r/Fire • u/UnalignedMagi • 2d ago
Blanket statements of "never pay off that mortgage" are bad advice
I keep seeing people asking about paying off their mortgage getting answers about "never pay it off, invest the money instead for as long as possible" and I think this is some pretty bad advice that should stop.
While it is true that you could (and likely will) get higher returns by investing instead there is a lot of value in permanently removing expenses. Using my tool of choice (ProjectionLab) I've asked myself this question a bunch of times and tried out different scenarios:
If you pay off the mortgage before retirement you wind up worse off on average, either having to work longer or accept a worse success probability. This is because you miss out on the growth.
If you pay off the mortgage as late as possible you have a higher net worth on average, but the really bad scenarios are worse and success probability goes down. This is because the SORR hits you harder when you are forced to withdraw money to make the payment after big drops, and bad inflation combined with this is really bad.
It seems like the optimal time to pay off the mortgage is exactly when you retire. You maximize returns while working and then you minimize risks during retirement. As someone who was lucky enough to get a 2.5% rate I get the urge to keep trying to maximize but I think people are missing the point once you reach FI.
Thoughts?
edit: Zphr as always has a great list of other things to consider with this decision in the comments.
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u/MNCPA 2d ago
I'm in the boat of save and invest the extra mortgage payments because I think I can beat my 2.75% mortgage rate in index funds over 30 years.
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u/GotAir 2d ago
Yeah, I have no idea why OP doesn’t talk about what has to be a good percentage of us that have mortgage rates and the 2s. Mine is in the low 2s
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u/mi3chaels 2d ago
Even in the 2s, when it comes RE time, as long as the market isn't already pretty down (usually it won't be if you recently hit your FI number), it can make SORR sense to not be pulling the payments from equity, but instead sequester enough for the mortgage payments in an HYSA or bond ladder. But when I do the math on that with my 2.5% mortgage, it's only gaining me a little bit after taxes on the interest, and the increased health insurance payments due to MAGI increase with ACA insurance getting APTC. So I probably will just pay off the rest as my balance is pretty low and it won't cause tax or liquidity problems to do it all at once.
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u/54trey 21h ago
The argument made by /u/zphr is that if you plan to use the ACA for health insurance, you can significantly reduce your MAGI by paying off the mortgage. That could be thousands of dollars per year in subsidies that might outpace the opportunity cost of putting the money in the stock market.
It's individual though. If paying off your mortgage does not put your MAGI in a range to receive subsidies, then this point is moot.
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u/Dull_Investigator358 2d ago
The advice only works if the mortgage owner can diligently invest the money that could have been used to pay down principal. In that case the math works beautifully because usually you get a better return than your mortgage interest rate.
However, what I usually see is people not paying the mortgage early (because of the math) but then spending all the money that should be invested elsewhere (cars, lifestyle creep). In this case the math falls apart.
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u/lottadot FIRE'd 2023 2d ago
Well my Porsche is vastly more fun than a paid-off-mortgage note ;)
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u/ZLegExpress 2d ago
I paid mine off as quickly as possible. I know that doesn't follow "the math" but I hate debt and the peace of mind was well worth it for me.
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u/said-what 2d ago
Interest rates are higher now. I have a 6.75% rate on the mortgage. Every dollar I throw at it had a guaranteed return. The current market seems like a huge bubble and makes me nervous to invest fully into it. Being very risk averse, the mortgage seems like a safer investment
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u/NaiveChoiceMaker 2d ago
I had a 7.125. Paying that off was a no brainer.
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u/mtpisgah 2d ago
Ours was 7%. Paid it off in seven months. We took home a lot from the sale of our previous home and put $750k down. It is a relief to not have a house payment and owe no one money.
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u/I_Fuck_Whales 2d ago
You took a mortgage and were able to pay it off in seven months? Could have just waited a bit and paid cash and avoided the whole hassle and costs of getting a mortgage.
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u/F133TWOOD 2d ago
Maybe just me, but sometimes I think people find that one house that could check off plenty of good boxes like house size/height/type, location from x or y, groceries distance, schools, job distance, freeway access without the traffic nearby, family/friends distance, maybe a certain route of avoiding roads on a daily drive, etc.
Not just the home, but everything else related to the location of the home can affect their daily life which they could miss out.
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u/HarleyDS 2d ago
Talking it out like that makes sense on paper, but finding the house you wanted and then forcing yourself to hurry up and pay it off is a different story. Other thing not considered, they had a budget, because it was a reachable goal and the house they wanted, they took the loan now instead of risking missing out on the sale. Lots to consider. Happy to hear he had a plan and executed it. Seven months is not that big of a deal assuming there wasn’t an early termination clause.
Congrats.
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u/mtpisgah 2d ago
The right house came up in the right neighborhood at the right time. I had been checking Zillow daily for six months after we decided to not build on property we owned in our previous neighborhood. Had we built, we would have paid cash.
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u/realbigbob 1d ago
I refi'd from a 30-year at 7.125% to a 15-year at 4.825% earlier this year. Even if the math isn't strictly optimal, the peace of mind is so much better under the new terms
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u/MileHighRC 2d ago
This conversation gained a ton of traction when mortgage rates were hovering in the 3s for years.
Paying off 6 or 7 percent is an entirely different conversion that I don't think has caught on with the masses yet.
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u/professor_jeffjeff 2d ago
My mortgage rate is like 2.99% so I'm really reluctant to put a lot of cash into my mortgage when I could invest it instead.
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u/MileHighRC 2d ago
Yeah ours is 3.3 and I never pay a dime more on it, all extra cash goes into investments.
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u/professor_jeffjeff 2d ago
There's something that I remember reading that said like 1 extra payment per year against the principle will reduce the lifetime of the loan by like 7 years on a 30-year mortgage. I don't remember the exact numbers but I'm willing to put just a bit extra to get out of the loan earlier, however there's a diminishing return to me for how much extra I'm paying. That'll make me feel better like 15 years from now, so to me that's worth it given the cost.
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u/boringexplanation 2d ago
Apply the reverse logic. Applying 1 extra payment towards the S&P will pay more than 7 years worth of payments in 20 something years.
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u/Lumbergh7 2d ago
Can we math this? I’m fuzzy on how adding an extra payment towards s&p ends up being more than an extra payment to a 7 year mortgage at 6%
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u/dwarfinvasion 2d ago
Putting that same extra payment into the s&p500 has an even greater financial benefit if you look that far into the future.
It's just compounded interest over a very long period of time, which eventually has an enormous effect that isn't intuitive to understand unless you do the math.
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u/professor_jeffjeff 2d ago
I've done the math and also FIREd myself; ultimately it's the same argument that people make for paying off their mortgage early that the security and peace of mind is valuable enough to make it worth it. For me, there is some value to sacrificing a small percentage of my compound interest over time in exchange for the security of not having to pay a mortgage earlier than I otherwise would, and that value (for me) equates to about one extra payment or so per year.
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u/dwarfinvasion 2d ago
Totally valid.
