Pay off house or invest the $ ?

paflyer said:
If you had enough cash to pay it off, why pay it off under those terms? Hopefully you didn't deplete the reserves.
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I wanted to be debt free. I was a little over halfway into the 15 year term. Still have plenty of reserve based on my current expenses. I'm not a financial expert but it seemed like the right thing to do.
 
paflyer said:
If you have the cash flow to service the note, then why reduce your investable or emergency cash holdings?
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I presume that if you have that kind of cash flow, you're not asking a bunch of pilots on the internet what you should do. There is a sense of security that comes from knowing that whatever else happens, you have a house to live in. It also gives you more money in retirement at a time when most people's income will drop.
 
bflynn said:
I presume that if you have that kind of cash flow, you're not asking a bunch of pilots on the internet what you should do. There is a sense of security that comes from knowing that whatever else happens, you have a house to live in. It also gives you more money in retirement at a time when most people's income will drop.
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If you look at the big "net worth" picture, it's how you want to apportion your wealth. Putting most of it in your house can leave you cash-poor. When the chips are down, cash flow -either from wage income or drawing from investment principal/returns- is king. If you still have a significant balance due on a mortgage but have access to a bunch of cash, you will always have a roof over your head.

Then again, if a different government was in place, you want hard assets that are difficult to be taken at the stroke of a pen.

You can own the house "free and clear" but you still have taxes (which are easily a thousand a month in many places), insurance, and maintenance to cover. If you don't pay the taxes, you're out on your ass (no one "owns" their property, they only have a deed "granted" by the Government.)

I think a lot of the "no debt" paradigm goes back to Depression ethics and is stoked by scolds like Ramsey and Orman (who, incidentally, make a fortune playing to the people with no financial chops or self control.)

But, in the end, do whatever lets you sleep at night. Just don't assume that it's financially advantageous.
 
paflyer said:
If you look at the big "net worth" picture, it's how you want to apportion your wealth. Putting most of it in your house can leave you cash-poor. When the chips are down, cash flow -either from wage income or drawing from investment principal/returns- is king. If you still have a significant balance due on a mortgage but have access to a bunch of cash, you will always have a roof over your head.
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Quite true. I wouldn't advocate paying off the house without having a significant portion of your wealth in more liquid assets or at least generating cash flow. However, as someone mentioned, setting up a home-equity line of credit can provide a quick-response emergency fund if you will have the cash flow to service it. Some years ago, I had a HELOC in place for $100k, variable at 0.5% below prime, as a "just-in-case" means of writing a big check if I had to. Never used it, and we've long since closed it out.


You can own the house "free and clear" but you still have taxes (which are easily a thousand a month in many places), insurance, and maintenance to cover. If you don't pay the taxes, you're out on your ass (no one "owns" their property, they only have a deed "granted" by the Government.)
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Yes, but that's not universal; depends on your local tax situation. Also, there may be some tax mitigation depending on where you live. Here in Florida, for example, we have a cap under our state constitution. Amendment 10 was approved by Florida voters in 1992 as a result of a citizen's initiative. Basically, it limits, or caps the annual increase in assessed value of property that has a homestead exemption. This prevents the tax from rapidly going out of sight as long as you own your home. You can get reamed if you sell your place and buy something new, but as long as you sit tight the tax increase is limited.



I think a lot of the "no debt" paradigm goes back to Depression ethics and is stoked by scolds like Ramsey and Orman (who, incidentally, make a fortune playing to the people with no financial chops or self control.)
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Ramsey basically advocates Jedi mind tricks for the mathematically impaired. :) For those folks, his methods are helpful.

Where I disagree with Ramsey is his preference for 15 year mortgages. We financed our place for 30 years, but paid it off in 12, which resulted in paying much less interest than a 15-year would have required. The other nice thing was, our monthly obligation was a much smaller payment than we were actually making, and we could fall back to the smaller number when necessary. For example, when we had a lightning strike and had to replace our well pump and re-pipe the house, we dropped back to the 30-year payment for a couple of months and covered the repairs. Then we jumped right back up to the larger payment.

For me, at least, flexibility is important. I'm more comfortable when I have options immediately available to handle what life throws at me.
 
