Stop 401k to pay off mortgage?

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SustainableHappiness
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Re: Stop 401k to pay off mortgage?

Post by SustainableHappiness »

The distinction between finances and emotions doesn't make sense to me. My finances are there to maximize my emotional well-being. If you aren't using wealth to make your day-to-day life happier what's the point (that can include massing massive amounts of money just because it makes you feel good). Unfortunately, that exact argument is used by YOLO spend the whole paycheque type mentalities and even non-YOLO "a matching washer and dryer will make me happier" decision-makers too... It's just a difference in guessing what will bring more happiness short vs long term.

For that guessing, using our established natural biases like loss aversion and the hedonic treadmill are what help us make our decisions.

Once DW and I established a level of wealth/career we wouldn't need to worry too much about optimizing more wealth/career (about 50% to FI using 4% rule thinking at 28-ish), we began to focus on things that make life easier EVERY DAY. We are currently paying off our mortgage as fast as possible and not investing much, have been for a year now because it makes us feel better than investing and it is highly unlikely we will look back and be like, "man I wish we hadn't of paid that mortgage off so fast". Having more cash flow also unlocks other possible lifestyles without having to stagnate or take away from our savings in the future.

We also took a big hit to our income in order to hang out together more with each other and our kids even though it massively prolonged the imaginary quest to FI (in fact there is no such thing as a life of leisure when you have 3 little kids). It just makes life better.

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jennypenny
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Re: Stop 401k to pay off mortgage?

Post by jennypenny »

@unemployable -- The amount of money in the nest egg is very important, but I don't think it's important to assess its value in relation to others. Besides, even if people said the OP had a lot less money than they should at 35, what could be done about that now? IMO they should start fresh and do their own math based on their own spending and goals.

AFWIW, I wouldn't pay off the mortgage. I'd be working on maxing out the 401K and building a large liquid nest egg in case the start up doesn't work out.

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unemployable
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Re: Stop 401k to pay off mortgage?

Post by unemployable »

jennypenny wrote:
Fri Nov 19, 2021 10:10 am
I don't think it's important to assess its value in relation to others
I never stated that it was.

Mister Imperceptible
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Re: Stop 401k to pay off mortgage?

Post by Mister Imperceptible »

get a 40 year fixed and say you can’t pay because covid

2Birds1Stone
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Re: Stop 401k to pay off mortgage?

Post by 2Birds1Stone »

This sounds like a terrible idea.

plantingtheseed
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Re: Stop 401k to pay off mortgage?

Post by plantingtheseed »

Several ways to deal with this, for the sake of psychology, but it will come down to - how much debt, do you have enough to cover it and what's left over?

To me, a house is shelter first, equity second. The value of a house changes. Equity is not constant. It's just timing and a house does not produce dividends.

Do you like the neighborhood and everything about where you live? Do you like the house? Can you see yourself living there for a very long time? If so, perhaps that will be justification enough to pay off the house.

And if the house is worth something later on, that's a bonus.

There is always sunk cost associated with home ownership, in terms of utilities, maintenance, insurance and property tax. It's the cost that comes with having a shelter for as long as you own it. Add the cost of interest, if there is an outstanding loan.

Interest on debt is always expensive, especially on a large loan over a long period of time like mortgage. Mortgage interest deduction? Paying out $10 to get $2 back is not a good way to do things. It helps, but doesn't help enough.

Therefore, even if the house is paid off, there will always be cost. It's not unlike owning a car. Same thing.

Perhaps another way to look at this problem is to take the cash flow and structuring it so that it can bear the total projected sunk cost - which I believe you've already stated (in a Freudian manner of writing).

Salathor
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Re: Stop 401k to pay off mortgage?

Post by Salathor »

We paid off our mortgage at 33. It ended up being a poor financial decision compared to investing, but I loved having real monthly bills of like $800 for a family of 4 in a HCOL area. I guess the question is, would you rather gamble on having an extra few hundred thousand dollars in a few years time or be guaranteed the security of the paid off house (edit: and correspondingly lower cash flow needs)?

We ended up selling the house just six months later; I think if we'd stayed in the house for another few years I would have felt better about the decision to pay it off sooner.

I certainly plan on living debt free going forward though, even if it is suboptimal compared to taking out a mortgage.

Mister Imperceptible
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Re: Stop 401k to pay off mortgage?

Post by Mister Imperceptible »

https://www.forbes.com/advisor/mortgage ... ification/

I did not pay my mortgage for 18 months.

My reward was that they recapitalized the last 18 payments, and modified my 30 year fixed at 3.99% into a 40 year fixed at 2.875%. My monthly payment is $150 lower than it was 18 months ago.