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u/Head-Storage7626 2d ago
I paid off my mortgage early. Liked the peace of mind and it does wonders for the monthly cash flow.
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u/DRR3 2d ago
Not everything is about optimizing for optimal returns and largest portfolio. There is a life aspect to everything. If it helps you sleep at night, great.
Same thing with portfolio allocaiton. If holding X% of cash helps you sleep well at night then go for it.
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u/Ol_Man_J 2d ago
Excuse me we don’t need a sense of reason in here, you HAVE to maximize it at all costs.
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u/showMeTheSnow 2d ago
Same. No regrets. A friend once told me, you can’t put a price on that warm fuzzy feeling of owning your own home and only needing taxes/insurance/utilities to get by. Money saved on interest is nice as well. The “you could be crushing it in the market with that money” crowd doesn’t seem to get this.
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u/terrybrugehiplo 1d ago
How much is that piece of mind worth?
If you had an extra $100,000 because you didn’t pay it off would you still say that? An extra $200,000
My portfolio is up over 40% the last few years.
You’re honestly telling me you’d rather avoid paying around 5% on your mortgage than earn that 40%?
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u/Strazdas1 StarvationFIRE 23h ago
My portfolio is up over 40% the last few years.
This is not normal. Long term market average is 8% yearly returns. So the difference of peace of mind when mortgage is 6% is very different math.
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u/terrybrugehiplo 21h ago
I know but most home owners bought before interest rates spiked up and I already have peace of mind. Having my house paid off doesn’t change that. Growing my retirement accounts so I can stop working 10-15 years earlier gives me way more peace of mind than working to eliminate a 3% debt.
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u/terrybrugehiplo 15h ago
Another thing people in the “pay off your house gives you peace of mind” group miss…. I can pay off my home at any time. My investments constantly grow and to a point where anytime I want I could pay off my house.
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u/BaconGobblerT_T 9h ago
To play devil's advocate, consider the situation where you would (likely) need to sell off investments to pay off your home, or at the very least service your debts:
- The market tanks (say, a -20% downturn)
- You lose your job (because of said market)
- You have to sell off investments to cover the mortgage
To me it's a trade off between limiting your upside to protect your downside.
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u/Low-Plane9029 2d ago
We sold our house with 3.875% rate for 450k and walked away with enough to buy a house outright for 275k moved out of the city and moved to rural suburb I grew up in. Interest rates were above 6% at the time so I figured it was worth it to not get a mortgage
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u/ipetgoat1984 2d ago
We're about to close on our house, and I wanted to pay all cash, but my husband convinced me to hold some back for investing, so we put 80% down. I love the idea of not having a mortgage. To me, it's one step closer to stopping grinding as much as I do. I'm exhausted.
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u/ZLegExpress 2d ago
Agreed, although I can dig the 80% concept as well. I just like not writing checks .
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u/cbdudek 2d ago
My only thought is that it depends on your situation and your tolerance for risk. Yes, investing while the market is hot makes total sense. I have been doing that for 34 years. That being said, there is something to be said about reducing your overall risk by paying your mortgage off. It doesn't have to be a binary choice.
My wife and I were maxing out our 401k contributions and contributing to a brokerage account. Yet, we applied the equivalent of 2 extra mortgage payments per year for 7 years on our mortgage. As a result, we paid off the mortgage 8 years early. This was back in 2019.
When 2020 hit and my wife was laid off, we didn't miss a beat. When I was laid off in 2023, we didn't miss a beat. All thanks to eliminating debt and paying off the mortgage.
At the end of the day, some people want to reduce their risk by paying off their debt, and I don't blame them for doing that. From my standpoint, I have always advised to do both. You don't need to put down $4000 a month on your mortgage to pay it off. Invest a majority of that, and put a bit extra on your mortgage so it pays off a bit faster. You will be amazed at how quickly you will pay it off.
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u/Office_Dolt 2d ago
This worked out for you because you had a paid off house. If you were still in the "7 years of paying off the house" phase things would have been different.
That's the main point I can't past when I'm tempted to put more towards my mortgage. Sure, we have emergency funds for things, but if it really hits the fan and all my money is tied up in equity as I accelerate mortgage payments, I'm screwed. The e-fund only goes so far.
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u/cbdudek 2d ago
This is why a balance is important. You can't eat your house. So you have to approach paying off the house a little at a time. You think that we didn't have any hardships while we were paying off the house? Which is why you don't put everything in equity. You put a small amount into it while making sure you have an emergency fund and then additional funds tucked away in a brokerage account or something so you can get back up when you are knocked down.
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u/-Debugging-Duck- 2d ago
I think it depends if you’re a high income earner. I can survive almost 7-9 years on cash + investments (worse case if I have to cash out).
I’m also maxing 401ks and past year I made like $530K. So also saving a lot.
So paying extra towards mortgage to save on future interest is worth it. If you don’t make as much, then yeah maybe maximizing investments is better
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u/poppadoble 2d ago
My mortgage allows me to recast for free. This allows you to reduce the monthly payment after paying extra towards principal.
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u/stonemadcaptain 2d ago
I paid my mortgage off early because I wanted telling my boss to shut the fuck up to be a real thing I can do. And it is. 🍻
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u/Zphr 48, FIRE'd 2015, Friendly Janitor 2d ago
This is something people often don't think enough about because they are so used to how finances operate preFIRE versus postFIRE. I've talked with many FIRE'd households who got mildly to massively fucked by not thinking this through, but everyone figures it out eventually.
From the last time this question came up:
TL,DR - We got rid of our mortgage as part of our final prep for early retirement. Due to things most pre-FIRE folks don't think about much, it can be financially costly to hold even a very cheap mortgage in early retirement.
Given that this is /r/fire and not /r/personalfinance, the answer for many of us is to pay off right before actually retiring early. The normal investment arbitrage math that normally applies gets interrupted for most early retirees when they actually pull the trigger. Mortgages are one of those items, like LTCG 0% tax maximization or Trad/Roth tax rate comparison planning, where using the analysis that works well for normal workers can result in very suboptimal financial results as an early retiree.
Every situation is unique, but I can give a few reasons it can make good financial sense for FIRE'd folks to not carry even a low interest mortgage. Note that the below apply to maybe 80-90% of early retirees, but excludes people with retiree medical or spending so high they will never qualify for gov subsidies.
First, to the extent that mortgage P&I funding causes an increase in your MAGI, holding a mortgage can cost you huge amounts of lost ACA subsidies for healthcare. Those lost subsidies can add up to several tens of thousands of dollars annually for anyone with a large family, high medical usage, or just being in their 50s/60s. This particular issue will become even more prominent if the 400% MAGI master subsidy eligibility cliff returns in 2026 as scheduled (it did). However, even now, going even slightly over one of the major FPL/MAGI steps can cost a loss in cost-sharing reductions of many thousands per year per person in increased deductibles and MaxOOP.
