Why the eagerness to pay off long-term debt?

In thread after thread, people on here say that if they won the lottery or otherwise came into a lot of money, they’d pay off their mortgages as one of the first things they’d do.

Why? Considering the normal rather low interest rate of most mortgages, and the historically higher rate of return, this isn’t necessarily a particularly good decision in that situation.

Essentially you can invest that 200k, pay your mortgage off over 30 years and end up with more money at the end of the 30 years, than if you’d paid the house off immediately.

Extremely simplified, if you’re investing at a return of 8%, and paying 6% on the same amount of money, you can pocket 2%.

Obviously if your taxes are exorbitant or your rate of return isn’t very high, you could easily lose money by not paying it off immediately, but I don’t think this is the case very often.

Bird in the hand is worth two in the bush.

If you can guarantee a higher rate of return on your investment than you pay on the mortgage then you are correct.

Do you know a lot of investments that reliably return 8% or better and carry little risk?

If the economic collapse of a few years ago happens you could find yourself with nothing but a mortgage.

There is some value to know you are debt free so even if the worst happens you are not totally sunk.

As with anything though your money management choices are yours. Not all people want to optimize for max return on their money (which generally means higher risk of losing it).

I’m with bump. But I only put 10% down on my mortgage, so I have to pay PMI until I hit 20%. So I would pay off enough to get me to 20%, then just make the standard payments. Also, I have 4 more years on my car at 1.9%, so I wouldn’t be in a real hurry there, either (although I would probably just trade it in for a better one). Then again, once I win the lottery, maybe all of this would be under my radar, like picking up a penny off the ground (which I don’t do).

This is just what I came in to say.

In my case, I’d only need about $2 million today at 8% to leave $3 at a reasonable age for dying, living my current lifestyle. If I died early, then I’d leave something; if I lived longer, I guess I’d have social security crumbs to subsist on.

Of course, that’s living my current lifestyle, which is certainly not jet setting, but then I don’t care to jet set. I’m perfectly happy where I am.

With only $2 million, I’d probably not pay off the house, because I’d be counting on an 8% return versus the 6% interest, but with, say, $2.2 million, why not pay off the house and not worry about scheduling payments? This isn’t Eve Online; I’m not acquiring wealth in some type of competition to see who’s the best player.

As is, I’ll probably have the house paid off way early on regular wages, just to get it out of the way. I still save enough to reach my early retirement goal, and live to my projected age at my current lifestyle.

And I’m also leveraging against all of the following: 401(k) crashing; losing my pension (yeah, we get both); social security means testing. The only cost is not jet setting or living large or having a new car every six months.

I don’t like making monthly payments. I have a house on two acres (including an '08 and '09), plenty of cars, and no debt month to month except utilities and satellite TV. I only had to scrimp a little bit for about seven years to get to this point about five years ago, and I love it.

Because the additional risk isn’t worth the very small gain in reward.

That is correct. There are a whole bunch of psychological factors that go into economic decisions that aren’t just math related. Having money costs time and effort to maintain and having a large surplus amount of cash around means that some of it will simply go poof over time by your hand or those of friends and family. I don’t mean maliciously either. Someone you know always has a cash flow problem and they will look to you to help fix it if they know you have some to spare. They are much less likely to try to get you to sell your house to fix their problem. People also tend to buy things they don’t have to when they have money at hand. Sometimes it is better to just sink it all in a moderate investment that puts a roof over your head and has an easily determined rate of return that is decent. That is not to mention things like college financial aid for your children which take raw cash in hand as a consideration when grants and scholarships are given out. Money can make money but it also costs money to have money.

It takes time and knowledge to maintain investments that can return 8% reliably as well. The options other than the stock market are very limited right now and have been for a few years. Putting that money in a money market account with little risk earns you about 1/8th - 1/4 of that goal at best right now so you have to crank up the risk pretty high to get your 8% or more.

With a 30-year investment horizon (as the OP mentions), a simple S&P 500 ETF with dividend reinvestments should return at least 8% annualized. Historically, I don’t think there’s been a 30-year period ever that has returned less than that, although somebody can check me on it. I, personally, would spread my risk a little, but would be in no hurry to pay off the mortgage.

