Guys, for the last year or so I've been sitting on more than $XXXk in liquidity (not including my 401k). I've toyed with the idea of picking up rental units, but at this point do not know enough about this business to jump into it and feel comfortable. I've reached the conclusion that I should just pay off my home. That is the one idea that I keep coming back to and that I feel most comfortable with. Trouble is that it defies most conventional financial wisdom. Here are my details:

- mortgage is roughly $XXX; market value is roughly $XXX; put 20 percent down when I purchased
- mortgage is 3.125% 15 year note, which has 12 years left on it
- age: 42
- annual salary: $XX/year
- wife is a stay-at-home mom to my three girls
- other than mortgage, we have no debt whatsoever

After paying off the note, I will have roughly $XXX in liquidity left, but after the note is paid off, I'll also be clearing an incremental $18,000 a year in saved P&I ($6,000 to interest) in addition to the $40,000/yr. plus in "free cash flow" after all expenses/taxes/commitments/investments to 401k we generate. We contribute 12 percent to our 401k.

A couple of things make me nervous. I work in oil and gas. While my job is not on the block as of yet, who knows what next year will bring. I tend to be very conservative in my finances, and somewhat of a nervous nelly when it comes to taking chances. I have been ranked the last few years in the top 5 percent of the company as far as performance, so the risk of unemployment is somewhat mitigated by that, but there are no guarantees. I figure without a mortgage, I could be free to either try my hand at rentals or some other investment opportunity. I also figure that without a mortgage, I would be free to take a job at a reduced salary without having to worry about making ends meet. I'm not terribly optimistic about finding another job outside of O&G that would pay me what my current job pays me. The plusses seem to outweigh the minuses. In fact, the only minus I can think of is the opportunity cost of other alternatives because I chose to pay off a cheap mortgage. I also am drawn to the psychological benefit of knowing I owe no man anywhere any money at all.

What else should I be thinking of? What would you do?

are you set re: schools?

So first and foremost, it all depends on your risk tolerance. If you feel rentals and the such are too risky and foreign to you then don't invest. However, I would say that long term, you would be better off taking a year to learn that business and become comfortable with it. Then decide if it is what you would or wouldn't like to do. To simply decide not to do something because you lack the knowledge of how to do it, seems like more risk to me. I would simply ask questions and read, read, and read some more about it. biggerpockets.com is a good site as well as texags. Your income and debt would allow you to easily own several. With $200K you could easily get 3-4 places.

What I would suggest.

- Research and become knowledgeable in real esate investments. Use that knowledge to decide if the risks are worth the return for you.

- I would start with one property. Typically it is 25% down so if you look at a place like College Station where average rentals are around $200k (generalization don't hold me to that) you would be putting ~50K down at closing.

-If after a year you feel that it was the worst decision ever, then sell the house and proceed to pay off your current one. If it fits your goals and lifestyle, then use your equity to purchase more.

I have a more aggressive approach because I am over 10 years younger and have no kids. I currently own 3 rentals and while stressful at times, enjoy the returns I get. End of the day you have to do what feels right to you.

thaed,

Thanks for the comments. Believe it or not, I have done quite a lot of research on real estate investing. In fact, I spent about 5 months building a model that would evaluate opportunities based on the knowledge I gained from "What Every Real Estate Investor Needs to Know About Cash Flow" by Frank Galinelli. I learned a lot from this book and so from a financial perspective I do not feel overwhelmed. I have a finance undergrad and finance focus in my MBA; hence, not bothered by the numbers. I am more overwhelmed with things like tenants who are filthy, who won't move out when they default on their rent, or when things get broken and need maintenance/repairs/etc. This is what makes me nervous about real estate investing.

In addition to that, which units are good rental units? What area of town should I be looking? What size homes should I be purchasing? One thing I gleaned from the book was that more units are better than less units from a return perspective, but once again, the uncertainty around market dynamics and locations drives me to something more certain.

What about using a combination of your income and that savings to pay off the mortgage on a more aggressive schedule - say within another 3-5 years - by paying a significant amount more each month? That would still leave you a large sum of cash for savings and other investment opportunities. You wouldn't save quite as much in interest, but you'd have the ability to stop the extra payments at any time if you have to change jobs and/or move.

