Homeowners feel compelled to pay off low-interest mortgages
15 posts across 3 communities in the last 60 days; 87% from r/personalfinance.
“How are you going to pay it off early? An awful lot depends on the opportunity cost of paying it off early. What are you giving up to make extra payments? (Do you have some big windfall that’s going to let you pay it all off at once?) Are you suggesting forgoing 401K…”
“Exactly. You can't eat your roof during hard times. If the stock market crashes, yes your investments go down, but you can still sell them to buy groceries.”
“Thanks! The liquidity of a brokerage is a good point. I just thought maybe paying down mortgage would diversify me a little bit in the event of a market downturn when we want to sell.”
Multiple users express a desire to pay off their mortgage despite the mathematical disadvantage of doing so. Some cite emotional reasons, while others explore strategies like bond ladders or consider potential legal protections for assets tied to a home.
SOURCES (39)
“How are you going to pay it off early? An awful lot depends on the opportunity cost of paying it off early. What are you giving up to make extra payments? (Do you have some big windfall that’s going to let you pay it all…”
“I belive the premise is that any extra you would pay to the mortgage could be invested for a bigger return then the interst cost. At the 3% I've got that's very true. At 5% its closer to an even bet. And the piece of mind of not having any debt is hard to put a price tag on.”
“A lot of your points are actually arguments for keeping a mortgage if you look at the opportunity cost of paying it off. Granted there is a rate even I would pay it off. For me that is probably closer to a 10yr treasury rate more than 2% below my interest rate while mortgage rates arent low enough for me to refi Depends on distribution of your assets between retirement and taxable accounts. I'll happily pay an extra 2% on withdrawals to pay a 5% mortgage if I am making 10% in the market. Won”
“Traditional advice I see is constantly to invest instead of paying off a mortgage early unless you have ~7% interest. I’m currently sitting at 5% and I’m convinced there is more merit to even paying that off than not, here’s my thoughts 1) Paid off mortgage means you will need less and can lower your tax bracket buckets when withdrawing from retirement. 2) Government benefits favor lower income. If you can lower your expenses by paying off a mortgage, and can control your income through retireme”
“Thanks! The liquidity of a brokerage is a good point. I just thought maybe paying down mortgage would diversify me a little bit in the event of a market downturn when we want to sell.”
“That’s where you’re wrong. There is no one size fits all method. Read the other comments and you’ll see that it actually makes more sense the way it is and for you to specify as opposed to the other way. In a country where the majority of people are $1000 away from financial ruin, making the payments ahead of time absolutely makes sense. For them, they avoid late fees and not having enough to pay next month’s mortgage payment.”
“Exactly. You can't eat your roof during hard times. If the stock market crashes, yes your investments go down, but you can still sell them to buy groceries.”
“No, I didn't miss any points. This is basic finance 101. The mortgage is added risk in retirement.”
Thank you for sharing! I'll try to work something out based on this
“Just compare the after tax rates in each and determine if the difference between them is more or less than what you would allocate as the risk premium. Pre tax 10% S&P 500 might be an 8% after return which is 1-ish point higher than current mortgage rates and is below my personal risk premium and therefore I would pay down a 7% mortgage. 8% is 4.6 points higher than your 3.4% and that 4.6 is above my risk premium and therefore I would not pay down that mortgage. My personal risk premium is a”
“Factor in the interest saved to the future returns of 400k that could be conservatively invested (if not already) for a balanced comparison. At 6.2% it's somewhat of a break even, though mortgage interest deduction may sway a little in the direction of holding the mortgage depending on your tax situation. I personally favor liquid assets a little more as there's a qualitative value in flexibility. As for contributing your assets to paying off the mortgage, this would seem unwise without”
“Standard idea is to invest as the market has earned more over the last 40 years. However, peace of mind and simplicity has a lot of people deciding to pay off the mortgage. I'm in a similar situation and have decided to pay off early and get a guaranteed 6+% value on my money rather than a speculative value in the market now due to the volitility and uncertainty.”
“Yes, I am on reserve. Thats what I was thinking of doing. When my mortgage is done, basically id be saving close to 2 grand a month for retirement or fill up my TFSA. I will have to ask my financial advisor which is smarter”
“Debt can be a tool. Both in real estate and business. It’s only scary if you’re not using it correctly. (Which a lot of people don’t.)”
“No. Let it ride. You’re essentially paying all principal now anyways. You’ll save little by paying early, you’ll lose on growth with the money that should’ve stayed put.”
