Help deciding best way to pay off mortgage faster

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Bluemnatra
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Help deciding best way to pay off mortgage faster

Post by Bluemnatra »

Another questions about pay off mortgage vs invest.

So the wife and I want to payoff our mortgage faster. We have 28 years remaining. After maxing out tax deferred retirement accounts we will have $1,132 each month to apply towards our mortgage or invest.

Fed tax rate is 22% and state tax rate is 9.3% (California)

Current Balance: $489,000 @ 3.19%

Option 1: Pay bi-weekly plus an additional $1,132 each month. Pay off in 14.2 years.

Option 2: Pay bi-weekly and invest $1,132 each month in a taxable brokerage account for 14 years. Balance due after 14 years would be $263,885. Then have the choice of paying the lump sum at 14 years and likely have a surplus after paying mortgage off.

So what would you recommend as the best option to eliminate our mortgage debt?
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mrc
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Re: Help deciding best way to pay off mortgage faster

Post by mrc »

Option 1: We paid biweekly (which is 13 monthly payments in a year), and an additional amount — applied to lower principal — each payment. Be sure your lender applies the extra payments properly.

Option 2 is too easily derailed by factors outside your control.

Also, don't pay extra on the mortgage without an adequate emergency fund.
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KlangFool
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Re: Help deciding best way to pay off mortgage faster

Post by KlangFool »

Bluemnatra wrote: Wed Jun 23, 2021 5:36 pm
After maxing out tax deferred retirement accounts we will have $1,132 each month to apply towards our mortgage or invest.
Bluemnatra,

1) Don't pay down your mortgage. Contribute and invest the money into your Roth IRAs.

2) Do you plan to pay down or pay off the mortgage and take a more expensive student loan for your kids?

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Topic Author
Bluemnatra
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Re: Help deciding best way to pay off mortgage faster

Post by Bluemnatra »

KlangFool wrote: Wed Jun 23, 2021 5:49 pm
Bluemnatra wrote: Wed Jun 23, 2021 5:36 pm
After maxing out tax deferred retirement accounts we will have $1,132 each month to apply towards our mortgage or invest.
Bluemnatra,

1) Don't pay down your mortgage. Contribute and invest the money into your Roth IRAs.

2) Do you plan to pay down or pay off the mortgage and take a more expensive student loan for your kids?

KlangFool
This would be after mine and my wife’s Roth were fully funded. Kids college is paid for by the VA.
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Big Dog
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Re: Help deciding best way to pay off mortgage faster

Post by Big Dog »

Option 1, which is equivalent to a guaranteed return of 3.19%.
wetgear
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Re: Help deciding best way to pay off mortgage faster

Post by wetgear »

No matter what option you choose you should refi first. You should be able to get a rate in the mid-high 2s for a 30 year and low 2s for a 15 year. Either way pay it like you didn't refi.

I personally like option 1 better but KlangFool will always suggest #2 because he's comfortable walking away from a home and mortgage if things go south. I don't have that same comfort even if it's financially the correct thing to do.
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Callisto
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Re: Help deciding best way to pay off mortgage faster

Post by Callisto »

I was just offered flat 2% @ 15 years. So definitely agree with those suggesting refi.

I'd then invest the money if your AA is stock heavy. The way I see it, how low can returns get. 1%? If the doomsayers are right... then you "lose" very little. On the other hand, if they are wrong and returns are near historical averages, then your investments will beat the mortgage interest by a lot.
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grabiner
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Re: Help deciding best way to pay off mortgage faster

Post by grabiner »

wetgear wrote: Wed Jun 23, 2021 6:46 pm No matter what option you choose you should refi first. You should be able to get a rate in the mid-high 2s for a 30 year and low 2s for a 15 year. Either way pay it like you didn't refi.
In addition, if you are considering paying off the loan early, you might as well pay less interest while making those payments.

My own preference whether to pay it down depends on whether you are deducting the interest, which depends on how much you donate to charity. If you can refinance to, say, 2.5%, and the interest is deductible, paying it down gives a risk-free return of only 1.72%, which is a poor return for a long-term investment. (Vanguard CA Long-Term Tax-Exempt yields somewhat less, but with a shorter duration, so selling this fund to pay down the mortgage increases your interest-rate risk.)
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Re: Help deciding best way to pay off mortgage faster

Post by Mike Scott »

Certainly see if you can get a better refi. I fall towards the side of investing the difference at low interst rates but the risk/reward decision is completley different compared to paying down the morgage. Opinions vary and neither side will know which worked better for about 30 more years.
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Re: Help deciding best way to pay off mortgage faster

Post by LittleMaggieMae »

I'd go with:
Option 1: Pay bi-weekly plus an additional $1,132 each month.