I'm in the same boat as my mortgage is the only debt that I have, and I really want to pay it off. Unfortunately, I owe about $240k and only have about 1/2 that in liquidity, so paying extra each month is my only option right now. I'm hoping to knock off at least 11 years and $30-$40k in interest on a 30 year loan.

Just as a side note - I owned a house in College Station before I moved to the Houston area for work. I loved the house and really didn't want to sell it, so I briefly considered renting it out. The original loan was about $180k and the monthly payment was between $1400-$1500 a month. I could have rented it for maybe $2000/month (it was a single family home in a nice family neighborhood). When I thought long and hard about it, it just wasn't worth the hassle when I'd only be making a few hundred dollars a month. I also didn't want the headaches of dealing with difficult renters (my parents had several rental properties when I was growing up, so I've seen the good, bad, and ugly). If I had held on to the house another year (sold it in 2013), I probably could have asked another $30-$40k for it, but I sold when I could (that's how quickly houses are appreciating there). Anyway, this isn't to discourage you, just to put things in perspective from someone who rented and owned in CS. There is a real shortage of single family homes there in the $200k-ish price range, so it might be hard to find a good deal.

Ah ok I understand better where are you are at then.

As with any investment there will be risks. In the case of real estate, those risks are much more apparent and easily seen. It is definitely a different game when some of the "losses" on real estate come out of your pocket as opposed to your total balance in a portfolio.

Management companies can handle finding quality tenants, hiring for repairs to be done, looking over damages to be charged to tenants, and with evicting tenants. In Houston, friend of mine has a lawyer that will go through the eviction process for ~$250 if doing on your own. Those things for the most part are small risks. Could you get tenants that trash your place and cause a ton of damage? Yes you could, but you can go after them for all that damage to make yourself whole. Again, it is more involved but why the returns should be higher.

My gut here is that you did your research into real estate investing and while you recognize the potential value of higher returns, you don't feel that you want to take on that level of involvement and risk over and above what you do. It would feel better and be more comfortable to pay off the house. I was a complete stress ball on our first place but am glad I bit the bullet and took the risk, but I am at a different point than you. If later you regret your decision, you can also pull that cash back out or save up for it over a few years so there is no wrong choice here.

If you decide you don't want to do real estate, which is perfectly fine, I would definitely be maxing out your 401ks and establish IRAs for both your wife and yourself. I understand your point on not paying for college. However, I will say the greatest gift my parents and wife's parents gave us was no debt coming out of college. It has allowed us to excel quickly and capture investment opportunities that our peers can't. We will be able to offer our kids, their grand kids, a higher level of living and education.

If you want to talk more about real estate, again I'm not an expert, but do have good experience in it, feel free to PM or ask on this thread.

thaed, thanks for your comments. That was what I was thinking. If I later decide to dive into real estate, I could easily get capital from any number of sources. My own free cash flow, banks, etc. My wife and I both have very high credit scores and soon to be no debt. That coupled with a good salary should make it easy for me to get capital if I really need it. I think I could save another couple hundred thousand in a couple of years' time as well. As far as 401ks, we end up saving the equivalent of 20 percent of my salary to the 401k when you factor in my company's match. The 401k coupled with our cash flow saves roughly $75k/yr.

It's great your parents were able to do that for you guys for your school. Wish mine could've done the same for me, but if I'm honest, I'm so proud of the fact that I paid for all my own school without any help save student loans. Might not feel that way if I still owed, but we paid them all off a few years back and it was one of the proudest days of my life sending in the $52,000 check to pay them all off. I paid for both A&M and Rice, and also paid for the remainder of my wife's school. We started out with nothing and now have amassed some flexibility and options. I'm grateful for the path we took to get here.

First of all congrats on that high salary at a relatively young age.

Second, with an interest rate of 3.125 the last thing I would do is pay that off. I'd pass that loan on to my children and grandchildren and whatever other progeny pop up down the road.

What you should do (besides purchase $200k worth of ORIG of course) is put the $200k in an index fund. Grow it at 8% a year on average and strongly reconsider your stance on paying off your kids education.

With the Texas tuition promise fund https://www.texastuitionpromisefund.com/ you could pay their way to A&M by purchasing 40k worth of tuition right now. No you are not obligated to do it,and my parents didn't help out a dime myself, but I am definitely going to do it. You should pull the trigger then alert them to what you did when they turn 18. It would be an awesome gift, one they would never forget, and one that will grow in meaning to them as they continue to age.

