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Should I pay off home with very low interest rate

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  •  Doc29 
    Participant
    Status: Physician
    Posts: 25
    Joined: 12/18/2016

    Hi everyone.

    I wanted to get the opinion of this forum. I am currently aggressively paying of my mortgage at 2.79%. Should be paid off in 20 months or so. My main rational is that I don’t know what else to do with my income.
    1. I am maximizing employer 401k W2 pre tax
    2. Maximizing solo 401k pre tax
    3. Approx additional 75 k in taxable a year
    4. Back door Roth

    All of these are in broad index funds

    After these 4 things I have supplemental savings that don’t have any other debts to pay so I’ve decided to pay off the house however almost everyone tells me it’s a mistake to pay off this agrresively with this interest rate.
    What else could I do?

    #169005 Reply
    Liked by Craigy
     jacoavlu 
    Moderator
    Status: Physician
    Posts: 1202
    Joined: 03/01/2018

    Hi everyone.

    I wanted to get the opinion of this forum. I am currently aggressively paying of my mortgage at 2.79%. Should be paid off in 20 months or so. My main rational is that I don’t know what else to do with my income.
    1. I am maximizing employer 401k W2 pre tax
    2. Maximizing solo 401k pre tax
    3. Approx additional 75 k in taxable a year
    4. Back door Roth

    All of these are in broad index funds

    After these 4 things I have supplemental savings that don’t have any other debts to pay so I’ve decided to pay off the house however almost everyone tells me it’s a mistake to pay off this agrresively with this interest rate.
    What else could I do?

    Click to expand…

    how much misc income, with regards to the solo 401k? Married, kids? If yes, spousal IRA? 529 plan(s)? HSA?

    nothing wrong with paying off debt.

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #169010 Reply
     Doc29 
    Participant
    Status: Physician
    Posts: 25
    Joined: 12/18/2016

    Putting in an extra approximately 8 to 10 K a month.?

    I owe about 180 K on the house.
    By the way what happens with paying property taxes once no more escrow. ?

    Thanks

    #169013 Reply
     Anne 
    Participant
    Status: Physician
    Posts: 556
    Joined: 11/07/2017

    By the way what happens with paying property taxes once no more escrow. ?

    Click to expand…

    You just pay them directly.

     

    #169014 Reply
    Liked by ITEngineer, Craigy
     Xeno 
    Participant
    Status: Physician
    Posts: 56
    Joined: 01/24/2016

    1. It’s usually an emotional decision, not a financial one, but you can still run some numbers. If you have any investments in savings, short term treasuries, MMA, CD, etc then one could argue that paying off the mortgage at 2.8% is mathematically superior. Let’s assume a 24% marginal tax rate and no state income tax as these are treasuries and further assume you’re not itemizing so the mortgage interest isn’t tax deductible — you’d need to earn 3.68% on your treasuries to achieve net after-tax returns of 2.8%. If you’re using a CD in a state with a 9% marginal tax rate, you’re at the 32% federal marginal rate, and you’re also paying the additional 0.9% ACA tax, paying off a 2.8% loan is equivalent to a 4.8% pre-tax return, so definitely nothing to sneeze at. It’s a false comparison to compare a risky return in the stock market to a risk-free return on paying down debt.

    However, you do lose optionality when you pay it off. You’re likely not going to be able to borrow again at 2.8% any time soon, and even if you can, it’s not as easy as selling a treasury or taking money out of a MMA. Also, even if you plan to itemize only once every few years, the years you itemize you will be able to deduct your mortgage interest, so that also lowers the return on paying it off.

    2. You will need to mail a check for your property tax once or twice per year. A lot of muncipalities will let you pay online. Also, same deal with property insurance. Please don’t forget to pay tax because your mortgage is paid off so you have no housing payment — that’s how demented old folks end up with tax liens on their primary residence and can theoretically even end up losing a home with a paid off mortgage.

    #169017 Reply
     jhwkr542 
    Participant
    Status: Physician
    Posts: 782
    Joined: 02/15/2016

    With a rate that low, I’d throw the savings in a regular taxable brokerage account.

    #169023 Reply
    Liked by Zaphod
    Zaphod Zaphod 
    Participant
    Status: Physician, Small Business Owner
    Posts: 4782
    Joined: 01/12/2016

    I personally wouldnt touch that rate and let it go forever, but to each their own. There can be some asset protection aspects to it as well depending on specialty/state specific issues.

