Put Savings Towards Mortgage Balance, or Nah?

by J. Money -

home glow

That was the subject line of an email I just got :)

And since we’ve been on a roll dishing out real life #’s and journeys, let’s add another to the mix and help a reader out, shall we? What would you do if you were in her position?

(The first thing I’d do is crack open a bottle of champagne and celebrate!!! Check out their incomes!!)

From “Method & Madness”:

Hi J Money,

Thank you for all you do for the online community and being a general butt-kicker. I’ve been a huge fan since the podcast days. I was wondering if I could pose a question/situation to you and the BAS Community. I always learn a TON when you’ve posted scenarios with all the numbers attached. Those posts are my favorite to read comments on because of the breadth and depth of knowledge you and your community have. My question is about taking our extra savings and applying it to the balance of our mortgage.

There a few things you should know about my husband and me. We are in our mid-to-early thirty’s, we live in a high tax, high cost of living area and have a mortgage balance of $206,000. Our home is worth approximately $460,000. We currently have a combined income of $350,000 but we both are in Sales so our income has the potential to fluctuate quite a bit. We are anticipating having that same income for 2018 but in 2019 and on it could go down by $50,000. Or more, you never know in sales!

We are currently maxing out our 401(k)s at work. In 2018, that is $18,500 per person (like you don’t know…). After that, on a monthly basis we are putting $3,000 into a post tax investment fund through Betterment (which I love). We also save a minimum of $1,500 a month in an account which started out as a “fluctuating income” fund, but over the last 24 months that has accumulated $122,000. We just transfer our extras/bonuses in the account, so it doesn’t stick around in the checking and get spent 😊. We do have an emergency fund of $25,000 and various other funds for ongoing expenses like house/car maintenance, vacation, my husband’s toy fund (there’s various off-road vehicles owned and on the wish list LOL). Our current mortgage payment is $1,600 a month, we pay an extra $1,000 towards principal.

Here are the deets:

Assets:

  • 401k’s: $152,495
  • IRA’s from Old Jobs: $29,700
  • Pension: $29,000
  • After Tax Investments (Betterment): $14,716
  • Savings Account in consideration: $122,558
  • Add’l Savings not being considered (Emergency, Vacation, House/Car Maintenance): $38,564

Debts:

  • Mortgage Balance at 3.625%: $207,852

Cashflow:

  • Monthly into 401k’s: $3,083 (two separate 401k’s)
  • Monthly into After-tax Investments: $3,000
  • Monthly into Savings Account in Question: $1,500 every month, 4 times a year + $5,000-10,000
  • Monthly extra on Mortgage: $1,000

We would like to (or we think we would like to) take the “fluctuation income” fund money and apply it to the mortgage balance. The remaining $84,294 would take us 14-19 months to pay off depending on how aggressive we get and successes at work.

On the personal side, we think we would feel more liberated to live a different version of life if we didn’t have a mortgage. We are unsure whether we want retire early, take a sabbatical, or if we just want to be financially independent. Either way, we want to be smart and focused. PLUS! We don’t have anything else we want to “do” with this money (not off-road vehicle related😊). This seems like a great goal to go after together.

I’d love to know your thoughts if you have a moment. Thank you for being a beacon of bad-assery,

– Method & Madness

Let’s just get this out of the way – definite first world problems here :) But good for them! They’ve figured out The Hustle and are now reaping the sweet sweet benefits of it. We should all be so fortunate!

The first thought I had was actually why they didn’t have even *more* banked with incomes like that (answer to come in a sec), but my rule with all this sorta stuff is pretty straight forward:

Do what excites you the most.

So long as it increases your net worth in the end, just jump in and start slaying whatever it is that moves you! You’re always MUCH more likely to keep going with things when you’re passionate and on a mission than you are just doing the “more responsible” thing. Who cares if you don’t maximize every last penny – you gotta do what best fits your personality and lifestyle!

(Unless your personality is motivated by chasing the most optimum route – in which case you crunch those numbers like a champ and do yo damn thing!)

And remember this too – we’re always allowed to change our minds. You may want to pay down those debts or save/invest/cut expenses *now*, but who knows what life will hit you with later or what new dreams will come your way. You have to be able to adapt to this stuff even if it flies in the opposite direction than it used to. As long as you’re always focused on the one thing that drives you NOW, there’s no way you can go wrong in the end.

(Again, so long as it all pushes your $$$ forward and not backward — we’re not talking about snatching up new cars or shoes or boats anytime you’re excited about them ;) Just *financial options*.)

So obviously you know my stance with our reader’s situation here (GO FOR IT!! PAY DOWN THAT MORTGAGE AND GET YOUR FREEDOM!!!!) but here’s more data for you before you chime in with yours…

The only thing I saw missing here to better put things in perspective were their general monthly expenses, as well as wondering why they “only” had $300k or so saved up with those types of incomes.

Here’s what she responded with:

Great call out on the income. Yes, it is relatively new to us, 18 months new. Our income went from $200k to $350k. And even though we get giddy and proud at that number at the top of the sheet, much of our income are bonuses (40-50%) and are subject to the federal tax on bonuses. Once it comes into our pocket it’s 40% gone. California can be a biatch.

We’ve also been mind ninja-ing ourselves in small steps to get to the savings rate we are currently at. So any time we realize an increase in pay (base pay raise) or a decrease in spending (cutting cable), that next month we up the amount into one of our savings accounts. That’s slow work. So both of your assumptions are correct, both the income and savings rate is new to us. That’s the reason for the lower account balances.

We also used some of that for large purchases in the last two years – $18,000 vehicle paid for in cash last year, – $10,000 off-road vehicle, etc.

$206,800 is the income that hit our bank account after 401k, taxes & benefits were taken out in 2018.

By category this is our “normal” monthly expense at $6,600 out going. We do our best to pay for larger, infrequent expenses (ie fence repair) in the months we have extra income come it. I haven’t included that in the average monthly budget below.

  • Giving – $685
  • Housing (not including extra on mortgage, but does include things like Cell Phones, Internet, Utilities, Ongoing Maintenance & Upkeep) – $2,500
  • Car Gas & Maintenance – $220
  • Food (Groceries, Restaurants & Bars, Coffee, Hosting BBQ’s/Dinners) – $1,165
  • Lifestyle (Gifts, Weekend Travel, Netflix, Haircuts, Shopping, Housecleaners, Hobbies) – $1,250
  • Health & Wellness (Chiropractor, Massage, Vitamins, Meds, Gym, Yoga) – $525
  • Taxes/Insurance – $178

I’m excited (and nervous) to hear what you have to say.

