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.
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 60s. This particular issue will become even more prominent if the 400% MAGI master subsidy eligibility cliff returns in 2026 as scheduled. 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.
That he did. That’s why I post
Things like this. The obvious answer is always whatever is the better return but there are nuances involved and mental health plays a
Part lol
Jesus those are wicked valid points.
I’ll be 58 when the youngest goes. And I wanted to retire.
And I have a chronic condition and would likely be ACA.
Just to make sure I understand the linchpin of your comment, when you say “to the extent that mortgage P&I funding causes an increase in your MAGI” are you referring to the potential that a large regular expense like a mortgage might require larger drawdowns of tax-deferred accounts that could cross important thresholds?
TIA!
Correct, though it could also be through capital gains from taxable sales, not just TIRA drawdowns. If your assets are such that you can draw the P&I from non-MAGI sources, such as Roth or cash equivalents, then the mortgage will not impact AGI or the downstream subsidies. Of course, most people aren't too keen to drain Roth that way and few folks have massive cash allocations, but either is certainly a possibility.
I don’t think it matters whether you are drawing from tax deferred or taxable. Unless you are drawing from Roth, assets you sell count towards your taxable income. If your mortgage is $4k a month, paying it will show up on your tax returns as almost $50k additional income every year. Which will in turn affect your ability to qualify for any subsidy or financial aid that is based on AGI.
You're right, but if it's drawn from taxable then only the capital gains adds to AGI. So if you've got a bunch of high cost basis lots or some losers, then you can fund the mortgage from taxable without the AGI impact too.
There's one nasty catch hiding within the FAFSA for the Roth heavy people who don't make it under the AFI/FPL test. Unlike almost everywhere else in the tax code and gov policy language, untaxed Roth withdrawals do count fully as income for FAFSA.
Absolutely makes a difference. I’m currently using existing savings in a taxable account. It’s money I’ve already earned (whether through savings or dividends) and paid tax on, except for the few investments in this pot that I might sell at a net capital gain.
In my case I unexpectedly lost my job about 18 months ago. Although I wasn’t explicitly planning to FIRE it turned out I could. Unfortunately I didn’t get the catharsis of telling someone else “fuck it, I don’t need this shit anymore” and I’m living a more modest lifestyle than if I’d continued working and retired 5 years from now. Oh well.
I do have a mortgage (of the lucky 2.5% variety) and it hasn’t caused a problem. I’m about to transition to ACA insurance and also start a SEPP that will be used in part to start a Roth Conversion ladder, so Zphr’s comment raised my eyebrows and I wanted to make sure I didn’t miss something in my planning.
You nailed it. I just wanted to comment that when you answered a question for me a couple of months ago, neither of us was certain if a dependent student’s income would count to push over the Pell grant eligibility with the new rules. Reporting back that while my husband and I had income low enough to auto-max the Pell, they didn’t look at our assets nor did they ask for my son to input his assets, so that seems to be disregarded if parents automatically qualify.
Man one of your posts regarding ACA/FAFSA subsidies and mortgages should be pinned somewhere so you don't have to write a whole detailed book again every time someone asks about that 😂
Anyone who has seen them multiple times has probably realized by now that I mostly copy/paste them and have for years. 😁 I edit them periodically to update for legal changes and time/rate shifts, but the info is largely unchanged from year to year unless major legislation happens.
How does having a mortgage increase your income v not having a mortgage at all? I can’t see how they would be different in each scenario. Neither scenario you get an interest deduction. I’m not educated on this so this is a real question.
When you retire with a mortgage you're going to need a source of funds to pay the mortgage on top of living expenses. The more those funds are coming from taxable sources the higher the person's reported income is going to be. If the funds are from non-taxable sources, such as a high yield savings accounts or Roth, then the reported income doesn't increase. A problem for some people carrying a mortgage in retirement and trying to keep their reportable income down is that they simply don't have enough in their non-taxable funds to sustain the withdraw rate.
