Paying off Mortgage- WWYD?

[Deleted]

My mortgage balance is around $55,000, 3% fixed, due to be paid off in another 7.5 years.  I can itemize so I get a bit of a break on the interest, but the interest deduction is only about $2,000/year these days.  Monthly payment is $700- P&I only.  No escrow.  After selling a lot of tech-related stuff earlier this year I have plenty of cash, so will not be selling equities to raise the money.

My plan would be to take the $700/month and move it into the Fidelity investment account and invest it.  The way everything has been beaten down this may be good timing.

I know what Phil would say.  Leverage is good.  This is one of those behavioral economics situations where I know what makes sense according to the numbers but I really like the idea of living in a paid-off house.  It's never happened to me before!

Thoughts?

[Deleted]

We faced this situation several years back. Yes, the purely financial side said we should pay XYZ monthly and keep ABC invested at some potential rate of gain. But having a paid-off house meant more to us than the dollar equation did. I haven't done a spreadsheet or anything like that to keep track of the upside and downside of our decision. But we have benefited psychologically from having a paid-off house and haven't seen any negative impacts. I get the Phil thing but sometimes going with our gut isn't bad either IMHO

[Artemis Windsong]

We accelerated payments and paid our house of years ago.  I added one full payment every month that went directly to principal.

Our vaca house is also paid for. 

Our neighbor said their financial advisor had showed them it was better to make payments.  No thanks.

[teen persuasion]

I paid our house off as quickly as we could, but our interest rate was 9.75%. At 3% I wouldn't pre-pay, I'd invest.

[tskeeter]

One point in favor of paying off the mortgage.  A mortgage free house simplifies the process of settling an estate.

On the other hand, I saw an article a few days ago where the writer projected 20% gains in the market for 2023.  If the fed backs off on interest rates as expected, I think those kind of returns are entirely possible for the next couple of years.

I’m a couple of years younger than you are, and I’m keeping my 3% mortgage for every second of the remaining term of the loan.

[Deleted]

Nov 24, 2022 22:09:52 GMT -5 Artemis Windsong said:

Our neighbor said their financial advisor had showed them it was better to make payments.  No thanks.

Well, the advisor WOULD say that, wouldn't they?   And it's actually true.  I remember as a kid Mom told me that they had enough $$ to pay off their mortgage but they weren't going to.  My parents were VERY conservative about borrowing- no credit card debt, Mom would occasionally buy good furniture on "90 days same as cash" (zero interest for 90 days), being very careful to send in the payment before 90 days.  I couldn't understand why they kept the mortgage!

I did a comparison assuming a 6% average return.  If I invested the $55,000 for 7.5 years I'd have $85,000.  If I take it out now, pay off the mortgage and invest what I'd have made in payments every month at 6% I'd have $68,000 at the end of 7.5 years.  Hardly enough to make a difference in my retirement at that age.  That neglects the tax benefits of the interest deduction but also neglects any taxation of the investment returns.

I wonder about my credit rating.  Right now it's excellent.  I have 3 credit cards and pay them off in full every month and have no other loans.  I can't see needing any other loans except switching out credit cards now and then.

[Bonny]

Athena,

I would do whatever you feel comfortable with. It's not really going to make a difference either way. With such a small balance I think I would just pay it off because it's one less thing to worry about.

Good luck!

[NoNamePerson]

I paid off a mortgage some years back. I made a copy of the "paper work" before having it recorded as paid in full. I sat down on my deck with a tall Screwdriver and set a match to the copy!! Most liberating feeling in the world to me. Drink was good too

I hate debt and Phil would probably flog me if he knew how I have done money things in my life time. But I say do what makes you feel good and ask yourself if you will regret the decision in the morning!