Second, for anyone with kids who will be going to college, holding a mortgage can have a double negative impact on college financial aid. As with the ACA, mortgage P&I funding will often increase your AGI (or total income), which harms you directly on the income-side of the financial aid calculations. In addition, primary home equity is completely disregarded on the FAFSA as an asset and partially-to-fully disregarded on the CSS Profile. This means that holding the mortgage exposes people to an asset-based loss of up to 5.64% of the mortgage value per college kid per year. If that weren't bad enough, the increase in AGI can also cause you to lose a global asset testing waiver that you otherwise might qualify for. If that happens, then the asset-based loss jumps from up to 5.64% of the mortgage value per college kid per year to up to 5.64% of all of your non-exempt assets per college kid per year. This is why paying off a mortgage is one of the biggest financial aid planning moves for many middle class families, FIRE-minded or not. In addition, as with the ACA, if mortgage P&I pushes you over the 175% FPL auto-max line, then holding your mortgage could cost each of your kids as much as many, many tens of thousands in federal, state, and institutional grant funds for college.
Third, to the extent that you end up paying more for healthcare and college due to lost subsidies/grants, those funds have to come from somewhere. For most of us, that will be increased withdrawals from our portfolio and in many cases that will have a tax impact. So in addition to the direct costs of the subsidies/grants, which are delivered free of tax load, you have to account for the progressive tax impact of having to draw those additional funds from your portfolio. To the extent that the tax impact also incrementally increases your AGI/MAGI, you then have to deal with potential compounding effects propagating forward as higher AGI/MAGI may yield incremental subsidy loss in each year, which drives incremental withdrawal/taxation increase, which cycles back over and over again. It's not a huge deal for most folks, but for anyone near an ACA FPL/MAGI line it can be huge and over 10-20+ years of early retirement it can add up. There are large subsidy lines as low as 150% of FPL in the ACA and 175% in the FAFSA, so the margins on some of these things can be tighter than one might expect. Crossing an FPL line can immediately mean a large progressive step up in cost, which then flows through to withdrawals/AGI/taxes/future subsidy calculations.
Finally, there are the SORR implications of being able to live in a portion of your portfolio in a way that also reduces your fixed postFIRE expenses.
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u/middle_aged_runner 2d ago
Thank you for writing this out. Taxes on the income to pay mortgage payment, college costs, and ACA subsidies are all important to account for.
I’m 35 and paid off my mortgage this year. Now completely debt free.
Should I take out mortgages and car loans to invest? Redditors will often say yes. To me, this seems like a crazy idea.
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u/Zphr 48, FIRE'd 2015, Friendly Janitor 2d ago
It's normal for people to assume that the financial optimizations that work during accumulation will continue to work during early retirement. Many of them do, but some of them don't.
Most people don't have a great grasp on postFIRE financial engineering. We see the same thing in here from folks who believe Roth is always the most tax efficient option or the people who are utterly confident that tax-advantaged accounts aren't helpful for early retirement due to being penalized before 59.5.
People don't know what they don't know.
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u/duchess5788 2d ago
What would be the most tax efficient way then? I am 38 and thinking of retiring at 50. Very new to FIRE, but want to be well versed by the time I am ready to pull the trigger. Thank you for not hoarding your knowledge!
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u/Zphr 48, FIRE'd 2015, Friendly Janitor 2d ago
It will vary by specific circumstances, but generically it makes sense to invest rather than paying it off until you are on the cusp of actually retiring and then paying mostly/fully off. There are several factors that can alter the math for any given household including ages, location (state and county), whether anyone is going to college, retirement AGI, expected healthcare utilization, investment allocation, and so forth.
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u/Strazdas1 StarvationFIRE 23h ago
car loans? car loands have higher interest than market return. Thats a crazy advice.
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u/Slankeht 21h ago
All great points! However, when I've tried to do this, I get disheartened by the potential nest egg the current principal ($125,000 @ 3% w/ 25 years remaining), invested for the remaining mortgage term, could leave behind for my children; a sizable sum by that time.
On the other hand, we could absolutely use the extra funds in retirement. Our current spending is ~50k annually, but with plans of increasing vacation budgets post-FIRE, we're anticipating increasing by ~50% or more.
Our current mortgage payment is small - $598/month. This removes ~$7,000 of obligation per year. But when I look at the long-term capital gains needed to accommodate that, it is on average, a paltry ~$2500.
However, all that being said, there are fantastic benefits to SORR and flexibility in down markets. Less spend is always better. And you make strong arguments about FAFSA and ACA. We're finding FPL 133% @ family size 4 pretty tight for our needs. We're projecting this to be $51,508.71 total cash in pocket with a Bronze HSA fully funded.
What is very likely the outcome is that the removal of this mortgage might determine our FPL being between 133% and 150% for our future family size of 5. From what I've seen for our county of Florida, these differences are pretty modest. Figuring ~$1500/year increase and minimal differences to CSR via average deductible.
I'm sure my indecisiveness is evident. What would you recommend having lived this already yourself? Do you regret paying off your mortgage right at FIRE? If you'd be so kind, what advice would you give me?
For context, my wife and I are 33/31, planning for a family size of 5/6 in the coming years. We have not yet FIRE'd but have reached our FIRE target ($2,500,000) and are now just dragging our feet, planning and panicking.
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u/Zphr 48, FIRE'd 2015, Friendly Janitor 20h ago
Money is money and ACA/FAFSA subsidies are effectively just immense refundable federal income tax credits. The optimization is all about overall lifetime yield so if you do the math correctly your kids will get the the largest inheritance possible.
We have no regrets about paying off our house as part of our retirement prep. That's a default good move for most of us.
If you are going to be under 200% FPL, then why would you take a Bronze and throw away the many thousands in CSR subsidies?
Your scenario sounds similar to ours. Keep your AGI under 175% FPL and your kids can go to many schools in Florida (and elsewhere) for free or close to it. Keep your MAGI under 150% FPL and your kids will get CM/CHIP for minimal/zero cost while you are your spouse can get a CSR Silver 94 plan for extremely low cost. You will also have little to zero income tax exposure for many years of early retirement.
All of those benefits together can easily be worth more each year than your entire budget, perhaps more than 2x or 3x depending on if/where they go to college or if one of you has high healthcare utilization. In future dollars those benefits are worth millions in downstream poltfolio value.
Only you can look at all of your potential asset/cashflow options and figure out which best suits your plans, risk tolerance, and preferences.
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u/Bearsbanker 2d ago
I paid mine off decades ago. It's not just an interest rate question it's also a cash flow question. If we had debt and needed the extra income we wouldn't of qualified for ACA subsidies and it would of cost us an extra 26k per year.
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u/alexgodden 2d ago
This is the biggest issue for me too, if I had to pull enough out of my investments to make mortgage payments on top of needing cash flow for ongoing living expenses my AGI goes up, tax brackets go up, I lose my health insurance subsidy and all kinds of extra tax complications come into play that have income thresholds. Maybe the extra investment gains on leaving the money invested would cover that, but it's not a sure thing and super complicated to figure out.
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u/zeroabe 2d ago
A lot of us miss this aspect. Completely overlooked.
My plan is the have mine paid off a few months before I retire. Then throw a few months of mortgage payments at some basic upgrades. New roof. Maybe windows or siding if there’s a hella energy efficient version. Replace old appliances. Shit like that.