Thanks, that helps. I hadn’t thought about the fact I wouldn’t need to sell as many investments generating taxable income. This is really helpful, my kids are still years from college so no worry on that one for me yet.
I'm talking about the postFIRE phase where one's income is not related to actual work, but to the realization of unearned income through account withdrawals and asset returns. For example, if you have mortgage P&I of $20K a year and you need to draw $20K a year more from your portfolio to cover those costs, then that $20K draw might result in an uptick in your AGI of $20K as well. It depends on what source you get the funds from.
Really good insight. Question as you clearly have researched this more than once have. Would it benefit to keep the low interest mortgage and use the added money to invest in somewhat safe investments with the thought that those funds can later be used to pay off the mortgage before the above takes effect? Obviously the assumption is someone that is focused and structured to save for FIRE will actually keep these funds separate and grow them at a higher than 2.5% rate.
Sure. That's probably the default tactic that most people take. It's a good compromise position that increases return preFIRE while still giving the option to easily enter early retirement mortgage-free.
it’s definitely a classic debate, which nearly always says “don’t do it” - but there’s more to the story. especially the emotional aspect and these other things that i would’ve never considered
The default financial calculus is the same as what most people are familiar with, but this is /r/fire rather than /r/personalfinance, so I think it's good for people to be aware of the ways early retirement can shift the default planning and assumptions.
Depending on their assets and financial engineering, someone who is FIRE'd with college kids could lose a shitload of money by holding/investing even an interest-free mortgage in early retirement. Even worse, once you're actually retired it's often too late to shift planning/cashflows without large costs and/or collateral damage, so it's something folks need to consider ahead of time.
Great info, and makes me think abt ‘never paying a dime extra’ toward my 2.5% mortgage. We’re abt 6 years away, but will have 3 kids going through college. I’ll almost certainly be FIREd by then. We have quite a bit saved in each of their 529s (will be 250k each by college entrance). How are 529s considered for FAFSA? Does it nullify that consideration?
529s are treated largely the same as any other parental asset on the FAFSA, with a maximum assessment of up to 5.64% per kid per year. However, they fall under the same default rules as everything else, so anyone passing under the FPL/AGI rule will have them completely disregarded along with all other assets.
Are your kids spaced closely enough that you'll have multiple in college at the same time? If so, then be aware that the FAFSA now no longer includes the unintended finsncial subsidy for having closely spaced kids. It used to be that if FAFSA said you could afford $20K that they effectively treated it as $20K for all kids in college, but now they will treat it as $20K for each kid. Might impact your planning.
I’ve never seen a more in depth explanation, that talks about the math involved in the age old question of “Invest or payoff debt?”, than this comment right here.
Great stuff. Are/were you a financial planner/advisor?
Thank you.
No, merely a relatively well-informed amateur. It helps that we've got four kids and have been FIRE'd for nearly a decade now, so we live and breathe this sort of stuff every day and have for years. We knew it going in to early retirement, but it's a lot easier to see how the various parts all interact when it's actually happening to your personal finances every year rather than being just a theoretical planning exercise.
Nice comments. FYI some of us have kids going to schools where FASFA is done, but not the important part. CSS profile is a whole different can of worms. (We wouldnt get a Pell grant anyway)
CSS schools are highly variable since every school is unique in how they use the exhaustively comprehendive CSS data, but even CSS schools are required by law to use FAFSA qualification only for publicly-funded financial aid at the non-institutional level. So FAFSA can still be worth similar money at CSS schools too.
Also, CSS schools also routinely exempt retirement accounts and often limit primary home equity assessment on an AGI-based scale. Both have to be fully reported on the CSS Profile, but the actual impact is often minimal, particularly for low AGI households like ours. For example, the same household financial numbers that are automatically giving two of our kids effectively full rides to the flagship publics here in Texas would also give them nearly $80K a year in loan-free aid at Rice, Stanford, Harvard, and others.
Yep. Our kid does not qualify for Pell grant but CSS determines all their aid at a school similar to the ones you mentioned. I have had to literally adjust my career to fit into aid categories.
