goals. That being said it feels F……good to know you have zero debt. We did nothing special, but always lived on a budget, invested longgg term, did not waste too much on silly purchases and lived within our means. I’m sitting outside drinking coffee with my lab enjoying some fine spring weather

 

[Beendare]

A lot of us have mortgages with interest rates sub 4%. If you’re in that situation is there any reason to make additional payments toward the principal, or are you investing that cash with the expectation of earning a high percentage?

I wouldn't pay it off.

It's the best deduction you have...and at a 60 year low interest rate.

 

[CorbLand]

Yep I know a few guys that sold “at the top” and watched their sold house continue to appreciate while they rented on the sidelines.

My point was that I have 500k in equity with a 400k loan at 3%. If we decide to sell in 20 yards and downsize when the kids are gone, the house will almost be paid off and with well over a million in equity by then, I assume, we will be able to buy a smaller house with cash and go into retirement with no mortgage.

I think have a paid off house in retirement is important emotionally.

One thing to remember when it comes to downsizing is if you have kids and want them to come home to visit, having room for them to do so is not a bad thing.

I have seen so many people retire, run out and buy some little 2 bed, 1.5 bath house to live in and then they scratch their head wondering why their kids don’t bring the grandkids home to see them.

 

[The_Jim]

Both options are good. I paid off my first house when I was 30 so my wife could stay home with kids. I went mortgage free for 10 years and last year we upgraded our house. The peace from no mortgage is great, and we will definitely pay this home off early. I can also understand why one wouldn’t, but I personally don’t like debt.

 

[Yooper]

I haven't read all the replies so I don't know if it's been mentioned or not yet, but if you don't already have one, go find yourself a trusted financial advisor. A good one will help lay all of this out for you and make a plan that fits your goals. Everyone has a different expectation of what they want long term and everyone has a different set of circumstances. There are no absolutes.

 

[pods8 (Rugged Stitching)]

I noticed recently that there is an autopay option for bi-monthly (twice a month) payments at 1/2 the typical monthly payment value. It calculated that doing so would result in me paying off my home a year and a half early (I have 15 years left on my 2.95% 20 year mortgage). That seems like a no brainer as that money is going to be in my checking account not earning interest regardless of if it comes out on just the 1st or the half values on 1st and 15th. Seems like something worth looking into that can help lower the cost of a loan without having to reduce $ in investments.

I was curious and just looked, mine offers a biweekly but they collect the payments ahead of time for the following month and I don't see any indication they apply anything early against the accruing interest. Where it lowers the payment timeframe in what they offer is they collect 26 payments so you make 2 principle only payments during the year.

Bummer cause I'd have liked to have half my payment loaded in for 2 weeks offsetting interest like yours does.

 

[Pochuck]

Our mortgage is below 4% and I basically round up for payments, so pay small extra amounts each month. $2130 becomes $2200. I'm not sure why I do that. Just feels like a small way of getting ahead. We plan to retire in 2037 (age 55) and our mortgage hits year 30 in 2040, so will have to eventually figure out how to pay it off early but it's not a priority right now. Also need to figure out what to live on age 55 to 59.5 as most of our retirement assets are locked up in 401ks.

Thanks for the tip-I moved my recurring principal payment to go to the market a while ago but I just changed my mortgage payment to round up now. What's an extra 250 a month

 

[Sccritterkiller]

This is the second time I saw this mentioned and I think it’s a valid point!

It makes even more sense when you know you aren't moving for a while and you loan to value ratio is below 20%.

My youngest doesn't graduate till '30 we aren't moving until he graduates. My loan to value ratio is 18% and my rate is 2.65%.
Why would I waste money paying off a loan that is costing me next to nothing with 80% equity in my house.
I can put that extra money in an S&P index fund for 5 yrs and make 10%.
Based on 100k...would I rather have my house paid off or 50k in my pocket in 5yrs?

 

[CorbLand]

Many financial decisions to not pay off mortgages are made when times are good and the added income from investments is appealing - actually pencils out to increase quality of life in retirement. However, way too many old folks have pushed the payoff date further and further down the road with refinancing and it makes a perfectly valid argument, until some unexpected event comes up and it’s now a significant issue. It’s easy to pay off a house when times are good, and nearly impossible when having to live off a minimal fixed income.

The problem isnt so much that they kicked the can down the road, its that they did it without saving/investing the difference. There is a difference between not making extra payments on your mortgage to buy depreciating things versus taking the extra amount and investing it.

If you actually invest the money, especially in safe investments, the absolute worst thing that happens to you is that you use the money you would have paid extra on your mortgage to pay your mortgage. The absolute best thing that can happen is that you never need to touch your investment and you end up with more money than if you paid your mortgage off. You cannot lose.


Then there is the wrench that can be thrown in that while having money to retire with is important, getting all the way there and having not done anything but work, save and invest to make it there is not a good thing either. Ultimately, people have to decide what is best for them and set up their life to maximize that.

 

[Ringbill27]

I don’t plan on being in this house long enough to pay it off, so I guess I’d invest the extra.

 

[LostArra]

Folks having this discussion are obviously on top of their finances and have probably won the game anyway. There is not a single perfect answer for everyone. I went the paid off route by 40 and do not regret it one bit 32 years later.

This reminds me of the discussion of when to take Social Security. Everyone's life situation is different so "it depends"

Pro tip for college savings: make sure your kids can read an entire book. Literacy is in short supply. If they can read and comprehend they will have scholarship money thrown their way. Otherwise they will be victims of All-American Racketeering (college tuition).

 

[TaperPin]

The problem isnt so much that they kicked the can down the road, its that they did it without saving/investing the difference. There is a difference between not making extra payments on your mortgage to buy depreciating things versus taking the extra amount and investing it.

Sure - that makes perfect sense. At least while life is going well it makes sense.
Getting used to always having a mortgage is very common nowadays, with the assumption is your mortgage frees up money to pay off higher interest loans, or is invested. Makes sense, even to teenagers in an AP economics class penciling out lifelong investments in a simulation. However, when something goes wrong, investments get cashed out, other loans go up and for many folks on the downward side of life the mortgage is still there. Sure, they should have planned better for the unexpected, taken a few fewer expensive vacations, but it is what it is for many old folks. Good decision makers or not, the ones with their house paid for are more secure than those who don’t.

In our family there are a lot of people in the trades. At one time workers comp was a good program - if you’re injured you get fixed and go back to work ASAP. Today’s workers comp will drag each step out as long as legally allowable, even against the recommendation of surgeons and doctors, so it’s not uncommon to have to sue the insurance company if something serious happens. A friend who detached a bicep at work was delayed so long he ended up with a partial disability and 6 months off work. Loosing $75k of income becomes the least of his worries if he gets pressured out of his job previous to the injury, or gets reinjured soon after returning. For a 45 year old, he was lucky to have a reasonable mortgage, because anything that wasn’t paid off became a big deal. This was during the Covid market crash and he had to cash out some stocks and got hammered. By the book investing works great as long as things are going well.

Making any investment decisions have to assume insurance of any kind are less than perfect in todays world.