Now we have the bigger picture :) In other words, they spend the same amount of money every month as I do, only with three times the salary! Haha… Which leaves a looooooooooooooot of extra money for $$$ goals which again is just amazing!

So if I were them I’d be maxing out every last financial checkbox as well just in case it does come crashing down one day… They can take away your job, but they can’t take away your wealth!! As long as you’re building a nice fat moat around it like they’re well on their way in doing.

So my vote is yes – 100% pay off that mortgage and free up that mind! Not only do you have plenty of cash flow and padding all around you, but it’ll only net you even MORE $$$$ once that house is paid off! It’s a beautiful thing!

And if liquidating all $122,000 in savings is still scary, maybe pull $80,000 from it to start with, and then throw the other $40,000 into your “Emergency, Vacation, House/Car Maintenance” fund giving you a whole *12 months* of expenses banked and ready to be used in case the $hit hits the fan… Which of course the odds are a long shot – especially with all your other $$$ stashed – but still. Might help you feel more confident and knowing you’re covering all the bases before going “all in” :)

Those are my thoughts – how about you guys?? Is she safe to start storming the mortgage?? Would you change anything else with her setup?  Do you wish you had those levels of income too? ;)

Drop your thoughts/comments/questions below, and our dear reader here will be pouring all over them and hopefully getting closer to a good answer for her family. Just please keep it respectful! Y’all kinda went buck wild on the last one – which is fine – but keep in mind it’s not that easy divulging your goods to the world so please keep it as attack-free as possible…

If you missed the last few articles like this we’ve posted, here they are again:

Happy gawking! :)

Jay loves talking about money, collecting coins, blasting hip-hop, and hanging out with his three beautiful boys. You can check out all of his online projects at jmoney.biz. Thanks for reading the blog!

{ 101 comments… read them below or add one }

1 Olivia April 9, 2018 at 5:11 am

Very true, personal finance is always personal!

It always makes me feel a little guilty to pay down a lower interest rate instead of earning an average higher rate (even with PE so high right now!). But the premium on having a mortgage free house would be kind of awesome!

Nice job on the bonuses, I feel you on the taxes! NYC is similar here!

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2 Cammie April 9, 2018 at 6:15 am

How exciting for them to have this position! Hang on a sec while I put their shoes on to get a better view…. :)
If it were me, and cranking back the time clock a few years, I’d want the time in the market especially for a mortgage with an APR that low. Market is on a downturn now and I’d put that huge or most of the huge amount in an index fund (you know the one and maybe that other one too).
Ok, my foot was cramped aaand I’m back. They have to look in the mirror and really find out what the end goal is. What exactly are you trying to accomplish? Understanding the end goal will help set up the rules of their game.
Super fun! Thanks for sharing Method & Madness and thanks for the badassery JMoney!

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3 J. Money April 9, 2018 at 7:07 am

Yes – very true on the main goal! They hinted at it with maybe wanting to be retired early or taking a sabbatical, but fleshing it out more could def. help zero in the decision better.

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4 Chadnudj April 9, 2018 at 12:29 pm

I’m with you, Cammie, albeit for an additional reason:

I value liquidity too much.

Look, sales jobs (particularly ones that lucrative) are subject to massive swings, if not elimination entirely, if the economy went into a downturn. You can’t easily get liquidity out of your house if you (one or both) lose your jobs to cover your other bills, whereas even if the market takes a tumble you can access your invested funds (maybe at less value, but still access them) to cover your bills.

Both are excellent choices to have, but I’d strongly lean towards investing to allow for that liquidity (especially when you’re already paying some amount extra each month towards the mortgage as it is).

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5 Method & Maddness April 9, 2018 at 12:43 pm

Great point @Chadnudj. I’d say “worst case” scenario would be back to the $200k range if we both had the worst-year-ever. We are in boring/established industries but we don’t take that for granted. Fluctuating incomes can bite you in the butt if you get too used to the highs.

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6 My Sons Father April 9, 2018 at 6:26 am

I love these real life case studies. I agree with J-Money about doing what excites you.

You also mention that this money is in savings, maybe I missed it, but does that mean a savings account? If so, you can’t be earning much interest on it, so I’m guessing your losing money every month by not paying off your mortgage (i.e. Mortgage at 3-4% vs savings at 1% = losing 2-3%).

If I missed it and it’s in investment accounts, then this equation works the other way, but you also have to calculate risk and peace of mind into the equation. Because of my personality, I’d pay off the mortgage as well. I have never met anyone who has regretted paying off their mortgage.

You’re killing it either way. Congrats!!

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7 J. Money April 9, 2018 at 7:08 am

I’ve only met one person who regretted it, but it’s always a “good” problem to have ;)

http://www.budgetsaresexy.com/how-i-lost-a-fortune-getting-out-of-debt/

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8 Method & Maddness April 9, 2018 at 12:47 pm

It’s in a regular old savings account getting 1% currently. So your calculation is correct.

Thanks for the perspective!

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9 Andy April 9, 2018 at 6:33 am

Hey great read J Money! Thanks for sharing this and congrats on the great incomes! I love J Money’s stance on go for your passion but I feel obligated to share the below video as the numbers are insanely compelling that it makes more sense (purely from a numbers standpoint ) to invest those dollars instead of just paying off the mortgage. Please see the video below as it is sooooooo eye opening! Just a couple thoughts though…
When you add extra to the mortgage, you are certainly crushing interest but you only get one “win” for every dollar, in the sense that you can never use that dollar again unless you sell. When you invest it, it keeps growing! I’m not sure how many years are left on your mortgage but I’m going to assume 20 and hope that is conservative… If you took 120k plus your 1k/mo at 7% that would be 1,005,575!!!
Again check out the video and I think you will agree that switching to investing those dollars will ultimately have the biggest impact on your freedom!
https://youtu.be/oR-SxrPPqRc

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10 J. Money April 9, 2018 at 7:12 am

Interesting way of looking at it with the “wins” per dollar!

