I was curious about what folks here were doing about their home loans. Aggressively pay it off as soon as possible, or stretch it through 30 years, possible more by refinancing a few times?

I bought my single family house in 2010 for a 5 year ARM for 30 years paying 20% down. Had to scrape the bottom of the barrel to put together the 20%, even borrowing some money from my brother. Luckily I had a great investing year in 2010 thanks to a few TexAgs geniuses with tips like LVS and GMCR and made enough that I was able to pay him off the same year. Over the next 7-8 years I have been putting all my extra money from salaries towards the loan as curtailment. Bonuses too. My wife began working a few years ago and her salary would go there too.

Now I see that my loan is at 24% of the purchase price. The last 4 years have been the best investing years and I don't know how long this would last, so I finally pulled the trigger today and sold some stock. When I use the money to pay the mortgage down, it would bring it down to 5% of my purchase price.

Now of course there are downsides to everything, I probably will lose some of the upside that is yet to come. I will miss out on some interest deduction, but I have also heard that mortgage interest deduction will go away soon. House prices may fall (unlikely) and I might be the entire owner of a devalued asset.

The biggest plus is peace of mind. I would not need to worry about a loan for as long as we live in this house. I wanted to do this earlier this year, but the market tanked so I did not sell thinking I would wait for it to hit a high again before putting in a Trailing Stop order. I had stopped contributing to any kind of taxable trading account (401k contribution is on) and now I can loosen up on that.

I have no other loans, car loans and others paid off. I will pay off the other 5% in the next few months, either from my salary or by making another trade.

Just wanted to share the good news with the cool people here, and ask about how others were managing their mortgages.

My wife and I bought the house we live in now as a starter home. We have two kids and in about 10 years we will need to upgrade. By then the house we will move to will probably be our "forever" home.

So for now, we only pay the monthly mortgage bill. It's at a solid fixed rate now (4.25), but we refinanced a couple of years ago because we were getting to the end of our original ARM fixed rate, and the rate then was 5.75.

I know it really isn't the way to go about it, but I think of it like this: 7-8% in the market yearly, and my mortgage is 4.25%. So I'm "making" more money in the market than on my house.

Because it's secured debt, it's important to ask yourself if you want to be leveraged to the housing market or not. If you do, I wouldn't worry about interest rates that much because assuming you have say 40% equity or less, it doesn't take that much of an increase in home value to cover your interest (in terms if return). If you have 90% equity, I'd be much more aggressive in paying it off. Just my 2 cents

Gordo14 said:

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Because it's secured debt, it's important to ask yourself if you want to be leveraged to the housing market or not. If you do, I wouldn't worry about interest rates that much because assuming you have say 40% equity or less, it doesn't take that much of an increase in home value to cover your interest (in terms if return). If you have 90% equity, I'd be much more aggressive in paying it off. Just my 2 cents

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You are long real estate whether it is encumbered or not. What you could otherwise use the money for (presumably investing) is the relevant comparison, relative to the rate/terms of the loan. The value of the house is irrelevant unless you the sell the home.

I vacillate on this all the time. I want my house paid off, mainly for the peace of mind and so I can have that $1500 a month to invest.

I refinanced to a 15 year with the intent to pay it off early, but at 2.625%, it's hard to justify putting that cash in a non-liquid asset. I have about 65% of the equivalent of the current pay-off available to me in liquid/cash assets, though (a mix of money market funds, mutual funds, and various other savings accounts). So, I don't feel too bad about carrying the mortgage.

Nice on the rate...

I got a 15 year in 2015 at 3.12% and thought I was slick.

I really do look forward to having it paid off, there is something to be said for the peace of mind of actually owning 100% of the place you live.

Purchased my home in 2009 with very little down and paid it off last December. The wife wants to upgrade which we'll do in a couple years but I only plan to get a 15 year mortgage.

HowdyAgs03 said:

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Purchased my home in 2009 with very little down and paid it off last December. The wife wants to upgrade which we'll do in a couple years but I only plan to get a 15 year mortgage.

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You are going to hate paying a mortgage again

WaltonLoads08 said:

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Nice on the rate...

I got a 15 year in 2015 at 3.12% and thought I was slick.

I really do look forward to having it paid off, there is something to be said for the peace of mind of actually owning 100% of the place you live.

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I got lucky. Just happened to be ready to refi when mortgage interest rates last bottomed out (August 2016). The three previous mortgages I'd had over the years were all 4 point something % (and I thought those were pretty good!).