Actually, I would just make one payment per month - the regularly scheduled amount and add in 1/12th of a regular payment + $1,132.00 each month. I like the one payment per month thing (with my extra prepayment amount added in). I get paid bi-weekly but my overall "spending plan" is built around 2 checks per month. And for some reason that bi-weekly mortgage payment thing messes with my math addled brain. :)

Option 1 gives you some flexibility so that if in a year or two or three, or if life happens or you have a change of heart about needing to pay off the mortgage faster, you can easily change the prepayment amount (but still would have pre paid on your mortgage/worked towards that goal while it was a goal).
Outer Marker
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Re: Help deciding best way to pay off mortgage faster

Post by Outer Marker »

Do a no-cost refi to a 15 year which you should be able to find for 2.75% or less and pay it off as scheduled.
EnjoyIt
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Re: Help deciding best way to pay off mortgage faster

Post by EnjoyIt »

Bluemnatra wrote: Wed Jun 23, 2021 5:36 pm Another questions about pay off mortgage vs invest.

So the wife and I want to payoff our mortgage faster. We have 28 years remaining. After maxing out tax deferred retirement accounts we will have $1,132 each month to apply towards our mortgage or invest.

Fed tax rate is 22% and state tax rate is 9.3% (California)

Current Balance: $489,000 @ 3.19%

Option 1: Pay bi-weekly plus an additional $1,132 each month. Pay off in 14.2 years.

Option 2: Pay bi-weekly and invest $1,132 each month in a taxable brokerage account for 14 years. Balance due after 14 years would be $263,885. Then have the choice of paying the lump sum at 14 years and likely have a surplus after paying mortgage off.

So what would you recommend as the best option to eliminate our mortgage debt?
You will get tons of different answers because they are all opinion based.

The only fact I can tell you is that historically investing the cash over long term such as 14 years has provided a better return than the interest on your mortgage. With that in mine, I would personally invest that money and in 14 years reevaluate my situation to see if selling those assets to pay off the mortgage is the correct decision. At the end of the day, having liquid assets provides you more flexibility compared to plow it into your house which I am assuming is the bulk of your assets today.

The one thing I believe everyone here will agree on is that you should refinance.
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SanAntionetta
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Re: Help deciding best way to pay off mortgage faster

Post by SanAntionetta »

What about Option 3: pay an extra $500/month and invest the rest. It doesn't have to be all or nothing, and this gives you some flexibility.
Admiral
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Re: Help deciding best way to pay off mortgage faster

Post by Admiral »

Here's the right answer for someone in your situation, i.e. who:

1. Has a 30 year mortgage
2. Has extra money each month
3. Wants to pay it off early
4. Can get a lower rate

Refinance to a 15 year mortgage at a lower interest rate, then pay as scheduled. Half the interest will likely be paid after about 5 years. You can reevaluate at that time.
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djpeteski
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Re: Help deciding best way to pay off mortgage faster

Post by djpeteski »

Is there a cost to paying biweekly? If so that may not be a good option. Many places charge for this and the bottom line is that it just does not make sense when the costs are considered.

For us, we just threw all our extra dollars at the mortgage. Our lender allowed principle only payments online and allowed more than one per month. So If I sold something and had an extra $80 in my pocket, I just deposited the money in the bank and put it to the mortgage.

In the end, there is no real miracles to paying off a mortgage. One must go with the lowest costs/least hassle way to get the principle paid down.
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Re: Help deciding best way to pay off mortgage faster

Post by KlangFool »

OP,

I do not believe in paying down or paying off low interest mortgage until I am financially independent. So, the answer would be option (3). Do (2) until you are financially independent. Then, pay down or pay off your mortgage.

Why would I pay down my low interest mortgage and delay my FI date by a few years? Until I am FI, a paid-off house does nothing for me. In fact, it limits my mobility and flexibility if the worst happened.

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Re: Help deciding best way to pay off mortgage faster

Post by Outer Marker »

If you have the available funds to regularly apply to the mortgage, a no cost refi to a lower rate 15 year term is a no brainer. The rate savings is free money.
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Re: Help deciding best way to pay off mortgage faster

Post by Surfcaster »

1) is risk free
2)involves risk

What is your risk tolerance? No one else can answer that part of the question. If you believe your incomes/jobs are very stable and you have sufficient emergency funds i would consider a 15 year mortgage refi. Otherwise the extra principal payments with 30 year is the safer way to go.
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Re: Help deciding best way to pay off mortgage faster

Post by Admiral »

Surfcaster wrote: Thu Jun 24, 2021 7:53 am 1) is risk free
2)involves risk

What is your risk tolerance? No one else can answer that part of the question. If you believe your incomes/jobs are very stable and you have sufficient emergency funds i would consider a 15 year mortgage refi. Otherwise the extra principal payments with 30 year is the safer way to go.
Small point but I would not consider mortgage pre payment “risk free.” Adding capital to an illiquid asset has its own kind of risk. Yes there is a guaranteed return. But it’s not risk-less.
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Re: Help deciding best way to pay off mortgage faster

Post by grabiner »

KlangFool wrote: Thu Jun 24, 2021 7:03 am OP,

I do not believe in paying down or paying off low interest mortgage until I am financially independent. So, the answer would be option (3). Do (2) until you are financially independent. Then, pay down or pay off your mortgage.

