Topic: Is it a bad decision to payoff mortgage early (Read 3509 times)

False!! he has to consider the other investment opportunity cost as well

You just have to compare the tax and risk adjusted returns from the investments that you make, vs the cost of continuing the mortgage.

Yes but you have risks : market prices going down (like any market); bad regulation; rents not paid; renovations ect.

Paying off your mortgage is an investment : if you have a high rate interest on your loan and you don't think there will be massive inflation it is a good investment but if you can find a better investment (Gold; Bitcoin; energy ressources companies not based in the US..) and you think there will be a higher rate of real inflation than the interest rate on your loan you should use your available cash for those other investments

Maybe you can pay off part of your mortgage and invest the rest of it in precious metal, Bitcoin or abroad

There are a lot of investment property with rental yield higher than 4.4%.

Check out the distress home on hudstore.com.

Paying off that mortgage is a 4.4% risk free rate of return investment.

Can you get 4.4% risk free anywhere else? What level of risk does investing in the stock market for potentially higher returns pose? Keep in mind tax costs when investing in stocks as well.

In any case, now that your mortgage is paid off, you can, if you choose, take out a HELOC at a comparable rate for a significant fraction of your home's value and invest it in the stock market, if you think that is a good choice.

Well, you don't need to materialize all capital gains. Maybe you have enough with the dividends. So you don't pay that much in taxes. It also depends on your tax bracket, of course.

By this measure investing in the stock market would have been the better bet, before taking taxes into consideration. Taxes would eat up a lot of these gains, and you would pay taxes on your pre-inflation gains (not inflation adjusted).

Stock are over valued these days. Municipal bond still have attractive yield.

4.4% is low, but I'd probably had also paid it, so I could forget about it, I don't like owing money to anyone. If you were comfortable with it, you could had invested in the stock market, which produces 5.2% real return (at least for the last 113 years!).

A relative of mine is a CPA and a very good one.. He is against being in debt. I just got my house interest down to just above 3 percent and I have diversified my money, silver, gold, bitcoin, cash. I want to invest my cash into something that makes something, but I dont spend more on bitcoin, (i will a little but not too much) and I asked if it was better to put my money into a 401k or moneymarket that averages 7-10 percent a year.. He advised me to pay off my house. But I only pay 3 percent, why not use that money to make  7 to 10? I dont get his thinking. now if I was paying 6 or more percent, i can see his thinking, but I dont get where hes coming from.

Doesn't it make sense to keep paying a low interest loan and invest in something that makes money? He's insistent that hes right, but he hasn't had the time to explain it to me.. next time i visit with him, I want to know, lol.. I think he just so against being in debt that it doesnt matter what interest your paying.. Gotta listen to him though, he is very comfortable with a meager salary by not getting into debt, paying cash for everything and investing properly..

I wish I would have listened to him when I was younger, I would be in a much better position than im in now..

IMHO, I think if you have a low interest mortgage, like mine, its a good idea, unless you can easily pay it off, but ive heard from a lot of people that renting is better off financially, until you can pay cash for a house..

If you can earn more by investing the money you borrow then you will end up with more money at the end of the day. The issue is that it is very difficult to get any kind of guaranteed return with any investment.

I agree that not owing someone (a mortgage company) money on your home does provide piece of mind which in itself should be worth something.

All fiat money is debt. Annual inflation is effectively the annual interest rate the government charges you for holding it. Holding cash as an asset is, in reality, a liability. Just because there's no bill or receipt showing how much value your USD loses each month, that doesn't mean it's not happening.

If your mortgage is @ 3.5% annual and CPI increases 4%/yr, you are effectively making .5%/yr on your debt even though nominally, it looks like you're losing wealth (when in reality, you're gaining wealth and losing money). 4% annual inflation, though, is historically low, so it's clearly a fantastic time to buy since inflation rates always cycle and you can get a fixed-rate mortgage at 3.x% with good credit. What to buy is a bigger question... Idunno about houses.

I'm sorry but that defies logic.

Doesn't matter how low your interest rate is, You're paying money in to a black hole if you owe interest on anything.  Paying it off as quick as he did he essentially recovered the entire cost of the house as he avoided just as much in interest(or more) than the principal on the house he bought.  That's a win and a better reason to pay off early than any reasoning that could be given on stretching it out over the whole loan term.

As was stated earlier.  Owing no one is better than owing someone.

It depends on what you'd be using the extra money (that would be used to payoff the mortgage early) for otherwise?