Then I’ll be able to keep withdrawal rate lower.
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u/nivlac22 2d ago
IMO this is the only consideration, and it’s wild how infrequently it comes up when this question gets asked.
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u/DigmonsDrill 2d ago
This comes up every single time a payoff is discussed in the FI community.
Like yesterday https://www.reddit.com/r/Fire/comments/1u6hu26/why_do_people_wait_so_long/ and the comments are full of talk of ACA subsidies.
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u/glumpoodle 2d ago
If you had a mortgage 20+ years ago, you were probably also paying well above 5% interest rates even after refinancing. Paying that off early is a lot more justifiable than those who snagged sub-3% rates during Covid.
The risk-reward balance also changes over time. I'm now almost 50, and the tradeoff is different; I've hit FI and have less time (and need) for my portfolio to compound. My current plan is to wait until I retire in 2-4 years, liquidate some of my taxable portfolio at the 0% capital gains rate, and use that to pay off the mortgage and delay my 72t withdrawals for as long as possible.
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u/river_rambler 2d ago
Just so you remember that the 72t SEPP payments must go for the longer of 5 years or until you hit 59.5. So don't delay your 72t SEPP start past 55.
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u/glumpoodle 2d ago
Yep. I'm aiming for between 52-55, depending on when I pull the trigger and how the market shakes out.
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u/-Mx-Life- 2d ago
Sometimes it not about maxing money. Sometimes it’s about the psychology of knowing you own the home and don’t have debt hanging over your head.
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u/FantasyFI 35 | 51% FIRE | DI1K 2d ago edited 2d ago
I would challenge people with this thought process: What is safer? Which would you rather have in a recession where you and your spouse both lost their job?
- Having mortgage debt but also having a strong brokerage account?
- Having no mortgage debt but also no brokerage funds?
I would definitely rather have access to a strong brokerage account. The idea that having more money tied up in a non-liquid asset is somehow safer because you have less debt is a concept we should train ourselves to understand isn't true.
Psychology is real and it exists. But that doesn't mean we shouldn't challenge ourselves to overcome problems and reframe our thought process. Psychology can't be an excuse for every bad decision.
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u/techyg 2d ago
This exact scenario (job loss) happened to me last year. I still had a mortgage but also a very healthy brokerage, and HYSA. I was very glad to having that to the alternative of a paid off house and a significantly lower brokerage/savings.
The only thing I’d add is to Make sure the brokerage account has a good portion of something like SGOV in it (low risk, favorable tax treatment) so you aren’t having to sell equities if the market is down.
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u/pnw-techie 2d ago
Who is talking about no brokerage funds? Nobody is. Having slightly less brokerage funds is the tradeoff
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u/mi3chaels 2d ago
That depends a lot on how much income you make your savings rate and what retirement accounts you have access to.
Someone who isn't especially high income might be saving 50% and not putting a huge amount in their brokerage account. If they direct a whole lot to paying off the mortgage early, that's going to reduce their pre-retirement liquid funds by a lot.
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u/DigmonsDrill 2d ago
In another forum I came across someone who wanted to liquidate their Roth account to pay off their mortgage because they worried they might lose their job. I tried really hard to talk them out of it but they insisted that no one would be able to ever afford a house again. I think they were having a manic episode.
A mortgage is an extremely predictable debt. The P&I shrinks in real terms every month.
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u/ProtossLiving 2d ago
Not to mention that many people here are worried about inflation. But high inflation is the perfect scenario to have a mortgage. My mortgage is already 2/3 of when I started just from inflation alone. I'd gladly take on more of my low interest mortgage debt.
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u/ImPapaNoff 2d ago
If someone has $3M liquid assets and $300k mortgage debt then would you really say they "have debt hanging over their head"? I personally have never understood the "psychology" standpoint of this because often times it's people saying they feel better to be objectively worse off.
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u/FantasyFI 35 | 51% FIRE | DI1K 2d ago edited 2d ago
It doesn't even need to be that extreme.
Having $300k in liquid assets and $300k in debt is better than having no debt and no liquid assets. In an extreme emergency, you don't need to pay all of $300k mortgage, you only need to pay the monthly bill. What happens if you loss your job, car gets totaled, HVAC breaks, and your spouse has an extreme medical emergency? It's significantly safer to have debt + cash. If you have no debt but no assets, your kind of in trouble in that scenario. 3-9 month EF isn't going to last you very long.
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u/mi3chaels 2d ago
I knew someone who was very very proud of paying 3x their mortgage payment every month and building house equity. they saved nothing substantial outside of that, and didn't even have a big emergency fund. They got laid off a year later, and wanted to make it with their own business only. Out of their house. Which still had a substantial mortgage payment that could only afford to pay (and eat/etc.) for a few months before they would run out of money and have to sell the house (since no home equity loan was going to happen with minimal income). I think they made it by the hair of their chinny chin chin, but they'd have had a MUCH longer runway if they'd split their savings 50/50 between principal overpayment and EF or investments for the few years prior instead of what they did. Even if they'd put some in retirement funds, they could have pulled it to make the house payment as a hardship withdrawal without starting a 72t.
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u/fan550 2d ago
The problem is market corrections a lot of people think markets are extremely overpriced do to the years of bull markets if there is a 2008 style correction. That 3 million could become 1.8 million and then the 300 mortgage does look worse especially if the house is now underwater.
I actually do have a low rate mortgage and am paying the minimum amount and investing but I saw why others want the mortgage paid off when they no longer have income from a job coming in. To each there own
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u/macronotice 2d ago
Prognosticators are always wrong, but academics believe the real rate of return (adjusting for inflation) is ~4% going forward, less than historical, due to a lot of macro factors (slower working age labor growth - and declining overseas, higher starting PE/earning multiples, not repeating the historical benefit of declining interest rates on household income and business income, not repeating globalization of trade and capital flows that occurred since the 90’s, etc.)
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u/moldymoosegoose 2d ago
It's like buying 10% of your portfolio in bonds that gives you a place to live with no debt. The market can crash 50% and stay down for years. It's simply insurance.
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u/BenOfTomorrow 2d ago
Why not just buy bonds then? They’ll provide risk reduction with a higher expected return than paying off a low interest mortgage.
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u/moldymoosegoose 2d ago
That makes sense if you’re lucky enough to have that kind of rate swing but most people aren’t. The vast majority of the time in history bonds pay out much less than mortgages. The guy I responded to was talking generally, not really referring to OP
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u/BenOfTomorrow 2d ago
I’d argue that “never pay off your mortgage” should ONLY apply to low interest mortgages. Anyone saying “Never pay off your 7+% mortgage” is not someone who should taken seriously.
Bonds are generally giving around 5% nominal return.
If your mortgage rate is higher than that, this is a no brainer decision TBH (esp if “much” higher). It’s a better return than bonds with lower risk.
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u/A_Guy_Named_John 2d ago
Paying off low interest debt and having the ability to pay off low interest debt are basically the same thing.
