Paying off mortgage in 5 years: Smart of foolish?

[gooddecisions]

This couple with young children tightened their belt, decrease their contributions to retirement, college savings plans, etc in order to pay off their mortgage in 5 years.
homes.yahoo.com/news/paid-off-mortgage-less-5-years-230600500.html?pt=BureoF2GVB|0|0|0|0|0|1058291935.07446

"We lowered our savings contributions. Our 401k contributions were originally set at 15 percent, so we cut this down to 5 percent and still received our employer match of 5 percent. We also had monthly allotments going toward 529 college savings accounts for our children; after realizing our pooling efforts would only require these contributions to be discontinued for a few years, we decided to stop them temporarily until the mortgage was paid off."

Because there hasn't been one of these threads in awhile...Genius or foolish?

[justme]

Well they were still putting 10% into retirement, and since it took them less than 5 years to do it I don't think it's that foolish. Barring the whole use of capital argument, though their interest rates weren't that low.

The big foolishness I saw was BUILDING the frigging house, deciding to put more money into it for a deck and basement, when they had only originally planned to stay in it for a few years and then downsize! Why build so big if you were going to sell in less than 5 years?

[thyme4change]

They never really said "Why" they paid it off, other than that they just wanted to get rid of the payment.  This was an article on "How" to pay it off.  At no time did he explain why they thought it was so important to get rid of a house payment that to many people looks more like a car payment.  

[Deleted]

paying off a mortgage in 5 years is awesome. I vote for smart.

[swamp]

Insert Phil script here.

[Shooby]

  Well, i hate debt.  So, as a result, everything i own is paid in full.   Works for me.

[gooddecisions]

haha, I've been following the Phil script actually. I guess it is working out. Like this couple, we tightened our belts but instead of putting it all to the mortgage, we put it all in retirement accounts, brokerage accounts, college savings accounts, real estate investments, etc. Our 3.25% mortgage will still be paid off by the time we retire. Yes, it means paying more in interest on the mortgage, but I'm hoping the investment gains over that 30 year period will exceed the interest paid on the mortgage- it has so far. We still get "peace of mind" knowing we could pay the mortgage off if we wanted, but even with not prepaying- it will still be paid off in the original 30 year period- and well before retirement.

[Deleted]

The "magic" of making good money in a LCOL area...

[Angel!]

I am going with stupid, although a portion of that judgment comes from hindsight.  They decided to pay off their mortgage basically at the bottom of the market.  So they would have seen a huge growth over the last 4 years on that money. 

I would also guess either they are extremely high income or something happen in the last 3 years.  Per the article, the first year they made minimum payments & then decided to pay it off early.  After the first year of minimum payments and the second year of focused payments, they had paid off less than $10K.  It then took them less than 3 years to pay off the remaining $147K.

For most people, cutting back retirement to 5%, stopping 529 contributions, cutting utilities, and budgeting wouldn't get you an extra $130K+ over 3 years.  So either they were major, major savers prior to this decision or they had some extra help from an inheritance or lotto win. 

[vonna]

I am quite comfortable with a 3.25 mortgage, and have the funds to pay it off.  Still, I understand that others would pay it off.  To each their own!

[phil5185]

They scrimped to pay an extra $147,000 in 3 yrs. With the new loan, they could have paid the min's, about $21,000. And the $125,000 would now be about $180,000 (the SP500 did well during that period).

In my world, a nice 4.375% 30 yr note plus $180,000 in the oven poised for another 27 years of growth ($3M, give or take).

But that aside, they did a great job and they now know how to provide a solid income stream (now if they only knew how to put that stream to it's highest and best use?)

[tskeeter]

From a strictly financial perspective, a dumb, dumb move.

The return on investment in a house is very good during the early years.  A home purchase is one of the few significant opportunites most people have to leverage their cash.  The fact that you can borrow money at preferred rates and take an income tax deduction for your interest payments makes this opportunity even more attractive.

To focus on paying off a 4 3/8% mortgage while passing up the opportunity to earn nearly 20% on the money you used to pay down the mortgage is the serious short term thinking.  (Between 1/1/2011 and yesterday, the S&P 500 gained 47.32%, or nearly 20% a year.)

Any analyst worth his salt ought to consider the time value of money.  Socking money away in retirement and investment accounts now will pay off big time when it's time for retirement.  Or as college expenses for the kids competes with retirement savings for the family cash flow.  Hit the Phil button now!