IF it's just sitting in a savings account, earning very little interest, it might be smart to payoff the mortgage early, resulting in a 4.4% return on that money (in the form of having avoided the interest).

If you're able to make more than 4.4% on that extra money it would not be as wise to payoff the mortgage early.

The question can't be answered as simply as I just described it but this is how you should start to think about it. Remember that owing no one is always better than owing someone.

Debt is slavery, although in some income tax brackets a little slavery is preferable to rape.

Why would it be bad to pay it off so fast? You know hoe much rent you saved right?
I don't know how it is in your country, anyway...

In case of massive inflation and you have a fixed interest rate it is a good thing to have loans and real assets

You made the best decision paying it off.  When everything goes to shit you don't want to be owing the Banks or the Government anything.  They will roll over you and take everything you have.

Be sure to have all ownership documents in order, to prove without a doubt everything is paid off and legally in your name.

Can use the liquidity you have to buy bitcoin or lend it out.

rhodium has lovely volatility ...

http://www.kitco.com/scripts/hist_ch...rly_graphs.cgi


it was up to 10,000 dollars an ounce in july 2008 then down to fuck all 1000 dollars january 2009, then back up to 3000 dollars in march 2010 then down to 900 dollars last xmas, now back on a roll rising up fast 50%

Numbers-only speaking, it was probably a good idea, anyway. Because, 1: Your debt-to-credit ratio is the main factor in determining your credit score. So paying it off is good for your score. 2: If the interest you're paying on a loan is higher than the interest you are earning for having that money in the bank, then you save money by paying off the loan.

fuck mortgage worries, ye should whack ten grand or a hundred grand whatever ye have going spare on rhodium

since scoffing on yer last xmas turkey, in 8 months rhodium has increased by about 50% from 900 dollars to about under 1350 dollars an ounce, nearly 250 of those dollars in the last 30 days on a rocket rise up expected to go to 2000 dollars in a month or two at this rate

http://www.kitco.com/charts/popup/rh0365lnb.html

Assuming you are married filing jointly at a 25% federal marginal rate, and you have a $150,000 mortgage at 4.4% interest over 15 years, then your average annual federal tax savings is about $950. For comparison, you are paying about $3,700 in interest per year. So your net is negative $2,750. Over the term of the mortgage, it's negative $41,000.

By contrast, the 2014 standard deduction for married filing jointly is $12,400.

So, unless you are itemizing deductions in excess of about $15,000 annually, then you are better off with the mortgage paid off from a tax perspective.

Sure, there are logical arguments for both sides. But, no one can dismiss the peace of mind you may feel by having paid it off. Sometimes that is more important than the numbers. Use that argument when talking to people. It's your money and your emotional state. They shouldn't argue with that.

yup,let's go with the the hypothetical 25% married jointly bracket ...

Do you itemize? Are you in a high enough bracket that the savings on your marginal rate offset the differential interest?

perhaps i should do a cash out refinance to get cash to buy the next house instead. that way i get to keep all the tax benefits of a primary residence loan?

They're relatively close. I've only been to one, a three story house that he rents the first two floors and lives on the third. But they're all probably within a few miles of each other.

Probably within driving distance based on his description.

Are those 10 houses together in one place or one area or scattered?

People who want to replicate his success can check out hudstore. Rental yield is well over 20-30% and possibly even more if you fix up the house yourself.

surely, u should keep the money and invest to earn more

Interest rates are low. Don't repay it yet.

He did okay. I shouldn't have said it's his sole income, but it's definitely his primary income. I think he probably pulls three shifts part time at a gas station.

He started by buying one house and fixing it up. While renovating it he realized he could divide it into something for him, and a rental space. Eventually he found the second house he could do the same to, so moved out of his and rented it, moved into the beat-up house, and lived there while he renovated.

Now I think he has 10 that he rents out and an 11th that he lives in. 10 rental places keeps him pretty busy but hiring someone to manage it would kill his profit.

how did they do during the recession?

they cant hire someone or their relatives to do the property management? doesnt seem like a full time job all the time .seems to be a solid source of income especially when this country is getting more and more crowded .