I have this "what's the worse that can happen" mind set. So far nothing has killed me or landed me in jail so all is good.     (So far)

[jerseygirl]

Jerseyguy wanted to pay off $100000 mortgage . I didn’t care. Now retired and very happy to not have mortgage payments. Fewer bills each month and makes life simpler. For me, simpler removes stress . Might have made more in the market, might not but market gyrations do cause some anxiety if you’re depending on market for paying expenses in retirement

[Deleted]

Nov 25, 2022 10:56:21 GMT -5 Bonny said:

Athena,

I would do whatever you feel comfortable with. It's not really going to make a difference either way. With such a small balance I think I would just pay it off because it's one less thing to worry about.

Yes, at this point it's the nuisance factor.  In the back of my mind I'd been thinking about paying it off when it hit $50K anyway.  I'm glad soupandstew mentioned spreadsheets even though they didn't use them- the calculation I did makes me feel better.  I've got a larger cash cushion now than I ever have (although I'm cautiously dipping my toe in the market again) and my predictable income (SS plus pension) is more than adequate so throwing $55K into the house equity isn't a concern.

I'll be talking to my advisor about year-end moves next week and will tell him to move $55K into my checking account.  He won't object- he has plenty more to play with.  And the mortgage company will be thrilled to take the $$ and lend it out at a higher rate.

[busymom]

I know Phil would disagree, but I'd pay off the mortgage, as long as you're disciplined enough to take the mortgage amount out of your check every month and put it away to save.  A good friend of ours told us recently that in the neighborhood he grew up in, folks rarely paid off their mortgages.  Life can throw a lot of curve balls at you, and he was telling us stories of neighbors who died young, or had some major health issues, and then the house would get repossessed.  Frankly, I'd rather have the peace of mind of having the place I'm living in paid for. JMHO.

[haapai]

At the age of 52, I received a couple of inheritances that would have been enough to pay off my 3.75%, $38K mortgage.  

I still have a mortgage. 

I looked for every possible way to rationalize paying the damn thing off.  I didn't find one that was worth the price that my own spreadsheets told me that I would pay for doing so. 

But I'm open to the possibility that others have different spreadsheets and different values.  I do not have children to protect while they are minors or send to college.  My partner would not be able to afford the taxes and upkeep on the house even if it were inherited without a mortgage.  I am behind on my retirement savings goals and cannot afford the luxury of such a conservative move.  YMMV. 

[The Walk of the Penguin Mich]

I’m going to go at this from a different direction.  

Since I paid off my car, my credit score has been steadily dropping despite me using my cards regularly and paying them off monthly.  My credit score was higher when the cards were paid off and I still had that monthly car payment, and it’s annoying.  

Your mortgage is another positive ping for the credit agencies, and once it is gone your score more than likely will drop.  So my question to you is ‘how important is this?’

[Deleted]

Nov 25, 2022 12:49:10 GMT -5 The Walk of the Penguin Mich said:

Your mortgage is another positive ping for the credit agencies, and once it is gone your score more than likely will drop.  So my question to you is ‘how important is this?’

That's probably my biggest concern.  I have no plans to borrow for anything in the future; paid cash for my car in 2020 so I hope that lasts awhile.  I apply for a new credit card maybe every 2-3 years and it could affect that process even though I have a LONG history of paying off in full every month, no late payments at all.

Good problem to have!

[The Walk of the Penguin Mich]

Nov 25, 2022 13:09:36 GMT -5 @athena53 said:

Nov 25, 2022 12:49:10 GMT -5 The Walk of the Penguin Mich said:

Your mortgage is another positive ping for the credit agencies, and once it is gone your score more than likely will drop.  So my question to you is ‘how important is this?’

That's probably my biggest concern.  I have no plans to borrow for anything in the future; paid cash for my car in 2020 so I hope that lasts awhile.  I apply for a new credit card maybe every 2-3 years and it could affect that process even though I have a LONG history of paying off in full every month, no late payments at all.

Good problem to have!

I agree.  But I have spent my life trying to maintain a good credit score and it really sucks when you start to watch it drop only because you don’t need to pay on time for anything.

i think when I buy my next car, even though I intend to pay cash, that I’m going to get a loan and pay it off fast.  That should reset my clock.  That is, provided my score isn’t in the dumpster by then.  

