Should You Pay OFF our mortgage?

[tony 0]

This issue has come up from time to time on this forum . This might offer some insight.

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

[EdLaFave 0]

Let's lay out some of the data:

• Historically the average stock market return is around 10% (minus fees and potential taxes).
• 30 year mortgages are going for 3% and even sub-3% right now with no points.
• Therefore, on average you could make 7% per year by investing what you would have sunk into your home.
• Depending on your tax situation, a mortgage also gives you a bonus deduction.
• If you have 100% equity in your home and prices rise by a typical 3% then you just got a 3% return on your money.
• If you have 20% equity in your home and prices rise by a typical 3% then you just got a 15% return on your money.
• Even if you pay off your mortgage you have NOT eliminated your housing expenses. You'll be paying insurance, property taxes, HOA, maintenance, and all of the rest forever.
• Obviously stock market returns and home appreciation are highly volatile and aren't guaranteed to be positive.

[tony 0]

But you have to live somewhere and you have to invest somewhere.  You can't escape fees, expenses  and taxes either way. Nothing ventured nothing gained and everything is risky.  Just live under a rock!!

[EdLaFave 0]

2 minutes ago, tony said:

But you have to live somewhere

I'm confused. I thought we were talking about whether to carry a mortgage as opposed to whether to live somewhere?

[MNGopher 0]

Ed and Tony are having one of their classic left brain/right brain friendly disagreements.  It think it can be shown that mathematically, investing the money will beat paying off the mortgage more often than not, but that doesn't necessarily make it the best choice for everyone.  You can't really put a price on peace of mind.  Let me be the centrist here.  In my case I bought a new construction 2,000 sf home in a medium cost of living area for $104,000.  This was in 1995 and my original interest rate was 7 point something.  I didn't know a lot about investing and only had annuities through my employer plan, so I plowed most of my extra money into the mortgage and paid it off in a little over 11 years.  With the mortgage paid off, I started saving and eventually started investing more around the time of the great recession, which turned out to be a good time to start.  Now, I was lucky on the timing here, and looking back at the rate of return of the stock market during the years that I held the mortgage, it probably would have worked about the same if I had invested the money vs. paying off the mortgage. My timing was lucky and it worked out for me, but in today's environment it certainly seems that keeping the mortgage and investing is the better choice.  However in the future, who knows?

Jim Dahle, "The White Coat Investor", wrote an interesting blog recently on the this topic of paying off debt vs. investing.        https://www.whitecoatinvestor.com/pay-off-debt-or-invest/

 

 

 

[EdLaFave 0]

1 hour ago, MNGopher said:

left brain/right brain

When we start to talk about emotions and psychology, I'm not saying there is a right or wrong. However, I'd more easily relate to the emotional drive to rid yourself of a mortgage if it meant that no matter what happened your housing would be taken care of for life, but property taxes and all the rest make that impossible.

[krow36 0]

The White Coat Investor article, including comments, is excellent! Thanks MNGopher!

[ScottO 0]

On 11/12/2020 at 5:55 PM, tony said:

Should You Pay OFF our mortgage?

No. Why would I pay off your mortgage? 😛 

[sschullo 0]

OP. I remember the FEELING of paying off my mortgage when I was 57. What a relief! Here is another article that may help you decide: https://www.cnbc.com/select/what-age-to-be-debt-free/. In this day and age of tens of thousands of financial blogs, articles, discussions and podcasts, there are hundreds of articles on this one subject and multiple discussions on the Bogleheads forum. FWIW, it's not just the numbers, but the debt free experience that counts too. Heck, if you don't like being debt free, you can always borrow money and purchase Tesla stock like this fellow did: https://www.bogleheads.org/forum/viewtopic.php?t=330263

[tony 0]

On 11/16/2020 at 2:49 PM, ScottO said:

No. Why would I pay off your mortgage? 😛 

Oops a slight error on my part in the heading. I missed a key.  

I agree with all the posts for the most part and can see all the angles of the discussion but getting rid of my mortgage for me was the best thing I did. I just got my property tax bill and as your house value rises so do your property taxes. Nice to know though that It's a one time yearly payment now instead of a monthly mortgage payment plus property taxes plus interest. The interest you pay on owning a mortgage is pretty significant. That's a huge fee IMHO worth getting rid of. Also the mortgage  tax deduction is ripe for elimination.

[ScottO 0]

Should You Pay Off Your Mortgage or Invest the Cash? (affordanything.com)

I wouldn't accelerate mortgage payments and regret the few times I put extra $ toward my home loan instead of my Vanguard account.

• All your lender cares about is getting their money on time. I could pony up extra /mo. or pay down 90% of my loan in a lump sum, but if I miss a few payments; foreclosure.
• Property value goes up or down regardless of a loan balance.
• All your $ in one house = All your eggs in one basket (poor diversification.) Disasters happen and houses don't recover in two years on their own.
• Using that same $ toward home improvements would do more to increase your quality of life and the value of the home, but see above.
• $ in Retirement Accounts > $ in Real Estate (review your state's laws) in the event of bankruptcy, divorce, legal action, etc.
• Getting money out of a home normally requires a lengthy(costly) process. Selling shares is so much faster.
• There may be less of a tax advantage to put $ toward a real estate loan than in a 403/457 acct.

I just got a loan modification offer from my credit union to go from 2.875% to 2.25%... not rushing to pay that balance off at that rate.

[tony 0]

here is more on the topic if anyone is interested

 

https://inflationdata.com/articles/inflation-adjusted-prices/inflation-adjusted-housing-prices/