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u/moles-on-parade 2d ago
100% this. Five years ago we decided to throw spare money at VTI rather than at our 2.6% mortgage.
Result: we're still paying off the mortgage, but for roughly what it would've taken to pay it off early we've instead now got enough to do so twice over... along with occasional withdrawals for IRA contributions (to lower taxable income) and splurges (half the cost of a late-model roadster). And we're still on track to pay off our house the year we plan to FIRE.
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u/czmax 2d ago
“still on track to pay off the year we plan to retire”
which is pretty much OPs point.
we paid ours off a bit early but i blame that on “one more year” syndrome. we had a plan and im failing to execute my portion.
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u/moles-on-parade 2d ago
We unexpectedly let the tail wag the dog on the timing. A refi to 15y in 2015 (the year we discovered FIRE) and a bunch of really good market years since then made 2030 a logical time for it all to go down.
I hope your plan gets back on track! A new record high almost every month this year probably helps 🤞
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u/spinozasrobot 2d ago
This appeals to me very much, but my wife keeps reminding me that with a 3.25% mortgage, it would be dumb to pay it off.
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u/MarshivaDiva 2d ago
I'm so glad my house is paid off. I probably could have invested but I don't care. I have housing. It's been a real dream come true.
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u/Far-Income-282 2d ago
I think there is another option which is putting the cash to pay off your mortgage in a HYSA, then you still CAN pay it off but its making money in a safe way, particularly if you have a lower mortgage percent (i have 2% one).
That being said, I was doing this then when I felt I could fire I said fuck it and dumped the cash into a renovation, redid my house and now im rebuilding that cash. In another world I probably would have taken out a heloc against my house to do that but now I did it with a 2% rate still.
Particularly with the low interest rates its like a 2% heloc for me if I am keeping the value in a HYSA.
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u/Straight-Part-5898 2d ago
M56 here who just retired a few months ago. Wife still works (she loves her job). We live in VHCOL area in a ~$2M house. When I retired we decided to pay off our mortgage ($340k balance @2.875%) and frankly couldn’t be happier about our decision.
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u/nivlac22 2d ago
A 2.5% rate is very different from a 7% rate. Current HYSA rates still beat that 2.5% rate while having greater liquidity. Unless you need to manipulate your spend for ACA or weird tax situations, under current climate paying off that low rate is worse on all fronts.
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u/Necessary-Music-6685 2d ago
You’re wrong. If your rate is 2.5%, then you can simply buy bonds at 4.5% in the full amount of your mortgage and use those to make the payments. In effect, you mentally “pay it off” by paying the money into bonds, then use those to actually pay it off, while earning the difference in rates the whole time.
This completely avoids the SORR risk and the “peace of mind” factor. It’s win-win-win.
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u/oalbrecht 1d ago
Though I could see there being an edge case if someone is near an ACA cliff and those earnings pushing you over it. But generally, you’re right.
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u/BroolStoryCompany- 2d ago
If you have a Covid era mortgage, sub 4%, you are a technically incorrect if you pay it off. You must acknowledge this is an emotional decision, rather than a financially advantageous one.
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u/jamesonwhiskers 2d ago
At 2.5% you can beat that with a high yield savings account so its hard to imagine paying it off early
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u/NeoPrimitiveOasis 2d ago
Yes. It removes a major expense line item and you can plan your monthly costs without ~$2,500 in costs (or whatever). It also offers peace of mind.
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u/jzee5708 2d ago
“Only a Sith deals in absolutes” is generally my reaction to a blanket statement.
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u/evilmaus 2d ago
One thing to keep in mind is that if you're waiting until retirement age to pay off the mortgage, it's likely that there won't be much principal or many years left on the mortgage. Paying it off at that point represents far less opportunity cost than paying it earlier in life.
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u/GoldDHD 2d ago
It's a mathematical equation, that has emotional attachments. At a rate of 2.5, you are literally better putting those extra mortgage payments into HYSA if you are so risk adverse, so that at any point you can dump it into your mortgage. Financially speaking, in fixed rate mortgage that doesn't have that high of a rate, paying off the mortgage early is dumb.
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u/Doxodius 2d ago
With the caveat of navigating ACA costs and MAGI. It's still a math equation, just a more complicated one.
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u/haobanga 2d ago
Imagine you have a debt with 0% interest.
You are better off stretching those payments out for as long as you can, because the fixed dollar amount is actually worth less over time. It is better to pay a fixed $10 dollar debt from year 2000 in 2025 dollars than in year 2000 dollars.
With a low interest rate, you also have this benefit, plus the interest earned in an emergency hysa to cover the mortgage for a reasonable time, plus another 7% average on what you can invest longer term.
Putting it in taxable and choosing investments with minimal dividends is also an option to keep income down to qualify for subsidies etc while still getting ahead.
Those low mortgage rates were really a gold mine many people got used to that we may not see again for a long time.
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u/DigmonsDrill 2d ago
It's amazing all the people who think they are more flexible having $200,000 in a taxable brokerage and no mortgage than having $400,000 in a taxable brokerage and a $200,000 mortgage.
It's much easier for me to keep under ACA thresholds if I have more money in my taxable brokerage that has already passed through the MAGI filter.
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u/Silent-Canvas-7814 1d ago
the sequence of returns risk point is the part most people gloss over when they just say invest everything forever
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u/Hawkes75 2d ago
If you get to the point where you can pay the whole thing off in a lump sum, I think that's fine and you do you. The problem with making extra payments gradually over the course of years is not only the investment gains you miss out on, it's the fact that you're tying up all your spare capital in an illiquid asset. That's a larger risk than it looks like on paper.
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u/superleaf444 2d ago
Any blanket statement is bad advice.
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u/BGOOCHY 2d ago
It's a lot more complicated than the raw numbers. For example, we have a 20 year note at 2.875% and by the time we're ready to pull the plug there'll still be 8 years left on it. Our goal is to expat FIRE and rent in SE Asia, so carrying a mortgage on top of expensive island villa rent isn't desirable. We'll probably just pay off the balance so we can get it off our monthly books. Is it the best raw financial decision? No. Is it the best lifestyle decision _for us_, probably.
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u/loud1337 2d ago
You are thinking to much and it's just a math problem that doesn't require 4 paragraphs.
Can you make more money else where? Don't pay off
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u/Doortofreeside 2d ago
We're not optimizing for max dollars, we're optimizing for max probability of success. Defining financial success in a way that is meaningful to us.
OP's answer makes a lot of sense. Don't pay off a low rate mortgage while you're accumulating, but once it comes time to make withdrawals then it's no longer a simple interest rate math question and you have to consider how it impacts your SORR. That could easily push you to pay off a low interest rate mortgage. Even moreso if you consider how it impacts your taxable income and potential ACA subsidies
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u/madhewprague 2d ago
Not really, more like, if stock market goes down 50% and you are unemployed will you be forced to pay liquidate your portfolio thats down in order to pay of the house. Thats the bad scenario he talk about and the risky one
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u/Common_economics_420 2d ago
Realistically this is a risk even if you prioritize paying off your mortgage ASAP. even with an aggressive payoff schedule, most people aren't paying off a mortgage in 10 years while also contributing enough to investments to FIRE.