I would say they also come with “peace of mind” wins too if being applied to debt – since that’s one of the main reasons people pay it off – but you’re right that investing it produces many more *financial* wins as time goes on :) Although, maybe you still get a 1/2 win if you then redirect all your freed up cash flow afterwards to investments?

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11 Andy April 9, 2018 at 11:21 am

Totally agree with half-credit which is inline with the Dave Ramsey plan. Peace of mind is certainly a big deal but I guess for me personally, having those dollars working hard for me day in and day out gives me more peace of mind than putting it in the mortgage because it is soo illiquid. Also given that this couple has arguably not much liquid net-worth given the newness of this high income, I am even more inclined to keep socking it away into investments because you can always sell shares to get cash but pulling money out of the house is trickier! Love the content and great discussion!

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12 Marilyn Brodeur April 9, 2018 at 10:39 pm

I’m in camp invest. In thier situation, I think of it as pre-funding retirement. Imagine having 1mil in invested assests by 36. Depending on markets, this figure is in the realm of possibility at that income. (PS we’ve been headed into a downturn the last 2 years. People who jumped out anticipating that missed out on huge returns. It’ll happen we have no idea when.)

Once they have a big ol bucket of investments, You can take a job that covers your living expenses and never “need” to save for retirement again. Compounding is most powerful early on.

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13 Method & Madness April 9, 2018 at 11:37 pm

Very interesting idea on the linked youtube video, thanks for the share!

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14 Michelle G. April 9, 2018 at 3:35 pm

This is a really important point, have to agree with Andy here. Each dollar spend on the mortgage is 1 win. Each dollar added to investments is a win that compounds over time.

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15 the Budget Epicurean April 9, 2018 at 6:47 am

Wow yes income like that is dreamy! Congrats on your hard work to get to where you are! And it sounds like you’re making all the right moves. You’re already maximizing all tax benefits so yes it comes down to what makes you happiest/ more comfortable.

Like J said you could start with a big chunk and see how you feel. Of seeing the balance droo by 50, 80, 100k makes you feel on top of the world, then go all in with the rest. If seeing savings droo by 50k makes your heart race, just stop there and maybe add an extra 1000 each month on top instead. There’s no wrong move here, and thank goodness for that!

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16 Mrs. Adventure Rich April 9, 2018 at 7:10 am

“On the personal side, we think we would feel more liberated to live a different version of life if we didn’t have a mortgage.”

Reading this was very telling to me (especially as I feel the same way!). If paying down a mortgage will give the writer a level of freedom and comfort not currently felt, I would also say go for it and pay a big chunk towards the principle! :) Cheers and good luck with your decision!

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17 Marilyn Brodeur April 9, 2018 at 10:44 pm

To play devil’s advocate, they spend 6600 a month. Mortgage is less than 2500. Included in that number is utilities, internet, phone, insurance. It won’t make them THAT much more “free” from thier regular spending.

I get that the emotional component is powerful and compelling. I’d like to take that a step further. Bottom line, on your monthly spending. How much will this really affect them?

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18 Dave April 9, 2018 at 7:36 am

I would reamoratize if possible. That way you can significantly pay down your mortgage but should your income go down the required monthly payment goes down as well.

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19 Kate April 9, 2018 at 7:47 am

They are killing it!
Although it might not make the most sense from a pure math perspective, if they feel that living in a paid for house would be freeing, and they are already contributing some to after-tax investments as well as maxing out pre-tax investments, I say go for it. There’s something freeing about living in a paid for home (I’d imagine… my last home buying experience was about as bad as yours, J ;)
They didn’t mention if there are or might be kids in the equation, but I guess they could also think about tax advantaged savings for kiddos, college, etc. – I wouldn’t, personally, but some might…

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20 Method & Madness April 9, 2018 at 11:39 pm

Hi Kate, no kids in the situation!

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21 Kate April 10, 2018 at 3:40 pm

I’d be inclined to pay it off, then, if it gives you peace of mind. We have 2 kiddos but are still prioritizing our FI before we worry about their college savings. Sans kids, I don’t think you’re wrong either way, but IIWIYS I’d probably pay it off..

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22 Chris @ Duke of Dollars April 9, 2018 at 7:47 am

Congrats on the new income the last couple of years!

We do something called a loan pool at Duke of Dollars, and alternative one as well.

Here’s the deets:

Have a savings account that you are pooling your money to pay off a mortgage. Each month put money into the savings account until it is > than the mortgage, then pay it all off at once. The reason we do this is because in case of a real emergency, you have money there to help, because besides interest savings, you don’t increase your cash flow until the full loan is paid off.

My favorite part about the strategy is your own decision on how much you save and how much you pay on the mortgage. You can do 50/50 split, so pay 50% of your extra mula to the mortgage and put 50% in the loan pool. This helps you save on the interest, and also have that extra savings until your actual cash flow increases.

Like I’ve admitted, you do lose a bit of money based on the interest of the mortgage and not paying the principal down as fast, so it is a choice one must make :)

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23 J. Money April 9, 2018 at 9:35 am

I like the name you have for it though – “Loan Pool” :)

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24 Ms. Frugal Asian Finance April 9, 2018 at 7:57 am

Wow congrats! Your finance is so solid. Such an inspiration!

I’d definitely put the savings towards your mortgage. Like J said, it would free up so much of your cash down the road and make you feel so liberated. You might also consider downsizing depending on where you live and whether you love your current home. Good luck!

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25 Budget on a Stick April 9, 2018 at 8:05 am

I would love to destroy our mortgage! I’ve come up with multiple payoff strategies but we are just planning on having the thing gone by 2031 (barring any windfalls or major life changes).

If they are comfortable doing so I’d say go for it. After that sucker is gone then you can ramp up savings like crazy.

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26 The Poor Swiss April 9, 2018 at 8:05 am

Very solid finance! And dream incomes :P I would also put more towards the mortgage. Especially since it could be fluctuating as they said. Putting it now that it is possible is smart since it may not be possible later and it will be a good advantage if the income go down.

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27 Jason April 9, 2018 at 8:07 am

For me personally, I would evaluate whether or not my earnings from the investment account was making more than what it cost in interest for the mortgage.

If no – I would look into lower interest financing and then I would consider paying off that debt.

If yes – I would put a temporary hold on continuing to add to the account and turn those guns toward the mortgage and kick its A$$. In the event of a catastrophic downturn. Option 1 is still always available.

