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October 22, 2007


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First of all, don't pull money out of your house.

Second of all, past performance is no guarantee for future returns. Just because your mutual funds have returned 12% annually in the past, does not mean it will continue to do so. Investment is not a guaranteed return.

It's okay for you to continue to pour money into your investments, but it's not okay for you to take money out of the house.

Since you are in your 40s, you should start looking into the right asset mix as you approach retirement. The closer you are to retirement, more of your money should be in investments that are less risky.

I am in a similar situation. I paid off my house at age 36 and have mutual funds mirroring the indices. Once you have fully funded an emergency fund, maxed out retirement accounts and education plans, I would invest in tax-advantaged mutual funds. I would not take out your equity and try to invest this. The whole point of paying off your house is to not have debt and not be levered. There are no good ways to take that equity and invest it. Instead I would take what you were paying for your house monthly and invest this in the stock market. Over the long run( it may be a very long run)you will come out ahead.
Back to the issue of paying the house off early. I would not do this unless you are pretty sure about staying there for a while. Make sure you have some liquidity. Also while you may not earn the most money in the long run, I would view the paid-off house as a conservative portion (guaranteed return of whatever interest rate you paid)of your portfolio like a bond.

Agreed- do not pull money out of the house. Perhaps set up a HELOC for emergencies, but do not use the proceeds for investing.

Since you just made your last house payment, and were used to setting aside that money each month, go ahead and continue to set aside that amount and make monthly contributions towards your mutual funds.

Hopefully in the midst of all of this you can enjoy some appreciation in your home as well.

Congratulations on paying off your house! I am assuming you are debt-free - if not, pay off that debt! You are in a great position to invest for retirement, even early retirement if that appeals to you. Build up that nest-egg, but I wouldn't take money out of the house. Are you concerned about tax deductions? Talk to an accountant - there are many other ways to minimize your taxes. You may also want to meet with a (fee-only) financial planner to make sure you are on track with your retirement planning.

Assuming you are already taking care of your retirement and emergency fund and have no consumer debt...otherwise, take care of those things.

I'm probably the only one that will say this, but get an interest-only mortgage on your home. Take the proceeds and invest in a conservative tax-managed account. Make mortgage payments as you have been doing.

Let's say your monthly payment was $900. If you just invested that at 6% over 10 years, you'd have $147k. If you take $100K out of the house and invest it for 10 years at 6%, you will have $181K!

By taking the mortgage, you also get a tax deduction. By taking an interest-only loan, you minimize your monthly payments. So, you could probably manage to contribute another $100/mo easily to your investment account, making your total $198k after 10 years!

By paying off the house (which is a great accomplishment), you have lost a great tax deduction and you have a large portion of your net worth generating 0% return. Convert that money into cash so it can earn a return, and if you ever need it to pay off the house, it's sitting right there where you can get to it.

I never got why getting a deduction on your mortgage interest is a good deal.

You pay your mortgage company x amount of dollars, and you get a x dollars deducted from your AGI. Awesome! You want to get another deduction? Tell your boss that you want to get paid *less* by x amount of dollars each year. Your AGI will also go down by x amount each year?

Either way you are throwing money away. What's so great about that?

Instead start to put some money into a mutual fund every month. You used to make a house payment every month nos put at least some of that money into a mutual fund.

Whatever your mortgage payment was, put that amount (on the same day each month) into a mutual fund - preferably, a low cost fund like an index fund.

depends how you feel about risk.

safest way: keep on plugging and don't put your house at risk. you'll get there eventually.

most profitable way: grit your teeth, take the leap and start all over again. If things go well you'll make stacks of money and be able to retire a decade earlier.

There's no way to have both. Make your choice, it sounds like you're risk-averse to me.

This is one of those questions that has no answer because there simply isn't enough information to give any type of informed decision.

The information we have is 44 years old with a paid off mortgage.

How much income do you earn annually?
How much are your expenses for your desired lifestyle?
How is your health?
How long do you plan on living?
How many kids do you have?
Do you plan on providing them with any type of college assistance?
What are some of your lifelong dreams? Trip across Europe? Prospecting for gold? Climbing Mount Everest?
What is important to you in life? Acquiring material possessions or giving to charities?