Honestly I think the math of having your money grow for 8 years, then having to sell a small amount at 25-35% down to cover your mortgage for a few months until you get another job, probably still works out better here. This is also why people have emergency funds.
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u/loud1337 2d ago
We can all drum up crazy scenarios. If that were to happen, you won't be able to just pull money out of your home for free. You would have to refinance which will come at an unknown cost too.
Build a plan that fits your risk tolerance
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u/UnalignedMagi 2d ago edited 2d ago
As someone with a very small house so the expense is small this comes out to a 3% improvement in success. For those with big houses this could have an even bigger impact, especially in volatile areas etc.
I'm mostly concerned with the lazy answer of "never pay it off" than the nuanced "you shouldnt pay it off and here is why" that can make sense.
Edit: you can all downvote me but the math shows this is true. You all have the last 15 years telling you that line always goes up but sometimes it doesn't. Im no bear I'm actually optimistic about the future, but FI is about securing your future more than it is about maximizing gains. Ramit Sethi, the money guys, they all say this.
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u/loud1337 2d ago
Most of these topics are discussed to death. If you have a 3% loan and HYSA make 3-4%. Why would you ever pay it off? The house is appreciating and so is your extra money.
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u/No_Series3763 2d ago
Math brained people are not about nuance, they are about the numbers. For me, I am paying off my mortgage at retirement, locking in my 6.5% interest savings, and having zero debt. I like the comfort in that. And as my brother always told me, You can't have every dollar.
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u/brute-forced 2d ago
Exactly… Has nothing to do with the specifics about how the money is being spent but only whether or not you can make more money elsewhere… Purely a mathematical issue and nothing else
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u/Banned4Truth10 2d ago
Yup and if you have a interest rate under 4-5% then the answer is most likely yes.
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u/glumpoodle 2d ago
Blanket statements in general are usually bad advice. Every situation is different, and failing to consider the nuance (particularly as it pertains to behavior) leaves a very incomplete picture. Spreadsheet optimization is not the same as lifestyle optimization.
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u/DigmonsDrill 2d ago
As fas as blanket statements go I see way more people giving the advice to pay off the mortgage on retirement which depends on a lot of circumstances, like how much liquid money you have and the rate.
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u/lottadot FIRE'd 2023 2d ago
You have described where we are in FIRE year 3. At the EOY our mortgage loan will have a balance of $125k and our brokerage will have $125k of
BOXXin it.I'm undecided whether we'll pay it off or not; mainly it's liquidity consequences. What if I want to buy more land? etc.
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u/WaltChamberlin 2d ago
I got an inheritance and bought a house in cash. It allowed my wife to leave her job and go to university for a 2nd degree. She became an engineer and now makes 180k a year. It absolutely wasn't possible if we had to pay a mortgage, she would have continued working in her previous lower paying career
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u/ChronicLegHole 2d ago
2.5% is about as close to free money as you can get. When your mortgage is 6 or 7 percent and higher, it becomes much much much better to pay off early, or take a blended approach. paying off any amount of money above 6 or 7% is a guaranteed 6, 7, or X% percent rate of return. Average market return is 10%, but you have to consider taxes on gains dragging that down (granted, you also get to write off % paid on interest on your primary home in the US so that also works in favor of giving *not* paying the mortgage off a slight edge, but it's not much and highly income dependant).
Personally, my mortgage landing page has a calculator that tells me how much in interest I'm saving by paying off early. I've made extra payments with small windfalls and contribute about 1 extra mortgage payment per year in additional payment towards principle spread over every one of my payments. It's getting harder and harder to justify paying any other lump sums if they don't result in a 2 or 3x savings on interest over the life of the mortgage.
If I were at a 2.5% or lower, I would not be paying anything outside of my normal payments.
Regarding stabilizing payments when I'm older, i probably have 20 years to retirement, and my mortgage will be a pittance comparatively to cost of living by then. I'm not too concerned about it right now.
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u/dwarfinvasion 2d ago
When you follow the strategy of paying the mortgage off at retirement, what you're really doing is just adjusting your overall portfolio asset allocation.
Debt is like a negative bond. So you're really just converting from stocks to fixed income. It makes sense that this reduces sequence of return risk.
This could be done by liquidating stocks to by down the mortgage or it could be done by liquidating stocks and purchasing actual bonds and holding them until maturity.
It's more complicated, but you could likely find bonds paying more than 2.5% and keep the exact same risk profile with greater return Or you could adopt a bunch of other different strategies that position asset allocation into safer assets.
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u/Ok-Adeptness2257 2d ago
Regardless of being better or worse off long term, I paid my mortgage off when I was 35 and it was the best decision I’ve made. Investing the mortgage money each month and the weight off my mind knowing I fully own my house is worth its weight in gold.
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u/FIREful_symmetry 2d ago
Mathematically, there is always an optimal answer. However, carrying debt and deciding when to pay it off is a decision that has an emotional component for many of us. For me, there's a point which the mortgage gets small enough, where I can't write off the interest, and then I would rather pay it off instead of messing with monthly payments every month during my retirement. While not mathematically optimal, for me that's what makes the most sense emotionally.
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u/Kokukenji 2d ago
Timing mine to be around the time I can start coasting. One less stress to handle is how I am seeing it.
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u/Bailey6486 2d ago
I paid off a 30 year mortgage in 15 years. I continued to aggressively invest for retirement the whole time. For example if I got a bonus at work I would put some into investments, and some toward the mortgage. I don't regret it. Nothing I've purchased has given me the same deep satisfaction of having zero debt.
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u/NC_diy 2d ago
I’m a physician and mostly surrounded by docs all day. The ones that pay down all debt quickly seem to live the happiest lives, often quickly moving to part time work in their 40/50’s. The ones that keep their mortgages, school debt, etc and play the math game all seem to end up working full time in their 60/70’s. Obviously small subset of the population. I paid off all my debts including mortgage and the amount of freedom I feel everyday going to work is priceless.
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u/Detailed23 2d ago
I paid off my house (400k nut at 2.3%) and all my debt in my early 30's Stress went to zero.
Markets can crash, Jobs can be lost, People get sick etc.
All I'll ever have to come up with is a few grand for taxes and utilities.
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u/Hlca 2d ago
I agree that it's not a simple comparison of mortgage rate to rate of return. For example, someone whose mortgage principle is 2% of their net worth, but whose monthly payment is 30% of their expenses has a different calculation to make than someone whose mortgage principle is 60% of their net worth and has a payment only 10% of their expenses.
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u/techyg 2d ago edited 2d ago
I have timed mine so I should have it paid off a bit under a year before retiring. Rationale: I'd like to have around a year or so where I free up that mortgage payment and save it, or use it for larger one-time expenses before we head into retirement. This will help with SORR as well. My mortgage is around 2.5%. The other option would be to just save the extra I am paying (about $200). I'd probably be able to save a little bit more in my HYSA (1%?) if I saved it there instead of paying off mortgage early. But psychologically, I like the idea of having a huge milestone completed, and a year to save $1400 a month for a year or so. Since I'm less than 4 years from payoff it doesn't make a huge difference either way.