I believe that house payments and retirement savings get favorable treatment when it comes to financial aid for college.  Why in heaven's name would you do things that you know will make it harder for the kids to qualify for financial aid?

After a few years of deprivation, I'd suspect that the cash freed up by paying for the house is more likely to find it's way into small luxuries than it is into investment accounts.  (Note that this couple didn't increase their retirement contributions after the house is paid off, to make up for the years of reduced retirement contributions while paying off the house.)     

[Tiny]

Jun 11, 2013 15:22:48 GMT -5 Angel! said:

I am going with stupid, although a portion of that judgment comes from hindsight.  They decided to pay off their mortgage basically at the bottom of the market.  So they would have seen a huge growth over the last 4 years on that money. 

I would also guess either they are extremely high income or something happen in the last 3 years.  Per the article, the first year they made minimum payments & then decided to pay it off early.  After the first year of minimum payments and the second year of focused payments, they had paid off less than $10K.  It then took them less than 3 years to pay off the remaining $147K.

For most people, cutting back retirement to 5%, stopping 529 contributions, cutting utilities, and budgeting wouldn't get you an extra $130K+ over 3 years.  So either they were major, major savers prior to this decision or they had some extra help from an inheritance or lotto win. 

And if they do have such a high income - I'm not sure how/why the 1K a month for the PI payment of their mortgage was such a big deal that getting rid of it would improve their lives dramatically.   I'd guesstimate they were paying 4K a month towards their mortgage for 3 years or so...  once the mortgage was done, it's not like they suddenly have 4K EXTRA a month for fun and games - they've got to re-allocate MOST of that to their retirement, college, long term savings...  Maybe even some of the 1k that was going to the mortgage as 'make up payments'. 

On the other hand, the idea of 'toughing out' 5 years to create a big pile of cash (or pay off a big debt) is admirable and I bet they will have a bright future.  

I have to admit that having had a paid off house before I was 47 yo I have to admit it wasn't all that wonderful or fantastic, nor did I get a big 'warm fuzzy' feeling - mostly because my property taxes are so high.  I could easily loose my paid for house due to prolonged unemployment.       That said, in hindsight I kinda wish instead of prepaying the mortgage I had created a Big Pile O' Money (by investing the money I used to prepay).  I'm finding having a Big Pile O' Money earning additional money to be more satisfying than having a paid off house.  (because having a Big Pile O' Money means I have a better chance to NOT loose my house for failure to pay the mortgage or proprety taxes or NOT be able to repair my house.)
 

[haapai]

I agree with Thyme.  It was a how article not a why article.

Getting the house paid off makes it much, much easier for them to move for a dream job or better schools.  It also might not have cost them nearly as much as we imagine.  Without a mortgage, they can probably sleep well with a much smaller EF in a much less liquid and higher-return vehicle. 

The author is a financial analyst, I suspect that he knows a thing or two about the time-value of money. 

It's also possible that this family was positioning themselves to live off one income (stay-at-home or start-up).  There's also a possibility that both halves of the couple worked for the same employer. 

ETA.  It's also possible that they underestimated the property taxes.  The house seems to have a great view, which some places tax heavily.  

[Deleted]

First off we did something close to that with our last house (didn't cut it that close though).

Then we did something close to that with this house (paid it off in 7 years with the sale of last house).

I see the reason for it because I don't like to pay interest. I find it kind of strange thought that people here LOVE to finance out cheap interest but can't stand credit card interest. Where ever it goes cc, loans, student loans, etc. it's all interest. Some people don't want to pay it no matter what & believe it or not all interest is money going out of your pocket.

I hear great reasons for stuff all the time like "You can deduct the interest you pay on your house". That's one of those thing that is situation specific. Our interest deduction never really amounted to much & became even less important as we paid less.

To focus on paying off a 4 3/8% mortgage while passing up the opportunity to earn nearly 20% on the money you used to pay down the mortgage is the serious short term thinking. (Between 1/1/2011 and yesterday, the S&P 500 gained 47.32%, or nearly 20% a year.)

Tskeeter is (I'm sure) right about this but even though I believe in the stock market I would NEVER depend on a gain nor would I run my life off of an expected gain. It's a coin toss what the market will do on any given day & your just playing the odds. I would have been a friggin genus had I gotten out of the market for a 2 month period years ago & it would have saved me $30,000. Hind sight is always 20 20 but looking ahead it's a crap shoot (even if the odds are on your side).

