logistics of paying off house vs financing

[MrsPete]

No question about it: Pay off the house.

Someone said it can't be emotional -- wrong. Perhaps I feel this way because I grew up with little financial security, and I gravitate towards things that make me feel safe; however, it's a strategy that has done well for me in my 20 years since college graduation. I honestly never expected to have as much as I do now -- and I still plan to work another 10 years. Anyway, knowing that no matter how bad things may be, your house is YOURS is a security that is worth giving up 2% interest.

Someone pointed out that in time of need cash is king, while money in a house is tied up. Yes, I can see that -- but once your mortgage disappears, you'll be amazed at how fast your savings can grow. You'll build up cash faster than you imagine.

On the other hand, those investments have their ups and downs. If put your money into your investments, then you lose your job and MUST withdraw some (to make your mortgage payment) at a "down time", that money is lost forever. On the other hand, if it's locked up in your house, the real estate market may decrease for a while, but it'll come back.

Disclaimers:

If you happen to live in Detroit or California or another area with really far-fetched real estate markets, this might not be good advice. But for those of us who live in more moderate markets, a house is still a sound investment.

And if you plan to move soon, putting money into your house might not be the wisest choice. IF you end up unable to sell your house and end up renting it, you might appreciate having that money available to use as a downpayment elsewhere.

 

[MrsPete]

When you pay off your house and burn the mortgage, take off your shoes and walk through the backyard. The grass feels different under your feet. The borrower is slave to the lender is deeper than just a mathematical discussion. It frees you up in places you don't even know you're stressed in until you don't have the stress anymore.

This is absolutely true.

 

[ilovemk76]

OP here...I'm definately planning on using the investment person that was used by my father (who left me the inheritance). They've done very well and were wonderful to work with through my father's illness.

I guess I'm just wondering what other people would do in my shoes as far as the house (because of the "security" of having your house paid off). I was thinking that 175000 at 7% (and it has earned more than 7%) would bring in around $12000/year and I would pay about 8000 in interest on my loan for one year-now to May 2012 (using the amortization calculator). That's 4000 cleared. The tax savings from our mortgage interest add about 1000 so I'm still ahead by about 3000.

So would I talk to someone in addition to the investment person at Schwab? Because I don't see him telling me to take the $$ and pay off my house. I'm sure he'd rather have me leave it invested with them.

Don't assume you will get the same write off in the future as in the pass. Your new inheritance will produce income that will raise your AGI. It is possible that increase in AGI will push you into a bracket where you lose some of your write-offs.

I would leave the investments alone but pay extra now on your mortgage as you no longer need to save for an EF and have much of your retirement fun in tack.

Another reason not to pay off the house is in the case of a divorce. Your DH cannot touch the money that is not mixed with the marital money but once you mix it he get ~half.

 

[timmac]

If the time ever came that you needed your could get another mortgage.

This is only true in theory. Getting a mortgage isn't an overnight process. If an emergency comes up where OP is suddenly unemployed for instance, it might not even be possible at all.

Either continuing the investing or paying off the mortgage are both viable options, depending on your perspective (as pointed out very nicely by a PP).

That said, an investment account is a very liquid asset, nearly as good as cash. A house, not so much.

 

[Suz D]

Don't assume you will get the same write off in the future as in the pass. Your new inheritance will produce income that will raise your AGI. It is possible that increase in AGI will push you into a bracket where you lose some of your write-offs.

Good point and one which I had considered. I also re-read my "I would still be ahead by 3000" and I had it totally backwards in my brain.

 

[Colleen27]

I think it depends on the rest of the picture. If you're happy with your savings and comfortable with your emergency planning in case of job loss, disability, etc., paying off the house would be a lot more practical step than if paying off the house meant having little or no liquid assets to fall back on.

I'm not one to discount emotions in regard to financial decision, personally - knowing that you own your home free and clear is a really powerful feeling that is hard to quantify in numbers. And while it doesn't have the same impact as investing a large sum right now, investing the money that would have gone to the mortgage makes the pure math much more complicated than a right-now comparison of interest/return rates.

 

[a1tinkfans]

I am so sorry for your loss OP.
Looks like you have gotten some differing opinions to your original post.
For me personally..in your shoes, Id pay down the house considerably and invest as well. I am one to compromise a bit and would think that the $$ found has "lightened your load" having little/to no mortgage left feels really good! Markets and life .........changes,,,,,,,,,,,
good luck with your decision.