Why would I pay down my low interest mortgage and delay my FI date by a few years? Until I am FI, a paid-off house does nothing for me. In fact, it limits my mobility and flexibility if the worst happened.
I don't understand most of this argument. What is your definition of FI (financial independence)? If it is having enough money to retire, then "enough money" is not a fixed number, but depends on your expenses, and the mortgage is one of those. If you would need $1M invested to be FI with no mortgage, you would need $1.3M invested to be FI with a $300K mortgage. If you retire at that point, you could pay off the mortgage then, or use your investments to make mortgage payments when due; either way, you would have the future returns on $1M to spend on other things.

Now, if you are only halfway to that goal, with $900K invested and a $400K mortgage, you could sell $400K in bonds to pay off the mortgage, or keep the bonds. The other $500K of your portfolio would grow at the same rate either way, while the $400K in bonds would grow at the rate of the bond yield and the $400K mortgage would grow at the rate of the mortgage interest. Thus, if the bond yield is the same as the mortgage rate, you would reach FI at the same time either way, regardless of what happens to the stock market. If the bond yield is lower than the mortgage rate, you reach FI faster by selling bonds to pay down the mortgage.

The reason I said "most of this argument" is that you need to be able to make a risk-neutral comparison. If you don't have the bonds, you can't sell bonds to pay off the mortgage; if you have less in bonds than the mortgage balance, you can only pay off part of the mortgage. If paying down the mortgage requires you to sell stock (or buy less stock with new money), then it will affect your FI date; holding more stock allows you to reach your goal earlier if the market rises, or later if the market falls.

(Risk-neutral matters in other areas as well. If you sell a bond fund with a 5-year duration to pay down a 15-year mortgage at the same rate, you are increasing your interest-rate risk for no benefit. This is why I advise the OP not to pay down the mortgage beyond refinancing if the interest is deductible.)
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Re: Help deciding best way to pay off mortgage faster

Post by Admiral »

grabiner wrote: Thu Jun 24, 2021 8:05 am
KlangFool wrote: Thu Jun 24, 2021 7:03 am OP,

I do not believe in paying down or paying off low interest mortgage until I am financially independent. So, the answer would be option (3). Do (2) until you are financially independent. Then, pay down or pay off your mortgage.

Why would I pay down my low interest mortgage and delay my FI date by a few years? Until I am FI, a paid-off house does nothing for me. In fact, it limits my mobility and flexibility if the worst happened.
I don't understand most of this argument. What is your definition of FI (financial independence)? If it is having enough money to retire, then "enough money" is not a fixed number, but depends on your expenses, and the mortgage is one of those. If you would need $1M invested to be FI with no mortgage, you would need $1.3M invested to be FI with a $300K mortgage. If you retire at that point, you could pay off the mortgage then, or use your investments to make mortgage payments when due; either way, you would have the future returns on $1M to spend on other things.

Now, if you are only halfway to that goal, with $900K invested and a $400K mortgage, you could sell $400K in bonds to pay off the mortgage, or keep the bonds. The other $500K of your portfolio would grow at the same rate either way, while the $400K in bonds would grow at the rate of the bond yield and the $400K mortgage would grow at the rate of the mortgage interest. Thus, if the bond yield is the same as the mortgage rate, you would reach FI at the same time either way, regardless of what happens to the stock market. If the bond yield is lower than the mortgage rate, you reach FI faster by selling bonds to pay down the mortgage.

The reason I said "most of this argument" is that you need to be able to make a risk-neutral comparison. If you don't have the bonds, you can't sell bonds to pay off the mortgage; if you have less in bonds than the mortgage balance, you can only pay off part of the mortgage. If paying down the mortgage requires you to sell stock (or buy less stock with new money), then it will affect your FI date; holding more stock allows you to reach your goal earlier if the market rises, or later if the market falls.

(Risk-neutral matters in other areas as well. If you sell a bond fund with a 5-year duration to pay down a 15-year mortgage at the same rate, you are increasing your interest-rate risk for no benefit. This is why I advise the OP not to pay down the mortgage beyond refinancing if the interest is deductible.)
Please expand on the underlined section. If you pay off your mortgage, you reduce your investible assets by the mortgage amount. But if you continue to keep all assets invested, your nest egg is not $1m. It's $1.3m minus the monthly payment each month. You keep your higher amount of capital invested. So while it's true that technically "you would have the future returns on $1M to spend on other things" (because you still have a mortgage to pay) in reality as long as the markets return more than your mortgage rate you're better off keeping the larger amount invested, not reducing it.
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Re: Help deciding best way to pay off mortgage faster

Post by EnjoyIt »

Admiral wrote: Thu Jun 24, 2021 8:18 am
grabiner wrote: Thu Jun 24, 2021 8:05 am
KlangFool wrote: Thu Jun 24, 2021 7:03 am OP,

I do not believe in paying down or paying off low interest mortgage until I am financially independent. So, the answer would be option (3). Do (2) until you are financially independent. Then, pay down or pay off your mortgage.