My brother does this. He specifically looks for houses on the city's vacant property list, finds the owner and makes them an offer. The city fines owners of vacant property, increasing every year it is vacant. By the time the house is vacant 5 years, it's $5,000 per year. And the city tacks on criminal penalties if it is not paid. So, the owners are usually thrilled to get an unsolicited offer. Many times he picks up the property for the back taxes and fees plus a paltry tip to the owner of $5,000-10,000. The best part is the city gives a 10 year full tax abatement for derelict properties and a 20 year abatement on improvements to vacant property -- 100% for owners who live in the property, 90% for owners who rent the property.

or rent it out and buy another house. I have a few friends who started doing that, and have since quit their jobs and do that as their sole source of income.

seriously, i'm planning to buy a more expensive house, probably somewhere in texas.
one problem seems to be that property sold prices are not public record down there, making me feel like walking into a minefield

buy a more expensive house now. lol
but in general, if you're not investing your money and earning more than your mortgage rate, and factoring tax deduction savings.....then pay it off.

just checked interest rate. 15y 0-point fixed mortgage rate is still at 3.4%, i thought it's risen to pretty close to where my rate was. now i feel better.

Sometimes is better grab business oportunities than quit debits. Most sucessful enterpreneurers made big loans counting only with the sucess of their projects and made good profits.

But if you have no investment plan, then better pay the mortgage

Reply to OP: Always better to pay off any kind of Mortgage / Loans early if you have spare funds available. The last thing you should do is invest such funds into speculative opportunities (at least this is what i figured based on your question!)

I hate to have any kind of loan on my head and ensure that i pay off my loans well before they actually end! I do set aside some funds from my salary every month to invest in speculation though!

It is always better to have/make more money. Even if this means that you pay more in taxes, the net effect is that your bank account is larger, or you can spend more money on things you like.

is not a bad decision at all because i did that some days ago.

If you have better place to park money or invest money then i cant see how paying off a mortgage early is a good idea.  Right now personally i havent even got a mortgage due to having better options with deposit money.  Not sure on my thinking atm.

just calculate how much interest you would save... you also could try to refinance it...

That isn't a bad thing you saved a fortune in interest costs and proved yourself a good lender.
It's more if you pay it off a month or two later that they get concerned and start issuing fees for settling early, basically it depends what type of mortgage arrangement you make originally.

Points being made here to delay paying off is you can use the money for business venture, which generally pay around 30% ROI per year. Not investing in low yield asset like bond.

Yah but you can't deduct the 4.4% you pay from your gains.... So if you only get 4.4% on your investment you will lose about ~25% (of the 4.4%) depending on where you live.

I used to apply/open credit cards with 0% interest rates, put everything I would normally buy on the credit card, then only pay the min payment and put the difference in a savings account and earn interest on what I would have paid to the credit card to pay it off, then once the 0% offer expires pay off the credit card. After a while of doing this I ran the numbers and it turns out that I didn't make very much doing this. It was a little bit like using a faucet (it wasn't this bad). Now especially what you can earn by doing this is even worse.

Well, you can have more than one bank/CU account open -- but yeah, the more you have, the more time you'll have to spend meeting their hoop-jumping requirements, but this shouldn't be more than an hour per month per account (and this could be scripted if more than a couple accounts are needed to be open). While interest rates are at historical lows, checking/savings rates have virtually nowhere to go but up, which is why the fixed rate available in HELoCs are so attractive. I'm not interested in them, ATM -- I don't want so much at stake and would be surprised if I could get a HELoC at a good rate, but I'm always on the search for 0% credit card promos.

Investment grade bonds will carry risk. If you are earning 4.4% on an investment grade bond, then your expected return (after accounting for defaults) is going to be closer to 2 or 3%, however your actual return may be less. When you payoff your mortgage the return is 100% guaranteed.

You only pay tax on gain. As for risk, you can always buy investment grade bond which offer higher than 4.4% yield.

because people think that investing the money instead of paying it back will yield a higer return than the 4.4%.

But those guys don't think about taxes and risk.

I was always under the thought the faster you pay it the more weight is off your shoulders so I don't quite understand why others are disagreeing.

When lending rate is low and inflation is high, it is usually better off to delay payment as late as one can.

The way to think about it is what else you could have invested the money in? (beetcoin alludes to this)  As long as you paid off all your other debts first, paying off your mortgage could have been a great call.  With interest rates so low, there probably was not a lot of other investments you could make that would have guaranteed you more than your 4.4% rate (less tax deduction).  That is still a pretty amazing rate though....

Exactly, so you would need to take on extra risk and then if you perform negatively, you might have trouble paying back. Thus overleveraging yourself.

