Paying off the mortgage because debt free feels good

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Scott 2
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Paying off the mortgage because debt free feels good

Post by Scott 2 » Wed Oct 05, 2016 9:16 pm

I'm gonna do it this month. It might not be mathematically optimal, but I am really looking forward to the low cash flow demands of being debt free.

Anyone else taken the plunge? Was it everything I expect? Any traps to look out for?

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Sclass
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Re: Paying off the mortgage because debt free feels good

Post by Sclass » Wed Oct 05, 2016 11:16 pm

I've never owned the home I've lived in. So I am not an authority. I can speak for my folks though.

They paid their place off after seven years. They had been making extra mortgage payments and finally hit the loan with one big payment and made it go away. I can recall the day they made the decision. It was a big deal.

Back in the 1980s the interest rates were a lot higher so it may not feel the same today.

Anyhow I believe that with their housing taken care of they were able to make more brazen investing moves. I can really recall their returns taking off shortly after doing that. My guess is they just didn't have the fear of being tossed out on the street on their minds when they took on big bets.

One I recall that happened just about the time they paid down their home was betting Chrysler would right itself under Iacocca in the 80s. They bet all they had, not the family farm, but all they had outside of it because they may have felt the home was nailed down.

My dad had guranteed employment so day to day expenses were an afterthought.

Good luck. Just because it doesn't make sense mathematically doesn't mean you won't come out ahead. Just my thoughts.

Did
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Re: Paying off the mortgage because debt free feels good

Post by Did » Wed Oct 05, 2016 11:30 pm

we love it. never so much as now i have a broken arm and am tired and in pain. it just feels safe and secure. i can only imagine this increases with age and fragility. congratulations.

Did
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Re: Paying off the mortgage because debt free feels good

Post by Did » Wed Oct 05, 2016 11:32 pm

ps one trap : never ending desire for improvements. DW always looks to more work. i see our housing problem as solved. next...

steveo73
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Re: Paying off the mortgage because debt free feels good

Post by steveo73 » Thu Oct 06, 2016 2:00 am

I live in Australia and it makes sense to pay the mortgage off financially but I still think the value of being debt free is huge. Our houses are so expensive as well so paying it off is probably the biggest thing that I will complete on the path to FI.

We paid it off at the start of this year and I feel like I have FU money at the very least. I think if I got retrenched, sold the house and moved I'd be FI.

IlliniDave
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Re: Paying off the mortgage because debt free feels good

Post by IlliniDave » Thu Oct 06, 2016 3:35 am

I did it and basically have no regrets. The only "trap" I can think of is don't do it at the expense of leaving yourself too strapped for cash in the short term. I've heard stories (of which I can't speak for the veracity) of people throwing all available resources at paying off the mortgage only to hit a gap in income or similar that causes hardship they could have weathered had they kept a liquid emergency fund and just made normal payments or paid off a little slower. Caveat is that the stories always come from folks who preach paying off mortgages as slowly as possible.

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cmonkey
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Re: Paying off the mortgage because debt free feels good

Post by cmonkey » Thu Oct 06, 2016 8:12 am

Make sure to check whether you have any pre-payment fee. Some banks will slap that on you if you pay off your loan before the end date.

Other than that, the above advice is good. We paid ours off in early 2014 and it is definitely a great feeling. That first paycheck after paying it off is something really special because you get to keep all of it for yourself. I still feel a ghost of that feeling each time I am paid.

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Re: Paying off the mortgage because debt free feels good

Post by jacob » Thu Oct 06, 2016 8:52 am

We paid cash. Initially it's nice not to have to write a monthly check---here my frame of reference would be a landlord's mortgage rather than my own mortgage---but like everything else (e.g. an ocean view) that feeling fades and just becomes normal. E.g. the first year, I would think about much rent I had "saved" thus far. Now, not so much.

Also, I suspect some of the emotion had more to do with writing the check than the actual amount. Owning as opposed to renting has increased the number of checks written because things like heat, water, ... is not rolled into the rent check. Those feel more like a debt one was born with and for all practical reasons have to keep paying to retain minimum services.

Also I don't really feel more secure, because there are still three large payments per year (tax1+tax2+home insurance = 45% of our annual expenses) ... and not making the tax payments would still lose the house.

PS: Not getting into debt (e.g. having to apply for a mortgage, car loan, etc.) did feel good.

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Dragline
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Re: Paying off the mortgage because debt free feels good

Post by Dragline » Thu Oct 06, 2016 1:11 pm

Yes, we did that some years ago. It felt like an accomplishment and was a good decision, especially in hindsight since almost of the extra payments were 2005 - 2008 and would have otherwise been invested in the stock market for the most part. Sometimes life is unfair in your favor.

It will increase your flexibility, but make sure you adjust your annual budget to account for lump-sum payments of taxes and insurance. There will always be maintenance expenses, too, as jacob mentioned.

Also consider taking out a HELOC afterwards if you think you might need that available, or as a substitute emergency fund.