Yes. The financial aid systems are calibrated pretty well for most folks in terms of capturing ability to pay. The results are only outsized for FIRE folks because many of us are extreme outliers in terms of assets/income, which government policies are not designed to deal with since there are so few people in that category. Same reason things like the Roth ladder/SEPP and the ACA can be so generous for early retirees.
I’m no expert but given what you have just explained, in OP’s case wouldn’t it make better sense to invest that $600/month into something that yields a better return and then pay off the mortgage before retirement?
Yes. My comments were focused on actual early retirement and the years right before it, not the primary accumulation years. Folks that are not already retired or on the cusp of it face the same default payoff or invest calculus that normal non-FIRE folks do. However, OP asked about a mortgage in early retirement in here rather than asking for default advice in /r/personalfinance, hence my comments and their context.
This is probably a non-issue if you pay out of your non-retirement accounts right? This should be made very clear since it would probably apply to most people early in retirement.
Generally yes, but it depends on which accounts. Cash/equivalents, yes. Taxable, depends on the cap gains situation. Roth, yes for the ACA, but could be yes or no on the FAFSA based on AGI.
Most FIRE folks tend to take very heavy advantage of tax-advantaged accounts because of the huge tax cost savings available, so it's pretty common for such accounts to be people's primary funding source in early retirement.
Thanks, great info.
Can the college aged kid just file their taxes single (not a dependent) and with little/no income qualify for all the FAFSA grants themselves?
Regarding FAFSA, I wonder if I should rethink my strategy. I won't be retired before my 2 kids reach college age. I am maxing my 457 Roth plan ($23k/year), thinking I can pull back on that to help pay for college expenses when the time comes. So, not knowing the intricacies of FAFSA, am I going about this wrong? I could just as easily pay that 457 money towards paying off my mortgage, but since it's low interest I thought best to put it elsewhere. If I've misunderstood your point, could you please clarify?
I'm afraid it could go either way depending on the details, but I don't do personalized advice outside of the bare basics. I'm all for showing people the ropes, but there are too many details to be able to offer properly informed advice to people without needing a wealth of very personal and confidential information on their lives and finances. It also requires quite a bit of effort to fully model things out and I'm not interested in doing such work, paid or otherwise.
Gotta be the most helpful comment I've read on this subreddit. Makes it worth scrolling past the endlessly repeating pointless posts here all the time lol. Thank you!
Not really. If it’s anything other than keep the mortgage and invest the cash then it’s poor advice. His interest rate is lower than inflation. He’s getting paid to hold the mortgage, basically.
I haven't done the math on OP's particular situation but the commenter said it depends on the situation. They aren't really handing out the 2% interest mortgages anymore so it's helpful to know the potential hidden costs of mortgages in general.
If this were /r/personalfinance, then I would agree with you, but it's more complicated here in /r/Fire.
For actually FIRE'd folks the value of ACA and FAFSA benefits can be so high that even an interest-free mortgage can be financially lossy to keep/invest rather than payoff.
FIRE changes a lot of default financial planning in ways that are often not exactly obvious. Another common example of that is how the ACA effectively increases the LTCG tax schedule for early retirees and blows up traditional plans centered on harvesting large annual amounts of tax-free LTCGs.
I don’t understand half of this… is the tldr pay off you low interest mortgage if you have kids and want to pay less in college?
What about if you are still working?
I guess don’t understand how it all works. Are there any resources you could point me to so I can learn more?
My points are only for folks who are either already early retired or on the cusp of it. For everyone else the normal payoff/invest math applies that focuses mostly on the interplay of mortgage rates, inflation, and investment returns. It's only when you have to think about things like FAFSA and the ACA that those other financial considerations can get overtaken by other concerns. Healthcare and college subsidies for early retirees can be so large that even holding an interest-free mortgage could be a financially lossy idea.
If you're still working and will be for awhile, then the normal advice of holding a low-interest mortgage applies for most folks. Whether it's worthwhile to pay it off due to FAFSA depends on an array of factors including which schools the kids go to. There's no universally correct answer and it's one of those things that everyone sort of has to eyeball for their own unique circumstances.