Half Fast said:
For me, at least, flexibility is important. I'm more comfortable when I have options immediately available to handle what life throws at me.
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Yep, that's my bottom line as well, and the point I've been trying to make. It's like flying; always keep your options open.
 
Half Fast said:
Where I disagree with Ramsey is his preference for 15 year mortgages. We financed our place for 30 years, but paid it off in 12, which resulted in paying much less interest than a 15-year would have required. The other nice thing was, our monthly obligation was a much smaller payment than we were actually making, and we could fall back to the smaller number when necessary. For example, when we had a lightning strike and had to replace our well pump and re-pipe the house, we dropped back to the 30-year payment for a couple of months and covered the repairs. Then we jumped right back up to the larger payment.

For me, at least, flexibility is important. I'm more comfortable when I have options immediately available to handle what life throws at me.
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The flexibility part I understand. The "less interest" part I don't understand. Unless you are leaving out important information, that is practically impossible.
 
JOhnH said:
The flexibility part I understand. The "less interest" part I don't understand. Unless you are leaving out important information, that is practically impossible.
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I could have been clearer. You didn't highlight the "paid it off in 12" part.

We paid the mortgage off in 12 years, saving 3 years of interest over what a 15 year would have cost in 15 years and an even bigger chunk over what using the full 30 years would have cost.

Sure, we could have done a 15 year and paid it off in 12 as well, which would have saved even more, but wouldn't have provided the flexibility. I don't recall the final figures, but we felt the slight amount of "extra" we paid that way was worth having the smaller required payment.
 
Half Fast said:
Sure, we could have done a 15 year and paid it off in 12 as well, which would have saved even more, but wouldn't have provided the flexibility. I don't recall the final figures, but we felt the slight amount of "extra" we paid that way was worth having the smaller required payment.
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Ok, that clears it up, but the fact that you saved interest wasn't because you had a 30 yr mortgage. It was because you paid it off in 12. If you had a 15 yr mortgage, you could have paid it off in less than 12 with the same size payments, or paid it off in the same 12, but with smaller payments.
 
JOhnH said:
Ok, that clears it up, but the fact that you saved interest wasn't because you had a 30 yr mortgage. It was because you paid it off in 12. If you had a 15 yr mortgage, you could have paid it off in less than 12 with the same size payments, or paid it off in the same 12, but with smaller payments.
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Right. As I said, I could have been clearer. Sorry I phrased the sentence poorly.

My primary point, though, was that I disagree with Ramsey's pushing the 15 year. Most of the folks that follow his advice are in financial difficulty and on thin ice. Having the smaller monthly obligation of a 30-year can help prevent a soaking if the ice starts to crack, and the 30 can be paid early if cash flow permits.

Of course, it's all about discipline, and Ramsey's people are usually following him because they've had a discipline problem in the past.
 
Half Fast said:
Right. As I said, I could have been clearer. Sorry I phrased the sentence poorly.

My primary point, though, was that I disagree with Ramsey's pushing the 15 year. Most of the folks that follow his advice are in financial difficulty and on thin ice. Having the smaller monthly obligation of a 30-year can help prevent a soaking if the ice starts to crack, and the 30 can be paid early if cash flow permits.

Of course, it's all about discipline, and Ramsey's people are usually following him because they've had a discipline problem in the past.
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Put that way, it makes perfect sense.
 
paflyer said:
Just don't assume that it's financially advantageous.
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Paying off a house to have the peace of mind of a residence in retirement is absolutely never about money. To me this discussion has never been about the money, it's been about the enjoyment of life.

FYI - I have an MBA in finance - I totally get the fiscal part of it. I just discount that in favor of not worrying my way through retirement.
 
bflynn said:
Paying off a house to have the peace of mind of a residence in retirement is absolutely never about money. To me this discussion has never been about the money, it's been about the enjoyment of life.

FYI - I have an MBA in finance - I totally get the fiscal part of it. I just discount that in favor of not worrying my way through retirement.
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Exactly! And once basic life needs are met, what's the purpose of money if it's not providing enjoyment of life, for yourself and others??
 
If you pay off your mortgage and save/invest the money you've been putting toward principal/interest, you won't be cash poor for long!

I'm working toward as much life simplification as possible (airplane stuff notwithstanding!), and consequent reduction in stress. One of the best days of my life was when I wrote my last mortgage payment check.
 