It is very difficult to get a guaranteed return that is this high. There are not many investments that even have an expected return of this much.

Basically you would be better of keeping it if you can yield an average of >4.4% ROI AFTER taxes. But keep in mind, that you should never invest money that you don't yet own. So basically you would lever yourself.

THough decision, I would have paid it off too.

Most mortgage balances are much higher then this so if you wanted to keep the entire amount in "checking" then you would have a much lower effective interest rate on the money you could use to payoff your mortgage with. It is also important to understand that these interest rates on checking deposits are not guaranteed to last forever, while you are guaranteed to be due for a set amount of interest (based on the outstanding unpaid principle) until you pay off your loan.

Another point is that if you were to pay off your mortgage then you can get a guaranteed return on this money over 30 years (you no longer need to pay interest on the money you use to pay off your debt). On the other hand, if you were to invest in anything but treasury bonds, you would be taking on some level of risk and your return would not be guaranteed. When comparing paying off your mortgage verses investing in treasury bonds, paying off your mortgage would be a better investment.

Finally if you were to pay off your mortgage, you could then use the money you would use as a mortgage payment to invest in something over time, using dollar cost averaging, preventing you from investing all of your money at the market top.

If the interest is fixed, keep the mortgage as it is, and invest your extra money elsewhere.

thats why people still have choice to get choice take it or leave it .

It was a smart move. Very smart.

Calculate the interest you would have paid over the 15 years. Why pay for the house twice?

Paying loans off early puts money in your pocket big time. Don't let the bank or finance company tell you otherwise.

There are some benefits to keeping it, not the least of which is the comfort of having plenty of cash on hand (though this really isn't an issue for long since you're knocking off such a big monthly expense). Due to how stupid the system is, paying it'll probably also negatively affect your credit score a bit. So long as you have good job security, though, you can always use it for a HELoC (rates are similar to traditional mortgage and you can lock in at a fixed rate) if you should want to, and while you don't, you're saving all that cash you'd otherwise be sending to The Void in interest and fees while also being able to really build your savings/retirement by knocking what I'm guessing was a ~$1k/mo bill.

Way more important than savings rate vs. mortgage interest is mortgage interest vs. inflation (at least in the US, where the savings rate is practically 0%). It's probably one of the best times in history to get a fixed-rate mortgage (and pretty much any cheap debt you can get your hands on) in the US, but that doesn't mean it's a good time to get or keep/refinance a mortgage for you. Inflation/Fed rates have been astoundingly low, which has to eventually change, likely quite significantly where your debt is devaluing significantly faster than the interest rates you can lock into today with you having access to savings rates >0%. Of course, right now, you could use all these different "accelerated checking" schemes (credit unions in particular are good for this, but they're always named something different) which actually pay decent interest (~5% annually) if you jump through a bunch of hoops (generally, something like ACH deposit 1-3 times [Paypal] and use your debit card 5-12 times [Amazon Prime membership will do you well, here, though Meritline can be a great choice, too]), and they usually have maximum deposit limits of $5k-25k.

With or without the mortgage, there are all sorts of different ways to play it -- you have tons of options open -- go have a nice dinner and burn your mortgage papers up if you haven't already. Important to note, too -- there's nothing wrong with being safe... if you're happy with where you are, all you're really doing each day you work is decreasing the amount of time until you can retire.

If you have a good income stream paying it off was a good choice.  You just need to hustle and build up enough for downpayment on #2 when the housing market tanks again... and it will.

Unless you had massive income there's no benefit to having to pay the bank 4.4% and then have them return 2/3 of 0.25% back to you.

This is very true. As mentioned above, you should keep in mind he value of having piece of mind that your house is paid for. You should also remember that the 4.4% you "earn" by paying off your mortgage is guaranteed, while any other investment is not.

It was probably better that you paid off your mortgage. You no longer have this debt hanging over your head that would force you to do work that you may not like tomorrow but have to do to keep your house. If something were to happen that would cause your income to drop (get sick, get laid off ect) the you would not need to worry about having a mortgage to pay.

Impersonally think this piece of mind is worth a lot.

Have a mortgage is already bad, in my opinion.They can't take your house if you don't have one, you don't lose the opportunity costs of investing our money, and you have no debts, so you will be a better shape for a crysis, and still have credit if some business opportunity appears.


I would pay the mortgage debt, however, only if I still had some reserve after quitting the debt, because protection against crisis and stuff is worth some interest.