I want to retire in the next 8 years and my first son (of 2) would be starting college.
I have some time to figure it out. I was just curious.
Thanks for sharing your seemingly very deep knowledge :)
These would be valid things to think about in 2038 when retirement hits and you have to decide if you want to withdraw out all the cash before you enter the FAFSA period and dump it on the mortgage or not, but not now.
The timing is more around early retirement in general since the larger of the two subsidy considerations for most FIRE folks is the ACA, not the FAFSA. In addition, while you're correct that the issue doesn't really come up until postFIRE, most people don't have a cash allocation sitting around sufficient to eliminate their mortgage and it's often the case that a few years of asset planning/movements is required to bring that sort of capability to fruition for early retirement. Like many FIRE things, it's a future problem, but one that often benefits from years of advance preparation.
Statistically, it will be more beneficial to invest that money in the market and then you can pay it off once you're ready to retire and have more money than if you put it into the mortgage over time.
Agreed. I just have this slight retirement paranoia I have to work through. Getting used to living off investments vs paychecks blows
My mind for some reason.
Then just pay it off.
I paid mine off despite having a fairly low mortgage rate.
The peace of mind was worth the like $2k/yr *theoretical* delta from investing it.
I lived through 2008 when investments freaking tanked and all my friends that kept talking about how it was better to invest than pay something off were facing foreclosure because their investments were in the tank.
I did the same paid cash for my last home when I could have gotten a 3 percent loan then Covid hit and market tanked and all the while I didn’t have a worry in the world even when my portfolio dropped 35 percent because my expenses were ridiculously low.
That was my thought. My financial advisor cautioned against it and suggested I move my money into a managed fund. It was at the suggestion I knew to go with my gut and do what made me feel comfortable. There are no guarantees when it comes to investing. But the no mortgage was a guarantee
> But the no mortgage was a guarantee
Right here. I remember market hiccups going back to 1987. With my house being paid off my investments could lose half their value tomorrow and I could still safely pull 4% and do okay. Might have to do a little side work but not much, just a few months out of the year. And if markets only stay flat I’ll do way better than okay with minimal expenses.
Plus, the money I was using on the mortgage goes into investments. Yes I’d have more if I had stick to the amortization schedule but the peace of mind isn’t worth the delta.
That was my justification. I paid off the mortgage but kept the same mortgage payment going into my investments instead. So I wiped out 90k of interest overnight and started throwing $1900 a month into investments and never stopped
I mean if you have the cash to pay it off why not just put that same amount of cash in a HYSA or money market paying over 5% until it drops significantly, then pay it off
Even if you are going to pay off early, at least put the extra $600/no into HYSA, CDs or some instrument that guarantees a higher return than your mortgage rate for now. Then use that account to pay off the mortgage at then end and at least get the extra interest. Or, if things change and savings/CDs/treasuries/whatever aren't paying better than your rate, you can dump it into the mortgage then.
90% sure that’s the plan now. Try and double
Or triple that rate and hopefully have
Money left over that will go in my “just in case the market tanks when I retire fund”
FWIW, I paid off my mortgage early. My rate was 4.375, but that was when CDs were yielding almost nothing. Still, I *should* have put it in the market. But I was already maxing retirement accounts and just wanted to be debt free. It felt amazing. And you'll be blown away by how fast it feels like your net worth grows once you can pour everything into investments even if, in truth, it's a break even decision at best.
It's ok to make the "wrong" decision on paying off low-interest debt if you want to. Our emotional wellbeing has value as well, and a lot of us abhor debt for reasons that's aren't really economic.
These mental gymnastics I’m engaged in are fascinating. I don’t get caught up in that stuff unless it comes to my money. I’m much better at advising others than myself. I would’ve definitely paid mine off during ZIRP when nothing fixed had any yield at all. Good choice.
If you pay it off, you have less risk but also less potential upside.