Good points, all, but if I were to receive a windfall, I'll tell you what I'd do, man.


Two chicks at the same time, man.
 
SoCal RV Flyer said:
If you pay off your mortgage and save/invest the money you've been putting toward principal/interest, you won't be cash poor for long!

I'm working toward as much life simplification as possible (airplane stuff notwithstanding!), and consequent reduction in stress. One of the best days of my life was when I wrote my last mortgage payment check.
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Really depends on what your payment is, how much you owe and when the scheduled payoff date is, how long you expect to be in that house, vs your forward income stream.

But I'm really peed off that I didn't get an invite to the mortgage burning party!
 
paflyer said:
Really depends on what your payment is, how much you owe and when the scheduled payoff date is, how long you expect to be in that house, vs your forward income stream.

But I'm really peed off that I didn't get an invite to the mortgage burning party!
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Yes, everyone's situation is different, to be sure. It made perfect sense to me, financially and spiritually.

Your invite probably got lost in the mail. The ceremony wasn't quite Burning Man in scale, but I was never happier to see those flames! :D
 
We're in our early 40s but also in a position where we could pay off our house but we would severely deplete our savings if we did so. Instead, we refi'd about a year and a half ago in the very low threes with no closing costs. Once you consider the tax deduction benefits (which is one of the few tax deductions we qualify for, heck we can't even write off our two year old), the effective interest rate is around 2%. Anytime you can get money that cheaply it's hard not to do. So instead we have three years salary in cash, almost that much in a mix of low to medium risk investments, and a decent sized CD at 2.3%. I like having quick access to cash in the event that an investment opportunity arises or an unexpected expense. If the need arose, we have the freedom to buy a new house and move, and have cash to cover a sizable down payment. To me, knowing I have the cash to pay off my mortgage is as good as paying off my mortgage, plus having the flexibility to use it if necessary.
 
Brad Z said:
We're in our early 40s but also in a position where we could pay off our house but we would severely deplete our savings if we did so. Instead, we refi'd about a year and a half ago in the very low threes with no closing costs. Once you consider the tax deduction benefits (which is one of the few tax deductions we qualify for, heck we can't even write off our two year old), the effective interest rate is around 2%. Anytime you can get money that cheaply it's hard not to do. So instead we have three years salary in cash, almost that much in a mix of low to medium risk investments, and a decent sized CD at 2.3%. I like having quick access to cash in the event that an investment opportunity arises or an unexpected expense. If the need arose, we have the freedom to buy a new house and move, and have cash to cover a sizable down payment. To me, knowing I have the cash to pay off my mortgage is as good as paying off my mortgage, plus having the flexibility to use it if necessary.
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Egg-zactly. Same with me.
 
Half Fast said:
My primary point, though, was that I disagree with Ramsey's pushing the 15 year. Most of the folks that follow his advice are in financial difficulty and on thin ice. Having the smaller monthly obligation of a 30-year can help prevent a soaking if the ice starts to crack, and the 30 can be paid early if cash flow permits.

Of course, it's all about discipline, and Ramsey's people are usually following him because they've had a discipline problem in the past.
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He recommends the 15 because he knows his clientele. Nothing wrong with it but it doesnt make it universally applicable financial advice.
 
Brad Z said:
We're in our early 40s but also in a position where we could pay off our house but we would severely deplete our savings if we did so. Instead, we refi'd about a year and a half ago in the very low threes with no closing costs. Once you consider the tax deduction benefits (which is one of the few tax deductions we qualify for, heck we can't even write off our two year old), the effective interest rate is around 2%. Anytime you can get money that cheaply it's hard not to do. So instead we have three years salary in cash, almost that much in a mix of low to medium risk investments, and a decent sized CD at 2.3%. I like having quick access to cash in the event that an investment opportunity arises or an unexpected expense. If the need arose, we have the freedom to buy a new house and move, and have cash to cover a sizable down payment. To me, knowing I have the cash to pay off my mortgage is as good as paying off my mortgage, plus having the flexibility to use it if necessary.
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In your 40s, with a .gov job, a pension, guaranteed access to group health insurance for life, your risk equation is different from someone in their 60s in the private sector.
 