I think the first step is to start answering as many of these questions above, once you have answers people can give you better advice. There is no "one size fits all approach" so while people are trying to be helpful, the suggestions may or may not make any sense.

Some other considerations are how much would you save in taxes if you borrowed and invested? Are you in a high tax bracket? Do you want to move up? Do you want to invest in income property? Do you want to retire early? What is your preferred asset allocation and how can you improve it? That is quite low for a house, so while you could do better borrowing and investing, you also need to be prepared for losses in bad years, and it might be worth the security of not having to worry about changes in circumstance.

I agree that there is no one correct answer to this question because it depends on much information about the person's financial situation, goals and preferences that are not provided.
As I read through the responses, I wondered if the advice would have been different if the following situation were described.
"I am considering purchasing a home for $125,000. I have sufficient investments to purchase the home for cash. Should I sell $125,000 of my investments so that I can purchase the home with cash or should I obtain a traditional mortgage at current market rates.?"
I believe that this scenario presents exactly the same issues. I suspect that many people would think about this scenario differently.

What do you want to do with the rest of your life? What is the money in the mutual funds for? Why did you decide that you wanted to pay off the house early?

I think this raises more questions than answers.

What I would do:

1) Don't listen to Joey - yes you will have $181K, but you'll still owe the original $100K loan, leaving you with a net of $81k, which is less than if you just put your original loan payment of $900 (assumed) in savings. Not to mention the money you'll waste on interest - yes you get a deduction, but what if you don't itemize? Why spend money just to get a deduction? You could accomplish the same thing by donating some to charity.

2) Pay off all other debt, if any
3) Contribute to your 401(k) until you get the full employer match
4) Max out Roth IRA if you qualify
5) Max out your 401(k)
6) Consider other taxable investments - I would look into rental property, but if you're not that kind of person - check out REITs, index funds, etc.

I only scanned the people's comments above, but I would only suggest pulling out money from the house to invest if you were starting your own business and would be likely to get a high return. Otherwise, it is not a good idea in my opinion.

Buy a vacation home and rent it out when not in use. Set this up as a business entity and receive the tax benefits

I am a big believer on not paying the house off "too fast." Though it is very dependent on each individual's situation. (Particularly when you are young and have a lot of equity, and a very low fixed rate. Taxes have nothing to do with it).

However, what is done is done. I think it would be a horrid idea to pull money out of an already paid off house.

I would agree with diverting your old house payments into the stock market. Yes, you probably could have fared better if you had done this all along (putting extra moneys to investments instead of what I assume was a low-interest mortgage). But it will be harder to make that up with a lump sum contribution to the stock market.

Another reason it is a terrible idea: I had a client do this recently - they borrowed $200k and invested it with little thought. The market wasn't doing well so they freaked out, took the loss, paid back 1/2 the loan. Shortly after the market took off to new highs. Boy just a lot of short-term thinking and bad market timing. Not good!

P.S. a mortgage tax deduction is a good deal because it can make a mortgage effectively cheaper than it appears at face value. For this reason a mortgage can make much more sense than renting in some cases. But in an invest vs. pay down scenario it shouldn't really factor too much (unless you are in a high tax bracket).

It should, however, be considered in a rent vs. buy scenario. In this scenario it is often a great deal. (It makes a big deal to those of us living in high COL areas who get significant tax breaks to help with our living expenses).

Hrm, I have to ask: would you borrow money at 6% to invest? Especially with no guarantee that you'll get a 12% yield. Not me.

You CAN simply invest enough money each month that would equate to a mortgage payment, on top of what you're already doing. And, if you plan on having kids, college savings is also an option.

Teri, I'd rather have a paid for home than a tax dedution. It's not smart to 'create' a tax deduction by going into debt. Besides, if you want a tax break, you could have the paid for home and simply donate money to charities or tithe. You get the tax deduction, and you don't have to go into debt or stay in debt to do it. :)

Without knowing how much you have saved for retirement, and other financial goals, it is really difficult to answer this question. Other than to say, I would not pull the money out of your house. You just achieved a great goal - paying of your house by age 44 - enjoy your victory!

As others have said, you should obviously pay off all debt (I assume you don't have any, but one never knows. Do you have a 3-6 month emergency fund set up? If not, set one up in an online savings account.