[haapai]

Nov 25, 2022 13:09:36 GMT -5 @athena53 said:

Nov 25, 2022 12:49:10 GMT -5 The Walk of the Penguin Mich said:

Your mortgage is another positive ping for the credit agencies, and once it is gone your score more than likely will drop.  So my question to you is ‘how important is this?’

That's probably my biggest concern.  I have no plans to borrow for anything in the future; paid cash for my car in 2020 so I hope that lasts awhile.  I apply for a new credit card maybe every 2-3 years and it could affect that process even though I have a LONG history of paying off in full every month, no late payments at all.

Good problem to have!

Ummh, what is going on here?  If you have no intention to borrow again, you have no reason to juice up or maintain your credit score by making sure that you have current installment loans. 

Why are you using the effect on your credit score (which is probably excellent, and could easily take a 50-100 point hit without you paying a cent of additional interest on any new credit line) to justify either the decision to pay off your mortgage or not do so? 

I'm beginning to wonder if you've done any math at all.  You appear way too interested in paid-off houses and high credit scores.  Those things have a role in personal finance, but they pale in the face of compound interest. 

[Tiny]

TLDR;
Do the thing that gets you closest to your overall LONG TERM goals - "peace of mind" - pay it off. A bigger investment portfolio - keep the mortgage.



I've got approximately 35K left on my 30y mortgage at 4.125% I've been paying it down in dribs and drabs for the past 9 years. It wasn't a very big mortgage to begin with. If I just continue to pay as agreed - it will be paid off in 9 years (I haven't done the exact math - but once the balance gets into the 5K or lower range it's a lot easier to pay off in one lump sum (move some EF money to it).   With my dribs and drabs method - it will most likely be paid off in 5 years (or less).  
 
I could pay the silly mortgage off - but it would require liquidating some investments and maybe using a large portion of my EF and who knows what else (maybe I will pay more in income tax - I have taxable income in the highest tax bracket I've ever been in).  All so I don't have to pay a $400 a month bill that's already baked into my "budget" and even my "retirement budget". 

I have had a paid off house - and the damn house was just as expensive as it was when I was making P&I payments (mortgage). Freeing up the mortgage amount didn't make all that big a difference for me.

So, even though paying off my mortgage most likely wont give me much of a sense of comfort or pride or peace or whatever.... I am aware that the comfort that not owing one of the myriad of bills that are required to be paid to maintain one's shelter seems to give many people a feel good and sense of peace.

As to my advice - this is either a "have faith in math" issue and don't pay off the mortgage by keeping your money invested - OR - it's a "I need to feel good" issue and using savings/investments to pay it off and then turn around and reinvesting the "mortgage payment"

[The Walk of the Penguin Mich]

Nov 25, 2022 13:55:59 GMT -5 haapai said:

Nov 25, 2022 13:09:36 GMT -5 @athena53 said:

That's probably my biggest concern.  I have no plans to borrow for anything in the future; paid cash for my car in 2020 so I hope that lasts awhile.  I apply for a new credit card maybe every 2-3 years and it could affect that process even though I have a LONG history of paying off in full every month, no late payments at all.

Good problem to have!

Ummh, what is going on here?  If you have no intention to borrow again, you have no reason to juice up or maintain your credit score by making sure that you have current installment loans. 

Why are you using the effect on your credit score (which is probably excellent, and could easily take a 50-100 point hit without you paying a cent of additional interest on any new credit line) to justify either the decision to pay off your mortgage or not do so? 

I'm beginning to wonder if you've done any math at all.  You appear way too interested in paid-off houses and high credit scores.  Those things have a role in personal finance, but they pale in the face of compound interest. 

Because other things than borrowing affect how much you pay for other things.  I occasionally change credit cards and have been denied for a cards for not having ‘enough’ on my report.  My score is lower than I would like it to be, and it has dropped well over 100 points since I paid off my car.  I have no debt, and since I paid for my car over 7 years ago, it dropped even more since my car dropped off my credit report. 

Despite being married, if something happens to TD, I will be required to get things on my own again.  That includes getting utilities in my name, or possibly buying another home.  It used to be I had sufficient that I never had to put a deposit down.  I doubt I’d get that now.