As a third option: It sounds like you have a great income stream. People have done this on far far less. You could get real serious about things and do both simultaneously.

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28 J. Money April 9, 2018 at 9:36 am

Haha yup – very true on that last point!

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29 Method & Maddness April 9, 2018 at 12:52 pm

Sooooo true about getting serious . . . thanks for the comment.

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30 Franklin Bach April 9, 2018 at 8:08 am

You have a fantastic plan in place. Congrats on the execution.
Financial freedom comes along in stages, and paying off the mortgage is the first step to having FU money. It’s first and foremost a feeling of security and blissful state that you never have to worry about outside forces messing with your housing.
We paid of our mortgage within seven years and saved $65,000 interest, Following the payoff we, sent the same amount into an S&P account ever since. End result: Savings, growth and security exclusively on our terms.

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31 J. Money April 9, 2018 at 9:36 am

Dayyyyyummmm – killin’ it over there!

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32 JD April 9, 2018 at 8:12 am

In 2009 when the Dow Jones hit 6600, my wife and I were sitting on $150k of cash in savings. Those were scary times. The uncertainty was almost paralyzing. The financial smart thing to do would have been to invest most or all of the $150k into the market. Instead, we paid $105k to pay off our mortgage and keep the other $45k in savings. So, in 2009, my wife and I became entirely debt free. We owned all of our cars, no credit card debt, we owned everything even our house. It was amazing. Psychologically, we had a whole new mindset. We didn’t care anymore about the market. Our 401k was down 50% but even if the world went to hell, we were free. There is absolutely no better feeling then being entirely debt free. That mindset allows my wife and me to make much more prudent decisions. If we had not paid off the mortgage and put $100k into the market it would be worth $500k today. But paying of the mortgage in our opinion is PRICELESS! Enjoy.

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33 J. Money April 9, 2018 at 9:39 am

So glad you’re happy with the outcome :) And as someone completely debt-free himself (even if I cheated and went back to renting vs paying off a house – hah) I can attest to it feeling great. But what’s even more telling of y’all is that you don’t have regrets and stew on “what ifs” with that market rebound! I feel like people get so caught up in all that and forget what an incredible blessing it was to eve be in the position of having a paid off house.

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34 Andy April 9, 2018 at 8:15 am

This is a great situation to be in, they should be really excited at all the options their income is opening up for them! I can certainly see the appeal in paying down the mortgage and I think the “excitement factor” is pretty important. Like J. Money said, if you’re really excited about paying it down, that’s going to really help you in staying committed.

However, I feel like you can get the best of both worlds in the short term. Since your mortgage rate is CRAZY low, it’s costing you very little in interest to keep it going. Why not commit money towards paying it down, but don’t actually send it to the mortgage yet, put it in investments for the time being. With that kind of income you can hit all the pre-tax options and then put a ton of money each year into a taxable brokerage account. You can let that brokerage account grow and grow until it’s more than enough to pay down the mortgage, and then some.

Once, you’ve got a sizeable brokerage account, you can then eliminate the mortgage all in one go, or you could choose to keep it invested and keep paying down the mortgage at the steady rate you’ve been doing. Basically, this’ll give you options instead of paying the money now and then there’d be no getting it back.

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35 J. Money April 9, 2018 at 9:40 am

This is like a tweak on Chris’ “Loan Pool” idea above – only using investments vs savings, I like it – a lot :)

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36 Method & Madness April 9, 2018 at 11:40 pm

I REALLY like this idea, thank you for the post. Keeping options open.

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37 [email protected] April 9, 2018 at 8:15 am

There one key piece of information missing here. What are their retirement or other key financial goals.

I’m in a similar situation (with lower income) deciding between paying down my 3.625% mortgage or investing in taxable accounts. Because I’m still many years away from my financial independence goal, I’m playing based on the math and investing today. By deciding to take more risk with a projected higher reward, I’m hoping that my time to FI is decreased. If I was already at or near FI I’d play defense (pay off mortgage) rather than offense (investing). By that point, I can do anything I want with my time so I’d rather lose optimization in exchange for safety.

Considering the income is variable I do understand why they would pay down the mortgage today. It’s certainly more efficient than leaving the money in a savings account.

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38 Katie April 9, 2018 at 8:18 am

It sounds like they have already made the decision to pay off the mortgage, which is a good decision, but from a mathematical stand point probably not the best option.
The interest rate is extremely low on the mortgage, and odds are if they invest the return in the long run will be better. They are doing great in that it appears even if their incomes drop next year, they would probably be able to cover expenses with current income and not dip into savings.
Another question that needs to be considered before paying off the mortgage is how long will they stay in the house? If it is there forever home and they have no plans to move, then paying it off sooner is better. But if they are thinking they want to be financially independent and travel and not have such an expensive home base, then it does not make as much sense to pay off a mortgage quickly.
I think they really do need to more clearly define their long-term goals before deciding whether to pay more on the mortgage or not. If they continue their $1k extra per month they will have it paid off in less than 8 years anyway.
I am in my early 30’s as well and I feel like I value having higher cash/investments+some debt than having lower cash/investments+no debt, mainly due to the low interest rate environment we’ve been living in. But I know all that is personal preference and can really impact your mental comfort.

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39 J. Money April 9, 2018 at 9:43 am

YES!!! Good point actually on the “forever home” vs “for now” home! You’re right – if they’re planning on moving anytime in near future then it can def. change things – not that you always know what the future will bring. Ironically though, getting all that freedom and/or retiring early could propel wanting to sell the house sooner than later haha…

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40 Method & Maddness April 9, 2018 at 2:21 pm

We’ve been in the home for 5.5 years. We will stay there at least 2-5 years. This is not a forever home. The next home would be $100-200k more expensive to move us to a “better” area and bigger lot size for our hobbies. We’re in no hurry due to the price it will take to get there. Again, California, so help me.

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41 Katie April 9, 2018 at 8:19 am

My husband and I were just discussing this option last night! We have $100,000 that we are considering applying toward our principal. If we decide to do it, we will recast our loan. Is that something you’ve considered? This would lower our monthly payment (without the expense of refinancing) and would serve as an immediate win. My husband is hesitant for the same reason as others: the money could be making more in the market. I believe the peace and freedom that would come from NO mortgage or even less mortgage are worth quite a bit—hard to put a number or percentage on that. :-) Good luck!