You have to have faith in the U.S. as a whole, the stock markets in particular, and the rest of the world to make be confident that it will be the same way 30 years from now. It probably will but maybe not. As it says in the fine print, past performance is no guarantee of future results. Some people would rather latch on to a more secure and tangible bet like paying off their mortgage rather than worrying about optimal investment strategies the whole time. You aren’t going to be the next Warren Buffet by not taking any risk but many people don’t want that. Paying off a mortgage and especially things like credit card debt gives a real return right away that is good enough for some people.

My family has rather recently come to have lots of free cash that they want preserved over generations. Setting that type of thing up takes a lot of time and research plus the fees of many professionals. Someone with no kids wouldn’t care about that. Neither way is right or wrong. It depends on goals, risk tolerance, and hindsight.

And the amount to gain isn’t “very little.” $200,000 at 8% grows to over $2 million after 30 years.

A $200,000 mortgage at 5% ends with you paying nearly $400K in interest and principle.

(Check my math on this–I just went to a couple of investment and mortgage websites to get those numbers. Obviously, the final calculation will also involve the tax advantages of the mortgage and the gains tax you pay on the growth of the investment.)

Everyone decides their level of risk, but for me, it’s worth the (in my opinion, minimal) risk. Or at least split it between the two. With $200K, put $100K in the market, and take a mortgage for only $100K. I personally would be more aggressive.

Oh, I understand the psychology behind it, of course. My parents paid down their mortgage in something like 7 years. I personally do not carry any debt whatsoever at the moment, and have not for the last six years. It’s a great feeling not to have to worry about owing anyone any money. But with the current rates, I do think the market is the smart money. I figure, if shit hits the fan that bad that my $200K investment is worth little in 30 years, there’s much bigger problems for me to worry about.

  1. In scenario A, you are still making payments toward your mortgage. Therefore, you need to calculate a similar monthly investment into scenario B.

  2. Subtract capital gains from the $2 million figure.

To add to what the others have said: a lot of people aren’t that interested in wealth accumulation but in financial security. Not having to ever pay rent or mortgage payments for your home feels very secure, esp. if the house is big enough that you could, if you had to, rent part of it out to cover the bills.

I can only imagine, but it must feel great to know that your home is your home, not something that can be taken away from you for missing a couple of mortgage payments.

Hold on. I had this written up a few minutes ago, but it got eaten. Let me try in a sec. I think it was around a $400K difference.

There are a few other tax implications I left out. Namely, the tax credit on mortgage interest.

Am I missing something?

Assume you buy a house for $200,000 at 5% interest (nice rate by the way…who got you your mortgage?). The next day you win a lottery.

Now, you can pay the house off in full or you can make mortgage payments and invest. Assume you manage 8% a year on the investment.

That is a 3% difference (between the mortgage rate and the investment return).

Yet you are suggesting that the difference between the two choices is $1.6 million ($2 million - $400,000) or $200,000 (paying off mortgage and skip the interest payments)?

I suck at math but that seems lopsided to me. (Financial calculations make my eyes bleed)

And I’d really like to know a reliable (low risk) investment that returns 8% for 30 years because looking over my 401K info I am not getting that. Perhaps if you spend the time to really research all the options and micromanage your 401K you can pull it off but now you have the time investment to consider. Not everyone wants to do that. Money managers cost money (not to mention investing incurs fees which can be not much to a lot depending on what you are doing).

Scenario A:

$200K @ 8% for 30 years = $2,187,146.12; capital gains = $1,987,146.12, after 20% capital gains tax: $1,789,716.90

Price paid for house over the course of the loan: $386,510.40

Post-tax investment value - cost of house: $1,403,206.50.

Scenario B:
Price paid for house $200,000
$1073.64 invest monthly @8% annualized return = $1,612,277.31; capital gains = $1,225,406.91; after 20% tax = $1,367,195.93
Post-tax investment value - cost of house: $1,167,195.93

So a difference of $236,010.57, if I did my math correctly (plus you would have to in the value of the mortgage deductions which will add a bit to the difference.) Somehow, I came up with closer to $400K the first time I did this calculation.

No, the difference is more like $250,000 when all is said and done. Is it worth it? Up to you.

What kind of rate are you paying?