Wednesday, April 25, 2018

The Age Old Question: Paying Off The Mortgage or Investing

Credit: Plume Ploume

I've read a lot of interesting articles about this topic.  Some people advocate paying off their mortgage with extra money and others advocate investing the money.  Where do you stand on this topic?  I am totally on board with paying off the mortgage.  This is for a few reasons: (1) I hate having debt, (2) I hate having a mortgage, (3) If something bad happens (like job loss) I would prefer not to have a mortgage payment to make, (4) I don't plan to make this house my forever home and I would like to have as much equity as possible when I sell so I have more money to put down on my forever home, (5) I want to make sure that even if the house market drops again that I will not be underwater on my house in the event that I am forced to sell and (6)I have PMI on my mortgage and I am trying to pay down the balance of the mortgage so that PMI is no longer required (maybe by early next year!).  If any of these scenarios occur, I think paying extra on the mortgage now is the best option for me.

Just for informational purposes my mortgage balance is $206,466 and the interest rate is 3.375%. I have a 30 year mortgage. The payments (without extra principal) are $1,481 (that's principal, interest, insurance and property taxes). 

Now, to be clear, I set annual goals for investing  (See previous post here).  I don't completely ignore my retirement or investing needs, I do plan to add $10,500 to my retirement accounts for the year.  I just budget $400 extra for my mortgage payment. Other people would use that money for investing. After all of my yearly financial goals are accomplished I hope be able to add a large lump sum to my mortgage payment at the end of the year. 

 So what do you do?  Pay off the mortgage early or invest?



15 comments:

  1. Replies
    1. Yes, yay!! I can't imagine a better feeling than paying off the mortgage.

      Delete
  2. We met with a financial guy years ago(before we paid off the house)who tried to get me to agree to putting the extra $ we were throwing at the mortgage into investments(of course, he wanted us to invest that $ into HIS instruments!lol). He gave me the old line about how we didn't want to lose the mortgage interest tax deduction by paying the house off. I told him I didn't just fall off a turnip truck and yes, I was ok with losing that deduction(as I had run the numbers both ways)and I would have paid much more $ out to a bank in interest on the home loan over the life of the mortgage vs. keeping that tax deduction.
    But then again, we were close at that point to paying off the mortgage early so most of our payment was interest and we were in our early 40's.
    If you are going to invest rather than paying extra on the mortgage make sure you keep enough liquid savings too.

    ReplyDelete
    Replies
    1. Ha! I do not understand the mortgage interest tax deduction as an incentive to keep a mortgage. I think right now I am content with just the $400 extra on the mortgage. I keep a $17,000 emergency fund as well as various sinking funds so even if I switch gears I've got some liquid back up.

      Delete
  3. Be sure to max out your retirement accounts first: you can foreclose on a house, you can't foreclose on retirement. Also, since you are looking at "shit hits the fan" scenarios, if you did have to file for bankruptcy (or someone sues you), the bank can take the house, but the retirement funds are protected (as long as they are qualified retirement funds - 401k, 403b, IRA, etc.). THEN, since you are dependent on yourself, I agree with A Dime at a Time: Hands down, pay off the mortgage!

    ReplyDelete
    Replies
    1. I have been maxing my Roth the last few years. I only have access to a Roth, the rest of my retirement is in a taxable account- so not automatically protected. In Florida, homes are protected from creditors (there can be liens, etc.)so there is no worry about losing my house due to a lawsuit. However, if I owed money I would sell my house and use the proceeds to pay any debt or judgment owed. I don't want to be on the hook to anyone if I don't have to.

      Delete
  4. Yep, I am a pay off the mortgage kind of girl, especially with PMI. I cannot stand PMI! People making ME pay for their insecurities bugs the crap out of me!

    ReplyDelete
    Replies
    1. OMG, yes! It's so dumb. $115 a month. Can't wait to get rid of it.

      Delete
  5. For me:
    1) Mortgage up to PMI payoff
    2) max retirement (18,500 for 401K or 5,500 for IRA whichever is available
    3) Additional to mortgage and to retirement (non qualified accounts)

    I view PMI as more like non-mortgage debt, so I want to get rid of that. Though I understand wanting the paid for house, for future equity or new home down payment, that strategy for too long forces you to view the house as an investment. It CAN be in investment, but not one you can liquidate easily in the face of an emergency.

    ReplyDelete
    Replies
    1. That is pretty much my plan. We do not have a 401k at work so I use a roth ira and a taxable account. Right now any excess will go to the mortgage, investments, a replacement car and home improvement. I do not view my house as an investment. It's too costly to be an invest (interest, taxes, maintenance and improvement). I just want to be able to NOT be upside down in the house when I sell. The more equity I have the better I will be in the long run. I ALWAYS think it's a good idea to not have debt- less risk.

      Delete
  6. Like you, I was dependent on myself, so I paid off the mortgage first, in my 50s, and what a wonderful feeling it was! However, I will add that the mortgage was not huge to begin with. If it had been much bigger this would not have been possible. I also probably should have invested more for retirement - have an ok nest egg, but not great. So it depends on your situation. You are still young and have some time to make a decision on this.

    ReplyDelete
    Replies
    1. oh wow, congratulations on the paid off mortgage!! I plan to increase my retirement contributions yearly until I decide/have enough money to retire. In a perfect world I will not have a mortgage payment in retirement.

      Delete
  7. My mortgage is the same rate and I struggle with this also. My husband wants to pay off the mortgage and I want to invest the money. Its not too hard to make more than 3.375% in the market.

    ReplyDelete
  8. Pay it off. Pay it off. Pay it off. Can't wait until we can.

    ReplyDelete
  9. This comment has been removed by a blog administrator.

    ReplyDelete