Just as a reminder to those offering advice, 12% returns are not the usual nor are they to be expected. The market does go down sometimes 
Also, not all can deduct mortgage-interest, particularly DINK couples. I fondly remember my single days of itemizing and deducting everything including that pesky mortgage interest. Now I’m all for the removal of that tax deduction since I can no longer use it. 
True. One should also remember that the real estate market goes down sometimes, too.
Why would that matter to someone who believes they will not sell their house within the next 50 years?
Would you remain in a home that was valued at $150,000 if you owed $175,000 on it? What about $250,000?
If I could afford to pay it off, yes (which it appears the OP can). Assuming I had no intentions of selling within 50 years, what do I care what it is worth now beyond the impact it has on property taxes?
Because you don’t want to keep throwing your good money after a depreciating asset. If my house lost value every year, I’d sell it.
Or,
Assuming I had no intentions of touching my savings for 50 years, what do I care what it is worth now beyond the impact it has on my income taxes?
And I didn’t mean to derail this…just wanted to point out 12% returns may not be realistic and mortgage interest is not always tax deductible.
Back to the discussion. I agree a split-approach is probably the wisest.
I hope you didn’t follow this strategy in the market and sold at the bottom.
The value of my house probably went down $150K - $200K during the recession. Nowhere close to being underwater though. Now it has recovered and is close to what it was before. Assuming you can make the payments, the value of your house means nothing, especially in a 50 year view.
The problem with wguy123’s strategy is that the intention of living in the same place 50 years is different from the reality.
The people who really got screwed in the recession lost their houses because their payments were unrealistic, or lost it because they lost their jobs even though the house was affordable, or who were forced to move because of some other reason. Those who kept jobs and stayed in the houses did just fine - especially in the Bay Area where I live, where the market is as hot now as before.
During the recession Dan Ariely said on Marketplace that the best investment strategy was to not open your 401K statement. Probably holds true for the housing market also - just don’t look at the real estate ads, and you’ll be fine.
We’ve actually owned our current home for 20 years, so we had nearly paid it off. But because we were getting hit with sky high taxes, we bought a more expensive home just last month, both to take advantage of these incredibly good interest rates, and because we needed a mortgage interest write-off to offset our gains. I realize that it’s a good problem to have, as problems go, but we discovered the hard way that AMT is not our friend.
The value of the house, and wether to sell it or hold it, is separate from a decision to pay off the mortgage (faster)
The mortgage is a debt that just happens to be secured by the house. While it is possible, depending on where you live, to walk on the debt and have the “underwater” portion become the bank’s problem, that is a whole other kettle of fish. Besides, for many, even a significant decline in value does not put them under water. Meaning that paying faster is equivalent to a risk-free return of (mortgage interest -net tax effect)
I think this decision should factor in your age. Until not all that long ago, I was fully invested into equities. I figured any downturns would correct themselves well before I needed the money. (I used a timeframe of 20 years - any money I wasn’t going to need for 20 years, could / needed to , be exposed to significant risk). Now that I’m closer to needing the money, some of what I put away is in lower risk vehicles. Since I think I’m a pretty good credit risk, paying off the mortgage is a zero risk equivalent investment for me, with a return of 3.29%. If any of you know of a zero risk vehicle that pays better, please let me know.
Where I live we’re no longer at the bottom. I’m not sure I’d buy a more expensive home for taxes - location and amenities, certainly. When we moved to the Bay Area we bought what seemed like an insanely expensive home out of necessity, but it seems absurdly cheap now,
Ok, since many of you seem to know what you’re talking about, maybe you can offer some advice here (consider it all hypothetical and non-binding… )
I’m in my late 40s. Recently divorced. Have three young children (elementary/middle school ages.) Just bought a house in September, with a reasonable mortgage payment at a 30-year fixed rate of 4.65%. I make a decent salary, but pay alimony and some child support, so my monthly gross just covers my expenses with a few hundred extra each month. I am putting the max my company matches (5%) into my 401(k) (which I’ve been contributing to for over 20 years from various jobs.) I have $30k in the bank, earning basically no interest, and no other investments. I’ve been hesitant to invest any of that bank money because I feel the need for the safety cushion for emergencies, but I know I could be making better use of it.
