Are you that worried about paying off your house before retirement?

[Red Squirrel]

No matter how much money you have, the math is the same. With low mortgage rates, paying a home off early is generally an emotional decision, not a logical decision.

Not really, when I look at my mortgage info in my bank, I pay about $200 of interest biweekly, regular payment would be $400, but I pay $600. The extra $200 goes right on the principal. If I was doing the minimum payments about HALF of it is going into interest.

Even if I have an investment account that yields me 20% interest and 20 grand lying around, that's like $333/mo in interest. I'm not aware of any investment that yields that much, I was being super generous. Nor do I have 20 grand lying around.

And yeah I suppose it might be an emotional decision too, but once a debt is paid that is a HUGE load off ones shoulder, and gives more freedom, and extra cash on hand per month.

My parents have always had lot of debt, some due to mistakes, some due to misfortunes, etc but I've learned from them it's best to clear all debt when you can. What if you get sick and can't work anymore or have to go on compensation, for example. You don't want to still be owing on your house as that is a huge load to bear when your income is suddenly limited. My philosophy is pay off debt as fast as you possibly can while you are still able to, then invest after. If something happens to your income you can temporary stop saving, but you can't stop paying a debt.

 

[Red Squirrel]

Wait, you guys actually believe you will have retirement?

I don't see myself retiring....

I want to retire early if I can, but with the way cost of living keeps going up, you pretty much need to create some kind of self sustaining income if you want to retire. Investment/saving alone is not enough any more. What saving is good for is to have an emergency fund if something happens like the furnace breaks down to the point of needing full replacement, so that you don't have to use credit.

 

[brianmanahan]

Jumpem, you need to decide if you want a happy, stress-free life or a chance at a few more dollars.

I personally did the math for myself, and did a life-style analysis and decided that I want to have no cares in the world rather than have a chance at a few extra dollars.

interesting you see it that way.

i see something like 200$k in the bank and 150$k on a 15-year mortgage as less stressful than 50$k in the bank and no mortgage.

 

[brianmanahan]

Wait, you guys actually believe you will have retirement?

I don't see myself retiring....

yeah, hopefully by the time i'm 45.

 

[HeXen]

No because I'll likely die working.

 

[Jumpem]

We paid ours off a few years ago, more because of BOA being a shitty company than anything else (they took over our Countrywide mortgage when everything went bad). Took that mortgage payment and started building an education fund for my daughter. Now that is pretty well funded maybe I can talk myself into buying a new car.

I was thinking about education funds today. If I keep putting the daycare money aside when they are older, and throughout college, that should be $100K or so to split between the tow of them.

 

[Jumpem]

Can kids get loans without the parents co-signing? Yeah, I know nothing about that process.

No. They can't.

 

[Jumpem]

Jumpem, you need to decide if you want a happy, stress-free life or a chance at a few more dollars.

I personally did the math for myself, and did a life-style analysis and decided that I want to have no cares in the world rather than have a chance at a few extra dollars.

Far too many people worry and have major stress (personally and with their spouse) over money issues. Having the house paid off in full basically eliminates all of that. All you need to worry about for the rest of your life is a few thousand in property taxes and enough food to survive. That is a very low bar to eliminate most of your stress.

Yes, a ~3% return on your mortgage investment is a bit worse than a possibility of a ~8% stock market gain. But, all sound investment advice suggests that you diversify and have some stable-value eggs in your basket (such as a bond). Treat the extra money you put into your mortgage as your guaranteed ~3% bond return portion and invest the rest in stocks. You'll do better than bonds right now and have peace of mind that is priceless.

Plus what does the stress cost you? If you are have no idea how you'll get out of debt, does that harm your health? Does it harm your relationships? If so, does it lead to costly divorce, or risky investments (such as investing in lottery tickets)? Just because you have a chance at a bigger return in stocks, doesn't mean you'll be financially better off either.

So, I say, have the house paid off before you retire.

Good points.

 

[highland145]

I was thinking about education funds today. If I keep putting the daycare money aside when they are older, and throughout college, that should be $100K or so to split between the tow of them.

All tow for $100K...I'm in. That will pay for...less that 1 education ride......unless it's community or tech.



just messing with you.

 

[dullard]

interesting you see it that way.

i see something like 200$k in the bank and 150$k on a 15-year mortgage as less stressful than 50$k in the bank and no mortgage.

That isn't the choice I personally see.

Using your numbers, I see:
a) $200k in the bank and $150k mortgage.
vs
b) $50k in the bank, no mortgage, and a $200k line of credit that costs me nothing to have, and low interest if I do choose to borrow, in the back pocket since I spoke with a personal banker.

