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September 23, 2009


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I am looking forward to paying off my mortgage in 3 more years. I am doing something that I am not sure is smart of not but it makes me more comfortable. I am saving the money in a money market account and just pay a chunk at the end of each year, that way, if there is an emergency or expensive need that we have, we have the extra money. (Above the E-fund)
My original Mortgage was 116k in 2003, and now we owe 67k. I can't wait for it to be gone. It will put us in such a great place. (We also fully fund two ROTH IRA's and give 20% to my 401k, hubby has a Pension.)

just a question, what do you consider to be saving "fully" for retirement? I've been wondering a lot about that question recently as I work my debt payoff schemes.

Theresa --

I consider it as follows:

1. You've set a retirement number.

2. You are saving enough per year that you'll reach that number on your estimated retirement date or before.

My wife and I will start saving 15% of our income for retirement and send the rest to the mortgage. We're currently still living like college students and living on about 40% of our income so it's definitely possible to do this if you keep away from "lifestyle inflation." :)

Does anyone have a link to an online calculator where you can input your mortgage and then calculate the total you pay given that you are paying x amount?

Here is an excellent mortgage calculator:

the site has a pre pay calculator on it.

Congrats on paying down your home. It must be a nice feeling. As far as pay down or invest, the right answer depends on the person. If the peace of mind of not having a mortgage is important, then pay down the home. If you can live with the mortgage and want to invest the difference, then keep it. If you look at just the numbers, having the mortgage makes more sense (maybe not the past year or two), but the numbers are only half the story.

Anyone have a guaranteed investment that has an annual return better than 5.58% after taxes, fees and commissions?
I currently invest about 15% of my income in my retirement and also pay a total each month of a hair over $1,000 toward the principle on my mortgage. In 31 months I'll be TOTALLY debt free and in a position to send almost all of what my mortgage payment was toward investments (my monthly "rent payment" will be enough to cover my insurance and taxes for the year).

Jerry8 "Anyone have a guaranteed investment that has an annual return better than 5.58% after taxes, fees and commissions?"

Why after taxes? Whether you need to adjust your investment return for taxes or not when comparing it with your mortgage depends on whether or not mortgage interest is fully deductible in your case. If it is, then you should compare it with investment return before taxes. If you can't - after taxes. You need to compare apples to apples. For people who live in low income tax states it sure seems like only those with high income can deduct full mortgage interest. But in high tax states, state income and property taxes can easily be higher than standard deduction.

Also, 5.65% is a bit high, so maybe right now it's difficult to find an investment bringing this much. But a few months ago, people got mortgages at under 5%. At the same time, you could easily find medium and long term AAA municipal bonds yielding as much. I bought a couple of issues of AA and AAA municipal bonds with yield-to-maturity of 5.5% (tax free rate of 5% on one and 5.25% rate on another; I bought at a discount). Keep in mind that interest from municipal bonds is tax deductible. For those who are in high tax states, 5.5% tax free municipal bond is more than even a 5.65% tax deductible mortgage. Is it risk free? No. But it's pretty low risk with AA and AAA GO munis.

Additionally, do you believe the current low interest rates will persist? Just in 2007, you could find CDs at over 5%, remember 6% offers at online savings? Do you believe we'll continue to have low inflation and low interest rates with all the money being printed and the current level of government debt for the next 30 years? Now, I don't know the answer to this question, but this is a consideration. If we get 80s type inflation and interest rates (my first CD I opened in 1983 was yielding 13%), than anybody with 5.85% mortgage will do very well. Will we? I don't know, but every investment decision is based on some future predictions. Your decision shall be based on what you think.

Another consideration is a potential emergency that requires more money than a normal recommended emergency fund. Something like being out of a job for several years or having a serious expensive illness in a family. If you pay off your mortgage as a lump sum - great, then you don't need to worry about your mortgage payments. But if you keep paying extra little-by-little, than if you have this real emergency, you still have your mortgage payments but less cash.