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Tyler9000
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Re: Paying off the mortgage because debt free feels good

Post by Tyler9000 » Thu Oct 06, 2016 1:13 pm

We paid off our house right when we pulled the trigger on FIRE. It was awesome. If/when we move again, we're dealing in all-cash from now on. Mortgages feel so old-fashioned and restrictive at this point. Not to mention unnecessary.

As for tips, I recommend doing a wire transfer for the final payment. My mortgage company charged a pro-rated amount of interest per day, so getting an accurate payoff amount on the exact day we made the transfer was important for making everything balance.

George the original one
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Re: Paying off the mortgage because debt free feels good

Post by George the original one » Thu Oct 06, 2016 2:38 pm

Tyler9000 wrote:We paid off our house right when we pulled the trigger on FIRE.
Since I still had two homes when I pulled the trigger back in Nov 2015 I couldn't do it then. Housing market finally got to the right point this last spring, but I procrastinated (which worked in our favor). Put the old home on the market in late Aug 2016 and had multiple offers with a signed deal in 5 days. Now that it is closed and I have the proceeds, we'll be paying off the current home this month, too!

As others have noted, the biggest downside to paying it off is doing so at the risk of being cash-poor. If you're not cash-poor, like most ERE folks, then you only have to consider whether it is optimal for you. I personally feel that having a mortgage while retired is riskier than having one while employed, but realize not everybody will feel the same.

For us, our monthly fixed bills will be down to: Obamacare, 2x phone accounts (one serves as backup/realtime ISP), satellite ISP, electricity, and garbage service. Other nonmonthly fixed bills (annual or semiannual) are: car insurance, home insurance, fishing license, and property tax. Which leaves groceries & fuel & clothing/incidentals/projects/entertainment being the variable bills.

Scott 2
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Re: Paying off the mortgage because debt free feels good

Post by Scott 2 » Thu Oct 06, 2016 6:25 pm

Very common around here. Good company!

I've taken the cash poor gamble to refinance a couple times. It worked out for me, but probably wasn't the smartest. My position is stronger this time.

I was planning to pay most of the balance mid month, then let my bank deal with the remainder via my last automatic payment. Maybe I'll give them a call to get the pay off amount and confirm there's no prepayment penalty. That seems like a good idea.

There are probably a few new appliances in our future, I've been loathe to put money into something I already owe money on. Most of our stuff is 15+ years old now.

Lucky C
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Re: Paying off the mortgage because debt free feels good

Post by Lucky C » Sat Oct 08, 2016 7:55 am

I'm saving up cash to buy a house with no mortgage. The reason is risk reduction, to limit drawdowns in my portfolio.

I believe I would end up ahead if I kept the money invested and took out a mortgage at today's low rates. But I'm pretty far along in terms of financial independence, so [StdDev(remaining working years) / E(remaining working years)] is rapidly increasing due to potential market volatility. Being a couple years off in your estimated working years due to forces beyond your control is to be expected when FI is 10 years out, but when you're only 2 years away, the risk of an additional 2 years can be terrifying!

By paying for a house with cash, I'm roughly expecting to work an additional month or two vs. the mortgage option (no big deal), in order to reduce the worst-case-scenario of remaining working years by somewhere between one and two years. It will feel good, plus it will make mathematical sense from a risk reduction standpoint.

Scott 2
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Re: Paying off the mortgage because debt free feels good

Post by Scott 2 » Sat Oct 08, 2016 8:39 am

Lucky C - we are thinking the same, maybe I just need a better handle on the math :). I'm not all that confident I know what I am doing when it comes to investing. There are so many variables to account for, so much uncertainty that is impossible to predict. I think that money will behave ok, but I'm also taking a lot on faith.

No need to write a rent/mortgage check? Now that I understand and can have confidence in. When I start looking "who do I pay" and "how do I get money to pay them", it makes so much sense.

Lucky C
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Re: Paying off the mortgage because debt free feels good

Post by Lucky C » Sat Oct 08, 2016 10:10 am

Yeah there are lots of variables involved, but for me, market volatility has the biggest impact on potential FI date since I have a reasonable bound on potential home prices, potential living expenses, and potential changes in my salary over the next few years. Roughly estimating your projected FI date considering market volatility, even if no other variables are considered, is better than nothing. When I estimate my expected FI date which is heavily influenced by an estimated fixed % investment returns, I realize there is only a 50% chance I will actually be FI by that date, and a 50% chance it will take some longer amount of time. Then I take the expected portfolio volatility, which is usually stated as annual standard deviation, and see what impact it has on my FI date.

You need to do the math to convert a single year standard deviation to X number of years. Say your baseline FI date is X = 5 years. If you expect 10% volatility over the next 5 years, that's 10%*sqrt(5 years) = 22.4% change in your portfolio value after 5 years vs. expected (for one standard deviation). Annualized, that's [(1 + 22.4%)^(1/5 years) - 1] = 4.1% difference per year. If your baseline expected return is 5%, you can expect a 68% chance that your returns will be 5% +/- 4.1% = between 0.9% and 9.1%. That's a wide range of outcomes and it's only one standard deviation so there's a 16% chance you won't even hit the 0.9% bound! Good motivation to pay off that mortgage :)

Alternatively you can go to Firecalc, set the number of years to how long you want to compare investment returns vs. having the mortgage paid off, and set spending to $0. Then go to Your Portfolio and choose Random with your estimated return and volatility. Set "inflation" to your mortgage rate, and when you run that it will show you a bunch of potential outcomes of your investments beating (or falling short of) your mortgage.

radamfi
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Re: Paying off the mortgage because debt free feels good

Post by radamfi » Mon Oct 10, 2016 5:38 am

jacob wrote:Also, I suspect some of the emotion had more to do with writing the check
This may seem like a silly question, but do you actually physically "write a check" (or cheque as we say in Britain) when paying the mortgage in America? Most people here get the mortgage automatically deducted from their bank account.