Max out any retirement accounts. Run one of those on-line calculators to figure out how much you need to be putting aside for retirement and make sure you are meeting that goal.

Then, figure out your other goals - do you want to get married and have kids? Start saving for that now. Wouldn't it be great to have enough money to buy a ring and pay for the wedding just in time for the right person comes along?

Do you want to give back? Why not set up a scholarship fund at your former high school or college? Or loan money to entrepreneurs in developing countries through

Other options:

Buy an investment property and rent it out.

Get another degree to increase your earning potential.

Start your own business.

As for Richard's comment about buying a vacation home and "set it up as a business entity and receive the tax benefits" - there is a lot more to it than merely calling it a business and getting deductions. If you are serious about this route, discuss the limitations and pitfalls with a CPA first.

I would only consider doing this if you have a long term stable source of income in the future to pay the mortgage. If you expect to pay the mortgage with investment returns, you would be making a big mistake. The safe spending rate for an equity portfolio is only 4% and could not provide enough to safely pay off a mortgage against it.

Lots of good advice here. I think the key isn't the numbers; it is the emotional issue. If you look at just the numbers then Joey's comment about taking an interest only loan and investing the difference makes the most sense. With the tax deduction and higher equity returns, you will end up with a bigger nest egg at the end.

However, you need to ask yourself why you paid the house off early. I imagine it is to have the peace of mind of not owing anything on your home. While your home equity will not earn any interest, it does buy peace of mind, which for many people is priceless. Also, if you invest in equities, you need to be prepared for a drop in the markets. So you truly need a long term perspective to pull off the interest only mortgage/invest the difference approach.

Start with the emotional reasons. If you can handle the volatility and knowing you have a mortgage, then take out an interest only fixed 30 year mortgage. If not, relish in the fact that you own your home outright.


I think I would approach this going forward. From now on "pay" a mortgage payment into a brokerage account and max out a Roth IRA [if possible].

The poor thing here would be to mortgage your property or even worse, don't do anything and not save a mortgage payment each month into a brokerage account.

Like people have mentioned prior...It sounds like peace of mind is your top priority and based on that nugget would suggest not doing anything wild with mortgaging your house, now that you reached your peace of mind.

Paid off Home: Great
Are You Sure: Did you make sure you paid off all other debt
No Interest to Deduct: That's OK
Cash Flow: Take ALL of the extra cash flow and INVEST IT.
Annual Return: Make more than 6% to 10% by DCA into MF forever.
In What: NoLoad+No Transn Fee+Low Exp+HighReturns MFunds
Feeling: Feel Great being Debt Free
Assumption: You STILL have NO OTHER DEBT when you did this
Emergency Fund: Must have one
Other Goals: Allocate $ to your other 10 to 20 years goals also

I have done all of the above, and FEEL GREAT. I am in the best financial shape of my life only cause of the Mortgage Payoff.

WHY: I did what some are saying. Borrow and Invest.
RESULTS: Does not work in practice due to fluctuating markets.
EMOTION: Human emotion gets carried away with mania-markets.

So, you DID THE RIGHT THING. I know for a fact. For ones who have done it, do it as I say above and then come back.

Good luck.


Just a thought: Great! You paid your mortgage off early! That's awesome! Don't forget a couple of important points.
1. Now you will have to pay the porperty taxes on your house yourself.
2. You will have to pay the insurance on your house yourself.
3. You will have to pay all of the other annual expenses that was paid out of your escrow account by your mortgager.
The likelyhood is that you will still need to set aside somewhere between 300 to $600.00 dollars a month
to satisfy these obligations or your home will still be at risk.

Be conservative, but all the other investment advice has been with investing in the stock market, or similar vehicles. I would suggest investing in real estate. Use an experienced real estate investor who knows how and where to invest in today's market. Most RE investor's I know are running out of money to buy the good investments available in today's market. You can easily earn 15% for a short term loan used to purchase and rehab a property, or 10% on a long term loan, (say held for rental). Best of all, if the borrower defaults, the money is collaterized by the property. You would own more real estate, that you could either keep, or dispose of by sale.

It depends. What do you have in retirement now? I hope during the time you were paying off the house early you maxed out all retirement options. Otherwise you left TONS of $$$ on the table. That's a shame. It would be better to pay off the house a few years later and have maxed out an IRA and 401k.

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