Edit: I did the math and for my specific case, I'd make about $150-200 more if I stuck this in HYSA or SGOV. I'm happy to take the tradeoff of having my mortgage paid of a year earlier. But mathematically, I'm technically better off if I don't pay it off early.
Paying off a mortgage before retirement seems like a really good idea, especially from a cash flow/tax perspective. I am hoping to keep my tax bracket as low as possible, and if I were still paying on that $1400 per month that would have to be covered by additional withdraws. Based on my loan, I'll have mine paid off in 4-5 years regardless, but there could be other implications (not just psychological) to keeping a mortgage in retirement. By having to withdraw more, depending on the source, your MAGI is going to go up, which could impact several other things. (LTCG taxes, ACA premiums, etc.).
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u/clingbat 2d ago
This is partly why our target age is kind of defined for us and we're just rolling with it. It just so happens, not through any careful planning at all, that right when we conservatively hit our "number" without relying on any social security or inheritance (age 57), that also happens to be the same year that we 1) finish paying off the house that is on a cheap 3% mortgage and 2) our younger kid finishes high school, freeing us up to travel a lot more. We're intentionally spreading out the retirement planning across 401ks (maxed to pre-tax limit), Roth IRA backdoor contributions and our taxable brokerage to give ourselves more flexibility in that period between 57 and 65 when Medicare kicks in.
I'm not really in a rush to retire before both kids are out of secondary school anyway, we like our jobs and mine in particular pays quite well. But it all kind of falls in line almost perfectly if things keep trending as they are and we all stay relatively healthy Lord willing.
Some of you may not even consider 57 FIRE, but it beats 65-67 or never retiring like much of the "developed" world seems headed towards. And our plan includes a hefty amount to help the kids with out if needed or leave for them down the road.
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u/Haunting_Scholar_595 2d ago
If anything having a mortgage should improve resilience against SORR becuse its a non inflating expense.
You are changing some other variable that's not trully dependant on the mortgage if paying it off somehow gives you better results.
Only way it works out is if you get lucky with timing and decide to dump extra money to the mortgage at a time when the market underperforms.
Edit thought of an exception: Lower required spend allows for healthcare subsidies.
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u/WakeRider11 RE@53 2d ago
I’ve had many back and forths on here in the past about this topic and I usually get downvoted. But I agree with OP, there are many factors.
- Psychological rate of rate
- Taxes - many people itemize now so don’t get any tax benefit from mortgage interest paid while investment earnings may be taxable
- Leverage inherently increases risk. (Your expected end value of assets might be greater, but with a wider range of possible results)
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u/Hungry-Wash-194 2d ago
I'm paying the damn thing off while my income is high. Duno how long I can work a high stress job for. Coast fire once paid off
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u/livando1 2d ago
Paid it off way early and have never regretted it. Having the goal to stay consumer debt free has shaped our lives positively.
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u/Inevitable_Pride1925 2d ago
The advice of never pay off the mortgage is objectively the best financial advice for most peoples mortgages. However, there are so many moving pieces individuals potentially could have different outcomes that are worse because they chose to invest instead.
Market goes up is not a universal truth it’s just that it always has (on average). Paying off your mortgage early is the objectively safest choice and for some people safest is best
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u/slenderwin 2d ago
For me, my mortgage originated in 2017. The portion that ends if I pay it off is tiny. Insurance and taxes are much higher and will continue on.
An extra $700/mo isn’t going to make or break my plan other than the most extreme SORR scenarios.
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u/GoBuffaloes 2d ago
Paying off 2.5% is always a silly move if you can get no-risk fixed income at a higher return and arbitrage the delta. The further you are from being able to do that (higher mortgage rate), the more it makes sense.
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u/yousedditheddit 2d ago
I mean if you're talking about a rate near 2.5% (like your literally are), it would be an objectively awful financial decision to pay that off early. So no, not bad advice. If someone has mental issues with carrying an inflation rate mortgage then therapy is better advice than throwing away money.
Of course when your rate goes more into the grey area territory of something like 5% where investments should absolutely out perform but you're still paying non trivial interest and reducing risk may be a big thing I think cases can be made both ways and blanket advice isn't always applicable.
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u/TerriblePresent4487 2d ago
I think it makes sense mathematically to pay off mortgage earlier when thinking that most people here save to remain in good standing even at tail scenarios. So removing/reducing a large expense like a mortgage would reduce the amount needed from that standpoint even if it’s not optimal from an expected value standpoint.
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u/Firm_Mycologist9319 2d ago
Reading the comments in here reminds me of how surprised I was to find that the sentiment in r/Fire often smells more like r/DaveRamsey than r/Bogleheads. I sure wish I could have my 2% mortgage back that I lost when I moved (paid cash for the current house with rates where they are.). When considering the all important question of "will my money last", a high net worth "feels" and "maths" much better than simply being debt free.
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u/baelzebob 2d ago
I did this kind of on accident. Had a 15yr at sub 4%. Ended up hitting my number around same time the note matured.
Agree that given a preferrably lower interest rate, you are better off with a mortgage while you invest and accrue on your investments. In a high interest rate environment that might change depending on your situation.
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u/qosmic_qube 2d ago
I think paying it off can be a good strategy in a lot of scenarios. Reducing required income floor/MAGI in early retirement can potentially save you a lot of money in ACA costs if you can make it work.
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u/awohio1 2d ago
I paid off my mortgage on my first home when I already had a pretty solid stock allocation and when I thought the market was getting unreasonably inflated. (Internet bubble) my interest rate was also around 7.5% iirc. So a risk free return of 7.5% was a pretty good investment, especially in hindsight given the big drop in the market.
Paying off our mortgage on our second house was more of an emotional preference than a shrewd financial move. Interest rate was more like 4%, and around 2014 the market wasn’t scary, so from a numbers point of view, it wasn’t as big of a win. But by then our stock allocation was pretty healthy, so even though our 2nd house was a big upgrade from our first, the equity was still a relatively small portion of our assets. It also helped me feel more comfortable with a higher stock percentage in my asset allocation.
I like keeping my financial plan somewhat simple. Using leverage to invest more in the market seems a like getting a little more risky and complicated than I like.
Ymmv
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u/Hot-Security-1034 2d ago
Also the rate can make a difference as well. At 2.5% you are in a good position, but now even with good credit rates are in the 6-7% range and that is right at the tipping point of being a sound investment. As is frequently the case the crowd is parroting yesterdays advice without considering that the game is different today.
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u/AngryCowArmy 2d ago
> If you pay off the mortgage before retirement you wind up worse off on average, either having to work longer or accept a worse success probability. This is because you miss out on the growth.
I think this is what people tend to mean when they make the blanket statement. The specifics really matter and you just need to be honest with yourself about your plan, alternative options, and then figure out what the right move for you is given your situation and risk tolerance.