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42 Method & Maddness April 9, 2018 at 2:22 pm

I didn’t know that was a thing to be honest. I’ll look into “recasting” with our MTG company. Thanks!

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43 Amy @ LifeZemplified April 9, 2018 at 8:47 am

Yeeesss! I like the idea of destroying the mortgage but as J$ suggested doing it in stages. I’d throw a chunk at it now and more chunks of money at it later at different times. That way you still keep a good amount of money available in case something else comes up that you might want to do instead. Such as investing a large amount in the stock market if it goes way down or if an opportunity comes up to do a different kind of investment altogether. You can keep chipping away at the mortgage and building up your account to wipe the mortgage out completely sooner than later.

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44 Mrs. Kiwi April 9, 2018 at 8:49 am

Did I miss the interest rate on the mortgage? Assuming it is in the 3-4% range, personally, I would invest that extra money in a taxable brokerage account. But with the words you used it sounds like you’d rather pay off the mortgage, so GO FOR IT, congrats!

And, for some totally unsolicited questioning, have you considered opening a DAF (Donor Advised Fund) to optimize your charitable giving? It could help lower your taxes and give even more!

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45 J. Money April 9, 2018 at 9:45 am

Yes to DAFs!! I keep reading about that on FIRE blogs – I’d love to do something similar myself down the road, although probably set up differently so I could directly give to individuals vs 501c3 organizations all the time… (not that that’s bad! just doesn’t affect me in the same way)

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46 Brian April 9, 2018 at 8:53 am

Love the real life situations to dissect. Thanks for sharing.

They call it personal finance. If your main goal or what gets you excited about your money is to dump the mortgage. I’d say go for it.

If you applied all of your saving you’d roughly have 85k left to pay. I’m sure that number would even get you more excite to achieving your goal of paying off the mortgage. It would be interesting to see with a little short-term sacrifice how quickly you could get it done. Good luck!

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47 Dave @ Married with Money April 9, 2018 at 8:57 am

I love that advice – do what excites you the most.

I wrote an article a while back about if it’s better to pay off the mortgage or invest. But it doesn’t matter. If you need to decide, you’re in a better spot than the vast majority of people and there isn’t really a BAD choice, right??

If I were in their shoes, I’d kill the mortgage, particularly with the potentially fluctuating income. They’re super close, so knocking it out with cash on hand and a few years of time should be plenty doable.

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48 Shay April 9, 2018 at 9:16 am

Coming from the perspective of someone who is a lot older (59) and widowed, let me throw in this consideration. Do they have enough life insurance/ disability insurance to cover the”what if I get hit by a truck tomorrow?” I was unexpectedly widowed 4 years ago and have had to rethink everything about my finances. EVERYTHING! I work in health care and see people who were making great salaries have the brakes put on their life after some disabling event. Death is expensive, but living with a chronic disease or disability is probably more expensive. One can’t plan for every single event in life, but I would encourage this couple to think about what would give them the most peace of mind if the worst thing happened. If having the house paid for means financial stability after a “what if” event, then go for it. If investing more now would give them greater flexibility in the case of a “what if” event then that’s their best decision, all other things being equal. You can’t always put a price on peace of mind. Best wishes to them and I would love to know what they finally decide to do.

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49 Jason April 9, 2018 at 9:44 am

Yes. Second to that

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50 J. Money April 9, 2018 at 9:46 am

Third to that! (And luckily they can afford all the insurance they need/want :))

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51 Ndy April 9, 2018 at 9:43 am

They wouldn’t go wrong destroying the mortgage so they can be 100% debt free soon. However, if it were me, I’d max out all tax-advantaged accounts first. I did not see this in the break down, but if they don’t have it, I’ll start Back door Roth IRAs for both of them at $11,000 annually (after converting their current old IRA’s to Roths) so that they will begin to build the tax-free account going forward. I will keep my emergency fund to a maximum of $50,000 and then will throw the rest at the mortgage until it’s gone. This should take much less than 2 years; then they can go ahead and start investing in their taxable accounts as much as they can afford to after that. Either way, they are already winning. Congratulations to them!

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52 J. Money April 9, 2018 at 9:50 am

They currently max out their 401k plans – each – but not sure they’ve considered the back door Roth idea before, so thanks for mentioning that :)

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53 OMGF April 9, 2018 at 9:52 am

Whoa! That’s great money. I would probably feel some kind of way about liquidating the full $122K so would do no more than $70K toward the mortgage and leave $50K to cover the potential shortfall in 2019. I’d leave that amount static and throw money that would have gone into that account toward the mortgage.

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54 Paul April 9, 2018 at 9:56 am

Since the bump is so new I would hold that fluctuation fund for another 18 months and continue to add to it till the balance was the pay off amount. Only reason is at that point the primary reason for a fluctuation fund is gone. Yes you’ll pay a little more interest and Yes there are other reason to have a fluctuation fund but none so dire that you cant just take time to build it back up.

I’m all for paying off a mortgage if you can… There are plenty of reasons not to but I can only imagine that satisfaction of knowing you actually own your house.

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55 Brian April 9, 2018 at 10:36 am

Looks like they are doing pretty well for themselves. Personally, I would ditch betterment and just go straight Vanguard (or Schwab or Fidelity) and lose that .25% fee that they probably don’t need to pay if they are doing some simple mutual funds/etfs. Rebalancing is easy enough and if you are using the funds from the broker they aren’t going to charge you for that anyways.

As for the mortgage, I’d probably pay a bulk of it down in quarterly chunks, that way the hit doesn’t feel as bad and you can see if it really bothers you to see that savings account dwindle down.

While it is probably too late to sign up for one now, I would consider getting a medical FSA (this assumes you aren’t on a HDHP with an HSA) and put as much in there as you can use in a year. It could be used for your chiropractor and possibly your massage (if deemed medically necessary and if it is done in the chiro’s office it probably is). That would be a little tax savings for you in the future.

Just a couple of my thoughts, of course do your own research and do what you think is best.

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56 J. Money April 9, 2018 at 3:28 pm

Great tips man, thanks!

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57 sdg April 9, 2018 at 10:37 am

This is a great story from young people. Other’s have mentioned the fact also that they could earn more money in investments (especially given their ages) opposed to paying of the morning.

Living in CA myself, I would recommend that they speak with a tax accountant to determine how the lack of the mortgage interest will impact their tax obligation.