Why would I pay down my low interest mortgage and delay my FI date by a few years? Until I am FI, a paid-off house does nothing for me. In fact, it limits my mobility and flexibility if the worst happened.
I don't understand most of this argument. What is your definition of FI (financial independence)? If it is having enough money to retire, then "enough money" is not a fixed number, but depends on your expenses, and the mortgage is one of those. If you would need $1M invested to be FI with no mortgage, you would need $1.3M invested to be FI with a $300K mortgage. If you retire at that point, you could pay off the mortgage then, or use your investments to make mortgage payments when due; either way, you would have the future returns on $1M to spend on other things.

Now, if you are only halfway to that goal, with $900K invested and a $400K mortgage, you could sell $400K in bonds to pay off the mortgage, or keep the bonds. The other $500K of your portfolio would grow at the same rate either way, while the $400K in bonds would grow at the rate of the bond yield and the $400K mortgage would grow at the rate of the mortgage interest. Thus, if the bond yield is the same as the mortgage rate, you would reach FI at the same time either way, regardless of what happens to the stock market. If the bond yield is lower than the mortgage rate, you reach FI faster by selling bonds to pay down the mortgage.

The reason I said "most of this argument" is that you need to be able to make a risk-neutral comparison. If you don't have the bonds, you can't sell bonds to pay off the mortgage; if you have less in bonds than the mortgage balance, you can only pay off part of the mortgage. If paying down the mortgage requires you to sell stock (or buy less stock with new money), then it will affect your FI date; holding more stock allows you to reach your goal earlier if the market rises, or later if the market falls.

(Risk-neutral matters in other areas as well. If you sell a bond fund with a 5-year duration to pay down a 15-year mortgage at the same rate, you are increasing your interest-rate risk for no benefit. This is why I advise the OP not to pay down the mortgage beyond refinancing if the interest is deductible.)
Please expand on the underlined section. If you pay off your mortgage, you reduce your investible assets by the mortgage amount. But if you continue to keep all assets invested, your nest egg is not $1m. It's $1.3m minus the monthly payment each month. You keep your higher amount of capital invested. So while it's true that technically "you would have the future returns on $1M to spend on other things" (because you still have a mortgage to pay) in reality as long as the markets return more than your mortgage rate you're better off keeping the larger amount invested, not reducing it.
Grabiner takes the assumption that a mortgage is a negative bond therefor in an example of a $1million 60/40 portfolio with $400k mortgage is exactly the same as a $600k 100/0 portfolio with no mortgage. That’s why I’m his mind selling all your bonds to pay off a mortgage leaves the person with the same asset allocation and risk tolerance.

I personally disagree with that stance because effectively on a balance sheet they are the same, but in a person’s mind they are very different. The point of having bonds isn’t just for fixed income, it is to prevent mistakes and to have some fixed income during dire times. The above to asset allocations are only the same on paper, but not in practice.
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KlangFool
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Re: Help deciding best way to pay off mortgage faster

Post by KlangFool »

grabiner wrote: Thu Jun 24, 2021 8:05 am
KlangFool wrote: Thu Jun 24, 2021 7:03 am OP,

I do not believe in paying down or paying off low interest mortgage until I am financially independent. So, the answer would be option (3). Do (2) until you are financially independent. Then, pay down or pay off your mortgage.

Why would I pay down my low interest mortgage and delay my FI date by a few years? Until I am FI, a paid-off house does nothing for me. In fact, it limits my mobility and flexibility if the worst happened.
I don't understand most of this argument. What is your definition of FI (financial independence)? If it is having enough money to retire, then "enough money" is not a fixed number, but depends on your expenses, and the mortgage is one of those. If you would need $1M invested to be FI with no mortgage, you would need $1.3M invested to be FI with a $300K mortgage. If you retire at that point, you could pay off the mortgage then, or use your investments to make mortgage payments when due; either way, you would have the future returns on $1M to spend on other things.
grabiner,

1) FI is based on current annual expense.

2) Let's assume that the current annual expense with mortgage is 60K with mortgage and 45K without mortgage.

3) Let's assume that the mortgage is 300K

4) Let's assume that the FI number is 25X current annual expense.

5) So, the FI number is 25 X 60k = 1.5 million with mortgage.

Or, the FI number is 25X 45K = 1.125 million plus 300K = 1.425 million.

