But, that's a different animal. I'm talking about people who keep a mortgage solely because of the tax refund, not to reinvest it (or in their case, waste it on crap) into other avenues.
I never had a 3.75% mortgage, as mine was higher than that when I paid it off. I do have a 2.25% HELoC for emergencies, but that's been at a $0 balance for two years, and closes in 2 years. I am in the option one camp, though I suppose there's a bunch of calculus type equations based on age, earnings etc as to whether at retirement age it would have been better to pay off the mortgage in less than 7 years like I did, and then take that extra and invest it over the next 23 years. Or to not have that money to invest until the mortgage is paid off. So, make 0.25% for 30 years, or lose 3.75% for 7 years, and then make 4% for the next 23.
Time to bust out the calculator...
Edit: Ran some numbers.
I'm going to base this on the 7 year payoff (my case) and the fictional dead uncle, with the 3.75% and 4.0% numbers.
(Numbers below rounded)
A $100,000 loan will run about $460/month over 30 years.
$1355/month thrown at a $100,000 loan will pay it off in 7 years. Which is almost exactly what I was at.
Option 1
So, rather than pay the mortgage off with our $100,000 windfall we dump $895/month in with the windfall we could have paid in additional principal. At the end of the 30 years the investment is worth $950,000 - less the $66,000 paid in mortgage interest (and I'm ignoring taxes because it should be a wash on made vs deducted anyway) You net about $884,000. Not bad.
Option 2
Pay off the mortgage with the $100,000. Start the investment with $0 in windfall, but put $1355/month in at 4% for the next 30 years. At the end of 30 years that investment is worth $940,000, but $0 in interest was paid, so your net investment is $940,000. $56,000 to the better.
However, I don't have any rich dead uncles, so in my case we have the following:
Option 1
Take that $895/month and put it into a 4% investment. At the end of 30 years, my investment is worth $620,000 but I still paid $66,000 in interest, netting $554,000. Still not too shabby.
Option 2
Do what I did and bust butt for 7 years, and pay off the house. I paid out about $14,000 in interest, and at the end of 7 years have a big fat $0 in my portfolio. But for the next 23 years, I can dump $1355 into an investment and at the end of that 23 years it's worth $612,000 - less the $14,000 I paid, I am at $598,000 - or about $44,000 better.
Now we can get into arguing inflation and what $460/mo is now vs in the future, but I plan on my income never going up.
Also, this is all moot because what do we do as pilots with our extra money? Spend it on planes!