Dave Ramsey has been mentioned a few times. It should be pointed out that paying off the mortgage is step 6 out of the 7 steps he recommends and you have to complete the first five steps before devoting any money toward step six. You can't take one recommendation out of context and criticize it for problems that might be encountered if the rest of his advice is ignored. Someone who follows his advice will not be cash poor when they pay off their house.

His steps are:
  • Baby Step 1 – $1,000 to start an Emergency Fund
  • Baby Step 2 – Pay off all debt (except the mortgage) using the Debt Snowball
  • Baby Step 3 – 3 to 6 months of expenses in savings
  • Baby Step 4 – Invest 15% of household income into Roth IRAs and pre-tax retirement
  • Baby Step 5 – College funding for children
  • Baby Step 6 – Pay off home early
  • Baby Step 7 – Build wealth and give!
 
weilke said:
In your 40s, with a .gov job, a pension, guaranteed access to group health insurance for life, your risk equation is different from someone in their 60s in the private sector.
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Agreed. That said, the Mrs is the primary bread earner, not in gov, and nothing in life is guaranteed...

Oh we do invest in precious metals. I'm currently holding about 1,800 pounds of aluminum.
 
Brad Z said:
It's actually about a $1/lb right now, but if it goes up the same rate as Gold did from 2000-2010, I'm sitting on $9,000.
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That's scrap value, as long as you don't turn it into scrap you are good.
 
I am walking down this road and have looked at the same thing... after crunching all the numbers I am going to pay off the house. I have been writing a rent/mortgage check every month for the past 40 years... time to get this monkey off my back!
 
Brad Z said:
When gas prices are going up or down I've been known to speculate by topping off when I otherwise would not have, or putting off filling up after a flight.
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And what impact does that position have on your liquidity? :)
 
PaulS said:
That's scrap value, as long as you don't turn it into scrap you are good.
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Then you only have to write checks a few times a year for taxes and insurance.
 
My real world example...

In the mid-1980's, we sold a house in Miami Lakes, FL for $110,000. The family buying gave us $50,000 down and we owner-financed the rest for 15 years.

We split the $50k and put $25k each into a Nuveen and an MFS tax-free municipal bond fund. Each sent us a monthly interest check.

We set up a checking account just for these transactions. Each month the family's mortgage payment and the two interest checks would go in. That only left a small amount for us to add to make the payment on our newer, more expensive home.

Of course, we could have just made a lump-sum $50k principal payment to our new mortgage, but this way we kept the home interest deduction for longer.

Anyway, worked for us.
 
FastEddieB said:
My real world example...

In the mid-1980's, we sold a house in Miami Lakes, FL for $110,000. The family buying gave us $50,000 down and we owner-financed the rest for 15 years.

We split the $50k and put $25k each into a Nuveen and an MFS tax-free municipal bond fund. Each sent us a monthly interest check.

We set up a checking account just for these transactions. Each month the family's mortgage payment and the two interest checks would go in. That only left a small amount for us to add to make the payment on our newer, more expensive home.

Of course, we could have just made a lump-sum $50k principal payment to our new mortgage, but this way we kept the home interest deduction for longer.

Anyway, worked for us.
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Did you own the Miami Lakes house free and clear?
 
paflyer said:
Did you own the Miami Lakes house free and clear?
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To the best of my recollection, yes. We were then in the habit of making additional principal payments with each mortgage payment, and I think we had paid off the mortgage.

Now, I think I might have taken those additional principal payments and invested them instead, though that might hinge on the interest rate being paid.

Again, there's no right answer, but this worked for us - and I think we came out ahead doing it the way we did.
 
Yeah, agree, just thinking if you had to pay off significant balance on the first house it wouldn't have worked out.
 
As an aside, with the doubling of the standard deduction to $24,000 for married couples in 2018, will not that make the tax-deductiblilty of mortgage interest payments less appealing to mere mortals?
 
FastEddieB said:
As an aside, with the doubling of the standard deduction to $24,000 for married couples in 2018, will not that make the tax-deductiblilty of mortgage interest payments less appealing to mere mortals?
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Yes.
And I think that is a great thing.

I hear on the news all the time about how people will be losing their mortgage interest deduction. But due to the standard deduction increase, more people will be paying less tax. Especially lower income people (aka mere mortals). And tax filing for those people will be simpler.
 
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