Now, I do understand the feeling of not owing anybody anything. I have a paid off home, and yes, it is nice. At the same time I have a lot of money locked up in my home - 40% of my net worth; I am not sure it is that hot. Regardless, when I made a decision to pay off my mortgage my situation was different - my rate was 7% while banks were paying around 3% if I remember correctly; inflation was nowhere in sight; I sold another property with a gain and had enough money to pay off the mortgage with one large check; I had other non retirement savings that I could've sold in case of emergency; I am 50 and I didn't want to continue paying mortgage in retirement.

But it's really an individual decision based on everyone's personal circumstances and preferences.

The biggest benefit about fully paying off the mortgage is cash flow. Cash flow is the lifeblood of businesses (profitable businesses do on occasion declare bankruptcy due to running out of cash). Cash flow is also the lifeblood of the individual.

FMF nailed it when he said it's about maximizing the difference between income and expenditures. Paying off a mortgage makes it that much easier to make that gap much bigger. Pay off the mortgage and all loans and you will be swimming in free cash if you are earning income. Also means that if you lose your job you have a bigger safety net as your monthly expenditures are that much less...

We have no debts and own our own place- the wife and I can take nice vacations each weekend if we wish with the money saved from not paying rent / mortgage. It really adds to the sense of freedom.

In my case it gives me the freedom to hold more in cash and grow net worth by saving vs 'investing'.


Thanks! I especially like the AARP site's calculator.

If all other debt is paid what will be the effect on credit score if the mortgage is paid off?

I have heard the credit score will fall dramatically if there is no debt to rate.

Remember credit scores today affect more than interest rates on home loans and other potential debt. They affect employment possibilites, insurance rates,insurability,etc.

Don --

I haven't had any debt for over a decade and we have a very high (near 800) credit score. Of course we pay our bills on time, etc. and those things impact credit scores too.

I use this calculator because it computes additional monthly or annual payments or a one-time extra payment plus tells you how many years you shave off:

$325k vs $285k vs $235k seem like big differences. They seem like you get $90k pretty much out of the air. But these numbers are actually misleading because they ignore present value vs future value of money calculations.

For instance. If I said I would give you $200K today or $200k 10 years from now which would you sooner have. Obviously today. How about $200K today or $210K 10 years from now? Still obviously sooner have $200k today. But wait, you just gave up $10k right? No, we all know that $200K today invested in the most conservative investment possible is worth more than $210k 10 years from now.

So how about $200K today or $250K 10 years from now. Then you start to get into the "it depends" area. So the difference in paying $325K over 30 years versus $235K over probably about 15 years takes some thinking to determine which is better and if the $235K is better its only barely better, not better by $90k.

Again this is all with the caveat that we are not talking about the average finanically incompetent American (which is granted most of them). But if someone is responsible and has the extra money rather than putting it towards the house, keeps it in safe investments, even if it is earning a little less than the interest rate on the house, they have a huge safety net in case of emergencies and are probably only "losing" a little bit versus the money they would save by paying off the mortgage (For instance, I have a 30 year at 4.375%, I could ladder my savings into 7 year CDs at 4% right now, and as interest starts to rise I could probably beat my mortgage rate quite easily in a couple years). I don't ever intend to pay one extra penny on that mortgage. If you have investment or business opportunites then getting that capital that you need at the effective rate of 4.375% is invaluable.

Just different ways to look at things depending on each individual's different situation.

For some people paying off the mortgage might be a great idea, for others, its actually a horrible idea, and for many its somewhere in between. There is no such thing as a rule that says its always a good idea to pay off the mortgage first if you have all other debts paid and retirement funded.

Huge disadvantage of paying off your mortgage is if you are in a hurricane proned area. I know people who paid thier houses off and then when a hurricane came and totalled the house, the insurance company walked, and they were left with nothing. Other people I knew owed almost 100% of thier house still, and the banks actually fought the legal battles with the insurance company to recover the funds. Just something to consider.

I really like the point that @Apex made except that I would look for an alternative to CDs. @VirginiaBob probably made my point for me. I think it is important to consider what is peace of mind or what is debt. If you have a mortgage and a side account that has enough or more than enough to pay off that mortgage and is liquid, are you still in debt? Where else in the financial world can someone give you 3,4 or $500,000 in a tax-advantaged fashion? Shouldn't we take advantage of this rather? Study how banks make money. They want as much of your money, as fast as possible and they will profit. Why let them profit when you can?

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