If you are a homeowner, you are being subsidized by the government and incentivized to have the least amount of equity as possible and to take the equity out at each stage of appreciation. If they stop the housing subsidy, everything will crash, so it makes sense to own something or many things that benefit from a crash.

This is my 3rd mortgage in 5 years and the house has already paid for itself (down payment, fees and interest fully recouped). Never pay off the house. It’s just a call option on housing hyperinflation.

Futureretiree
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Re: Stop 401k to pay off mortgage?

Post by Futureretiree »

Mister Imperceptible wrote:
Fri Nov 19, 2021 4:26 pm
https://www.forbes.com/advisor/mortgage ... ification/

I did not pay my mortgage for 18 months.

My reward was that they recapitalized the last 18 payments, and modified my 30 year fixed at 3.99% into a 40 year fixed at 2.875%. My monthly payment is $150 lower than it was 18 months ago.

If you are a homeowner, you are being subsidized by the government and incentivized to have the least amount of equity as possible and to take the equity out at each stage of appreciation. If they stop the housing subsidy, everything will crash, so it makes sense to own something or many things that benefit from a crash.

This is my 3rd mortgage in 5 years and the house has already paid for itself (down payment, fees and interest fully recouped). Never pay off the house. It’s just a call option on housing hyperinflation.
To each their own. I know long term mathematically paying my home off at the expense of 2 years lost contributions of 401k is not financially beneficial. But I want to own my home. If your fine paying monthly for the bank to own your home that’s your prerogative but mine is ownership. I don’t want to owe anyone money and I don’t want anyone else owning “my” property

Mister Imperceptible
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Re: Stop 401k to pay off mortgage?

Post by Mister Imperceptible »

Well as long as you understand what you are doing is mathematically suboptimal.

It’s possible invested monies not directed towards mortgage repayment will actually suffer a capital loss, and so locking in a suboptimal return may be part of a larger strategy. Europeans do this when they lend money to Austria for 100 years at 0.5% interest, or buy a German bund with a negative nominal yield. I cannot say I understand the strategy, but I understand that it is a strategy.

It is also possible that a bureaucrat imposes taxes on your property so onerous that it amounts to confiscation of said property. Or that the area you live in is overrun by mostly peaceful looters and rioters and the property value collapses, making the house payoff a sunk cost. A paid off house is also a sitting duck for lawsuits or divorce settlements. So I originally thought as you did, I even put $25k into the principal of my mortgage before further studying and reversing direction, but reconsidered that the only thing I can really say is “my” property is that which I am sitting on top of and am prepared to physically defend.

But I would say that, if you’re still working and contributing to a 401k, that cessation of investing to to pay off the mortgage works against the goal of accumulation. It is is akin to buying a 100-year Austrian bond and is more like something a 90-year-old retired chocolate maker would do. But if you retire early, you may feel like a 90-year-old chocolatier sooner than later. Personally, I want to find the chocolatier and borrow money from him.

I am just laying out the risks, I assume you came here to have you inclination to pay off the mortgage challenged. What may be right for you may not be what may be right for me.

The Old Man
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Re: Stop 401k to pay off mortgage?

Post by The Old Man »

Futureretiree wrote:
Fri Nov 19, 2021 4:48 pm
... mine is ownership. I don’t want to owe anyone money and I don’t want anyone else owning “my” property
If you have already made up your mind, then what is the purpose of your post?

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unemployable
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Re: Stop 401k to pay off mortgage?

Post by unemployable »

The Old Man wrote:
Sat Nov 20, 2021 3:54 pm
If you have already made up your mind, then what is the purpose of your post?
OP does seem to be looking more for permission than advice. In which case, go ahead. It isn't my money.

plantingtheseed
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Re: Stop 401k to pay off mortgage?

Post by plantingtheseed »

Housing is a big financial decision and a wise man would seek advice even if likely course is known. So I can understand OP's position.

The only remaining is the choice that OP can live with in any outcome.

take2
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Re: Stop 401k to pay off mortgage?

Post by take2 »

Futureretiree wrote:
Fri Nov 19, 2021 4:48 pm
To each their own. I know long term mathematically paying my home off at the expense of 2 years lost contributions of 401k is not financially beneficial. But I want to own my home. If your fine paying monthly for the bank to own your home that’s your prerogative but mine is ownership. I don’t want to owe anyone money and I don’t want anyone else owning “my” property
The strong emotional attachment to home ownership is a funny thing. If you were running a business and had two similar options in front of you (essentially investing in an appreciating asset vs. choosing to pay back cheap debt with a lower interest rate than your own cost of capital), the rational choice would be quite clear. But for some reason many are drawn to the allure of owning their own home “free and clear”. I suspect it’s the societal push that home ownership is a strong (perhaps the ultimate?) sign of success for the middle class? Saying “I’m finally done with the mortgage” is also more socially acceptable (and respected) than gloating about a figure in your 401k.