6) So, the person could FI at 1.5 million. Or, the person could FI at 1.425 million by taking 300K off the the portfolio to pay off the 300K mortgage.

<<Now, if you are only halfway to that goal, with $900K invested and a $400K mortgage, you could sell $400K in bonds to pay off the mortgage, or keep the bonds. >>

I reject the "negative bond" idea. I borrowed from my mortgage to invest in my 60/40 portfolio. It is your choice to think differently.

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LongRoad
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Re: Help deciding best way to pay off mortgage faster

Post by LongRoad »

Outer Marker wrote: Thu Jun 24, 2021 7:10 am If you have the available funds to regularly apply to the mortgage, a no cost refi to a lower rate 15 year term is a no brainer. The rate savings is free money.
This option was mentioned by a few posters above and is a clear win if you're confident the payments on a 15 year mortgage are affordable.

If you still have a monthly surplus it can be invested.
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Re: Help deciding best way to pay off mortgage faster

Post by alfaspider »

Seems silly to make blanket pronouncements about when you should pay off your mortgage. Your mortgage is a negative bond. There are circumstances when that might make sense, but it has to play into your asset allocation and where you are in your tax advantaged space usage. It makes no sense to pay a 3% mortgage with non-deductible interest then turn around and buy bonds yielding 2%.

So it boils down to how your mortgage plays into your asset allocation. I am making early mortgage payments to avoid bonds in the taxable account. Based on my contributions, I have an implicit 80/20 split, but the 20 is going to the mortgage instead.
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Re: Help deciding best way to pay off mortgage faster

Post by alfaspider »

LongRoad wrote: Thu Jun 24, 2021 8:41 am
Outer Marker wrote: Thu Jun 24, 2021 7:10 am If you have the available funds to regularly apply to the mortgage, a no cost refi to a lower rate 15 year term is a no brainer. The rate savings is free money.
This option was mentioned by a few posters above and is a clear win if you're confident the payments on a 15 year mortgage are affordable.

If you still have a monthly surplus it can be invested.
Whether that makes sense depends on the specific market. When I refinanced in December, the jumbo market was in a weird place. A 30 year jumbo was 2.8% (what I did), while a 15 year jumbo was 3.6%. I actually had to clarify with my broker that the "3" was not a typo when they quoted me. It was just weird inverted yield curve stuff. Obviously better to just pay the 30 year in 15, and the 30 also provides extra flexibility.
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Re: Help deciding best way to pay off mortgage faster

Post by Money_Badger »

LongRoad wrote: Thu Jun 24, 2021 8:41 am
Outer Marker wrote: Thu Jun 24, 2021 7:10 am If you have the available funds to regularly apply to the mortgage, a no cost refi to a lower rate 15 year term is a no brainer. The rate savings is free money.
This option was mentioned by a few posters above and is a clear win if you're confident the payments on a 15 year mortgage are affordable.

If you still have a monthly surplus it can be invested.
I would agree with this. Otherwise, I'd invest the money and retain the flexibility that comes with liquidity.
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Bluemnatra
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Re: Help deciding best way to pay off mortgage faster

Post by Bluemnatra »

Okay so the thing is I’m more on the side of invest the surplus and my wife is on the side of paying off the mortgage. She hates debt. So we talked last night and decided we could do both. And the last refi I did she was pretty adamant that was the last one. We did a refi last year from 4.5% to the 3.19% and wouldn’t the closing costs would increase the loan?
"The greatest enemy of a good plan is the dream of a perfect plan"
EnjoyIt
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Re: Help deciding best way to pay off mortgage faster

Post by EnjoyIt »

Bluemnatra wrote: Thu Jun 24, 2021 9:20 am Okay so the thing is I’m more on the side of invest the surplus and my wife is on the side of paying off the mortgage. She hates debt. So we talked last night and decided we could do both. And the last refi I did she was pretty adamant that was the last one. We did a refi last year from 4.5% to the 3.19% and wouldn’t the closing costs would increase the loan?
Happy wife, happy life, but sometimes convincing wife is worth it. Put it in a spread sheet or a mortgage calculator and show her what a 2.25% mortgage would look like compared to what you have. I'm sure she will come around if you show her the benefits and do all the legwork. Also, there is a great mortgage refinance thread on this forum. Just do a search and you will see some great options that have no closing fees. Well worth the look. Just as a thought. cutting your interest from 3.19% to 2.19% on a $300k mortgage is worth about $3k in the first year. I think that is worth a few hours of your time, no?

As for the decision to split it 50/50, it's a good compromise. May I suggest you keep that invested cash separate so that you can see the difference between the two options. Hopefully in about 3 years you can show her what the difference is and maybe re-evaaute you decision.
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LongRoad
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Re: Help deciding best way to pay off mortgage faster

Post by LongRoad »

In very rough numbers, it looks like a no-cost/low-cost (think zero or <$500 total closing costs) refinance to 15 years might shave 0.50% off your rate. But not surprisingly, the 15 year term would also roughly eat the $1100/mo. surplus you have.