Would you use it to pay down the mortgage? I plan to be in this house at least until the kids are out of school, so 13 years at a minimum. Invest some of it elsewhere?
Southern Yankee - no.
Cash is liquid. If you loose your job, you’ll want that cash - if you put it in your house and lose your job, getting the equity out will be very difficult. If a recession hits and you lose your job, that $30k will be worth $20k when you need it.
When you have enough money that you feel like you can weather a “normal” emergency - then make the decision about paying down the mortgage or playing in the market. I like the market myself - interest rates for most of us are low, and the market is more liquid if I need the money. I can pay off my house tomorrow with money out of my portfolio if I need to or want to, but over the long term, it will be more profitable in the market and more liquid.
Thanks, Dangerosa.
I agree with Dangerosa, you need at least 6 months take home pay in a liquid account, money market or savings. After that I’d start investing in the market. In your case I’d recommend low fee index funds, Vanguard has quite a few with different portfolio styles and varying minimums, but in most cases substantially lower fees than most brokerage houses.
My weird-ass procedure: We bought our house 10 years ago with a 30 yr. fixed mortgage. Refinanced several times chasing interest rates down, most recently last year at 3.65%, still 30 year fixed. At each refi, I recalculate the payment required to pay the house off at the original payoff date of 2034, and pay that. So my payment has gone down, but not as much as it could have, but I’ll still have the house paid off by the original planned date, which just happens to be my planned retirement date as well. We’re planning on staying in this house forever BTW.
BTW, the 30k to 20k comment was supposed to reference money in the market…I left that part out because…need coffee…
Six months is the rule of thumb, but adjust it to your circumstances. If you are in a career where you wouldn’t be unemployed more than a few weeks or you can easily trip your expenses down to “starving college student” you might need less - if your job is very stable - say you are a union teacher with seniority and good disability insurance - you probably need less. On the other hand, if your job isn’t stable, if its hard to find employment, if you will be picky about who you work for, if you make a lot of money, if you have lots of obligations (mortgage, car loan, student loans, credit card bills, expensive cell phone contracts), if you have kids who are dependent on you and you want to keep life as normal as possible for as long as possible - you might need more - maybe a lot more.
We will have ours paid off before year’s end. We’d bought the house with a 30-year mortgage in 1998 at 7 or 7.5% (can’t remember which), then refi’d to a 15-year, 5% mortgage in 2003 that had about the same monthly payment.
Next year, it’ll be like getting a $22K tax-free raise. :):)
While not in the same boat my mortgage is up for renewal in September so I thought I’d share my present experience with you.
Because my mortage is up in a few months I thought I’d started looking at my options now. I saw my mortgage broker and this is what I came up with.
As of September I’ll have a little over 21 years left on 30 year mortgage (which I got 5 years ago). Currently I pay ~$670 every two weeks (bi-weekly excelerated) and am locked in at 3.99%.
We were offered a variable rate of 2.6%. So we’re going to take that rate, BUT will continue our payment of $670 every two weeks. We’ll be putting around an extra $200 a month directly against the principal. Right now on one of my payments about $280 goes against the principal and the rest against my interest.
Over 5 years paying that extra $200 a month will easily shave 2-3 years off my mortgage.
Adding this extra will be transparent to me and my wife because we’ve been paying this for the last 5 years. Also if rates increase, we can lock in. They’ll never rise (at one time) anymore then 0.5%. We’ll keep our payments the same but instead of ~$200 extra a month it might be ~$125.
So finally after 5 years if interest rates increase above the 3.99% I’m paying now because I’ve been hammering the principal my payments will probably less than the $670 I’m paying every 2 weeks.
Almost too easy!
MtM