All this to say that you don’t need permission from anyone to do what you want, but it might be worth some time thinking about why you asked in the first place if you were already dead set on eliminating your mortgage. Perhaps you’re suffering some cognitive dissonance between what you know is the rational choice vs. what society has told you what to value?

Or maybe I’m way off the mark. Either way, best of luck.

Married2aSwabian
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Re: Stop 401k to pay off mortgage?

Post by Married2aSwabian »

Check your tax situation as well. For DW and I filing MFJ with a $160k mortgage at around 4.5% four years ago when tax law changed, there was no more benefit from interest expense, since standard deduction for MFJ went up to around $24k!

Stocks are very pricey right now. If you’d feel better paying off your mortgage, do it. Being mortgage free is a great feeling. ;)

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Sclass
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Re: Stop 401k to pay off mortgage?

Post by Sclass »

Futureretiree wrote:
Fri Nov 19, 2021 4:48 pm
To each their own. I know long term mathematically paying my home off at the expense of 2 years lost contributions of 401k is not financially beneficial. But I want to own my home. If your fine paying monthly for the bank to own your home that’s your prerogative but mine is ownership. I don’t want to owe anyone money and I don’t want anyone else owning “my” property
It’s good that you know what you want. Others suggested to do the math which was good. I think there may be some uncertainty in the parameters. Is the 401k return as good as you think? Perhaps you need really good market prescience to make that call. Fees are high. Choices limited. Actually the same goes for sole ownership of a home.

You’re also talking two years of contribution. Someday that may just look like noise. At the same time you do seem to be a 401k contributing rockstar. So as others have said you have to do your own math.

I like the last post about being middle class. It is a combined mathematical and psychological decision. This goes beyond “do what makes more money.”

I have some comments on that but they don’t really belong here. Being a wealthy renter has put me in a lower social caste among my friends and family. It makes me want to buy a home now that the game is over - simply to fit in. I can’t bring myself to do it because stocks have done so well so far. So much judgment is made on you based on the home you own as opposed to other assets that aren’t seen. My step mother recently told me my assets have little significance because they “are not seen.” Sad. Makes me feel insecure and poor. :lol:

For the record I never bought a home or contributed to my 401k. Neither had sufficiently promising yields. In my fifties and ER I can back test my life experiment and see that they’re middle class investments designed to help retirees stay middle class.

Scott 2
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Re: Stop 401k to pay off mortgage?

Post by Scott 2 »

Funny - on the class side of things - my parents paid their mortgage around 50. My mom framed the letter, with a floor plan of her house. It was a big deal. No question that influenced my choice to do the same.

My initial response to "middle class investments designed to help retirees stay middle class" was a little offense. @Sclass doesn't appreciate all his advantages! But, thinking more - that's exactly what I wanted out of my home and 401k. I didn't (don't?) fully comprehend how the wealthy use money to make money. I was never part of that world.

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Stahlmann
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Re: Stop 401k to pay off mortgage?

Post by Stahlmann »

Instead of "middle class investments designed to help retirees stay middle class" shouldn't it be "middle class investments designed to help elites stay elites and keep status quo"?

WFJ
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Re: Stop 401k to pay off mortgage?

Post by WFJ »

One could spend hundreds of hours estimating all the potential scenarios, build complex simulations, hire statisticians and tax experts and all estimates will be useless by the time you need the money if any tax laws regarding mortgage interest, 401k plans change. I typically do about 95% of above analysis and find that a 50/50, 33/33/33 or 25/25/25/25 splitting between strategies is usually the best long term strategy with this much uncertainty. Anything else is just some kind of mental exercise in meaningless precision, like "The high temperature at LAX on November 21st 2022 will be 78.765454 F" A calculations a climate scientist can complete with expertise and precision, but meaningless.

Full disclosure, I've never owned a home and don't really plan to. Labor wage flexibility and market gains have made SWR fractions of what it would have been had I joined the homeownership path in life. Time will tell if this strategy repeats over the next 20+ years.

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Sclass
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Re: Stop 401k to pay off mortgage?

Post by Sclass »

Scott 2 wrote:
Mon Nov 22, 2021 10:33 am
My initial response to "middle class investments designed to help retirees stay middle class" was a little offense. @Sclass doesn't appreciate all his advantages! But, thinking more - that's exactly what I wanted out of my home and 401k. I didn't (don't?) fully comprehend how the wealthy use money to make money. I was never part of that world.
Sorry. I was feeling frank.

You are part of that world Scott. Keep thinking. Thinking is good.

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