There's nothing wrong either with splitting the difference and both paying down the existing mortgage and investing. I'd have no argument if that makes the best sense for your wife and you.
:sharebeer
mortfree
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Re: Help deciding best way to pay off mortgage faster

Post by mortfree »

Bi weekly is a waste of time.

The lender (most likely) isn’t going to apply your payment to the balance each time you pay.

They usually hold the first payment and then when the next payment shows up it completes the transaction.

Just pay in a lump per month.

However can you really afford to plow over 500k into the mortgage in a reduced timeframe?

And splitting the decision may actually be worse.

Finally do you think you can commit to this approach for an extended period of time?

Lenders don’t care if you’ve paid extra then experience a hardship and can’t make the next months mortgage payment.
Mid-40’s
nolesrule
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Re: Help deciding best way to pay off mortgage faster

Post by nolesrule »

What's the advantage to biweekly payments? other than an extra half-payment that goes to principal twice a year, it doesn't lower the interest and it causes money to leave your accounts earlier than necessary.
stoptothink
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Re: Help deciding best way to pay off mortgage faster

Post by stoptothink »

mortfree wrote: Thu Jun 24, 2021 9:44 am Bi weekly is a waste of time.

The lender (most likely) isn’t going to apply your payment to the balance each time you pay.

They usually hold the first payment and then when the next payment shows up it completes the transaction.

Just pay in a lump per month.
This. All four of the lenders I dealt with just held onto the payment and applied it to the next month. It's primarily a psychological thing, mathematically there is no real benefit (in fact, you are likely to lose half a month of growth on that money).
KlangFool
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Re: Help deciding best way to pay off mortgage faster

Post by KlangFool »

Bluemnatra wrote: Thu Jun 24, 2021 9:20 am Okay so the thing is I’m more on the side of invest the surplus and my wife is on the side of paying off the mortgage. She hates debt. So we talked last night and decided we could do both. And the last refi I did she was pretty adamant that was the last one. We did a refi last year from 4.5% to the 3.19% and wouldn’t the closing costs would increase the loan?
Bluemnatra,

Not saying that you should argue with your wife. But, even after you pay off the mortgage, how much is your property tax and house insurance every year? Please make sure that both of you have the numbers as to how much annual expense that you reduce by paying off the mortgage.

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go2run
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Re: Help deciding best way to pay off mortgage faster

Post by go2run »

Bluemnatra wrote: Thu Jun 24, 2021 9:20 am Okay so the thing is I’m more on the side of invest the surplus and my wife is on the side of paying off the mortgage. She hates debt. So we talked last night and decided we could do both. And the last refi I did she was pretty adamant that was the last one. We did a refi last year from 4.5% to the 3.19% and wouldn’t the closing costs would increase the loan?
As others have suggested, look into the refi. Run the numbers. I wouldn't necessary roll any closing costs into the loan. Pay cash for that. You should be able to calculate how many months your break even point is.

FWIW, we have debated the same thing. We chose to invest additional cash but also make periodic additional payments along the way. In the long run, our return on investments was well over what the mortgage interest rate was. We have 8 years left on the mortgage and our expected interest outlay if we pay the minimum is $9,900. So, we continue to the split approach.
LittleMaggieMae
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Re: Help deciding best way to pay off mortgage faster

Post by LittleMaggieMae »

for the OP: no matter what path you take - odds are once your mortgage balance gets small enough (maybe when you've got 3 years or fewer of payments) you will just pay it off because the loan balance seems inconsequential in comparison to your overall investments/savings (or net worth).

You might want to add that "decision" and what money (where it will come from and any tax implications) you would use to do the pay off to your long term goals/plans. It's not something you need to think about now... but I'm pretty sure if you are still living in your house (haven't sold it and moved away) that "small to you" mortgage balance is gonna make you make a choice. :)
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F150HD
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Re: Help deciding best way to pay off mortgage faster

Post by F150HD »

Pay bi-weekly
any mortgage company I've had did not allow bi-weekly payments. Have read some do some don't. Worth a double check.
WhatsIRR
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Re: Help deciding best way to pay off mortgage faster

Post by WhatsIRR »

What is your AA?

We are 85/15 We’d like to get the house paid off early but not to the point of stopping investing. Our solution with extra cash is 85% goes to equities and the 15% bond portion gets used as an extra payment on the house.
EnjoyIt
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Re: Help deciding best way to pay off mortgage faster

Post by EnjoyIt »

WhatsIRR wrote: Thu Jun 24, 2021 10:33 am What is your AA?

