I crunched some numbers this afternoon and found that if DH and I put every spare penny we have on our mortgage for the next 3 years, we can pay our $57K mortgage completely off 24 years ahead of schedule.
DH is 49, self employed, with no retirement plan.
I’m 41, employed, with no retirement plan.
Two kids 10 and 11 still at home.
$20K in cd’s locked up with 5+% interest
Should we pay off the mortgage or put this money into a retirement fund which will earn very little interest?
Lowering debt is never a bad idea. I’m sure experts will be along with more detailed advice. Perhaps start IRAs with 2k per year each, and pay down with any that’s left after that.
Allow me to quote my account, Bill.
“I am debt averse. Anything to reduce your debt is good.”
Yes, there’s some opportunity cost to paying off your mortgage early. But there’s also certainty in it.
And the ways things look short term you’re better off having a fully paid for piece of land than mutual funds at the moment.
Pay the damn thing off and thumb your nose at the note-holder. It’ll feel good.
I proposed doing the “pay bi-weekly” thing when I bought my condo. After a discussion with my banker, I changed my mind. In MY situation, I am only planning on being here a maximum of 4 years (preferrably 3). She told me that in that short amount of time, the additional few payments will not mean much.
HOWEVER, if you are planning on living there for an extended amount of time, it would be a very smart thing to do.
My parents, upon buying their home around 20 years ago now, paid an additional $100.00/mo on a $600.00/mo mortgage (conventional 30 year). I do believe they also popped in any tax refunds or “bonus” monies. Their house was paid in full a few years ago, and now at ages 65 and 68, they own it free and clear–without any worries of where they will be when medical expenses eat up their income.
Two points that my financial advisor made when I suggested doing the same thing: I could almost certainly get a better rate of return by investing the money wisely and real estate is not a very liquid investment. If I run into hard times like the loss of a job or a long-term disability, I can get to money in an investment fund much more easily than I can tap my equity.
InternetLegend is absolutely right. Godforbid something should happen to either of you, the only asset you would have would be your home - and selling it would not be a good option.
I assume I am right when I say you no longer are paying interest, thus no more tax benefits.
One option is to sell your home, buy a new one with the profit and get back into using interest to lower your tax. Most people sell their homes after 11 years (when the tax benefits on a 30 year mortgage end) and use the equity to buy up.
However, if you do pay off your home, there is something called a “reverse mortgage”. It is usually used by people far older than you are, but in essence, it means the bank buys your house back in monthly installments. I think you might both be too young for that option.
It might be nice to have the house paid for, clean and clear, but again, that leaves you with a roof over your head and no cash. What would happen if one of your kids actually wants to, and gets accepted, to Harvard? What happens if one of you dies and the other is unable to work? What happens if both of you are suddenly unemployed?
Your cash is in the house.
The house.
Pretty dangerous gambling chip.
Could you explain the bit in parentheses please?
A little more information that may help.
This is our permanent home. We are the designated ones who will be taking care of both sets of our parents, who live minutes away.
We are still paying interest, but the standard deduction works out better for us.
If our home is paid off, and something happens to DH’s self employment income, I would be able to pay our bills with my wages.
We have enough cash on hand for a six month emergency fund.
I pray that if we chose to pay the house down in three years, that we would continue to make those large payments to a retirement fund until DH retires.
In the current economic environment, the rate of return on residential real estate is higher than any other investment I can think of. True, it can’t continue to be this “hot” forever, but compared to 2% in a money market, or minus-10% in the stock market, real estate looks pretty good.
Second, tapping into the equity in a paid-up house shouldn’t involve more than a trip to the bank. Even for the most conservative lender, approving a $20k loan on a $200k house with no existing mortgage would be a no-brainer.
We are working to pay ours off and should have it paid off when my youngest enters 1st grade.
We have some other investments as well - fairly well funded 401ks, some stocks and bonds.
Here is my figuring:
We currently have very good incomes. Paying down the mortgage has already allowed me to refinance, so if one of us loses our jobs, we have $500 less we need to pay. Paying it off will allow us to live off a single income quite comfortably.
We have two kids currently in daycare - and a little money set aside for them for college. Once the house is paid off and daycare expenses drop, we can start putting that money toward their college funds (and have enough left over to additionally fund our retirement and travel a little).
We also don’t get the full value out of our mortgage deductions - so the tax benefits aren’t huge for us.
Most importantly, I am debt adverse and have a touch of OCD regarding money issues. Financial security is very important to me and not holding a mortgage is part of that - it will give me a lot of peace of mind - worth far more than the small amount of interest I might be able to get in a different investment. Your mortgage is as close as it gets to a sure thing.
We have a home equity line of credit - so the real estate interest we’ve already paid of is really liquid if I need to get to it.
We have 3 teenage children. We paid off our mortage 2 years ago. We have a solid home equity line of credit open to us if we need it. I sleep pretty well at night as a result. I HATE debt. I say go for it!
Marcie recently re-financed her townhouse to take advantage of the lower interest rates. Although her monthly payment is within a few dollars of what it was before re-financing, the term is now fifteen years instead of thirty. By making one extra payment per year, she will own the thing outright in twelve years, which is exactly when she plans to retire. I think she made exactly the right decision and I encourage the OP to retire the mortage ASAP.
Agree.
Paying off a mortgage early is usually foolish. Why use money that could earn high interest to pay off a low interest debt? It doesn’t make sense. In most cases you would be much better off taking that extra money and investing it in conservative mutual funds and/or a Roth IRA.
A mortgage, esp. with the tax benefits, is about the cheapest source of capital you are going to get. If you are paying 4% (after taxes) on the loan, and making 10% on your investments you are netting 6%, plus your home is appreciating, probably faster than 4% a year, so in the end keeping the debt in the mortgage is a good idea. Of course it all depends on your tolerance to risk.
Where, oh where, are all these investments that are returning 10% per year?! Even the market optimists are currently saying that we shouldn’t expect the stock market to return better than about 6% in the next few years, if that. Safe investments, like CDs, money markets, and Treasury bills, are returning considerably less than that. In light of these numbers, retiring a mortgage that has an interest rate of anything over 5% makes perfect sense.
You might be able to make 10% if you’re very lucky. You could also take all that loose cash to Vegas - you might get a 1000% return, but that doesn’t make it a smart financial move!
Also, the 10% is quoted as being 6% more than you make on your mortgage. That is only the case if the 10% is an after tax figure, making it even more difficult to achieve.
And that whole ‘think of the tax advantages to paying interest’ thing is crap. Y’all should know better than that.
Even if you get 33% (roughly) of the interest you pay on your house back because of the mortgage interest deduction you’re still out the 66%.
And I’d kill for a 10% return on investments right now.
About that mortgage interest deduction: After refinancing the standard deduction came out better this year than itemizing. Egad, for the first time in years. I imagine some people are in the same boat wrt refinancing with a mortgage in the OP’s range.
The assessed value of my townhouse in Northern Virginia has gone up, over the past three years, by 14%, 26%, and 10%. Looks like a good place to park my cash! Even when the housing market cools off (and it has to, eventually), experience in this area indicates that it will plateau for a while, rather than collapsing.
Yeah, I’m in NoVa, too (Loudoun). I got my assessment and it went up about 15% this year. Ugh.