“This is one of the many things I disagree with Dave Ramsey on. A paid off house is an emotional goal and not a financial goal.”
Better than understanding them and having 0 investment properties?
“Yeah that rule is antiquated and often disregarded, and this is actually a great example why. Have you heard of the 25% rule? Because this mortgage payment is 37.5% of their take home Anyone advocating spending 37.5% of their take home on strictly PITI is quite frankly an idiot. Sorry. And here you are actually saying they should spend $3,640 or 45.5% of their take home on a mortgage lmao. Ok bud”
“If you have a 30 year loan at 5% and pay $100 in interest, or the same loan at 7% interest and pay $150. You could pay off the 7% loan FASTER and only pay $100 in interest. Effectivly your rate was 5%. Yes yes, time value of money and blah blah blah.”
“Sure this is a consideration when evaluating your portfolio. Fixed rate mortgages lessen interest rate risk. My argument is that appreciation and debt paydown isn't a bonus when calculating evaluating property performance, but a drag on equity.”
“Can you explain why you think appreciation and principal paydown make your investment worse? I understand favoring cash flow over those two variables, but an increase in cash flow, appreciation, and principal paydown would be ideal, right?”
“It’s called amortization, you pay more interest in the first part of the loan and more principal over time as the loan progresses. Look up amortization tables.”
“I don’t think that’s new mortgage thing, it has been that way since I can remember Principal pay down is just icing on the cake.”
“I focus on cash returns. I really don’t care how long it takes me to pay off the loans if I’m not paying for the loans. I consider how much I bought the house for, how much I can potentially sell the house for in the future and how much I make monthly after month. I don’t concern myself with the rest unless of course it’s sitting vacant for any length of time because then of course I’m paying for it.”
“The 12% principal share is just what an amortization curve looks like in year 3-5 at 6-7%; on a 30-year note you don't cross the 50/50 principal-interest line until roughly year 18-19 at those rates. The number that matters isn't principal paid, it's the spread: $19,785 gross rent against $15,488 debt service leaves almost nothing for capex and vacancy on four doors. Also worth pulling the PMI out separately - on the 5.875% and 6.375% loans you may already be near 78% LTV on the orig”
If you pay it off faster you. Effectively had a lower rate
“I’m so happy my loans on investment properties are at 4%, 4.25 % and on primary 2.75. Don’t know if I’ll ever try to pay them off faster”
“That definitely makes a mortgage look more appealing, especially if you can put that money to work elsewhere. It's a smart way to balance savings and investments.”
“It's pretty tough to beat the tax advantage of a 401k. Personally, I'd hold the course with your normal 15%. But, at the near 7% interest rate, it's not crazy to pay it down some. Just probably not optimal.”
“The magic number would be around 4% for me, where I'd put everything toward investments. Unfortunately (or fortunately), I'm at 5.25% right now, and do about a 25/75 split, 25% extra to mortgage and 75% to investing. This is also assuming we're talking about taxable brokerage. I'd go for maxxing any tax advantaged accounts first.”
“Like 5 years back, my wife and I started a brokerage that was earmarked for paying off the house. Started it with $15k put in like $1k/mo. It grew pretty good with the bull market run. This year our mortgage balance was at around $113k and we had some extra savings built up, enough that in combination with the brokerage we could pay off the house. That brokerage was going gangbusters. You could see the money piling up. It's awesome. Our mortgage was only like 3.125%. We took the money from t”
“This is why personal finance is hard. Emotions beat the living hell out of logic. No don't pay it off. A 2.7% mortgage is like the bank paying you money for a loan. Even sitting in a HYSA its more beneficial. If you want to get real fancy and satisfy your emotions, create a bond ladder with your mortgage payment and every month when your bond matures, pay off mortgage using it.”
“Just to be a contrarian, here are some reasons why you are right to pay You need to keep your income down and can control it. Some people in retirement who get their income from selling investments are in this situation. They prepay mortgage, lower cash needs, lower income, and then qualify for healthcare subsidies or lower tax brackets. Money in a house may have some legal protections that your investments don't. For example, if you need medicaid and are married, they don't go after you”
“When you talk to people who paid off their mortgage or took social security early none of them are going to tell you they regret doing it. We paid off a 4% mortgage about eight years before I retired (spouse worked another 5 years). The math told us it was better to keep the mortgage and invest the payoff amount. Spouse said to pay it off and she won the argument. I've been retired now for 9 years spouse for 3. Looking back I don't regret paying it off at all. Could we have had a few mor”