 

[Suz D]

OP here...
Thank you everyone for being so kind in your replies. It was so hard to lose my dad but he had dementia and had been really declining in the last 2 years. He'd really been suffering over the last 5 months (the last 3 especially). I'm so grateful that he's finally at peace and is able to be with my mom. They were married 53 years when she passed away in August 2008.

Back on topic...if we make a large payment on the house instead of paying it off, that won't change our monthly payment amount but just reduce the length of time we pay on our mortgage (substantially of course) so we wouldn't be able to contribute any extra to retirement.

We live pretty much paycheck to paycheck without a lot left over. This isn't as bad as it sounds. We live fairly frugally and put a lot in savings every month (about 20% of our take home pay because my husband only gets paid 9 months of the year-college professor-so we have to plan for three months with no paycheck), plus we put 10% in our retirement account (through DH's work/they match so we didn't want to reduce that amount obviously), we have a fully funded emergency account, a savings account for unexpected but not emergency expenses (like vet bills, car tires, etc) plus we tithe 10% of our income and have no CC debt. Just not a lot for "fun" money. I don't want to touch the investments for our summer living expenses, but we'd need to save less each month during the school year to cover summer if we didn't have to make a house payment.

The more I think about it, the better paying off the mortgage sounds. It would be VERY nice not to have a house payment, invest say 2/3 of the house payment for retirement, and have that other 1/3 to ease the tightness of our budget. My DH is in his mid 40's so he hopefully has a lot of working years still ahead of him (and could work well into his 70's...loves what he does, not physically demanding, and by that time in his career it would not be as stressful to publish or perish). We have a 15 year old and a 4 year old. A bit of "fun" $$ while our children are young would be lovely.

Does that sound sensible or foolish? And thank you again for your replies...feel free to keep the conversation going and the ideas coming.

 

[luvmy2sams]

I am sorry for the loss of your dad. DH lost his father about 5 months ago, and we are in a very similar situation. The emotions can be overwhelming at times, but we are so thankful that FIL blessed us with a substantial inheritance.

We had been househunting with the intent of purchasing our "forever" home based solely on DH's salary. However, after much debate and soul searching, we have decided to liquidate some of the inherited stocks to purchase our new home outright. I can't begin to tell you how freeing this is, and we don't even close for another few weeks! DH and I are in our late 30's, and we have DD12 and DS7. Our only expenses will be monthly bills, taxes, and insurance, so we'll have a large chunk of what would normally be allocated to mortgage expenses to stash away for retirement, college, and extras.

Good luck with your decision!

 

[bettymae1121]

This is one of those situations where there isn't really a "wrong" answer. There are pros and cons to paying off the house early and pros/cons to keeping the money invested. You should do what YOU feel most comfortable doing. Me personally, having a mortgage payment doesn't bother me in the least, especially if I had healthy bank/investment accounts and no other debt. Other people find they sleep better at night with ZERO debt, including a mortgage.

One thing to consider though, how many years do you have left on your mortgage? If you're paying it off in 10 years or less anyway, it probably won't make a huge difference in the amount of interest you'd be saving, since you pay most of your interest in the first half of the loan anyway. In that case I'd keep the money invested for sure. If I had 20+ years left, I'd either refinance it to 10 or 15 years or go ahead and pay it off, which ever seemed to make better math sense.

 

[DawnM]

I think you are on the right track here!

You mentioned earlier investing at 7%. Even in an agressive market, this is usually the amount LONG TERM, not yearly. So, counting on that $12,000 per year every year is most likely not the case.

I am trying not to get too into this thread as I have gotten reemed for my radical thinking re: paying off mortgage in previous threads!

I am not a die hard Dave Ramsey follower, but we are very much followers of his principals and ideas. Being debt free completely is the way to live.

Dawn

.

We live pretty much paycheck to paycheck without a lot left over. This isn't as bad as it sounds. We live fairly frugally and put a lot in savings every month (about 20% of our take home pay because my husband only gets paid 9 months of the year-college professor-so we have to plan for three months with no paycheck), plus we put 10% in our retirement account (through DH's work/they match so we didn't want to reduce that amount obviously), we have a fully funded emergency account, a savings account for unexpected but not emergency expenses (like vet bills, car tires, etc) plus we tithe 10% of our income and have no CC debt. Just not a lot for "fun" money. I don't want to touch the investments for our summer living expenses, but we'd need to save less each month during the school year to cover summer if we didn't have to make a house payment.

