Should we pay our mortgage quickly? Home office edition
May 29, 2019 9:54 PM Subscribe
Hello, we have a 15 year mortgage for our home, and we also have a largeish investment account that we could empty to pay off about a third of the mortgage, allowing us to pay it off within 5 years. HOWEVER, I also have a home office for which I can write off a portion of our mortgage interest, so there is an amount of time in which this writeoff is better than the interest we save (i think). We live in California. Is there a website or equation that will tell us what the best thing to do is, money-wise?
We hate debt and seeing how much interest we could save by paying more and more and more every month has us dreaming of eating cup-a-soup for a few years and being totally debt free. But maybe we are ignoring some smarter way. Thank you
We hate debt and seeing how much interest we could save by paying more and more and more every month has us dreaming of eating cup-a-soup for a few years and being totally debt free. But maybe we are ignoring some smarter way. Thank you
If the rate of return on your investment account isn't substantially more than your mortgage interest, it might be worth looking into options for improving the investment strategy and/or refinancing for a better interest rate. Here I can get 7% long term with a boring investment strategy, and a mortgage at 2%, so financially speaking it's a no brainer for me to hold onto investments.
Years ago in different circumstances I did pay off a mortgage, and I have to say that the sheer feeling of relief and relaxation not having that obligation hanging over me was really surprising. But I probably could have got the same feeling from knowing that I had the money to pay it off available to me in case of emergencies.
posted by quacks like a duck at 12:23 AM on May 30, 2019 [5 favorites]
Years ago in different circumstances I did pay off a mortgage, and I have to say that the sheer feeling of relief and relaxation not having that obligation hanging over me was really surprising. But I probably could have got the same feeling from knowing that I had the money to pay it off available to me in case of emergencies.
posted by quacks like a duck at 12:23 AM on May 30, 2019 [5 favorites]
The typical advice for this is No! Absolutely not!
If your money isn't making more interest than the interest in your home, you should
A. Invest in something that earns you more money
B. Refinance your home
A lot of home value as an investment is that the worth of the home goes up over time without you doing anything. I would pay off the home as slowly and cheaply as possible and then invest the rest of your $$$$ in a diverse portfolio. You'll make bank when your home value has doubled in 20 years, not when you saved 10k in interest payments. Your stocks should be making more than that for you.
posted by Kalmya at 3:23 AM on May 30, 2019 [3 favorites]
If your money isn't making more interest than the interest in your home, you should
A. Invest in something that earns you more money
B. Refinance your home
A lot of home value as an investment is that the worth of the home goes up over time without you doing anything. I would pay off the home as slowly and cheaply as possible and then invest the rest of your $$$$ in a diverse portfolio. You'll make bank when your home value has doubled in 20 years, not when you saved 10k in interest payments. Your stocks should be making more than that for you.
posted by Kalmya at 3:23 AM on May 30, 2019 [3 favorites]
There are so many more advantages to having those funds in an investment account than in having a smaller mortgage. The rate of return on your investments should be higher than your mortgage. You get some tax advantage to holding a mortgage, even under the current Trumpian tax system. Unless your investment account is quite new and suffering under the current market scenario, you will likely have to pay capital gains taxes to cash it out. It's generally simple to set up margin privileges on an investment account and use it like an instant paperless low-interest personal loan or HELOC if you ever have a short-term cash shortage, all without paying capital gains like you would even to sell the investments--which is also an option for larger needs/wants/emergencies.
If you really, really want to move those funds out of the investment account, move them over time into Roth IRAs or college savings accounts or some other tax advantaged vehicle.
posted by drlith at 4:41 AM on May 30, 2019 [1 favorite]
If you really, really want to move those funds out of the investment account, move them over time into Roth IRAs or college savings accounts or some other tax advantaged vehicle.
posted by drlith at 4:41 AM on May 30, 2019 [1 favorite]
Can you pay your monthly mortgage like you are on the 5yr track, and then at five years use the balance in your account to pay off that last third?
That way you at least make 5 yrs of interest on that money (plus the psychological safety blanket), but at 5 years you have a paid off home mortgage. Best of all situations.
posted by KMoney at 5:12 AM on May 30, 2019 [6 favorites]
That way you at least make 5 yrs of interest on that money (plus the psychological safety blanket), but at 5 years you have a paid off home mortgage. Best of all situations.
posted by KMoney at 5:12 AM on May 30, 2019 [6 favorites]
Can you pay your monthly mortgage like you are on the 5yr track, and then at five years use the balance in your account to pay off that last third?
This seems like the option that lets you have your cake and eat it too. Keeping the liquid savings for the time being and paying the mortgage out of your income lets you preserve liquidity and take whatever minimal tax advantages remain; in five years, if all goes according to plan, you can then decide between paying off the remainder in one lump or just continuing with the accelerated payment plan.
The question about whether or not it makes sense to prepay your mortgage vs prioritize other investments is both financial (along with various assumptions about future stock and housing market ups and downs) and psychological -- in other words, this might be the right path for you even if financially it isn't optimal, if it makes you feel that much better.
posted by Dip Flash at 6:18 AM on May 30, 2019 [2 favorites]
This seems like the option that lets you have your cake and eat it too. Keeping the liquid savings for the time being and paying the mortgage out of your income lets you preserve liquidity and take whatever minimal tax advantages remain; in five years, if all goes according to plan, you can then decide between paying off the remainder in one lump or just continuing with the accelerated payment plan.
The question about whether or not it makes sense to prepay your mortgage vs prioritize other investments is both financial (along with various assumptions about future stock and housing market ups and downs) and psychological -- in other words, this might be the right path for you even if financially it isn't optimal, if it makes you feel that much better.
posted by Dip Flash at 6:18 AM on May 30, 2019 [2 favorites]
I was thinking along the same lines as KMoney and Dip Flash. It depends a lot on how much of your monthly payment goes against interest and how much goes against principle.
