Unless it was one of those 0% loans. They are still offered occasionally.
Advantages and disadvantages of paying off a mortgage early.
- Thread starter dave holl
- Start date
Unless it was one of those 0% loans. They are still offered occasionally.
It really depends on your state of mind (and that of your wife).
Mathematically you are better off to keep the mortgage since you are earning more on the investment than the mortgage interest is costing you. PLUS (and it's a big plus) you are taking the money from a tax advantaged account that will cost you money in tax when you withdraw it.
On the other hand, if you can afford it, and if you really like the peace of mind that comes with a paid off mortgage, it might be worth the monetary loss. There is a lot to be said for peace of mind. Stress can kill you.
Mathematically you are better off to keep the mortgage since you are earning more on the investment than the mortgage interest is costing you. PLUS (and it's a big plus) you are taking the money from a tax advantaged account that will cost you money in tax when you withdraw it.
On the other hand, if you can afford it, and if you really like the peace of mind that comes with a paid off mortgage, it might be worth the monetary loss. There is a lot to be said for peace of mind. Stress can kill you.
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"Your would be spending 5%-8% money to save an a 4% debt."
How much is your tax rate on that 5-8%? Depends on your tax bracket top end rate state and Fed.
How much is your tax rate on that 5-8%? Depends on your tax bracket top end rate state and Fed.
Targets Guy
US Veteran
Don't pay off the mortgage. Take the 5-8% that your lump sum is making and buy guns with it.
If your 4% mortgage is fixed and your investments average 7%-8% annually you are OK until you get the bounce in the market. I have had those market "adjustments" that eat up savings quickly. One thing to consider might be pulling 8K out every year for 5 years until it is paid. This gives you what you want [no mortgage] and allows you to invest what you are currently paying on the mortgage.
Like Sheepdawg, we paid ours off as quick as we could. Not owing a monthly payment is a hell of a lot better than getting a measly income tax deduction. Plus, when times get hard you have one less worry. Never regretted it. I see no advantage to owing money.
I watch my 401K, I put in money, the company put in money and every quarter I had less... 
Took out all of the 401K and paid off the mortgage.
House is free and clear now. And I'm $880 a month on the plus side.
Best thing I ever did....
Took out all of the 401K and paid off the mortgage.
House is free and clear now. And I'm $880 a month on the plus side.
Best thing I ever did....
Triggernosis
Member
You're not really "saving" anything by paying interest on anything, whether it be mortgage interest that you can "write off" or otherwise.
It kinda goes like this in my opinion: "Gosh dear, let's pay loan interest of $10,000 this year so we can save $800 on our taxes!" As Dr. Spock would sat - that doesn't compute.
It kinda goes like this in my opinion: "Gosh dear, let's pay loan interest of $10,000 this year so we can save $800 on our taxes!" As Dr. Spock would sat - that doesn't compute.
HOUSTON RICK
Member
I would not pay off the mortgage early. It will be paid in time. Let if be paid off "naturally". your income on $40,000 investment will offset any benefits from accelerating a mortgage deduction and go forward every year.
Huskerguy
Member
Obviously there is a great deal of information we do not have here. At your age, assuming the money is in a tax deferred account, you will have the RMD to deal with and you would have been drawing money out since age 70 1/2. If that is the case, then you are already going to pay the taxes on that money anyway. If the money is NOT in a deferred account then that is a horse of a different color. The taxes have already been paid and only implication is reduction of your principal amount.
The 5-8% return is current and probably not guaranteed is it? What would your thinking be if we were in a down market and your returns were much closer to zero.
What funding/income source are you comfortably making the payments from now? How much total income is coming from the 5-8% return? How quickly could the 40k be paid back to your retirement account if you took some out to pay it off? That is assuming you would need to.
I was faced with this same situation a few years ago. We didn't want to quit putting money in a 403(b) for retirement so we actually did both. We found a way and paid the house off very early and saved thousands. Never a better feeling and I can vouch for that.
One thought, depending on where your income is coming from, keep making the regular house payment you are now making and make additional payments from the return on your investments which is currently 5-8%. That way you do not touch the principal and you harvest investment returns, pay taxes and then apply that to your loan along with the regular payment. Without knowing the numbers, you could get this done pretty quickly. You also have to factor in the savings of interest on the house verses your tax bracket in the total savings of the deal which I am sure you have done.
Some other factors are you and your wife's health. Can you do what you want to do comfortably now and even when the markets eventually go south should you reduce your savings to pay off the house.
Blessings Dave
The 5-8% return is current and probably not guaranteed is it? What would your thinking be if we were in a down market and your returns were much closer to zero.
What funding/income source are you comfortably making the payments from now? How much total income is coming from the 5-8% return? How quickly could the 40k be paid back to your retirement account if you took some out to pay it off? That is assuming you would need to.
I was faced with this same situation a few years ago. We didn't want to quit putting money in a 403(b) for retirement so we actually did both. We found a way and paid the house off very early and saved thousands. Never a better feeling and I can vouch for that.
One thought, depending on where your income is coming from, keep making the regular house payment you are now making and make additional payments from the return on your investments which is currently 5-8%. That way you do not touch the principal and you harvest investment returns, pay taxes and then apply that to your loan along with the regular payment. Without knowing the numbers, you could get this done pretty quickly. You also have to factor in the savings of interest on the house verses your tax bracket in the total savings of the deal which I am sure you have done.