The more I think about it, the better paying off the mortgage sounds. It would be VERY nice not to have a house payment, invest say 2/3 of the house payment for retirement, and have that other 1/3 to ease the tightness of our budget. My DH is in his mid 40's so he hopefully has a lot of working years still ahead of him (and could work well into his 70's...loves what he does, not physically demanding, and by that time in his career it would not be as stressful to publish or perish). We have a 15 year old and a 4 year old. A bit of "fun" $$ while our children are young would be lovely.

Does that sound sensible or foolish? And thank you again for your replies...feel free to keep the conversation going and the ideas coming.

 

[Suz D]

One thing to consider though, how many years do you have left on your mortgage? If you're paying it off in 10 years or less anyway, it probably won't make a huge difference in the amount of interest you'd be saving, since you pay most of your interest in the first half of the loan anyway. In that case I'd keep the money invested for sure. If I had 20+ years left, I'd either refinance it to 10 or 15 years or go ahead and pay it off, which ever seemed to make better math sense.

Bettymae, we bought in 2008 when the interest rates had taken a big jump so our rate was 6.5%. We refi'd in 2009 to get down to 4.62%. So we still have a LONG time on the loan. Thanks for your post. It adds considerably to the pros of just paying off the mortgage.

 

[DawnM]

Is this for a 15 year or a 30 year?

Dawn

Bettymae, we bought in 2008 when the interest rates had taken a big jump so our rate was 6.5%. We refi'd in 2009 to get down to 4.62%. So we still have a LONG time on the loan. Thanks for your post. It adds considerably to the pros of just paying off the mortgage.

 

[chicagoshannon]

I'd definitely pay off the house. I hate knowing what my $180K loan is actually costing me over the years! Then I"d just invest my would be mortgage payment in something that earns me interest instead of costing me interest!

 

[QVCshopper]

Sorry about the loss of your dad... Thought maybe I could help with your question. We paid off our mortgage five years ago. We did it with money saved from our condo, yearly work bonus, and a very small inheritance from my DH's grandma. That said, we have been thrilled with our choice. Our mortgage and house amount when we purchased is very close to yours.

While I'm not sure the grass feels different, I think we feel different. We aren't stressed about money, never fight about money, never really worry and money. I still live frugally and we have been able to more than double our savings since paying off the mortgage. Of course, the stock market has come back some during that time. But we paid it off just before the major drop, and if we hadn't, I know we would have regretted it, thinking we lost all that money, even if it was just on paper.

Since you are living close to paycheck to paycheck, and probably intend to stay in your house, I think it's a good choice for you. Enjoy the freedom; without the major bill, it's so much easier to save money in the future. Hope that helps! And sorry again.

 

[tlbwriter]

I think, as someone said earlier, there is no wrong answer here.* Leaving the money invested or paying off your mortgage are both good options.

*Well, there are some wrong answers. Buying a gold-plated Lexus would be wrong. But you didn't list that as one of your options so I'm assuming you're not considering that.

 

[bettymae1121]

Bettymae, we bought in 2008 when the interest rates had taken a big jump so our rate was 6.5%. We refi'd in 2009 to get down to 4.62%. So we still have a LONG time on the loan. Thanks for your post. It adds considerably to the pros of just paying off the mortgage.

Okay, so you've got 28 years or so left. In that case, in your shoes I'd for sure (if nothing else) refinance it to a 10 or 15 year loan to cut the total interest amount way down (rates are still low, I think? I haven't looked lately). Or if you don't want to spend the money on yet another refinance, you could also just calculate what it would take to pay off your current loan in 10-15 years, which agains saves you thousands in interest. There are calculators out there that will help you with figuring out how much extra you need to pay to the mortgage company.

Now of course you can still pay it off in full if you wish, nothing wrong with that choice either. But if you choose not to pay it off, then either refi to a shorter term or increase your monthly payments to pay it off way early.

 

[DVCKev]

I say keep the liquidity of your money and also keep the mortgage interest deduction as well. What if the property tanks and goes underwater. Keep the mortgage and be smart...

 

[ndfi78]

I say keep the liquidity of your money and also keep the mortgage interest deduction as well. What if the property tanks and goes underwater. Keep the mortgage and be smart...

On the flipside, what if the market tanks and they lose all that money in investments. Pay off the mortgage and be smart...

My opinion is to pay off the house, and it isn't even close.

 

[ceecee]

Sorry for the loss of your dad. If you can make 7-10% right now that's great. A lot depends on your age as to how aggressive your investments should be. I love having no mortgage and the peace of mind means something to me.