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Should I pay off home with very low interest rate

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  • Zaphod Zaphod 
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    Not trying to pick on anyone, but what @don‘tknowmind said is really important.

    You’re not freeing up cash flow, it’s an illusion. in fact you’ve put money where it’s difficult and costly to access, illiquid even.

    You free up no cash by paying off your mortgage. You have moved money from your left pocket to the right. You needed the cash flow to pay it down in the first place, net it’s a zero until paid off ofc.

    It’s not improved until debt is fully gone, and until then you’ve actually decreased your liquidity because your putting all this future/extra cash flow toward the mortgage.

    Time value of money, time value of money, it’s probably the first 99 important things to understand about money in general.

    #169226 Reply
     Peds 
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    however almost everyone tells me it’s a mistake to pay off this agrresively with this interest rate.

    Click to expand…

    i throw another bone into this pile, a simplistic look.

    VWIUX has a yield of 2.78% right now. tax free.

    and you are paying something costing you 2.79% before you account for taxes.

    you could literally invest in VWIUX until you have enough to pay off the mortgage in one foul swoop and come out even.

     

    so again, mathematically it doesnt look correct to pay extra to the mortgage at this time.

    #169257 Reply
     Bmac 
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    however almost everyone tells me it’s a mistake to pay off this agrresively with this interest rate. 

    Click to expand…

    i throw another bone into this pile, a simplistic look.

    VWIUX has a yield of 2.78% right now. tax free.

    and you are paying something costing you 2.79% before you account for taxes.

    you could literally invest in VWIUX until you have enough to pay off the mortgage in one foul swoop and come out even.

     

    so again, mathematically it doesnt look correct to pay extra to the mortgage at this time.

    Click to expand…

    Only in jest here, but I love the, presumably typographical, idea of one “foul” swoop. Lol.

    #169286 Reply
     Peds 
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    Only in jest here

    Click to expand…

    i think thats literally all i do 😉

    #169299 Reply
     docnews 
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    @peds. More fair comparison would be VWSTX since it’s risk is lowest though still present (the fund you noted can and does dip negative for a whole year). The returns are about 1% post tax.

    #169554 Reply
    Zaphod Zaphod 
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    @peds. More fair comparison would be VWSTX since it’s risk is lowest though still present (the fund you noted can and does dip negative for a whole year). The returns are about 1% post tax.

    Click to expand…

    How is that different than anything else? Do house prices not fluctuate and even go negative? Of course they do, pretending otherwise is simply a choice. You can make that choice by ignoring the mark to market on any account.

    #169585 Reply
    Liked by Peds
     Peds 
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    @peds. More fair comparison would be VWSTX since it’s risk is lowest though still present (the fund you noted can and does dip negative for a whole year). The returns are about 1% post tax.

    Click to expand…

    i dont think it is.

    a house is not a short term investment.

    also i dont use it, so it doesnt help me.

    if anything pick limited term. its 2.29%.

    but even then its only a TLH partner for me.

    #169588 Reply
     docnews 
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    @zaphod, your mortgage due never “goes negative” so even if your house falls in value you are personally ahead in you pay off some of the debt.

    @peds if you are not planning on using the money for at least 20yrs EE bonds give you 3.5% pre-tax. I thought you were pointing out the advantage of liquidity? Obviously low risk returns should beat no risk returns over the long term.

    I don’t disagree that it is wise to take risk over the long term, but it should be stated for what it is: a higher risk allocation. I plan on using my mortgage payoff as bonds in my mind and take higher risks with equities. The downsides to this are lower liquidity (but I don’t go for liquidity on my long term investments anyways) and limits one ability to rebalance (but I hope to be able to do this with my new income allocated for investments).

    #169594 Reply
    Liked by jz
    Zaphod Zaphod 
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    @zaphod, your mortgage due never “goes negative” so even if your house falls in value you are personally ahead in you pay off some of the debt.