Congrats to them for taking their raises, increased commissions and saving more rather than succumbing to lifestyle creep. Bravo

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58 brian @ singledadmoney April 9, 2018 at 10:40 am

Thanks for posing this real life situation and being honest with your numbers. Since the question WAS NOT asked about how they could make the most money the quickest and the statement about having no mortgage would be freeing, I agree with J$ that YES, pay off the mortgage asap. It sounds like that is what you are leaning toward anyway. Instead of dropping a little bit (50k-80k) to see how it feels, I say go for all. Drop the entire 122k to the mortgage. You have your second emergency savings account that is already at 6 months expenses, great!!! Keep it right where it is for now. I’d even stop the 3k monthly to Betterment to go after your main goal of paying off the mortgage. Now, with 7100 per month (3000 betterment, 1500 fluctuating savings, 1600 mortgage, and 1000 extra mortgage) going toward the mortgage, I suspect/expect that the remaining 84k on the mortgage will be knocked out in less than 11 months and that’s not even counting the quarterly bonuses. So, by the end of Q1 2019, your sitting on about 735k of paid for real estate, retirement accounts, and savings accounts. At that point, re-engage your betterment savings, bump your emergency fund up to 12 months expenses if you’d like, and pretty much do whatever you want. You’ve obviously worked very hard to get where you are. Imagine how fast your investments will grow by this time next year and how the burden of a mortgage is no longer on your mind!!!

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59 J. Money April 9, 2018 at 3:30 pm

Full on turbo action! Haha…

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60 Lily | The Frugal Gene April 9, 2018 at 10:42 am

Lol “storming the mortgage” haha, great word choice. Their mortgage is slightly lower than our mortgage but I think it should be paid off. Personal finance is personal.

And a mortgage is still debt no matter what. It’s a big emotional burden (or to them it just sounds like something annoying to carry) for a lot of people.

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61 Jennifer Brown April 9, 2018 at 10:45 am

Fabulous Income!! If these balances were mine I would dump the 22,558 in my emergency fund and pay the remaining 100,000 on my mortgage today, like before lunch.

Keep at it!

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62 Penny @ She Picks Up Pennies April 9, 2018 at 10:48 am

A beacon of badassery. I.LOVE.IT.

Kill the mortgage. That’s what we’re doing. We make far less than they do, but I think I feel the same emotional/psychological state. We are aggressively paying down ours (while maxing out our Roths). It doesn’t have to be either or, but I do get the feeling of wanting to make a big “dump” on the debt ;)

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63 J. Money April 10, 2018 at 9:26 am

That should be my new tagline – “A beacon of badassery.” haha…

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64 SMS April 9, 2018 at 11:01 am

As others have said, I would pay down the mortgage with $100k of the savings and then keep whacking at it from current earnings until it is gone, which should not take long at that earnings level. Then make sure the remaining savings are invested appropriately and rebuild. It sounds like paying down/off the mortgage is what they want and the feeling of being debt-free is indescribable! Priceless! (On a much much lower level I had that choice years ago and unhesitatingly chose to pay off the mortgage; when Murphy came to visit I was so glad I had done that.)

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65 J. Money April 9, 2018 at 3:30 pm

Oh nice!! Congrats!!

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66 Maureen April 9, 2018 at 11:05 am

Just a thought……..
We were headed in the right direction. Paid off house, saving for retirement. Then wham, adult daughter diagnosed with debilitating lifelong disease. Then her husband abandoned her. We are now caring for her and her two children financially and physically. Our retirement money is now paying medical bills, food and and extra expenses. My thought is be debt free, you never know what might happen.

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67 J. Money April 9, 2018 at 3:31 pm

Damn, I’m sorry to hear that :(

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68 lisa April 9, 2018 at 11:10 am

Your plans to pay off the mortgage sounds great and I agree with J$. You sound like you’re on track to FIRE. So happy for you! Keep rockin’ those investments and savings accts!

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69 Cody Wheeler April 9, 2018 at 12:21 pm

I’ve thought a lot about paying down our mortgage as well. I’m back and forth on it. My wife and I have a pretty good savings rate (around 35%) and a very cheap mortgage rate (3.625%). The more I think about it, the more I just feel like paying additional into a mortgage is just tying up my money unnecessarily and not using it as effectively as I could be.

To put it a different way, it’s really easy to get my money out of the market if need it for some reason. I can do that in a day. But it’s pretty difficult to get my money back that I’ve paid towards my mortgage. That requires a home equity line, or a refinance, which can take months and be a ton of paperwork.

Financial efficiency aside, unless literally every single other box is checked (they might be in this case), paying down my mortgage is my absolute last priority.

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70 Chris @ Mindful Explorer April 9, 2018 at 12:31 pm

Bloody Hell !

They are rolling in cash like Scrooge McDuck in Ducktales opening intro LOL
Take the next entire year and stop all EXTRA spending immediately
Pay OFF ALL your debt immediately, why have savings if you have debt over your head
Make all matching investment retirement plans
Then put any extra towards your mortage

I bet they could be debt free and mortgage free in just one year, challenge yourselves and see if new habits stick.

AND make sure you keep reading everything here at Budgets are Sexy to find more optimization in your life!

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71 J. Money April 9, 2018 at 3:33 pm

Haha yeah – I bet they could too! And I bet they’d still enjoy their lives just as much too since so much in life is free :)

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72 Captain April 9, 2018 at 1:06 pm

While I tend to agree that being debt free is the way to go, eliminating the mortgage for the sake of eliminating it only makes sense if there are no other higher-alternative investments that you can make or if there exists a chance greater than 0 that the mortgage payment will not be made. If either of those are the cases, then drop the money into the mortgage. If the money is put as equity in the house, it appreciates at the rate of local property values. But it’s not liquid – and that’s a huge problem! I come from a camp that deems if I have enough money to immediately wipe out the debt if the need arises, then it’s as if I have no debt at all (and I am talking about non-consumer debt). I hate opportunity costs.
If I have the option of either buying an investment property in cash or buying three due to me leveraging (within my personal risk tolerance bounds), I will almost everyday go for three.

The key is, though, to not have the payments impact the current cash flow. If the margins with the added debt is approaching the “Danger Zone” (Kenny Loggins) – less than adequate emergency stash, get rid of the debt immediately. If not, keep it under watch and invest more. I personally have an unsecured LOC that I can tap which acts as my buffer in case of case (as my father says). That way, more of my money is chasing productive enterprises.