I figure at some point when I get sub-$100k, I'll have grown my savings enough to feel comfortable paying off the house.

It's a balance. No sense in being "house rich" and "cash poor." Make sure you've got enough liquidity to fund all your obligations, a reasonable portion of your wants, and all the surprises that will come your way.

With the increase in standard deductions this yr I noticed my itemized deductions will be less than the standard deduction for the first time ever. There is no longer any reason to be paying mortgage interest. Consequently I intend to get my house paid off ASAP- next 12 mos or so looks doable. My rate is 3.75%

Believe the math would say don't pay it off, but we just paid our house off earlier this month after living here 9 years and it's a great feeling.

Got my latest mortage in August of 2016 as well. 30 years at 3.375 with no points. Never paying it off early.

leoj said:

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What is the rate on the loan?

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4.125%

Also refi'd in August of 16. No intention to pay a dime early.

TriumphForks said:

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Also refi'd in August of 16. No intention to pay a dime early.

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what are your reasons for your decision?

MemphisAg1 said:

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It's a balance. No sense in being "house rich" and "cash poor." Make sure you've got enough liquidity to fund all your obligations, a reasonable portion of your wants, and all the surprises that will come your way.

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Agreed.
I only put in what I can afford. I have much more in stock for a rainy day so I assume that if I lose my job or something, I still have funds.

We paid off our old house last spring. It was the starter house my wife had bought pre-me and we only owed something like $30k on it. I had run the numbers a bunch of different ways and came to the conclusion that our debt to income ratio would make it hard to finance our new house while we still had the old mortgage on the books. After we moved we could sell the old place and then just recast the new note after putting most of the proceeds to it and get our mortgage down quite a bit.

So we paid it off and had a few blissful months of no mortgage. Found our new house in early August and got it under contract. Closing date of September 11.

And then Harvey happens.

Both neighborhoods majorly flood but both houses are narrowly spared. We end up closing a few days late but everything is fine. My in laws (who did flood) camped at our new house while we got ready to move and then we swapped and they moved into our old house while they put THEIR old house back together. Several projects came up immediately that zapped our cash. My in laws house took much longer than expected to get back together and they didn't move home until Memorial Day so we're just finally getting our old place on the market.

Cash flow, I've been just fine for the last year, but I am soooo looking forward to filling back up the coffers.

Your long position on the value of this house is independent of your financing terms.

This is tax advantaged debt, and from your comments you seem like if you had more debt in the form of a big mortgage you would have 100% of that money in the market.

So the question IMO is your tax-adjusted APR on the debt, how does that compare with your expected investment return.

For example - let's say you are paying 4% on mortgage but you save 1% of that on taxes. The effective rate is 3%.

Opinions will vary widely on an expected return for your investments, but let's say it's all SPX index and your expectation is an average return of 7% over the next 30 years (in line with historic averages).

All other things held constant, you would be leaving A LOT of money on the table by choosing not to lever up with a mortgage.


Asset backed debt on an appreciating asset, with the funds kept in the market, is a good thing

And I find just as much peace of mind logging into my accounts and seeing balances larger than the debt

Absolutely. If your opinion is we will see a -10% correction and then return to historic average returns (7%) for the remainder of the loan, I haven't run the math but I suspect it's much closer. Still edge to leverage investing, but less clear advantage.

Do it with a 10 year horizon and paying off the mortgage is the winner.

From my own perspective - I like any leverage as cheap as current tax advantaged mortgages. 3% will be hard to get much lower than if your investment horizon is longer than a few years, even with a downturn.

Simple answer - I view it as the "conservative" part of my investing plan. An extra $600 each month towards the principal and it's essentially moved our 30 year loan into an 18 year loan.

I don't think I would ever get "aggressive" with paying down a mortgage, however I like putting a little something extra down as a safe 3-4% return that will eventually lead to me paying off a house completely.

Can't you technically get a 'better return' by paying extra payments early on in your mortgage. All the interest is front loaded in the mortgage and if you can get on the positive side of the principal/interest ratio earlier it essentially results in an even better loan bc you avoided paying all those high interest payments early on in the loan? Maybe I'm off here?

I think a lot of the decision is emotional as stated above, I would also challenge continued 7% return assumptions.