As an example, if you were in the early years of a long mortgage and 11/12 went against interest and 1/12 went against principle, then one extra payment would pay off enough principle to shorten the mortgage term by year, and save a lot of interest. OTOH, later in the life of the mortgage, a single additional payment would not have so much effect, and it would be more a matter of comparing the interest rate with rates paid elsewhere, as suggested by the first couple of answers.
I'd suggest you check the details of the mortgage and your bank's practices to see what's possible. So far as I know, all mortgages allow prepayment but that doesn't mean your bank doesn't superimpose some sort of annoyance. Once upon a time, we had a bank that printed coupons to be included with the payment. When we made an extra payment, they issued a new book of coupons. Such a practice would mitigate against making double payments every month in favor of 1 big pre-payment per year.
posted by SemiSalt at 6:39 AM on May 30, 2019 [1 favorite]
As an example, if you were in the early years of a long mortgage and 11/12 went against interest and 1/12 went against principle, then one extra payment would pay off enough principle to shorten the mortgage term by year, and save a lot of interest. OTOH, later in the life of the mortgage, a single additional payment would not have so much effect, and it would be more a matter of comparing the interest rate with rates paid elsewhere, as suggested by the first couple of answers.
I'd suggest you check the details of the mortgage and your bank's practices to see what's possible. So far as I know, all mortgages allow prepayment but that doesn't mean your bank doesn't superimpose some sort of annoyance. Once upon a time, we had a bank that printed coupons to be included with the payment. When we made an extra payment, they issued a new book of coupons. Such a practice would mitigate against making double payments every month in favor of 1 big pre-payment per year.
posted by SemiSalt at 6:39 AM on May 30, 2019 [1 favorite]
I agree with all of the advice above that generally, it doesn't make financial sense to do what you're suggesting, since you should be able to make enough in the market to make up for the interest you're paying on the house.
But.
Keep in mind that a big factor in financial decision making is emotional/mental. It makes better financial sense to keep cash in my pocket than buy a snack at the airport, but framed another way, buying a snack will make flying less miserable and hey, that's what money is for, so I buy the snack.
In your context, understand the math first, and then ask yourself whether cutting the mortgage check each month is a stressful event for you, and whether paying off that debt would reduce your stress and overall mental load. If it would, consider whether that mental easing is worth the cost in a dollars-and-cents sense.
posted by craven_morhead at 8:09 AM on May 30, 2019 [1 favorite]
But.
Keep in mind that a big factor in financial decision making is emotional/mental. It makes better financial sense to keep cash in my pocket than buy a snack at the airport, but framed another way, buying a snack will make flying less miserable and hey, that's what money is for, so I buy the snack.
In your context, understand the math first, and then ask yourself whether cutting the mortgage check each month is a stressful event for you, and whether paying off that debt would reduce your stress and overall mental load. If it would, consider whether that mental easing is worth the cost in a dollars-and-cents sense.
posted by craven_morhead at 8:09 AM on May 30, 2019 [1 favorite]
I would suggest looking into how recasting your loan---not refinancing, but recasting---can be added into your analysis and decision making.
posted by rabidsegue at 9:30 AM on May 30, 2019
posted by rabidsegue at 9:30 AM on May 30, 2019
Purely as a data point, we were in a 15 year at an obscenely low rate (under 3%!), and it made no sense to focus all of our extra money on paying off a house that we intend to stay in for a long time. But that's exactly what we did and when we wrote the last check it was AWESOME. A+++ would pay off early again.
Now we routinely have money leftover in our budget each month. Usually we just feed our brokerage account, but it's really comforting to know that we've got that cushion if unusual expenses pop up.
posted by AgentRocket at 10:30 AM on May 30, 2019 [4 favorites]
Now we routinely have money leftover in our budget each month. Usually we just feed our brokerage account, but it's really comforting to know that we've got that cushion if unusual expenses pop up.
posted by AgentRocket at 10:30 AM on May 30, 2019 [4 favorites]
Response by poster: Thank you! Is there a math equation that a financial consultant would use to calculate the actual dollars and cents advantages or disadvantages? Like “suppose you could get x% on your investments, length of mortgage, mortgage tax incentive etc, divided by 8, square root of your mother’s shoe size = $good idea to pay off THIS early but not THAT early”?
posted by andreapandrea at 7:25 PM on May 30, 2019
posted by andreapandrea at 7:25 PM on May 30, 2019
There are equations that do that, and they depend a lot on your particular circumstances. It would probably cost you a few hundred dollars to talk about it with a good financial advisor and get an answer that fits your specific circumstances. In the process, you can get advice about your finances and strategy for your whole life. It's worth the investment.
posted by Sublimity at 12:54 PM on May 31, 2019
posted by Sublimity at 12:54 PM on May 31, 2019
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It's also worth considering how illiquid real estate is compared to an investment account. If something comes up and you suddenly NEED 50 grand, it's a whole heck of a lot harder to take that out of a house than it is to take it out of an account. No calculator knows whether this is something that's likely to happen to you. Do you have dangerous hobbies, aging pets, aging relatives, aging automobiles, aging house, terrible insurance, young kids?
I completely feel you on hating debt. I'm inclined the same way and grind my teeth every month when I see how much of my mortgage payment is interest. But sometimes debt at a low interest rate allowing you to keep money in a liquid, cash-earning investment account and write off a portion of your mortgage interest is a better proposition for your financial future than no debt.
posted by potrzebie at 10:51 PM on May 29, 2019 [9 favorites]