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73 Daniel April 9, 2018 at 2:16 pm

I am going to be the minority and say first look at the numbers. Remember that money once sunk into paying down a mortgage is hard to get back (even HELOC’s are getting tighter and inching back up the interest levels. Your house is your most non-liquid asset that is also, from historical trends, in your least well performing asset class. It depends on your risk preference but I look at my overall asset levels compared to my net equity and aim for no more than 20% of the total assets being that equity. If it drops below 20% I would be fine with paying down to get back to that number, but overall? My mortgage is cheaper than rent, particularly when you slice out the principle paydown. But everyones risk preference is difference… Will I look forward to the day that I don’t have a mortgage? Yes. But not enough to hasten it at the expense of other opportunities.

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74 Diane April 9, 2018 at 7:12 pm

@Daniel Your point about your house being a non-liquid asset is certainly something to consider. Especially since they are decades away from being 62 years-old and could then get a reverse mortgage.

However, peace of mind and knowing that the mortgage is paid-off has tremendous value. We all know that many monetary decisions are not necessarily decided by the numbers. There is a lot of emotion involved.

I would suggest like a few others to pay it down over a period of time rather than all at once.

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75 Greg Pohl April 9, 2018 at 4:44 pm

Good day J. Money! Had to jump in on this one, as being a real estate investor.

First off I agree they should do what makes them happy. Just consider and realize the tax effects of EVERYTHING you do! I am amazed how most people only think of there taxes around this time of year. I just reviewed my draft yesterday and am excited that we will be getting over $11K refund, so have the incentive to file asap.

With their income, they are in the 32% tax bracket, given that mortgage interest is a deductible expense, their effective rate on that mortgage is 2.465% (.68 x 3.625%). They should be able to get at least 1.25% savings rate on their savings with that kind of balance. If you deduct that you end up that the mortgage is really just costing them 1.215% so very little.

Now let say worst case scenario, they did pay it down, then lost both or one jobs, need money to live on then had to re-borrow against their house.

The rates have gone up to over 5% now AND because they don’t have the income may not even be able to get a loan, and if they had to get a home equity line the interest is NO longer deductible.

You can always pay more towards your mortgage, but you can not take equity out without all the transactional costs, appraisals fee, bank fees, loan points etc. They are already paying an extra $1,000/mo down which is great!

They most likely need some tax shelters. I would save up more and buy a rental house free and clear and get the “depreciation deduction” (Purchase price of property less land value divided by 27.5 years) which is really just a paper loss, as real estate has been going up in the long term and depreciation is a kinda freebie.

For example, on one of our rentals that we paid $317K for, in 2017 we deducted $9,705. We didn’t spend that, so at our tax rate of 25% it saved us $2,426 in taxes.

Now add this to the equation and it gets really exciting!

Buy a house THEY would consider living in at some time, rent it for say ten years so. Sell their current house and pay no taxes on the gain, then live in what was the rental at least two years as your primary and then sell it, BAM the house should have appreciated say $100K to be conservative and you get to keep ALL of the appreciation and capital gains tax-free!

Then do it again and again, as long as you don’t mind moving. They will have to pay depreciation recapture of 25%, but since they are in the 32% tax bracket, that is a saving of 7%.

I know it is a very aggressive tax-saving strategy, but hey considering they are already working for uncle same for over a third of the year anyway, isn’t it worth it?

PS: I have used this strategy five times already to the tune of over a million dollars all tax-free capital gains!

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76 J. Money April 10, 2018 at 9:30 am

wowwww – incredible!!!

as a non-real estate guy I don’t follow it *all* the way, but yeah man – it def. seems like you’ve figured it out! Thanks for taking the time to share with everyone – I bet others will really give this some thought :)

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77 Steve Tea April 9, 2018 at 6:26 pm

ROTH, ROTH, ROTH Looking into starting a Roth IRA!

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78 FullTimeFinance April 9, 2018 at 8:33 pm

I tend to consider risk tolerance when making mortgage payoff decisions. Outside of liquidity a mortgage payment has the same fundamental effect as buying a bond at the same rate plus minus any tax differences. So do you feel you need more downside protection from stock market gyrations? Then payoff mortgage. All else invest. How much is the personal part.

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79 Christy m April 9, 2018 at 9:59 pm

We paid off our mortgage last summer. It is the BEST feeling ever! Much more secure feeling. We paid our house off because my husband is a consultant, and it makes us feel more secure that if he would have difficulty finding a new client, we would be safe. Only 16,000 of debt (car) and we will be completely debt free. (paid off house first because the interest was lower on car and if something tragic happened, I’d rather have a car repossessed than my house)

My advice: Make sure you have at least 6 months of living expenses in emergency funds (we keep 12 months)

Max out those 401ks

Then kill that mortgage. It feels GOOD!

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80 J. Money April 10, 2018 at 9:30 am

I think you’re the first person I know to have paid off their house before their car, haha…. (And I love every bit of it :))

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81 Christy m April 11, 2018 at 8:32 am

We have 4 cars total (two teens)my husband and me. Figure if it should be repossessed, we’d just have to make do with three cars (first world problems). Now that we have a year’s worth of emergency fund, we are maxing out our 401ks. (both 50 yikes!) Car will be after 401ks. Then on to saving for my husbands Tesla…

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82 J. Money April 11, 2018 at 9:35 am

A nice treat for all that saving/investing/debt killing :)

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83 Gina April 10, 2018 at 12:14 am

What an ideal situation to be in! I’m so with you J Money, I’d totally pay off the mortgage and be free. They already have a nice amount of equity in the house so they’ll only have more by paying it off. They’ll have so much breathing room to do all that they want once the mortgage is gone. Think of all of the savings they’ll enjoy then!

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84 Debbie April 10, 2018 at 3:15 am

Paying off the mortgage in their 30’s gives them plenty of time to invest for retirement. OR they could put their extra funds 50% towards the mortgage principal & 50% towards investments. It all depends on what gives them the most peace of mind. No mortgage is huge if one looses a job.

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85 Bryan April 10, 2018 at 9:09 am

Freeeeeeeeeeeeeeeedom! [Insert Mel Gibson’s blue and white Braveheart face]

It’s a win/win question that only you can answer for yourself and one that I have asked and answered for myself.