Some other factors are you and your wife's health. Can you do what you want to do comfortably now and even when the markets eventually go south should you reduce your savings to pay off the house.
Blessings Dave
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I took a lot of finance and economic classes in undergraduate and graduate school in getting my MBA and for some reason most investments never paid off too well for me. I have invested with many big firms like Merril Lynch, Shearson Lehman, American fidelity, etc and over time I never made a very good average interest rate. Experts say leave it in the stock market or mutual funds and it should average 10% over time but that wasn't the case for me, it might just be my bad luck but I say, if you're able to pay your mortgage off and be debt free, do it and pay the taxes and get it over with. You can always borrow against the house if you absolutely must.
amazingflapjack
US Veteran
I suggest that you "owe no man anything, but to love one another."
I look at it this way.
As long as the money is earning you more in interest than the mortgage is costing you in interest, leave the money in your investments and make the monthly mortgage payments. Especially if pulling money out of your investments to pay off the mortgage will cost you some MORE in taxes.
If at some point the interest on the mortgage becomes more than what you're earning on the investments minus the taxes you'll pay for taking the money out of the investments, then THAT is when it is time to pay off the mortgage.
Until that happens, using the investments to pay off the mortgage is just throwing away interest earnings AND spending more money than you have to in taxes on withdrawing the investment. That's a double hit.
As long as the money is earning you more in interest than the mortgage is costing you in interest, leave the money in your investments and make the monthly mortgage payments. Especially if pulling money out of your investments to pay off the mortgage will cost you some MORE in taxes.
If at some point the interest on the mortgage becomes more than what you're earning on the investments minus the taxes you'll pay for taking the money out of the investments, then THAT is when it is time to pay off the mortgage.
Until that happens, using the investments to pay off the mortgage is just throwing away interest earnings AND spending more money than you have to in taxes on withdrawing the investment. That's a double hit.
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In the vast majority of cases you would be right. The exception would be when that deduction puts you into a lower tax bracket. This mostly applies to those with far more money than I however.
Your advice for the OP to take money they are earning more interest on to pay off a debt they are pay less interest on - and have to pay more taxes when they withdraw said money - pretty much explains why you never did well investing your money.
Always pay debt off HIGHEST INTEREST LOANS FIRST.
Never use higher interest $$ to pay off lower interest $$
Even if one is higher balance.
Work on highest first then work down the line.
Never used secured debt (ie equity loan) to pay of unsecured debt (ie cards).
1 card with <10k bal
8 trk pymnts left
Then I will knock out the <40 on my home and be DEBT FREE in by plan about 3yrs or less.
Sent from my iPhone using Tapatalk
Never use higher interest $$ to pay off lower interest $$
Even if one is higher balance.
Work on highest first then work down the line.
Never used secured debt (ie equity loan) to pay of unsecured debt (ie cards).
1 card with <10k bal
8 trk pymnts left
Then I will knock out the <40 on my home and be DEBT FREE in by plan about 3yrs or less.
Sent from my iPhone using Tapatalk
My father was a VP in a savings and loan and head of the mortgage department. When I came of age to buy a house, he told me to borrow as much as possible for as long as possible.
The dollars that you get from the bank today are paid back with cheaper dollars as time moves forward due to inflation.
Technically, you have a $40,000 debt and a $40,000 investment so for all intents and purposes they are a wash. So you really should not be stressed as the debt could be retired at any time.
Sure you could pay off the mortgage with the investment and if money became an issue borrow against the now debt free house but why bother. You already have $40,000 sitting somewhere that you could use in an emergency and you don't have to apply for a loan to get it.
In simpler terms, you have an investment earning 5% - 8% or if we use an average rate, 6.5%. $40,000 at 6.5% yields $2,600 per year. The mortgage debt is costing you 4% or $1,600 per year.
So, using your investment to retire the mortgage debt will cost you $1,000 a year.
If you take that $1,000 and buy Smith and Wesson's, they will go up in value and you will earn even more plus you will have the enjoyment that they bring.
To me it's a no brainer.
The dollars that you get from the bank today are paid back with cheaper dollars as time moves forward due to inflation.
Technically, you have a $40,000 debt and a $40,000 investment so for all intents and purposes they are a wash. So you really should not be stressed as the debt could be retired at any time.
Sure you could pay off the mortgage with the investment and if money became an issue borrow against the now debt free house but why bother. You already have $40,000 sitting somewhere that you could use in an emergency and you don't have to apply for a loan to get it.
In simpler terms, you have an investment earning 5% - 8% or if we use an average rate, 6.5%. $40,000 at 6.5% yields $2,600 per year. The mortgage debt is costing you 4% or $1,600 per year.
So, using your investment to retire the mortgage debt will cost you $1,000 a year.
If you take that $1,000 and buy Smith and Wesson's, they will go up in value and you will earn even more plus you will have the enjoyment that they bring.
To me it's a no brainer.
I agree with most posters here, but we paid our home off then we dropped the flood and wind insurance because we can, we only have fire and liability. BY doing that we have extra money to enjoy. I know what happens if there is a disaster. The insurance comp has a large deductible i hate insurance there such a rip off. Read you policy some of the fine print is scary. I feel paying off your home is part of the American dream and as we all know investment can come apart at any time. Do what is best for you and your family. good luck