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cmonkey
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Re: Paying off the mortgage because debt free feels good

Post by cmonkey » Mon Oct 10, 2016 7:16 am

Rent is mostly paid in checks I believe, as are property taxes, otherwise you also pay a 3% fee to cover the card fee/auto payment.

Cornerman
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Re: Paying off the mortgage because debt free feels good

Post by Cornerman » Mon Oct 10, 2016 12:30 pm

For me it was the easiest way to get my monthly expenses down, I am not mortgage free yet, but it has made a significant impact.
Debt free would be ideal for me. It will allow me to FI sooner.

radamfi
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Re: Paying off the mortgage because debt free feels good

Post by radamfi » Mon Oct 10, 2016 1:01 pm

cmonkey wrote:Rent is mostly paid in checks I believe, as are property taxes, otherwise you also pay a 3% fee to cover the card fee/auto payment.
Card fee I can understand, but why charge 3% for auto payment? Surely direct debit (as we call it in the UK) is cheaper to administer? Many organisations in the UK charge you extra if you *don't* use direct debit. Paying by check/cheque means a lot of manual processing.

Augustus
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Re: Paying off the mortgage because debt free feels good

Post by Augustus » Mon Oct 10, 2016 2:53 pm

You can get a decent rate of return by paying off your mortgage, I calculate mine to be about 5%. Maintenance is extremely annoying, and can be costly if you buy the wrong house. Things like reroofing, major plumbing problems, etc can all be very expensive.

I paid mine off and I love it. I am pretty conservative when it comes to money though, I hate debt and risk. It's nice to know that no matter what happens, I should at least have this place to live in.

George the original one
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Re: Paying off the mortgage because debt free feels good

Post by George the original one » Mon Oct 10, 2016 8:43 pm

radamfi wrote:
cmonkey wrote:Rent is mostly paid in checks I believe, as are property taxes, otherwise you also pay a 3% fee to cover the card fee/auto payment.
Card fee I can understand, but why charge 3% for auto payment? Surely direct debit (as we call it in the UK) is cheaper to administer? Many organisations in the UK charge you extra if you *don't* use direct debit. Paying by check/cheque means a lot of manual processing.
Because "Chase" or "Citibank". Of course it's cheaper to administer, but it is also a great way to generate more revenue if you charge for the service.

Scott 2
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Re: Paying off the mortgage because debt free feels good

Post by Scott 2 » Thu Oct 13, 2016 9:46 am

Well, I now owe one cent on my mortgage - the closest I could get through the website.

The final payoff amount includes this month's accrued interest and a $40 free. I don't have a printer to mail in the form, and I'm not paying thirty bucks for a wire transfer. I figure this stops accrual of significant interest and will trigger them to send the final form.

I did learn once paid, the bank needs to do some stuff related to releasing the lien against the home. Then after a month, I need to reach out to my insurer to have them removed, and to the county, to ensure they are removed and I have a copy of the document that proves I own the house.

So I guess I'm doing it this year.


Lucky C - Still trying to make time to look at the math more. I'm at the end of my accumulation phase, continuing to work because my situation is good, so the numbers are a little different.

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Re: Paying off the mortgage because debt free feels good

Post by lilacorchid » Tue Nov 01, 2016 11:40 am

Congrats!!!

We did it on the old house and I personally loved having the extra cash flow which is really the big change. The non-logical part of me was thrilled with having so much more freedom with my money. We recently bought a new house and decided to take out nearly the entire amount on a HELOC just because we like the freedom so much. My husband also has a job where his hours change, so he is pretty happy to have that freedom as well.

Scott 2
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Re: Paying off the mortgage because debt free feels good

Post by Scott 2 » Mon Nov 14, 2016 7:34 pm

I was able to remove my lender from my property insurance via the insurance company website. The release of lien appeared in the website of my county recorder, along with the releases from my prior refinances, which I suppose I should have looked for in the past.

It feels great to be debt free. Not that I had money stress before, but I feel wealthy now. The downside is much of my motivation to be financially responsible seems to have disappeared with the debt. I just spent forty bucks getting pizza delivered, cause hey, it's Monday and why not?

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cmonkey
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Re: Paying off the mortgage because debt free feels good

Post by cmonkey » Mon Nov 14, 2016 8:21 pm

Scott 2 wrote:The release of lien appeared in the website of my county recorder
I actually took screenshots of the records on the county website, as if the official document wasn't good enough. :D

Congrats!

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