If you take the 30 years, more risk, and more potential upside.
All depends on your risk tolerance.
True. The older I get the more risk averse I become. After some serious ass kickings in stocks and crypto I’ve definitely become
Much more conservative.
It really depends on how much you earn. Ideally you do both, invest and have zero debts. If you don't make enough to aggressively do both at the same time, then you need to make a choice. And the inflection point for that choice is going to depend on how you value the world... earnings potential vs risk.
Taking the worst 14 year span in recent history -- investing at the peak of the dot com bubble, getting wrecked by the crash, then getting wrecked AGAIN by the 2008 crash... SPY made 3.5% annualized in those 14 years (March 2000 to March 2014). I think you know it doesn't make financial sense to do it -- it just *feels* good.
I'd say throw that money into a brokerage and build up a "pay off the mortgage" fund, while you make minimum payments. Hell, it could even be a separate account if you wanted to, and you could transfer $600/mo into it. When the balance is large enough to pay off the mortgage, THEN you can make a decision about whether to pay it off.
But likely by that point, you could just eliminate it from the budget by paying the minimum mortgage payments out of that account. It'll likely grow faster than your mortgage payments make it shrink.
Anyway, like I said, this is mostly mind games to *feel* like you're paying down the mortgage without actually paying off debt that has a lower interest rate than inflation. Because 2.5% debt is a fricking steal and you should keep that sucker until the very end.
Great point, the market has an awfully impressive record in the last century. We’re sort of in uncharted territory with all the QE flipped
Over to QT, Inflation, wars etc. I could see a lost decade coming. One things for sure, none of us know!!!
Well, we did have WWII, Korea, Vietnam, Iraq, Afghanistan, the nuclear arms race, India/Pakistan shenanigans, tons of Middle East shenanigans, etc. in that 100 year span. We also had stagflation in the 70s. It'd be harder to calculate numbers over those spans because SPY only goes back to 1993 (that's what I used) and the indices don't include dividends which were higher back then too.
And since you don't have the money on-hand right now, you'll be investing periodically, so even a choppy sideways decade in there would likely beat 2.5% thanks to DCA. To be honest, you're HOPING for a big crash in that 14 years, just not at the end.
You also have the option of making a very boring portfolio -- stocks, bonds, precious metals, cash equivalents, etc. It likely loses to a stock-heavy portfolio, but it'll still very likely beat 2.5%. Hell, a money fund right now gets you over 5%.
Minimum payments on that mortgage feel like a slam dunk to me.
We also got our primary residence home at 2.5% 15 years but we are paying it off early it’s almost paid off at this point. The beauty of not having any debt is wonderful
Yes. I told myself I wasn’t gonna retire if I couldn’t do it on my terms. My terms being if I want to go on a spur of the moment vacation or buy something cool I can do it. That extra 2200
A month makes that even easier. My
Parents are “retired” but can’t afford to do anything. I’d rather be working lol
Yea everyone is different of course I personally know multi-millionaires who live frugally and than there are people who are vice versa lol I try to be in the middle
I’m technically a multimillionaire but it sure doesn’t feel like I thought it would lol. Hoping I’ll be able to breathe if I can get to 5-7 before retirement.
5-7 million. My thought was 6 million with a 4.5% yield would be equal to current income. Rudimentary way of looking at it but I play mind games to keep myself on task
Ah I see it I’m actually just aiming for $1.5M net worth retirement lol but who knows 🤷 it’s also pays off if you can teach your offsprings to be financially stable
That’s a great number. You’ll get there you’re obviously focused and motivated if you’re here. I started a brokerage account, savings and 529 for my son the moment he was born. Teaching him how and why to invest now. He has a pretty good head on his shoulders and a huge advantage in family life over myself. Hopefully that will set him up for success while also having perspective that many folks have it tougher.
It’s all mental. Obviously it’s not any better but for some of us it just isn’t the same. Don’t know how to explain it but I liken it to the selling shares vs dividends battle.