 

[ponyo]

No matter how much money you have, the math is the same. With low mortgage rates, paying a home off early is generally an emotional decision, not a logical decision.

It's interesting how people who have the money and are in position to pay a home off early will almost always choose to do so. Is it because people with money are risk averse? Or they just have more experience with life to know the many risks out there?

 

[vi edit]

That would be why I said it is generally an emotional decision. Most people say they "like the feeling of having no debt" or "I like not having a payment" -- there are certainly exceptions, but I stand by my original statement.

I still think you have personally have an emotional attachment to the notion that it's an emotional decision.

There is a ton of *NOW* financial freedom offered to people when their mortgage is freed up. A spouse can stay home and be with kids instead of paying daycare bills.

People can save up and pay for cars in cash instead of financing.

Credit cards can be paid off in full (or not used at all) saving on financing costs.

Depending on your tax brackets you may not be able to itemize enough interest in the first place to get past the standard deductions so that's a wash. You still pay property taxes which depending on the state are where a bulk of your mortgage savings come. Plus you have a guaranteed return on your interest that you aren't guaranteed in the stock market.

It's more than just pure emotion. There are real world, every day practicalities provided with having that payment gone.

 

[MrPickins]

...Depending on your tax brackets you may not be able to itemize enough interest in the first place to get past the standard deductions so that's a wash....

This has always been the case for my wife and me.

 

[FelixDeCat]

Im living in a van down by the river.

 

[madoka]

I'm not even worried about how many of my homes I'll have paid off by the time I retire.

In the end, I have a job that I can do at home by myself or off my computer and get paid $1,000-2,000 per day by working a few hours a day. I don't know if I'll ever retire.

 

[fleshconsumed]

Can kids get loans without the parents co-signing? Yeah, I know nothing about that process.

No. They can't.

Correct me if I'm wrong, but I thought they can take stafford loans by themselves. Anything else would be a private loan, and basically require a co-signer.

 

[Homerboy]

Correct me if I'm wrong, but I thought they can take stafford loans by themselves. Anything else would be a private loan, and basically require a co-signer.

You are not wrong. Stafford, Perkins and I think Direct PLUS loans all require no credit check and no cosigner.

Obviously, there are MANY kids out there that a cosigner wouldn't even do them any good (as the cosigner's credit sucks). There are avenues for them to get the loans they need.

 

[highland145]

Obviously, there are MANY kids out there that a cosigner wouldn't even do them any good (as the cosigner's credit sucks). There are avenues for them to get the loans they need.

Hey, kid, let highland145 hook you up with a college loan. :sneaky:

 

[Homerboy]

Hey, kid, let highland145 hook you up with a college loan. :sneaky:

Only sorority sisters are eligible?

 

[highland145]

Only sorority sisters are eligible?

They'll get the family interest rate. ()

 

[jlee]

Not really, when I look at my mortgage info in my bank, I pay about $200 of interest biweekly, regular payment would be $400, but I pay $600. The extra $200 goes right on the principal. If I was doing the minimum payments about HALF of it is going into interest.

Even if I have an investment account that yields me 20% interest and 20 grand lying around, that's like $333/mo in interest. I'm not aware of any investment that yields that much, I was being super generous. Nor do I have 20 grand lying around.

And yeah I suppose it might be an emotional decision too, but once a debt is paid that is a HUGE load off ones shoulder, and gives more freedom, and extra cash on hand per month.

My parents have always had lot of debt, some due to mistakes, some due to misfortunes, etc but I've learned from them it's best to clear all debt when you can. What if you get sick and can't work anymore or have to go on compensation, for example. You don't want to still be owing on your house as that is a huge load to bear when your income is suddenly limited. My philosophy is pay off debt as fast as you possibly can while you are still able to, then invest after. If something happens to your income you can temporary stop saving, but you can't stop paying a debt.

I still think you have personally have an emotional attachment to the notion that it's an emotional decision.

There is a ton of *NOW* financial freedom offered to people when their mortgage is freed up. A spouse can stay home and be with kids instead of paying daycare bills.

People can save up and pay for cars in cash instead of financing.

Credit cards can be paid off in full (or not used at all) saving on financing costs.

Depending on your tax brackets you may not be able to itemize enough interest in the first place to get past the standard deductions so that's a wash. You still pay property taxes which depending on the state are where a bulk of your mortgage savings come. Plus you have a guaranteed return on your interest that you aren't guaranteed in the stock market.

It's more than just pure emotion. There are real world, every day practicalities provided with having that payment gone.

If someone is in a financial situation where having a paid-off house means they can pay their credit cards off, they are not in a position to be considering the respective merits of "do I pay off my house or do I invest instead." The decision "do I pay the mortgage off early" shouldn't be even raised if there is outstanding high-interest consumer debt.