Don't listen to those morons, they want you in debt so that when everything collapses they can take away your house, don't forget, even if you only technically owe a small amount on the mortgage, you've still put your house up as collateral and Thomas Jefferson warned central banks would come and start taking everyones homes and land through their systems. Hell, I even heard on the news once about how a bank ( I think it was RBS ( Royal Bank of Scotland ) ) went and deliberately fucked over businesses with bad advice etc. so that they could then buy them up for cheap.

Finish the mortgage, build up some savings and of course invest in some precious metals too to prepare for the inevitable hyperinflation, my parents seem to think this way and think that not paying off their mortgage would be a cheap option but I'm going to see if I can't convince them somehow that it isn't lol, they're old though and don't know any better.

I would say it is not a bad decision. Paying off your mortgage, essentially gives you a 30 year guaranteed rate of return of your interest rate. It will also give you piece of mind that you will likely not lose your house to foreclosure if you were to lose your job or have another major financial setback (you could still lose it to tax foreclosure if you don't pay property taxes).

probably depends on multiple factors, like your income and your investment opportunities. if you can make more than 4.4% back with little risk, then why not just pay the loan over the years.

how much of that 150k is part of the home? as in how much is your home worth?

I think it should depend on how much you could make in a low-risk investment. If you could make more than 4.4% without too much risk, then it might be better to keep the mortgage. Personally, I think you made a pretty good decision. Being debt free is never a bad thing.

Depend on your interest rate and rental yield.

If the rental yield is higher, then it is not a good idea to pay it off as you can use the same money to buy another property with similar yield.

You made the right decision for several reasons. First, based on the price of the home and your mortgage interest rate, there is almost no way it made sense for you to itemize, unless you had some massive additional deductions. So, you were getting zero benefit from the mortgage interest tax deduction. Even if you did get a benefit, unless your income is very high putting you in one of the higher marginal rate brackets, the benefit was likely de minimis.

Second, your rate, although low by historical standards, is actually very high when compared to the return on savings and low risk investment at the moment. By paying off early, you got a guaranteed 4.4% return with essentially zero risk, something you would never find in the current market.

Third, this will positively affect your ability to borrow in the future. A fully paid off long term debt is something lenders like to see even more than outstanding debts that are current. Moreover, you have cash now and as they say cash is king. This will allow you to make a larger downpayment, reducing the debt to equity ratio on your next house purchase and thereby reducing the risk to the lender. The lender will offer a lower rate for a better loan to value ratio. You will also be in a position to consider paying points to reduce your rate.

Q1 - can you make more than the discount if you invest the money, instead of pay the mortgage?
Q2 - is there a reasonable chance for you to lose your main income?

Q1 y and Q2 no = pay mortgage early is a stupid idea

Q1 n = pay your mortgage

Q1 y and Q2 y = not enough data for a definitive answer

You probably are much better off having paid it, particularly if you intend to go into business as an owner. In general, asking for financial advice on here is silly, and asking for advice as you did, which is to say you didn't give any idea of what your longer term plans are, is pointless.

i should have just kept the mortgage. i know im gonna kick myself a few years from now when interest rate goes back up.


I originally planned to keep the mortgage while saving up cash for down payment of the next property. but it hurts to see 4.4% mortgage interest going out the window every month while a bunch of cash is sitting doing nothing in the 0.5% saving account. so i chickened out and decided to pay off this mortgage first. now i have $150k sitting there doing nothing.

Don't listen to them. Paying off any debt with an interest rate above the savings rate is almost always a sound financial decision (high income individuals excepted).

If you could have split two loans on a build project, work out what a $75,000 mortgage over 5 year would have been, and do another $75,000 mortgage over the next 5 years after, - its the cheapest way to borrow $150,000 by far, and then no real compulsion to pay off early.

It's good to pay off a mortgage if you intend to borrow money for a commercial venture or something along those lines. Bankers tend to be a little extra impressed by a paid off mortgage. It tells them you may have an interest in being responsible with any other loan.

This applies to traditional bankers only.

I say pay it slow. If you have a way to make more than the 4.4% your paying, then you are better of not paying. I assume your rate is locked in? If it is a balloon mortgage then I would think differently.

A few years isn't too bad but if you can buy a house in cash instantly, think twice what kind of investments you could make with $100 grand.

I was so eager that I paid off a 4.4% $150k 15y mortgage in a few years. now some people are analyzing and suggesting that i should have run it out.


thoughts?