Thinking about pre-paying home loan. Good? Bad? Thoughts?

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FPMLLC
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Thinking about pre-paying home loan. Good? Bad? Thoughts?

Post by FPMLLC »

Hey guys, It's been a while since I've posted. I will update my journal later but here is my dilemma. I am currently working on a big project, and expensive one. But it's under business Tax ID, so I keep them separate.

Over the past 23 Months I have Paid off

Wife's student Debt - $12,439
Wife's Car -$11,283
My Car - $6,304
Home Equity line - $22,493

Every time I paid one off it felt amazing. and just crushed the next one. But there are no debts left. Except my mortgage that I just refi (2 months ago) for 15 yrs @ 3.99% with a balence of 280K ( I have about 48% equity)

Now I know with that low of a rate I should let it drag, but I don't want to. I save about $20k a year and still doing ok. The biggest argument against paying it off is the tax break. But I have two other rental properties that I could claim one as my primary so I'm not worried about that.

My thing is, that it felt so good to get those other debts off my back, and this is the biggest and would feel amazing.

The other thing is, I want out of my job, BADLY, i LOATHE it but it gives me about 7.5 hours a day to work on side work which i Love and would love to make primary source of income at some point.

So I think If i can start paying this down, it will mean less hanging over my head and would give me a piece of mind to quit my very secure, well paying albeit awful job.


My other thought is to dump all the extra cash I can find into my business. But the business runs on it's own, and I am working on investors soon enough. Not to mention the amount I need I couldn't generate quickly so it would be drops in a bucket vs paying down home note.


Thoughts? Opinions?

George the original one
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Re: Thinking about pre-paying home loan. Good? Bad? Thought

Post by George the original one »

A 4% mortgage is at the high end of "no reason to pay off early". 4%-5% is in the realm of "keep this mortgage only if you can't refinance". Over 5% (I used to say over 6%) is "pay it off ASAP or refinance".

Financially it makes no sense to pay off those low mortgages early if your annual investment returns average above 6%. My investment returns have averaged in the 20% range (much to my surprise... I only planned on 8%), so I have no reason to pay off a mortgage early.

If you & your family's personality is such that paying the primary mortgage off early makes you feel more secure, then do so.

FPMLLC
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Re: Thinking about pre-paying home loan. Good? Bad? Thought

Post by FPMLLC »

I have averaged 26% this year, not too surprising since the market has been doing well. And the math tells me not to pay it off. But i have three things that I am working with.

1. (not my plan but it's there) My mother is very well off, and eventually she will be gone (something she reminds me of all the time when I bitch about money). So I do have a bit of security there.

2. If were able to pay off my mortgage, the rental cash flow on the two i have would make up a large portion of my monthly needs. So at that point, I keep working, saving MUCH more now, close to 60% of my income with no house note. I also plan on expanding my rentals in 2014, and i COULD put the money towards that, but we both like the idea of no debt other then rental properties.

3. With absolutley no debt, we would have the freedom to take time off, and I could work 100% towards side projects.

Seneca
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Re: Thinking about pre-paying home loan. Good? Bad? Thought

Post by Seneca »

Comparing paying off your home to the, generally accepted, next lowest risk investment, bonds- http://www.marketwatch.com/story/paying ... 2012-06-18

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jennypenny
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Re: Thinking about pre-paying home loan. Good? Bad? Thought

Post by jennypenny »

I can see paying off a mortgage, but I don't agree with a couple of points in that article. First, paying off a mortgage isn't 'riskless' as he says. Illiquidity can be risky. He also uses 2% as an alternate investment return, but there are better options. PenFed has a 3% 5-yr CD right now. https://www.penfed.org/Money-Market-Cer ... WT.ac=1197 If you combined that with their 2.625% 5/5 ARM and the tax deduction, you might come out ahead by using CD's. https://www.penfed.org/55-adjustable-ra ... WT.ac=1207

I think paying off your mortgage is a gamble because you're comparing today's rates of return. What if CDs are up over 6% in 5 years? If you pay off the mortgage, you've locked yourself into the lower return. Some people might also be at an income level where the mortgage tax deduction keeps them under certain income thresholds (child tax credits, ROTH limits) which provide an additional return, so to speak.

With rates where they are now, I think the biggest factor is the sleep-at-night factor. Some people are more comfortable with no debt. Others are more comfortable with liquid assets. I think it's a personal decision. My only recommendation would be to maintain a HELOC if you pay it off to maintain a little liquidity if needed.

FPMLLC
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Re: Thinking about pre-paying home loan. Good? Bad? Thought

Post by FPMLLC »

That is always an option, to maintain the HELOC just in case. I have about 13K in savings account, and business account is funded if it ever got DIRE.

I just am really drawn to the idea of being 100% personal debt free. I know I would make more with out paying it off, but seems so far away. And With paying my mortgage I am limited on how much I can save and invest into other things.