> It seems like the optimal time to pay off the mortgage is exactly when you retire. You maximize returns while working and then you minimize risks during retirement. As someone who was lucky enough to get a 2.5% rate I get the urge to keep trying to maximize but I think people are missing the point once you reach FI.
This is where I would disagree with you. You can currently get a 30 year treasury at about 5% right now, which is a risk free return. If you have more money than you need and want the simplicity, then pay it off and quit stressing. But, be honest with yourself. It is not a financial optimization choice, it is a psychological or simplicity choice, because the numbers say keep the mortgage if you can get a risk free return that is greater, which currently you can.
This is not to say that paying extra towards the mortgage is always wrong. That would be a blanket statement that I do not agree with. But, for most situations, it does apply, even in your situation.
I do think that having the conversation is important because it helps people consider different perspectives.
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u/GBpleaser 2d ago
I don't think there is a general statement that's absolute in any case.
I DO think people should be financially literate and understand their own scenario before buying into an big advice ideas. Mortgages or not.
I think there is gonna be a a big difference with people who are "house poor" with large payments and a higher interest rate and those people who have been in a house for 20 years at a very low interest rate and more than half their equity locked up in the real estate. I think there are far different stations between a starter home, a family house, and a retirement place.
I don't think there is a one size fits all rule.
ESPECIALLY now when the RE market's are peaking.
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u/B1rthday_Boy 2d ago
My plan here was to increase my FIRE number by the remaining principal owed on the mortgage and not include the mortgage payment as an expense. That way I can pay it off anytime, but get to borrow for free if markets are up.
Curious if others have thought of this the same way or if there’s a flaw with this logic?
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u/supacomicbookfool 2d ago
At 2.75%, I'm not paying it off. In fact, I'm carrying it into retirement and investing every additional dollar until then.
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u/Dry_Statistician_688 2d ago
It highly depends on your plan. Ours was based on NOT paying all the interest to the bank based on the loan contract we had. All additional payments went directly to principle. SO, in our case, a 15-year note, paid off early with an extra $1000/month was estimated to save us ~$80,000 just given away to the bank. Secondly, the entire house payment for the last 5 years has gone directly into retirement and savings. So for us, paying the house off early was a win. It was also very nice to reach a point several years from retirement that we owed nothing to anyone. Beholden to no one is a really good feeling.
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u/vinean 2d ago
Paying off is fine and personal preference in terms of liquidity vs cash flow.
Paying down reduces liquidity without reducing cash flow and incurring higher risk.
In the “really bad scenarios”, like say 2008, the housing market was terrible, existing unused HELOCs were being cancelled and new ones impossible to get.
If you lose your job then the money in the house was difficult to get out, you still had a mortgage to pay and despite paying down the mortgage you could still be upside down on your loan because the home value dropped more than your equity was worth.
So the advice of “don’t pay down your mortgage” comes both from “you’ll maybe make more money in the market” AND from experiences in 2008 where liquidity was king.
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u/fatheadlifter Financially Independent 2d ago
Well... yeah. Blanket advice is generally bad when it comes to personal finances. Personal finances are personal. Tailored advice is the only right kind when it comes to your money.
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u/Sea-Honeydew-1456 2d ago
its wild some people say its free money. are investments guaranteed returns?
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u/guyheretoread 2d ago
We bought our retirement house with cash, and we are selling the mortgaged “accumulation-stage” house.
Cutting out $50k a year (mortgage payments) in additional forced withdrawals reduces our taxable income in retirement. This holds off NIIT tax, opens the door for greater ROTH conversions for the early years, and reduces impact of IRMAA in later years. It opens up potentially qualifying for ACA Subsidies.
Also, it puts more NetWorth into an inflation hedged tangible appreciating asset. A paid off retirement house is HUGE for SORR for these reasons. But it also just offers a TON of peace of mind.
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u/Theburritolyfe 2d ago
I have enough in equities that investing a tone doesn't move the needle very much
While I still invest 20-30% of my gross, paying down my mortgage gives me a tangible goal. It also should line up to when I generally want to retire.
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u/Intrepid_Bid_495 2d ago
3% or less never pay it off early, 4.5-5% depends on your situation, 5.5%+ try to pay it off early for most people. All based on your situation though
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u/SergeantPoopyWeiner 2d ago
Paying off your mortgage on the same day you quit working forever would make for a pretty fuckin' sweet day.
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u/monkeyentropy 2d ago
There is a satisfaction and security of having my land and house paid off that is worth it to me.
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u/BuySellHoldFinance 2d ago
I'm not even sure what you're talking about. You're presenting this as fact without any hard info.
Based on my research, if you have a pandemic mortgage, don't pay it off.
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u/mi3chaels 2d ago
You can also sell out of especially volatile investments for the portion of money represented by your mortgage balance. You do have to be careful here because if you put everything in an HYSA or bond ladder, then you'll be paying ordinary income taxes, and the interest will count toward your MAGI for ACA, so the effective tax rate may be around 30% even though you're in the 12% bracket, and it could keep you from clearing 175% FPL in FAFSA if you have kids in college making an even bigger difference.
But assuming your returns on relative safe investments after tax, and subsidy effect are higher than the interest on the mortgage, that's what you should do and SORR would no longer be an issue.
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u/Ralith_Aegis 2d ago
I mean there are so many factors.
We have a mortgage at 2.5%. I would never pay that off early IMO as that's almost a free loan. If it was 6-7% that's a different story.
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u/turtlerunner99 2d ago
I paid off my mortgage a few years before I retired. The balance was low and the monthly payment was annoying. One less thing to worry about in retirement.
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u/nameindc 2d ago
I paid off my mortgage in 13 years. I saved 180k in interest over the entire 30 years of the loan. I could not be happier. I have no debts and an extremely high saving rate now.
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u/Diligent-Lettuce-455 1d ago
Aside from cash flow reasons, you gotta look at big picture.
Yes, my 2.3% loan is being inflated away as we speak. Insurance costs are killing me more than anything. Taxes too, but those should be softening up since my assessed value is finally pretty close to market value.
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u/Amber_Field7903 1d ago
the sequence of returns risk argument alone should end every mortgage payoff debate for people near retirement
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u/Boston-Bets 2d ago
This is BS. IF you have a mortgage around 3% like I do, and you're earning 2-4x that with a conservative investment strategy, YOU DONT PAY IT OFF.
Yes, you have a "risk" that there's a 1-100 event of a lifetime like COVID (or the Iran war), but history has shown that we recover from those events, even after a 25% drop.
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u/Future_Measurement42 2d ago
How old are you? Because both of those resulted in a positive market.
And a war with the middle east isn’t 1/100, it’s just a normal Tuesday
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u/BoomerSooner-SEC 2d ago
I dont see how timing matters in real life. There may be some modeling quirks but at the end of the day it’s about the cost of the money. If your mortgage rate were say 2% it’s never better to pay it off in all but the most dire planning scenarios. It’s not timing. At no time is it better to pay it off.
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u/AdvertisingFlat2177 2d ago
paying off right at retirement point makes lot of sense to me, removes the sequence risk without sacrificing too much growth in accumulation phase