Oh, and I get the math part, but I guess you didn’t see the part about paying it off quickly to avoid much interest.

[Deleted]

I think I mentioned this on another thread recently-your insurance score impacts your insurance premium and your credit score is part of the insurance score calculation.

Also, another part of the equation is whether the individual gets a tax benefit from deducting mortgage interest- with the increased standard deduction, many do not.

[Rukh O'Rorke]

Nov 25, 2022 17:58:15 GMT -5 soupandstew said:

I think I mentioned this on another thread recently-your insurance score impacts your insurance premium and your credit score is part of the insurance score calculation.

Also, another part of the equation is whether the individual gets a tax benefit from deducting mortgage interest- with the increased standard deduction, many do not.

Interesting point, and also interesting how the whole financial industrial complex penalizes people for not be plugged into the financial matrix they've created to maximize their profits off us.


At some point, accumulating assets should free us from caring about such things as credit scores and being "approved" by the "system".


So the real question is - red pill or blue pill?

[Deleted]

Nov 25, 2022 18:15:36 GMT -5 Rukh O'Rorke said:

Nov 25, 2022 17:58:15 GMT -5 soupandstew said:

I think I mentioned this on another thread recently-your insurance score impacts your insurance premium and your credit score is part of the insurance score calculation.

Also, another part of the equation is whether the individual gets a tax benefit from deducting mortgage interest- with the increased standard deduction, many do not.

Interesting point, and also interesting how the whole financial industrial complex penalizes people for not be plugged into the financial matrix they've created to maximize their profits off us.


At some point, accumulating assets should free us from caring about such things as credit scores and being "approved" by the "system".


So the real question is - red pill or blue pill?

but they are often color shifters so who knows down the road?

[minnesotapaintlady]

I still plan on paying my mortgage off when I retire or soon after. Both sets of parents have a paid off mortgage and my aunt paid off hers last year. They all told me the credit hit was minimal (like 20-30 points). I don't really care about score at all these days and a 30 point hit would still be the upper 700's so that's kind of a "whatever" anyhow.

[MN-Investor]

Absolutely pay off your mortgage now.

You are paying less and less in interest each year. Yes, the yearly deduction recently might have been about $2,000, but right now 3% of $55,000 is $1,650. Next year the interest paid will be even less.

As far as continuing to itemize, consider using a Donor Advised Fund to lump your contributions into alternate years so you can itemize every other year.

My sweetie and I bought our house in 1980. We were always in agreement on finances and investing. We made extra payments and finished paying off our house in 1994. (Mortgage interest rates were outrageous back then.) It was such a nice feeling to not be sending off money every month!

As far as needing to borrow, I can't imagine what I would need to borrow for. The last time we borrowed was for the house in 1980. As far as credit cards, I just got a new one last year from Fidelity, the firm where my IRA is. It has a $25,000 limit. So not having any loan payments hasn't hurt my ability to get a credit card.

[CCL]

I refinanced my house at 2.625%. No way I would pay that early. Matter-of-fact, I kinda wish I had borrowed even more. I dreamed of a rate like that for years. My first mortgage was 10.5%, so I've come a long way.

[tskeeter]

Nov 25, 2022 7:50:22 GMT -5 @athena53 said:

Nov 24, 2022 22:09:52 GMT -5 Artemis Windsong said:

Our neighbor said their financial advisor had showed them it was better to make payments.  No thanks.

Well, the advisor WOULD say that, wouldn't they?   And it's actually true.  I remember as a kid Mom told me that they had enough $$ to pay off their mortgage but they weren't going to.  My parents were VERY conservative about borrowing- no credit card debt, Mom would occasionally buy good furniture on "90 days same as cash" (zero interest for 90 days), being very careful to send in the payment before 90 days.  I couldn't understand why they kept the mortgage!