Good luck to you.

I would be in no hurry to pay off that mortgage. Money borrowed at a rate that low is a rare oppty that we may never see again.

As for what to do with the money...I think the market is due for a rough patch, so I wouldn't be anxious to dump it all in at once. If you do, look at some "smart beta" funds.

Congrats on having such a wonderful problem!

While I don't really have a suggestion either way, and I really don't want to derail the thread, one thing to keep in mind: you paying off your college loans from 20 years ago will NOT be the same thing as them paying off their college loans in the coming decades.

College inflation has driven the price to ridiculous numbers, and shows no signs of slowing up. The mountain of debt that a college student will face 10 years from now will likely be 8-10X what you had to deal with for the same education, but with only 2-2.5 times the starting income you had.

Once again, not trying to sway you one way or another, just wanting to help people process the math.

If paying off the mortgage is what you feel is best, then do that. It may not be the best financial decision, and everyone else on the thread makes good points, but if it's the right emotional decision for you and your family, go for it. No mortgage payment means a huge raise each month, no debt hanging over your head, etc. I would do it too, in your position.

If you were laid off tomorrow, how long could you cover your current monthly obligations with liquid savings ?

Also does the $6,000 you would save in interest consider the amount of tax savings you are getting from writing off the interest ?

It's still money out of pocket so it's technically not "saving" him anything by having the tax advantage.

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It's still money out of pocket so it's technically not "saving" him anything by having the tax advantage.

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In his bracket it would reduce the $6,000 savings down to $4200 since his tax liability would now increase by $1,800.
I don't feel like doing the math but I will venture this drops his cost of borrowing 170k down under 2.5% which is extremely cheap considering he is the sole provider and is employed in a cyclical industry. Without knowing his monthly nut, I would rather hold cheap borrowed money then pay the mortgage off to save $350 a month and risk being in a financial bind if laid off.

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If you were laid off tomorrow, how long could you cover your current monthly obligations with liquid savings ?

Also does the $6,000 you would save in interest consider the amount of tax savings you are getting from writing off the interest ?

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jp,

Without a mortgage, and with the money I'll have in liquidity after paying off my mortgage, I could last probably 10 months without a job. More realistically, I'd say that if I lost my job, it likely wouldn't be any time within the next 12 months. In 12 months time I could easily save ~$XXX additional, and with reduced costs after paying off the mortgage, I could likely last 2 plus years without a job.

As far as education goes, this idea that everyone needs an education and that it is the parents' responsibility to pay for it is reasonable only to the extent that college tuition stays somewhat reasonable. With the amount of inflation in higher education, we're quickly approaching the point where very few families will be able to afford college for their kids. As I've laid out before you, I make enough money to where if I decided to go another direction as far as paying for my kids' education, we could probably do that without hurting us too much financially. It's not a function of me being cheap, or not wanting my children to get the best advantages, but more that my primary devotion is to have enough saving for my wife and I to survive retirement without being a burden to my children. I am also a Type 1 Diabetic. What would happen if I kicked off early? What would my wife do? Sure, she's college educated and could always go and get a job, but she would need the flexibility to be able to raise our children in the same manner we've both felt heretofore was best (with her at home). If I took a huge chunk of our "nest egg" to pay for college tuition, I just don't think that is reasonable. That written, I save like I am going to pay for their college, and who knows, with out a mortgage and a very low cost structure and good salary, that is easily within the realm of possibility.

Reasonable people can disagree on this point. Like I wrote before, my parents did not pay for my education at all. Neither did my wife's family. We're both better for it, but I realize not everyone in the same situation will end up like we did.

My wife put me through school while she was a bank teller at Brazos Valley Credit Union making $15,000/yr. When I graduated A&M, I finished putting her through school at UofH when I was recruited out of A&M to work in downtown Houston. We made it work. It took us a little bit of time extra to get out of school, but we knew that going in.

Sounds like you need life insurance to make sure your family is taken care of in case somethjng happens

There is some risk associated with paying off your mortgage. If Oil and Gas prices tank for 3+ yrs, housing prices in Houston drop 25% ,you are jobless , and you need to sell your home to move to another area for work you might prefer to have more liquidity versus 100% ownership in an asset that at least in the short term is depreciating. I like the idea of putting excess cash flow into home principle over time but keeping the bulk of your powder dry just in case the worst happens . That way you aren't making a black or red call, rather you are diversifying.