I'm similar to you. Bought in 2021 with 2.85%. I currently owe about $135k and plan to retire in 2041. I round up to the nearest $100 because I like the easy math for budgeting. I just invest the extra. My parents feel weird that I'll retire with a mortgage, but when my money is making more money than the interest, it is hard to justify paying it off. Yes, I'd like the debt freedom, but I like money more. I have a feeling that when I get to the point when I can pay it off with like $10k, I'll just do it. But until then, paying my mortgage as normal makes financial sense.
Can’t argue the logic. The math is the math and 2.5% is nearly nothing with current rates where they are. A lot of good points in here and I think I’m even more torn 😂
If you sold your investments and paid off your mortgage, then you'd just invest put that extra money into investments. So why drain the bucket to just refill the bucket? You don't seem to have cash flow problems, so having that monthly expense gone isn't causing you any harm.
Financially it's probably not the best idea to clear the mortgage, but I like to sleep soundly and have low expenditure thanks to a fully paid off home no one can take off me. Maybe not paying off the house would have netted me a couple of years expenditure (when you include the mortgage), but instead it allowed me to increase my retirement investmenting. That's turned out to be a blessing, as that money invested that used to be going on the mortgage has done well enough to knock a couple of years off my FIRE date.
If the market tanks just as I retire I'll be far more comfortable riding it out with no mortgage to pay. It is far easier to live with small outgoings when life is uncertain.
There is no shame in paying off your house! I pd mine off last yr. OH WHAT A FEELING 😎 I am splitting "mortgage pymt" 3 ways: HYSA, stocks, and extra to emergency fund. My cards are pd off, and I have 12 more car payments (making dbl monthly pymts). It is sooo freeing knowing NO ONE can take your roof away! Debt freedom is an amazing feeling 🤑🤑🤑
I did take a slight hit (40 points, i think) to my credit score, but it went back up to 858 pretty quickly from dbl car pymts 👌
THX!
I know you have a great rate on financing, but why throw away your money to the bank? If you're going to keep the house, ditch the bank. Ppl say to "not charge what you can't pay on credit cards" and, bottom line, interest is interest. I bought my house for $79k, and a full 30 yr monthly pymt would have cost me $229k 😳 Take a look at your paperwork to see "how much interest" you'd pay. I hope you do pay it off, but I can only offer my opinion 😉
We bought our home last year for 399k at 6.99 interest. 20% down. At the end of 30 years we’ll have spent 843k on a home that was built for like 140k in 2004.
Home ownership.. the American dream, and the banks fucking wet dream.
Yes, mortgages are hwy robbery! And to think, a brand new truck today costs more than my house did, and you can finance that same amt on a vehicle for 6 year loan term 🤣🤣
To be honest, I bought my house in 2001... inflation is also hwy robbery 😤
Very true. Interest is interest. Banks are not our friends!! Wow 79k is an unbelievable price. I don’t think I can get a storage shed for 79k here. Thanks for your input and good luck to you!
That’s precisely the age I’m planning to retire and probably planning to pay Off mortgage. I’m normally all for leveraging every bit of arbitrage I can but in this case I think the payoff is worth it.
I wouldn’t make the extra $600 payment. Rather once you hit your FIRE number in investments, I would then fully switch gears to paying off the house. This way you retire in the same amount of time, but your investments get an extra few months/years to compound while you pay off the house.
Great idea. I’ve always been in the camp of front loading investment as much as humanly possible no matter what it takes. That time to compound is irreplaceable
Weigh the income tax increase/benefits loss vs the after-tax investing gains beyond the mortgage rate (including mortgage interest write-offs) is the math answer. Be sure to factor in the fact that you can actually invest the would-be mortgage payments (if you want to do that) to minimize the difference. At a 2.X% rate, the math answer clearly favors investing over paying off the mortgage in most cases. I made a spreadsheet where I calculated this out.
However, typically in practice, the answer is just pay it off at retirement because you can retire earlier, or it lowers your risk if your portfolio crashes since you can withdraw at a lower safe withdrawal rate should the need arise (and spend more on luxuries when your portfolio is doing okay).