I did a comparison assuming a 6% average return.  If I invested the $55,000 for 7.5 years I'd have $85,000.  If I take it out now, pay off the mortgage and invest what I'd have made in payments every month at 6% I'd have $68,000 at the end of 7.5 years.  Hardly enough to make a difference in my retirement at that age.  That neglects the tax benefits of the interest deduction but also neglects any taxation of the investment returns.

I wonder about my credit rating.  Right now it's excellent.  I have 3 credit cards and pay them off in full every month and have no other loans.  I can't see needing any other loans except switching out credit cards now and then.

I agree with your logic and your math, Athena53.  The challenge is that the theory and reality often diverge.  I suspect that only a small percentage of folks, even YMers, have the self discipline to invest the mortgage payment every month after the mortgage is paid off. In my case, I could see myself deciding that now that the mortgage is paid off, I can divert a couple of months worth of mortgage payments to fund a nice vacation, and I can afford to upgrade the cable service to get a couple of channels I’m interested in, and with more disposable income every month, we can eat out more often.  Sure, a lot of the mortgage payment might make it to my investment account.  But, a portion of the mortgage payment is very likely to fund lifestyle inflation.  So, for most people, the gap between the two options isn’t $17K, it’s more likely that the gap is $30K or more.

[teen persuasion]

Nov 25, 2022 19:14:48 GMT -5 minnesotapaintlady said:

I still plan on paying my mortgage off when I retire or soon after. Both sets of parents have a paid off mortgage and my aunt paid off hers last year. They all told me the credit hit was minimal (like 20-30 points). I don't really care about score at all these days and a 30 point hit would still be the upper 700's so that's kind of a "whatever" anyhow.

We paid off our mortgage around 2010. Credit score stayed above 800 for a long time; no other installment loans, never had a car loan.  Only after the mortgage history fell off after 10 years, and a credit card got closed for inactivity during covid lockdown, did the score drop a bit lower, but still hovers around 805.  It regularly drops below 800 when we charge our annual oil pre-buy, because it drives credit utilization up above our normal.  Then it bounces back up over a few months.

[Deleted]

Nov 25, 2022 13:55:59 GMT -5 haapai said:

I'm beginning to wonder if you've done any math at all.  You appear way too interested in paid-off houses and high credit scores.

Ah, you underestimate me. I monitor the IRR on my investments separately for each holding.

I can itemize regardless of whether or not I have mortgage interest- I'm a single so the standard deduction is pretty paltry. I'm aware of credit scores being used in insurance and that's a bit of a concern- not sure if they do it in my state. Some don't allow it even though there's a clear correlation between loss potential and credit scores.

I saw some reassuring news about credit scores not dropping too much- that is a concern but I agree it's a darn shame you have to be in debt to be considered credit-worthy. When DH and I bought our last house, we had invested assets worth 10X the cost of the house and were planning to put down $150K of the $250K purchase price. The silly bank focused on DH's SS and my $1,800 in pensions and would loan us only $100K. I was one year post-retirement and our withdrawals from savings were irregular- although our assets had gone up by $100K in that year.

Putting the $700/month into savings won't be an issue. Honestly, I have enough to spend on all my wants and needs with lots left over for charity and the kids' 529s. I suppose I could buy an Escalade with a 7-year loan and make payemnts on that!

[minnesotapaintlady]

Nov 26, 2022 8:46:08 GMT -5 @athena53 said:

I can itemize regardless of whether or not I have mortgage interest- I'm a single so the standard deduction is pretty paltry.

Less than 12% of all taxpayers itemize, so it really isn't all THAT paltry.  You can always just up your charitable donations 2K/year to make up for the lost interest deduction.

[Deleted]

Nov 26, 2022 9:09:47 GMT -5 minnesotapaintlady said:

Less than 12% of all taxpayers itemize, so it really isn't all THAT paltry.  You can always just up your charitable donations 2K/year to make up for the lost interest deduction.

[/div][/quote]

Yeah, I could- but it looks like my charitable deductions will already be about 1/3 of my 2022 AGI.

[jerseygirl]

Thought if using the standard deduction only get $600 for charity deduction even if giving more?
We’ll probably use the std deduction for first time next April.