    Remember straight comparing simple and compound interest, fixed vs. open ended terms is not apples/apples and a poor way to frame choices.

    No one should really be using a CD, you can get all kinds of liquid secure investments with much more yield.

    #169026 Reply
    Liked by Anne, q-school, Firefly
     Peds 
    Participant
    Status: Physician
    Posts: 2110
    Joined: 01/08/2016

    Hi everyone.

    I wanted to get the opinion of this forum. I am currently aggressively paying of my mortgage at 2.79%. Should be paid off in 20 months or so. My main rational is that I don’t know what else to do with my income.
    1. I am maximizing employer 401k W2 pre tax
    2. Maximizing solo 401k pre tax
    3. Approx additional 75 k in taxable a year
    4. Back door Roth

    All of these are in broad index funds

    After these 4 things I have supplemental savings that don’t have any other debts to pay so I’ve decided to pay off the house however almost everyone tells me it’s a mistake to pay off this agrresively with this interest rate.
    What else could I do?

    Click to expand…

    taxable.

    stop it.

    #169027 Reply
    Liked by Hank, jz, ENT Doc
    hatton1 hatton1 
    Participant
    Status: Physician
    Posts: 2655
    Joined: 01/11/2016

    I think it is fine either way.  I paid mine off in my mid 40s by adding extra money each month that would of otherwise gone into taxable.  In my 30s I focused on investing in stocks.  Investments made in the 30s are a compounding miracle.  Do not miss this by paying off a low interest rate mortgage.  As you get older then pay it off.

    #169035 Reply
     StarTrekDoc 
    Participant
    Status: Physician
    Posts: 1500
    Joined: 01/15/2017

    Exactly.  We’re in mid40s and FI;  contemplating paying off the 4% 30yr, but haven’t done it yet. Even with conservative investing, have been quite ahead in returns to the interest rate —  Horizon still a bit off and itemizing; so still getting benefit from mortgage

    #169038 Reply
    Liked by hatton1
    ENT Doc ENT Doc 
    Participant
    Status: Physician
    Posts: 2038
    Joined: 01/14/2017

    It’s not the financially correct decision IMO but if goals are to retire early I completely understand wanting to eliminate a large, fixed expense. But get ready for another (healthcare) if that’s the case.

    #169050 Reply
    Liked by billy, DCdoc, Zaphod
     Doc29 
    Participant
    Status: Physician
    Posts: 25
    Joined: 12/18/2016

    Sorry, Meant to say I contributed 75-100k a year to taxable. Not sure if I should do more.

    #169057 Reply
    Zaphod Zaphod 
    Participant
    Status: Physician, Small Business Owner
    Posts: 4782
    Joined: 01/12/2016
    WCICon18

    Sorry, Meant to say I contributed 75-100k a year to taxable. Not sure if I should do more.

    Click to expand…

    Whats the downside to a large taxable?

    #169080 Reply
    Liked by q-school
     G 
    Participant
    Status: Physician, Small Business Owner
    Posts: 1105
    Joined: 01/08/2016

    Sorry, Meant to say I contributed 75-100k a year to taxable. Not sure if I should do more.

    Click to expand…

    Whats the downside to a large taxable?

    Click to expand…

    Compounding wealth too quickly?

     

    Hi everyone.

    I wanted to get the opinion of this forum.

    Click to expand…

    Doc29, your profile says you joined this forum 2 years ago.  If you’ve been paying attention, these threads pop up every few months.  Clearly you would be financially imprudent to pay off that loan.  But there are worse things to spend money on, right?

    #169082 Reply
    DMFA DMFA 
    Moderator
    Status: Physician
    Posts: 2016
    Joined: 06/24/2016

    You can do literally whatever you want and be fine with that extent of savings.

    You could pay off the mortgage and be more aggressive with your equity allocation. Not sure bonds would earn 2.79% today; you might just consider the mortgage debt your fixed-income portion until it’s paid.

    If you lose your income, you’ve got hundreds of thousands available you could use to pay your mortgage off.

    The more you have, the less you need the leverage.

    "I like money." - Frito Pendejo (Idiocracy)

    [Not a financial professional (yet), lawyer, or employee of The White Coat Investor]

    #169105 Reply
    Liked by Anne, StarTrekDoc

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