CPDAggie10 said:

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Can't you technically get a 'better return' by paying extra payments early on in your mortgage. All the interest is front loaded in the mortgage and if you can get on the positive side of the principal/interest ratio earlier it essentially results in an even better loan bc you avoided paying all those high interest payments early on in the loan? Maybe I'm off here?

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I don't think the math works out that way but could be wrong. I think of it as investing at the same rate for a longer period of time

CPDAggie10 said:

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Can't you technically get a 'better return' by paying extra payments early on in your mortgage. All the interest is front loaded in the mortgage and if you can get on the positive side of the principal/interest ratio earlier it essentially results in an even better loan bc you avoided paying all those high interest payments early on in the loan? Maybe I'm off here?

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the loan is amortized and yes, paying big chunks toward the Principle early reduces the total amount paid in interest.

This is why in low interest rate environments people refinance from a 30 to 15 year mortgage. They re-amortize the loan for shorter duration at a lower rate.

CPDAggie10 said:

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Can't you technically get a 'better return' by paying extra payments early on in your mortgage. All the interest is front loaded in the mortgage and if you can get on the positive side of the principal/interest ratio earlier it essentially results in an even better loan bc you avoided paying all those high interest payments early on in the loan? Maybe I'm off here?

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Annualized return is the same no matter when you prepay. You can see a larger absolute return by prepaying earlier in the life of the loan.

What do you guys think is the right balance between home equity, debt, and stock (ignoring 401k). So in a purely hypothetical example, say you have $200k in cash and stock and wanted to buy a $400k house. Would you do something like $100k-$150k in home equity (instead of just 20%)? How would the housing market in the area impact your decision?

Gordo14 said:

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What do you guys think is the right balance between home equity, debt, and stock (ignoring 401k). So in a purely hypothetical example, say you have $200k in cash and stock and wanted to buy a $400k house. Would you do something like $100k-$150k in home equity (instead of just 20%)? How would the housing market in the area impact your decision?

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I'm certainly no expert, but $100-$150k in home equity is useless to me if I still owe $250k-$300k on a 15 or 30 year mortgage. I'd rather keep that cash invested and available to me if I need it than tie it up in a house (that I would have to sell in the event that I needed access to the money).

I also don't see the point in having "extra" equity in a house unless you are absolutely certain you won't be moving. When I bought house #2 (which I expected would be my forever home), after about a year, I was kicking myself for not getting a 15 year (but hadn't quite gotten to the point where I was making extra payments). Well, when I unexpectedly had to sell that house after less than two years, I was actually glad that I didn't have more cash tied up in the house (especially since the timing was such that I moved and bought a new house before selling).

I guess it also depends on how well you can afford the monthly payment (and potentially make extra payments to pay the loan off early) if you only put 20% down.

Ragoo said:

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CPDAggie10 said:

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Can't you technically get a 'better return' by paying extra payments early on in your mortgage. All the interest is front loaded in the mortgage and if you can get on the positive side of the principal/interest ratio earlier it essentially results in an even better loan bc you avoided paying all those high interest payments early on in the loan? Maybe I'm off here?

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the loan is amortized and yes, paying big chunks toward the Principle early reduces the total amount paid in interest.

This is why in low interest rate environments people refinance from a 30 to 15 year mortgage. They re-amortize the loan for shorter duration at a lower rate.

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The timing of making early principal payments simply shifts the period (and degree) in which you are facing reinvestment risk. You'll never know if the "return" on the early payments is neutral, improved or hurt until after the fact.

It is absolutely true that extra principal payments shorten the life of a loan and reduce total interest paid. But, that is not a return, at least not a total return. In an extreme example with a 4% mortgage paid off completely, it is easy to say that it is a 4% return (or even say a 3% after-tax return). However, that is just part of the return. What you do with the freed up cash-flow over the remaining loan term would be a phantom part of the return that seems to be generally ignored in this discussion. The actual return on those cash-flows could be positive or negative, pushing the actual return of the decision higher or lower than the pre/post mortgage cost.

Maybe I'm in the minority, but I regularly advise the opposite of what you stated. I prefer longer term loans in low rate environments and shorter term loans in high rate environments. This of course assumes the payment itself is a comfortable level. In essence, low rates are an easier hurdle... thus I want more leverage. The longer loan lets me keep that leverage locked in longer, with a lower payment.

Mine wasn't that of advice, only confirming that paying more early reduces the overall interest burden. At the end of 30 years you won't have paid 600k+ for a 400k house.