    @peds if you are not planning on using the money for at least 20yrs EE bonds give you 3.5% pre-tax. I thought you were pointing out the advantage of liquidity? Obviously low risk returns should beat no risk returns over the long term.

    I don’t disagree that it is wise to take risk over the long term, but it should be stated for what it is: a higher risk allocation. I plan on using my mortgage payoff as bonds in my mind and take higher risks with equities. The downsides to this are lower liquidity (but I don’t go for liquidity on my long term investments anyways) and limits one ability to rebalance (but I hope to be able to do this with my new income allocated for investments).

    Click to expand…

    I think we’ve taken a turn deep into the weeds where it doesnt matter anymore.

    Im of the school where you shouldnt view your house as an investment, so comparing it straight away doesnt make any sense really. Its just an opportunity cost thing. I also dont believe in the idea of a forever house or anything of the sort, maybe I will later on, but it wont be the house Im currently in for sure.

    Homes are debts attached to hard assets, unless you put 5% or less down and have lived in it for a short time, you can always sell the house. Presto! Zero mortgage.

    If you hate your mortgage and it keeps you up at night, just sell and rent a place, you’ll be debt free. Thats the absurd side of the argument. Most of the time this issue is one of lack of financial understanding and imagination.

    Which is why in the end I always go for proper framing, yet still dont care what you choose to do. Its when people evaluate things using improper metrics/comparisons and choose conclusions they otherwise wouldnt have if done properly. That should be avoided at all costs in any choice we make. That way you dont have to worry about regret which is not good.

    #169628 Reply
    Craigy Craigy 
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    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…

    There’s worse things you could do with the money.

    For what it’s worth, paying off your house diversifies your net worth to an extent.  Even buying total market funds, bond funds, etc., if you’re 100% in the market, your wealth rises and falls at the whim of the market.

    The best argument I’ve heard for a whole life policy was that it’s a place to put your “safe” money.  I.e. it’ll never perform all that well but it diversifies your wealth into something relatively stable.  Paying off your mortgage, even at 2.8%, is going to “perform” better than any life insurance product sold as an investment.  It will also “perform” better than just holding cash.

    If you think we’re at the top of the stock market and due for a recession, then you’re paying off your mortgage at the best time possible, essentially “cashing out” near the top.  Of course you won’t actually know if this was the case until you look back from the future.

    The good news is that this whole dilemma will solve itself in about 20mos and ~$180k of payments.  At that point you can begin doing the “financially sensible” thing.  $180k of extra investments compounding over the period would have been nice, but it’s hardly something that would really move the needle for you in the future.

    Only way where this is a really bad idea is if you’ll be needing liquidity sometime soon.  Even then, it should be marginally easier to obtain future financing if you don’t have a mortgage balance.

    LEVEL 1 WCI FORUM MEMBER.

    #169916 Reply
     Dr.A 
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    One consideration after paying off mortgage earlyis scaling back on work, exchanging income for enjoyable time.

    #171149 Reply
     royalblue 
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    Hands down, I’d pay the house off. You are making amazing progress on your entire financial picture. I’d go ahead and knock the house off the list just to not have to think about it anymore. Bravo, you’ve done so well.

    #171741 Reply
     ITEngineer 
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    No one should really be using a CD, you can get all kinds of liquid secure investments with much more yield.

    Click to expand…

    Are you suggesting that people should be using T-bills instead?

    #172010 Reply
    Zaphod Zaphod 
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    No one should really be using a CD, you can get all kinds of liquid secure investments with much more yield. 

    Click to expand…

    Are you suggesting that people should be using T-bills instead?

    Click to expand…

    There are mm funds, t-bills, very short term bond funds, its basically that there are a litany of options with full liquidity, higher yield and little risk.

    #172012 Reply
    Liked by Hank
     Doc29 
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    Appreciate the comments. Thanks

    #172094 Reply

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