I pulled the trigger and paid enough extra to make my 30 year 3.5% mortgage a 6 year mortgage. Yes, I lost (7%-3.5%) roughly in returns but I also gained a guaranteed 3.5% return and more importantly to me…a sense of peace…forever.

Do what sets your soul ablaze and you will have no regrets.

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86 J. Money April 10, 2018 at 9:32 am

That last line!

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87 Jen13 April 10, 2018 at 10:00 am

Method and Madness:

We have a similar situation in that we have a mortgage of 3.25% and owe about $230,000. We chose to not pay it off (even though we could) mainly for the reason that we intend to sell in 5-10 years most likely in about 7 years. We have an assumable mortgage and believe that interest rates will rise and it will be a great selling feature when the time comes. We want to minimize the difference between the selling price and the mortgage owed. Also our income is not high like yours and we want to have cash available for any financial investing opportunities that may come along. Those are our reasons.

If you intend to live in your current home forever or a really long time and do not have an assumable mortgage and have plenty of cash on hand (which you do) then pay it off for peace of mind.

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88 J. Money April 10, 2018 at 11:15 am

How interesting! I didn’t even know assumable mortgages were really thing? I don’t think I know anyone who’s ever been a part of one of those on either side of the equation…. Do most mortgages have this in the clauses, or is it something special you have to get or ask for?

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89 Jen13 April 10, 2018 at 12:55 pm

FHA, VA, USDA offer assumable loans, conventional loans do not. We have a VA loan.

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90 SavvyFinancialLatina April 10, 2018 at 12:55 pm

Assumable mortgage? Can you explain more?

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91 Jen13 April 10, 2018 at 2:10 pm

I deleted the first paragraph because it kept saying my comment was spammy.

We took out a bank loan that was guaranteed by the VA.

For example, Let’s say we take out an assumable loan guaranteed by the VA for $250,000 and by the time we sell we have $200,000 left on the loan. Let’s say we sell the house for $275,000. Then the buyer must come up with the $75,000 and then can “assume” the rest of our loan. We transfer the loan to them, or they “assume” it. The more mortgage we pay off the more money people need to come up with. Therefore, we try to minimize the difference between selling price and mortgage owed to have a bigger pool of buyers.

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92 [email protected] April 10, 2018 at 9:57 pm

NAH for me. Underperforming and illiquid asset that loses about 5% per year to the markets. I have refinanced my mortgage a couple of times and am paying $1050 per month on a 400k house. It is all about cash flow for me and I honestly don’t care if I ever pay it off.

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93 Ms ZiYou April 12, 2018 at 3:32 am

Completely agree with the sentiment personal finance is always personal – if I was in their situation I’d invest rather than pay off the mortgage. As I’m a numbers geek, and I believe that market returns will beat the mortgage rate in the next 10 years.

My parents are vert risk adverse and all about paying off debt, and never invest, so it’s been a deliberate decision to try and take a different path myself.

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94 J. Money April 12, 2018 at 6:50 am

Are they doing well with that strategy in general? I know there’s a lot of people who only use cash, never take out loans, never invest, etc, but still doing good overall with $$$ – just not *great* with the investing in the mix, which I agree is key :)

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95 NICOLE C April 12, 2018 at 1:35 pm

I still kick myself from time to time for the decision I made to pay off the student loan 8 years ago.
The stock market was slowly recover from crash and the old me was burnt by credit card debt. At that point, all I want is to get out of debt, any debt.
Also, I wasn’t into personal finance yet to know what opportunity cost is.
I probably wouldn’t pay off my mortgage. But Only you would weight out what more important to you, either being debt free or the potential earning.

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96 J. Money April 12, 2018 at 1:59 pm

God job killing your debt though! Still very much a HUGE win!

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97 Jill April 12, 2018 at 3:39 pm

If it were me (I feel the same leanings and am about to pay off our mortgage), I’d do the whole $122 to mortgage. Then I’d keep everything else the same except lower the weekend expenses big time, anything that doesn’t totally bring you lots of joy or sub those out with free and lower cost things. Use whatever you save there to send more to index funds. Then I would reassess how much you would need to knock the mortgage out in 12 months. Up your payments to make sure it’s done in a reasonable time frame. I would send those bonuses to the index fund and only rent off-road vehicles until the mortgage is done. Over 12 months starts to make you very antsy when you’re that close. Once it’s Done you can load so much extra money into investments you won’t have missed out on a whole lot for delaying that extra push only one year. Especially if it continues to go down.

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98 TJ April 13, 2018 at 12:29 am

I would keep the 401k as it is. Max it out. I didn’t see the loan on the mortgage if it was a 15 or 30 year. Typically the interest on a 15, or in your situation even a 5/1 arm may be substantially lower than the standard 30 year fixed, so I’d look into that. Get a HELOC, it costs like 500 bucks if you get in a pickle. I like to keep at least 4-6 month safety net just in case. The remaining extra cash at the end of every month, since you are in your thirties would go 30% debt reduction, 70% into a taxable account. No T bill is gonna yield 3.625%.

We don’t waste money on cars, but do splurge on experiences and vacation at least a few times a year. You will be millionaires befor you know it.

Cheers,

TJ

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99 TJ April 13, 2018 at 12:38 am

Also if the market crashes 40% and you’ve got the guts, with that amount of home equity you can cash out the HELOC and dump it in the stock market. 3.625% garraunteed return for now, then lots of greenbacks sitting back in the brick and mortar piggy bank you’ve already saved.

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100 Dr. Cory S. Fawcett April 22, 2018 at 9:03 am

I agree with paying off the house. I paid mine off years ago and have been very happy with that decision. If you need more ammunition to help you with the decision, read my book, The Doctors Guide to Eliminating Debt. There is no good reason for you to keep the mortgage at this point, especially if it is tugging at you to pay it off. You already decided to pay it off early, that’s why you put and extra $1,000 a month into it. Go for it, you won’t be sorry.

Dr. Cory S. Fawcett
Prescription for Financial Success

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101 Gasem April 22, 2018 at 9:01 pm

One the average you make more investing,and also don’t miss the effect of inflation. If you pay the mortgage now you pay with expensive dollars compared to future cheap inflated dollars, a kind of reverse compounding. Remember when you buy equities you own shares not just dollars, shares tend to keep up if not exceed inflation

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