We are 85/15 We’d like to get the house paid off early but not to the point of stopping investing. Our solution with extra cash is 85% goes to equities and the 15% bond portion gets used as an extra payment on the house.
Does that mean over time your AA will drift higher and higher towards equities?
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
LeslieSmiley
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Re: Help deciding best way to pay off mortgage faster

Post by LeslieSmiley »

I wouldn’t pay off the mortgage at 3.19% faster if i have a long time horizon to accumulate and invest. Like many have suggested, i would look into a no-cost refi to a lower rate and continue to invest in a portfolio that aligns with your risk tolerance.

The compound annual return of your portfolio with those “invested” money would likely be meaningfully higher than the 3.19% that you save and that saving will continue to be less and less every month due to inflation.

In addition, paying off the mortgage means locking up your capital to an illiquid asset. You can’t sell just your kitchen to rebalance or pay for unexpected expenses.

Paying off or down a mortgage only makes “financial” sense if the interest rate is high.

Paying off or down a mortgage for emotional or psychological reason (e.g. i just like the feeling of not having debt) is subjective and cannot be gauged or assessed objectively in terms of financial prudence.

So you should ask yourself why you want to pay off the mortgage faster and act accordingly.
WhatsIRR
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Re: Help deciding best way to pay off mortgage faster

Post by WhatsIRR »

EnjoyIt wrote: Thu Jun 24, 2021 10:34 am
WhatsIRR wrote: Thu Jun 24, 2021 10:33 am What is your AA?

We are 85/15 We’d like to get the house paid off early but not to the point of stopping investing. Our solution with extra cash is 85% goes to equities and the 15% bond portion gets used as an extra payment on the house.
Does that mean over time your AA will drift higher and higher towards equities?
For us it would be a small creep but yes over time you’d see some.

Our 401ks/IRAs are dominant in our portfolio (5-6x of taxable) and are set at 85/15 and are contributed at 85/15.

Depending on account balances and contribution levels you could skew quicker.
rlchambers
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Re: Help deciding best way to pay off mortgage faster

Post by rlchambers »

First I never saw your age. If you are near retirement a few things to consider.
Do you plan on staying in the same house for 30 years?
Today we have a shortage of homes which makes the houses more expensive. We could have lower prices should a housing bubble occur.
One solution would be to sell your home at higher prices. If you plan on retiring in a few years in another area. Then you could rent a home in the new area until the prices are more reasonable. Then you could purchase a new home in the area that you plan on living finance the new home for 15 years @2.375% and payments bi-weekly. In the interim, you would put the proceeds from your home that you sold into VTSMX. You might want to downsize.
EnjoyIt
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Re: Help deciding best way to pay off mortgage faster

Post by EnjoyIt »

WhatsIRR wrote: Thu Jun 24, 2021 10:45 am
EnjoyIt wrote: Thu Jun 24, 2021 10:34 am
WhatsIRR wrote: Thu Jun 24, 2021 10:33 am What is your AA?

We are 85/15 We’d like to get the house paid off early but not to the point of stopping investing. Our solution with extra cash is 85% goes to equities and the 15% bond portion gets used as an extra payment on the house.
Does that mean over time your AA will drift higher and higher towards equities?
For us it would be a small creep but yes over time you’d see some.

Our 401ks/IRAs are dominant in our portfolio (5-6x of taxable) and are set at 85/15 and are contributed at 85/15.

Depending on account balances and contribution levels you could skew quicker.
When we were very close to being financially independent we paid of our mortgage. We were 70/30 in our set allocation and basically deferred all taxable investments to the debt. Anything that went into tax advantage accounts went into equities. Any dividends in our taxable account went towards the debt. When we finally finished the payoff we ended up close to 75/25 on our AA. Once the mortgage was paid off, we directed all investments in taxable and tax advantaged towards bonds.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
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Bluemnatra
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Re: Help deciding best way to pay off mortgage faster

Post by Bluemnatra »

I’m 37 and yes we plan on staying in the home long term with no plans to ever move. My wife wants to leave the house to our children. Best refi rates I found through LenderFi and Aimloan were 2.75% for $377 closing costs and then 2.625% with $2,619 closing costs, both 30 year fixed
"The greatest enemy of a good plan is the dream of a perfect plan"
Admiral
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Re: Help deciding best way to pay off mortgage faster

Post by Admiral »

Bluemnatra wrote: Thu Jun 24, 2021 11:15 am I’m 37 and yes we plan on staying in the home long term with no plans to ever move. My wife wants to leave the house to our children. Best refi rates I found through LenderFi and Aimloan were 2.75% for $377 closing costs and then 2.625% with $2,619 closing costs, both 30 year fixed
Did you check 15s?
LittleMaggieMae
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Re: Help deciding best way to pay off mortgage faster

Post by LittleMaggieMae »

Bluemnatra wrote: Thu Jun 24, 2021 11:15 am I’m 37 and yes we plan on staying in the home long term with no plans to ever move. My wife wants to leave the house to our children. Best refi rates I found through LenderFi and Aimloan were 2.75% for $377 closing costs and then 2.625% with $2,619 closing costs, both 30 year fixed
FYI: you don't want to pay down (or off) your low interest mortgage and then have to borrow money to pay for/help with your children's education.