Seneca
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Re: Thinking about pre-paying home loan. Good? Bad? Thought

Post by Seneca »

jennypenny wrote:I can see paying off a mortgage, but I don't agree with a couple of points in that article. First, paying off a mortgage isn't 'riskless' as he says. Illiquidity can be risky. He also uses 2% as an alternate investment return, but there are better options. PenFed has a 3% 5-yr CD right now. https://www.penfed.org/Money-Market-Cer ... WT.ac=1197 If you combined that with their 2.625% 5/5 ARM and the tax deduction, you might come out ahead by using CD's. https://www.penfed.org/55-adjustable-ra ... WT.ac=1207
In your comparison you'd want to use the APR on the mortgage, not the rate, so you'd be down a bit. And certainly after income taxes on your returns it might be a bigger spread, depending on mortgage deductions, brackets etc etc.

I agree that article was imperfect, but we can shoot holes in any hypo. We should discuss risk on investment returns, the questioner's actual long term investment returns, and the impact of taxes on your actual realized investment gains, which are often not mentioned.
With rates where they are now, I think the biggest factor is the sleep-at-night factor. Some people are more comfortable with no debt. Others are more comfortable with liquid assets. I think it's a personal decision. My only recommendation would be to maintain a HELOC if you pay it off to maintain a little liquidity if needed.
I haven't experienced it yet, but totally debt free people I know don't just sleep better at night, they make different choices without the worry of having to service that debt.

A high savings rate should let anyone pay off their mortgage very quickly. You are trading the risk of relatively short term illiquidity (which I prefer to moderate with cash savings, and in a pinch, tax advantaged investments which I would not pass up to pay extra on a mortgage) for far better household liquidity as soon as the mortgage is gone.

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jennypenny
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Re: Thinking about pre-paying home loan. Good? Bad? Thought

Post by jennypenny »

Seneca wrote:In your comparison you'd want to use the APR on the mortgage, not the rate, so you'd be down a bit. And certainly after income taxes on your returns it might be a bigger spread, depending on mortgage deductions, brackets etc etc.
I agree. My point is that with CDs (a safe investment) at current rates, we're getting closer to a point where it's a break-even situation. If interest rates go up at all, the mortgage will stay the same, so the scales might tip in favor of carrying the mortgage.

A high savings rate should let anyone pay off their mortgage very quickly. You are trading the risk of relatively short term illiquidity (which I prefer to moderate with cash savings, and in a pinch, tax advantaged investments which I would not pass up to pay extra on a mortgage) for far better household liquidity as soon as the mortgage is gone.
I guess it depends on how you define that. A person might have an extra $2-3K a month in liquidity, but the first $250K of liquidity is tied up in the house.


Our difference of opinion is a prime example of why it's a personal decision. We're not really disagreeing about the numbers. We're disagreeing about what's 'better' or 'safer.' That's a judgement call everyone has to make for themselves based on whether they're salaried, freelance, or retired, whether they have kids, plan to pay for college, plan to move, like to manage investments, etc. I don't think the math alone provides a clear-cut winner.

Dragline
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Re: Thinking about pre-paying home loan. Good? Bad? Thought

Post by Dragline »

Do both, I always say. I would pay it down quicker, but not put all my extra investment money against it. Maybe 25% of what would otherwise be invested.

I have enjoyed not having a mortgage every day since I paid ours off. We still have a HELOC that can be accessed at will if necessary. Sometimes I use it to leverage other investments when I don't want to use cash or sell something.

A more complex strategy would be to put the money in an investment account and borrow against it on margin, using that money to pay down the mortgage. This only works at places like Interactive Brokers where you can get margin rates lower than your mortgage rate. And you better have some @#$% stable/uncorrolated investments and not go overboard on the margin.

George the original one
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Re: Thinking about pre-paying home loan. Good? Bad? Thought

Post by George the original one »

It's always possible to do both. 50% goes towards mortgage, 50% is invested.
[LOL, I knew Dragline would beat me to it]

I currently have two homes with mortgages. I have enough in the taxable account to pay off one mortgage... the dividends are enough to pay 75% of both monthly mortgage payments. If I lost my job today, that's enough money to go 4 years without lifting a finger (in reality, we'd sell the current house and move to the other house, then we could go 8+ years, which ought to be enough to draw on the pension).

The retirement plan is that I work long enough to sell this house, pay off the other house, and live carefree. Retirement doesn't need the hassle of a mortgage, though mathematically it would make sense to have one.

FPMLLC
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Re: Thinking about pre-paying home loan. Good? Bad? Thought

Post by FPMLLC »

This is all good advice, and I can see how it is a very personal opinion. In my situation, if I Paid it off I still have access to cash if need be via business accounts, savings, and a small nest egg that is slowly building in my safe...

I already max out my tax deferred accounts and fully fun a ROTH every year. After that money, I am left with three options
1.Pay down mortgage
2.Invest it in the market
3.Invest it in my business


I have two other mortgages that are 5-6% and are rental properties in an area that should prove to be very nice sooner than later. So they are just sitting pretty. They are also in the business name.