What to do with the liquid cash is a whole different discussion but in this environment I probably wouldn't put it into rental real estate in Houston. I would put 6-12 mos of living expenses in an emergency fund that is readily accessible, and spread the rest of it out over different investments.

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Sounds like you need life insurance to make sure your family is taken care of in case somethjng happens

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Yup, we've got that covered as well. I have a life insurance policy on my wife (small - $250,000) and me in the event I died. I get it through my employer.

Thumbs up emoticon for your mindset on college since it sounds like you've thought it through.

My comments weren't meant to change your mind, just meant to add to the discussion.

Regarding the life insurance comments, with the way you laid out your goal for your wife (stay home with your girls, see them through school), make sure you include enough in the insurance plan for her to retire. She would be passing on work during her primary earning years and this not in a position to put away savings herself. She'd need a nest egg to be growing while she's working at the house, that would be in a position to find her for a really long time.

i meant primary schools (k-12)

If you paid off your mortgage and realize you don't like it, can't you just go back into debt?

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i meant primary schools (k-12)

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Mike, we live in The Woodlands so the schools my kids attend are very good. No private school here.

awesome, i may have missed that part but figured it was worth bringing up as part of the equation.

You make $200k/yr, you need to have a 6 month emergency fund ($100k). The other $100k, do what you want. Split half into investment and half into debt repayment. But I would not recommend you pay off your house and only have $30k in your emergency fund. That's not enough imo.

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If you paid off your mortgage and realize you don't like it, can't you just go back into debt?

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Not if you're unemployed and in the oil business.

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You make $200k/yr, you need to have a 6 month emergency fund ($100k). The other $100k, do what you want. Split half into investment and half into debt repayment. But I would not recommend you pay off your house and only have $30k in your emergency fund. That's not enough imo.

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Jeff, my cost structure, without a mortgage, is only about $3500/month. $100k in savings could carry me 28 months.

I personally think the 6 months emergency fund is over blown to some degree once you reach a certain income level. I think $100k sitting in cash can be pretty pointless. He could easily refinance his house and pull that money back out in an emergency. The only thing that really would require that much cash is being laid off. If that is the case, he has time on his side to burn through the $30k before he would need to pull other triggers, refinance house loans, credit card debt, 401k loans, etc... to get through the tough times. That is just my two cents and as always, depends on what people are comfortable with on risk tolerance. I know some people that preach a year of salary in cash.

just for sake of clarity, I suggested 6-12 mos of living expenses for an emergency fund rather than 6-12 mos of income.

He said he'd still have 30k in liquidity which should cover his bases for 6-12 mos without any kind of house payment. Plus severance. Plus I'd assume unless he's laid off the day after he pays it off that he'd start aggressively saving to build up a little more liquidity. Beyond that I don't buy into many doomsday scenarios.

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He said he'd still have 30k in liquidity which should cover his bases for 6-12 mos without any kind of house payment. Plus severance. Plus I'd assume unless he's laid off the day after he pays it off that he'd start aggressively saving to build up a little more liquidity. Beyond that I don't buy into many doomsday scenarios.

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What does that have to do with your comment and my reply?

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If you paid off your mortgage and realize you don't like it, can't you just go back into debt?

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The answer is: if you're unemployed, no.....it's not that easy to just "go back in debt". I'm assuming that if he paid off his mortgage, the only reason he'd want/need to go back in debt is if he lost his job, and he's in a volatile industry.

When things are going great, bankers will work with you. When things aren't, they won't. (not a slight on bankers, just a reality of how things work in their world). They give loans/mortgages to people that are in a position to pay it back; not those that aren't (unemployed).

This has been a great discussion. Lot's of strategies being discussed. In my opinion, the most important number in this equation is the 3.125% interest rate. Because it is so low, and you can use it for tax deductions, I would pay only the minimum amount each month. What you do with the difference is another discussion entirely. But t doesn't make much financial or mathematical sense to pay anything toward principal.

Some people will talk about the feeling of accomplishment and freedom from having paid off their mortgage. But in your situation you can easily pay off your mortgage with one check. You've already won that game, you are just choosing to continue paying because it benefits you.