Don't get me wrong -- I'm not saying it's a bad decision. Mathematically, it's generally advantageous for extra cash to be invested instead of used to pay down low-interest debt. It's certainly far better to pay a mortgage down than to just stuff cash under a mattress or spend it on unnecessary stuff.

If someone is in a position to maximize their tax-advantaged retirement accounts ($18k 401k, $5500 IRA, $3350 HSA) or put that money towards a 3.75% mortgage instead, which avenue would provide more return down the road?

 

[dullard]

If someone is in a position to maximize their tax-advantaged retirement accounts ($18k 401k, $5500 IRA, $3350 HSA) or put that money towards a 3.75% mortgage instead, which avenue would provide more return down the road?

A good investor or an average investor?

http://www.thestreet.com/story/11621555/1/average-investor-20-year-return-astoundingly-awful.html

http://blogs.wsj.com/moneybeat/2014/05/09/just-how-dumb-are-investors/

The average investor returns about 2.1% to 3.7% in those studies. That average investor should choose the 3.75% mortgage.

I fully agree that mathematically, you want to invest in a diversified range of stocks and bonds, especially if you can do it in a tax-advantaged account. But, you have to consider reality. Is the person actually disciplined enough to do so? And is it really that bad to get a guaranteed 3.75% return as part of a portfolio? No, as long as land is a small part of your portfolio (which is essentially what paying off your mortgage is) that can do quite well in keeping panic at bay (and panic often leads to poor investing).

No one should seriously argue to ditch the 401k and dump it all into a mortgage. But if you are already at least hitting your company match in your 401k in stocks, putting a few extra dollars into a mortgage can be a good investment choice.

 

[fleshconsumed]

Regarding OP, we are maxing our pre-tax stuff (HSA/401k), but won't have the house paid off. 401k is a far better vehicle than 529 because aid applications don't consider 401k in your worth but they will loot your 529 for all that's in it. If you can max 401k and put into a 529 then that's even better, because at that point you won't get aid anyways.

Sadly yes. Don't have kids yet, so my knowledge may not be as complete, but from what I understand financial aid applications will ignore any retirement savings such as 401K/Roth IRA when calculating financial need. However, anything in the 529 plans and other liquid assets such as savings/checkings/brokerage accounts aka stocks and bonds will be included. It sounds fucked up, but a diligent saver putting away $200 every month into 529 plan will get get "screwed" in the end because his kids will get less financial aid than someone else who decided to put those extra $200 into a bigger house or a BMW lease. Makes me wonder if doing 529 is really worth it.

 

[Homerboy]

If someone is in a financial situation where having a paid-off house means they can pay their credit cards off, they are not in a position to be considering the respective merits of "do I pay off my house or do I invest instead." The decision "do I pay the mortgage off early" shouldn't be even raised if there is outstanding high-interest consumer debt.

I think you misunderstood his point:

Credit cards can be paid off in full (or not used at all) saving on financing costs.

he's saying that instead of in the future charging things and then paying it off over the course of several months (new furnace, new washer/dryer, vacation, hospital bills... whatever), they have the cash on hand due to know house payment. He wasn't saying paying off EXISTING high interest consumer debt.

I am in that exact same situation. It sucked not having cash on hand when I needed it (or wanted it) so things would get charged and it might take me 2, 3... even more... months to pay it off.

Now that I have no mortgage, I can pay it off immediately, or at worst within a couple of months.

 

[jlee]

A good investor or an average investor?

http://www.thestreet.com/story/11621555/1/average-investor-20-year-return-astoundingly-awful.html

http://blogs.wsj.com/moneybeat/2014/05/09/just-how-dumb-are-investors/

The average investor returns about 2.1% to 3.7% in those studies. That average investor should choose the 3.75% mortgage.

I fully agree that mathematically, you want to invest in a diversified range of stocks and bonds, especially if you can do it in a tax-advantaged account. But, you have to consider reality. Is the person actually disciplined enough to do so? And is it really that bad to get a guaranteed 3.75% return as part of a portfolio? No, as long as land is a small part of your portfolio (which is essentially what paying off your mortgage is) that can do quite well in keeping panic at bay (and panic often leads to poor investing).

No one should seriously argue to ditch the 401k and dump it all into a mortgage. But if you are already at least hitting your company match in your 401k in stocks, putting a few extra dollars into a mortgage can be a good investment choice.

To be fair, it is really easy to be a good investor. Buy index funds and don't sell them.

That is a good point, though - someone who makes decisions based on how they "feel" will probably be more likely to sell stocks when they're plummeting and buy when they're going up, which is not a good plan.