I think the "sleep at night" factor is what I am after. The feeling when I close my eyes, or buy something or invest, just knowing I am free and clear elsewhere. Or if god forbid the business tanked, I know I'd still have home paid off. Not to mention, like above, being able to just know that it is paid off and I will never (aside from rentals) have another giant debt again. It's got to be an amazing feeling.

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Re: Thinking about pre-paying home loan. Good? Bad? Thought

Post by jacob »

I see a lot of mention of ROI and a little mention of accessible cash, but also consider net worth volatility. Paying off debt is going to reduce fluctuations quite a bit because debt-payoff has close to zero volatility (baring refinancing).

Seneca
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Re: Thinking about pre-paying home loan. Good? Bad? Thought

Post by Seneca »

jacob wrote:I see a lot of mention of ROI and a little mention of accessible cash, but also consider net worth volatility. Paying off debt is going to reduce fluctuations quite a bit because debt-payoff has close to zero volatility (baring refinancing).
This and cashflow volatility, which I mention separately from liquidity as I think it's a slightly different issue.

The older I get, the less I think about net worth and more I think about cash flow. You cannot beat paying off your personal house with the same dollar amount in investments for guaranteed cash flow...

JohnnyH
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Re: Thinking about pre-paying home loan. Good? Bad? Thought

Post by JohnnyH »

With the markets as high as they are and cash returns as low as they are, I'd strongly consider it... I'd want at least 2 years of expenses saved in liquidable accounts first, before I started paying off the mortgage.

Spartan_Warrior
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Re: Thinking about pre-paying home loan. Good? Bad? Thought

Post by Spartan_Warrior »

The good news is whatever you decide isn't permanent. I've been wrestling with this myself since I bought my house 2.5 years ago, waffling between paying down my mortgage and making more investments. Result? I have a lot more equity and a lot more investments than 2.5 years ago.

Do what makes you comfortable. What makes you comfortable might well change over time. As long as your total savings rate doesn't change, you should be good either way IMO.

(And after reading this thread, it seems clear you've already figured out what makes you most comfortable, at least right now. So go ahead and bring the hurt on that mortgage.)

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jennypenny
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Re: Thinking about pre-paying home loan. Good? Bad? Thought

Post by jennypenny »

Slightly OT ...
@Those who have paid off their mortgage--Did you feel how you thought you would feel when you paid it off? Did it feel better? Did you worry that you didn't have enough of a cushion? I don't have a burning desire to pay off our mortgage, but now I wonder if I'd feel differently after I paid it off.

chicago81
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Re: Thinking about pre-paying home loan. Good? Bad? Thought

Post by chicago81 »

The day I paid off my (5 year old) mortgage in 2010 was the second happiest day of my life (second to only my college graduation.)

Since then, I took out an equity line against my home (just to have ready for investment opportunities, should they arise.) As fortune would have it, shortly afterward, there was a distressed condo in my building that a bank was trying to sell very quickly. I used the equity line to make a quick cash offer for the property. It has been a fantastic investment as a rental property. I have since then paid off the equity line, and I now own 2 condos, mortgage free! The rental property has probably doubled in value from the price I paid for it.

Would I have been better off if I had just invested in an index fund over that time period? Possibly, although it would have seemed riskier. I think I did very well, on a risk-adjusted basis.

chicago81
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Re: Thinking about pre-paying home loan. Good? Bad? Thought

Post by chicago81 »

jennypenny wrote:Slightly OT ...
@Those who have paid off their mortgage--Did you feel how you thought you would feel when you paid it off? Did it feel better? Did you worry that you didn't have enough of a cushion? I don't have a burning desire to pay off our mortgage, but now I wonder if I'd feel differently after I paid it off.
It felt as good as I thought it would, if not better. I was not worried about having a cash cushion, because I knew I would be able to save up a big cash cushion very quickly (since I never had to make mortgage payments anymore!)

Seneca
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Re: Thinking about pre-paying home loan. Good? Bad? Thought

Post by Seneca »

jennypenny wrote:Slightly OT ...
@Those who have paid off their mortgage--Did you feel how you thought you would feel when you paid it off? Did it feel better? Did you worry that you didn't have enough of a cushion? I don't have a burning desire to pay off our mortgage, but now I wonder if I'd feel differently after I paid it off.
Preppers/doomers always pay cash, JP. Er, maybe gold too.

You're losing your chops. :D

Tyler9000
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Re: Thinking about pre-paying home loan. Good? Bad? Thought

Post by Tyler9000 »

For me, FI means not only freedom from work, but also as much independence from required cash flow as possible. It's not simply a risk thing -- it's a mindset. Yes, I could potentially make a few thousand more a year by keeping my low interest rate and investing the difference, but my ultimate goal is for that to be no longer necessary. At some point in the near future, I want to declare financial victory and move on to other interests.

FWIW, a good rule of thumb I've read elsewhere is to keep the duration of your mortgage about the same as the remaining years you have of work income before you plan to retire. So if you'll retire in 15 years, get a 15 year mortgage. Or if you plan to ERE in 5 years, pay down your mortgage aggressively in that time. That keeps your money liquid while you accumulate your nest egg, but minimizes expenses & investment volatility at the time you stop working.

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