Back when I was investing, we invested every month PLUS we also paid extra on the house every month. It's not a one or another thing unless you want it to be. In these peoples case they still invest & still got the companies match so they in fact doubled their money PLUS paid off their house. I see nothing wrong with that. Don't forget that it's each person choice what they do & they are the only ones that have to live with the outcome. You set your goals & you do what you need to in reaching those goals. These people did & I see nothing wrong with that. I might have done exactly the same thing with this house had I not been so old. Being older I no longer wanted to cut everything to the bone to pay the house off a year or two less.

[Gardening Grandma]

They scrimped to pay an extra $147,000 in 3 yrs. With the new loan, they could have paid the min's, about $21,000. And the $125,000 would now be about $180,000 (the SP500 did well during that period).

But if they had put $125,000 in the market in the fall of 2007, it could just have easily been worth $75,000  in 2008.  Short term, the market is a gamble.  (It's a gamble long term too, but the odds are better.)

I've never heard anyone express regret about paying off their mortgage.

[Deleted]

I've never heard anyone express regret about paying off their mortgage.

I haven't either. As a matter of fact both times we opened a bottle of wine.

[Tiny]

Yahoo just published a 'rebuttal' to the Hatter's 5 year pay off plan.

finance.yahoo.com/news/family-went-way-too-far-165347146.html

[thyme4change]

Although I agree with the rebuttal - whole heartedly, this statement:

"That extra money applied to the mortgage is effectively gone until they sell the house and whether you're selling or staying there, it's not a free house once you get the loan paid off,"

is a little bit exaggerated.  They could easily get a revolving home equity line of credit and use it in case there was an emergency.  They could likely go to a bank tomorrow and take out a $100k loan on that property, without too much fuss.  

[gooddecisions]

...unless they lose their income and then nobody is going to give them a loan. And, likely that loan will be at a higher interest rate as they creep up over the next 30 years. I opened up a bottle of bubbly when we reached the first 100K milestone, then 500K, then 1MM. I sleep just fine knowing my mortgage and the rest of the housing bills will still be paid even if I lose my job.

[Tiny]

Jun 12, 2013 13:16:42 GMT -5 thyme4change said:

Although I agree with the rebuttal - whole heartedly, this statement:

"That extra money applied to the mortgage is effectively gone until they sell the house and whether you're selling or staying there, it's not a free house once you get the loan paid off,"

is a little bit exaggerated.  They could easily get a revolving home equity line of credit and use it in case there was an emergency.  They could likely go to a bank tomorrow and take out a $100k loan on that property, without too much fuss.  

This is true - but in effect you are paying to borrow your own money!   Of course, if you can do a line of credit or a new loan at a rate lower than what you were paying when you paid off the house - it might not be so bad... but you are still paying (in the form of interest and any fees/expenses associated with opening a loan) for the use of what's technically "your own money". 

And the original article was about how the couple disliked having debt and wanting it (their mortgage) gone.  

FWIW:  I'm all for having a HELOC set up in combination with some 'cash on hand' money to handle emergencies.  
  

[thyme4change]

but in effect you are paying to borrow your own money!

By not paying off your mortgage and saving instead, aren't you kind of doing the same thing?

[jeffreymo]

Paying off long-term low interest debt is towards the bottom of a long list of financial objectives I have.  It and other figures are a number in my spreadsheet.

[mithrin]

I agree with NOT paying off the mortgage early.  They could have used that capital to invest and come out further ahead.  My mortgage plan is to pay on time, but not throw extra at it.  Rates have started to go up, but if they come back down, I'll consider a re-fi to a new 30 year note, and take cash out if I can.  I can put the cash into brokerage and Roth accounts.  If rates stay higher than my fixed rate, then I'll look into getting a HELOC to get cash out to use for investing, depending on what rate I can get.

I don't want to have a paid off mortgage when I retire.  What I want instead is a pile 'o money sitting around that is greater than the balance on my mortgage/HELOC.  If I felt like not having a mortgage payment in retirement, I could just pay it off.  Or I could just let the money pile keep growing.  The point where I definitely would payoff the house is if I shifted my investments into lower yield but more stable funds where the expected growth was within a point or two of the mortgage rate.

[Deleted]

Another interesting way to look at paying off a mortgage. Don't we always tell people that they should at least contribute enough to get the full company match on their retirement plans? That's generally a dollar for dollar match. Well every dollar extra you pay on a mortgage can (depending on the loan percent & time line) knock 2 or 3 dollars off the end of the loan. That's a 2 or 3 hundred percent gain.

But really it all comes down to what you want. Mortgage or invest, either way is better than buying a boat, car, or another "toy".