Look to the future and see if there are other big ticket things you would do (or like to do) in the future - you don't want to borrow money at a higher interest rate than your mortgage.

As has been pointed out - you can't sell parts of your paid off house to raise money or to use short term. You CAN borrow against it with a HELOC or a HEL or a new first mortgage - but then you are paying to use the money paid on the original debt.

I don't think the pay down/pay off the mortgage decision should be made in a "vacuum" - you need to determine how your house (and the mortgage) fit into your Big Picture and future plans/goals.
supalong52
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Re: Help deciding best way to pay off mortgage faster

Post by supalong52 »

This is more of an emotional decision than a financial one. We chose to take out a 15 year mortgage. When it is paid off, our eldest will be in high school and we will have two years before college costs start to kick in. We could have taken a 30 year at a similar rate, but it didn't sit well with me that I would have to maintain discipline for many years to pay it off in 15 years. The flexibility wasn't worth it to us compared to the feeling of security that we would be able to stick to our intended timeframe.
Last edited by supalong52 on Thu Jun 24, 2021 2:08 pm, edited 2 times in total.
nolesrule
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Re: Help deciding best way to pay off mortgage faster

Post by nolesrule »

Bluemnatra wrote: Thu Jun 24, 2021 11:15 am I’m 37 and yes we plan on staying in the home long term with no plans to ever move.
Is the master bedroom on the ground floor?
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grabiner
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Re: Help deciding best way to pay off mortgage faster

Post by grabiner »

KlangFool wrote: Thu Jun 24, 2021 8:33 am
grabiner wrote: Thu Jun 24, 2021 8:05 am
KlangFool wrote: Thu Jun 24, 2021 7:03 am OP,

I do not believe in paying down or paying off low interest mortgage until I am financially independent. So, the answer would be option (3). Do (2) until you are financially independent. Then, pay down or pay off your mortgage.

Why would I pay down my low interest mortgage and delay my FI date by a few years? Until I am FI, a paid-off house does nothing for me. In fact, it limits my mobility and flexibility if the worst happened.
I don't understand most of this argument. What is your definition of FI (financial independence)? If it is having enough money to retire, then "enough money" is not a fixed number, but depends on your expenses, and the mortgage is one of those. If you would need $1M invested to be FI with no mortgage, you would need $1.3M invested to be FI with a $300K mortgage. If you retire at that point, you could pay off the mortgage then, or use your investments to make mortgage payments when due; either way, you would have the future returns on $1M to spend on other things.
grabiner,

1) FI is based on current annual expense.

2) Let's assume that the current annual expense with mortgage is 60K with mortgage and 45K without mortgage.

3) Let's assume that the mortgage is 300K

4) Let's assume that the FI number is 25X current annual expense.

5) So, the FI number is 25 X 60k = 1.5 million with mortgage.

Or, the FI number is 25X 45K = 1.125 million plus 300K = 1.425 million.

6) So, the person could FI at 1.5 million. Or, the person could FI at 1.425 million by taking 300K off the the portfolio to pay off the 300K mortgage.
Here, #4 and #5 are inconsistent. The FI number is 25x current annual expenses only if those expenses will last throughout your retirement, and grow with inflation; a $1.5M portfolio will usually allow you to withdraw $60K every year, adjusted for inflation. In contrast, the mortgage payment will not grow with inflation, so your real-dollar expenses will decline every year, and will decline much more when the mortgage is gone (after 30 years in this example if it is a 3% mortgage).

As an extreme example, suppose there are only two years left on the mortgage, so the balance is $29K rather than $300K. You don't need $1.5M for FI, whether you pay off the mortgage now or not; you need $1.125M for your non-mortgage expenses, and enough to either pay off the mortgage now or make the payments over the next two years.

If you have not yet reached FI, then whether keeping the mortgage causes you to reach FI earlier or later depends on the return of the money you invest instead of paying down the mortgage. If that money is in bonds, you may know what its return is, and thus how it affects the FI date. If it is partially or entirely in stocks, you may expect to reach FI earlier, but you have to decide whether the risk is worthwhile. Similarly, if you pay down your mortgage, you can still invest more in stocks and expect to reach FI earlier, but again you have to take the additional risk.
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Wedemeyer
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Re: Help deciding best way to pay off mortgage faster

Post by Wedemeyer »

Money is so cheap now, I personally wouldn't pay off a mortgage early. I would refinance to get a lower rate. If your outlook is longterm, then invest that money in the market. That approach is likely to outperform the mortgage payoff, and will yield better diversification.

I'm with KlangFool, let the bank hold the risk. Ain't nothing guaranteed about the future value of your house.
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