I am debating paying off my mortgage early. I currently have 13 years left on a 15 year mortgage. I owe $74k and change and have exactly 74k in savings. Should I go ahead and pay this off? My concern is that I will not have anything else "liquid" but should be able to save 3-4k a month once the mortgage is paid off.
I have always been told that a mortgage is "good debt" but the thought of being completely debt free is very tempting.
About me: 29 years old yearly income 120k
Mortgage 74k @ 3.125%
Car Loan 7k @ 1.99%
No credit card debt
Fri Dec 11, 2015 3:26 pm
oldguy Senior Member
Cash: $ 715.40
Joined: 21 May 2006
quote: I am debating paying off my mortgage early. I currently have 13 years left on a 15 year mortgage. I owe $74k and change and have exactly 74k in savings. Should I go ahead and pay this off?
Here's my take. In 1972 we bought a house, asked the bank for a 20 yr loan (to avoid interest costs), it was hard for them to do, it was before computers, lol. We made DPs on 4 more over a 10-yr period (rental houses). Then we worked toward paying down the loans - first our home, then one other. About then I realized that my Return on Equity was falling - I analyzed the situation (without the emotional "debt free" legend) and refi'd the houses. We kept them for 40 years, refi'd them several times. Each time we put the equity into the SP500 Index.
The houses all made good money, appreciated multiple times - but the seed money from the houses that went into the SP500 did far better.
Consider - US Mortgage capital is among the cheapest in the world, all other nations have 10 yr limits, resets, etc. But here, Joe Blow can go into a bank, ask for $300k to buy a house, ask for a 4% rate, ask for a 30 years fixed rate guarantee, and get the money.
Anytime that you can borrow reliable 4% FR capital and place it in an 11%/yr longterm investment do it. Eg, borrow an extra $50k on a house, that will cost about $240/m ($86,000). Place that $50k in an 11%/yr investment - in 30 yrs that is $1,150,000.
I would invest the $164, 000 into the SP500 Index (average longterm return is 11%/yr). Use a taxable account at Fidelity or Vanguard for the $74k, the money will grow tax-deferred, and it will be accessible in one day if you need to sell some. You might keep a small amount (<$5000) in a savings account. Your $164k should grow to about $3.7M at age 59. So you are well on your way to building wealth.
You've done well - a good income, no Student Loan (?). You are in a location where you were able to buy inexpensive housing and get a good income at the same time.
Follow the rule - direct your income to its highest and best use. Ie, put it where it earns a good return, not savings accounts, not repaying low cost debt (your car si a good eg, keep that loan full term).
Fri Dec 11, 2015 5:04 pm
Ezeel New Poster
Cash: $ 0.45
Joined: 11 Dec 2015
Thank you, I never even thought about that option!
Sat Dec 12, 2015 4:13 pm
Cash: $ 380.25
Joined: 09 Feb 2009
Here is another approach if I were in your position. Yes you could leverage the property and invest in the Stock Market and hope that it doesn't tank for any extended time period. I mean if your ROI for that time period is 5% or less (even if historical data on the S&P 500 has been 11%), you'd not be gaining anything during that time period.
If you quickly pay off the mortgage you have an immediate ROI of 5% and have your entire mortgage payment to invest in the S&P 500 for the rest of your life until you retire.
Lastly, most people who say a mortgage interest deduction is a wonderful tax advantage cannot do simple math. ex. If you take 100k mortgage, your total interest you paid the bank for the year was $4,467.00. When it comes time to file your taxes and let's assume that you are in the 25% tax bracket. When you file your taxes, you'll receive a tax refund from the IRS for $1116.00. So what's that is saying is you'd rather pay the bank interest of $4,467 of your money to get a $1116 tax refund at the end of the year. How does that math add up??
IMO, I would only pay off your mortgage if you have the money and can eliminate it asap. If you don't have the income to support extinguishing the loan anytime soon, then I'd still make your monthly payments and invest your other post and pre-taxed dollars, otherwise you'll be retiring without substanstial funds.
Risk comes from not knowing what you're doing. (Warren Buffet)