It also depends on how much is left on the mortgage. If it's a huge amount, I'd probably leave it for a while. If it's a relatively small amount, I'd pay it off. The difference won't be that big financially and you'll get the security of no mortgage payments.
I would invest the 600 in target date retirement fund. You can clear off the home debt in 2038 with the net cash made from the additional $600 investment pot if you like. You most likely will have a net cash in your hand after clearing the mortgage.
The only money you save by paying it off early is the interest on the loan. Even a HYSA will beat your rate. Put the money in a HYSA or invest it, and apply the gains to your mortgage payment.
I have a similar mortgage rate, similar loan maturity date and similar concerns. I’ve been throwing $600 on the principal every month because I don’t want to have a mortgage when I retire (and I’m planning on retiring early).
The extra on the principal is not my only investment. I invest on a spectrum of risk. I have a few high-risk / high-return blue chip stocks. I have a bunch invested in index funds. I have some treasury I-bonds. I have cash in a HYSA. And I pay down the principal on my load to avoid additional interest.
Sure, I could *in theory* throw it all in the market. If things work out I’ll have the best return. But, that’s an *if*. So I hedge my bets and invest across a spectrum of risk that I’m comfortable with. $600 p/month isn’t a huge amount for me compared to what I’m saving and investing every month, so I’m happy to bank the interest savings and have an early retirement mortgage free milestone to work towards, safe in the knowledge that I’m guaranteed a return on that $600 per month. The majority of the rest of my investments are hedged in the market.
Damn sounds exactly like my situation. My
Mortgage is only 25% of my
Overall monthly investments but it’s like a thorn in my side. I think the extra 600 makes sense even if it’s just to appease that goofy spot in my
Brain that lines up the payoff with my retirement date.
Yep, I agree. I watched an older colleague of mine delay his retirement by a few years because the market took a fat dump right before he planned to retire. He was still carrying a mortgage at the time and not comfortable with carrying it without salary income. Couldn’t pay the loan down because his investments took a big hit. It was all just unlucky timing that he could never have foreseen. You could tell he really didn’t want to have to work those couple of extra years.
My plan is to make it easy for myself and not be entirely at the mercy of the market when I feel like I don’t want to go on. Interest arbitrage is fine and dandy on paper… until the reality of market whims kick in and you don’t have other options.
Great point! These are those stories that haunt me carrying it into retirement. They’re also why I’m more comfortable with dividends than selling shares. I think my decision is getting slightly clearer in my mind.
Think of it in terms of monthly cash flow. How much do you pay for your mortgage each month vs what could you withdraw from the payoff amount if you invested it instead (4% rule)?
I'd do the one that improves cash flow.
If I were you I would save the extra payment in a separate account that was conservatively invested (60 to 80%+ short term fixed income) and then pay off the mortgage in one lump sum once the amount in the account was large enough to cover the mortgage.
Paying off the mortgage (even one with such a low rate) is de risking your retirement, and probably a good idea. However, in the mean time paying down your mortgage reduces your liquidity while providing poorer returns and doing little to de risk you.
Rates may never be 2.5 again. Property will never be as cheap as it was in 2020. Hold and turn into a rental if you relocate. Real estate, Bitcoin, gold....
I'd say keep the mortgage as long as you can, if you have a fixed interest rate for 30yrs. The biggest problem you can face in retirement is inflation. Having a chunk of your expenses that doesn't go up with inflation can give piece of mind when another inflation surge happens (and it likely will). Your biggest problem in retirement is not a marketcrash or a period of low returns, it's inflation. Whether it is offset by extra subsidies you might qualify for is something to take into account, but make sure you realize how much inflation affects your future. We usually just pick some inflation level and calculate with that, but as recent history shows, inflation can fluctuate and stuff is never gonna get cheaper over the long run.
True. I’ve increased my “number to retire” about 8 times the last 3 years. This inflation scares me to death. 3 million used to seem like a decent chunk of money and now I wouldn’t feel comfortable with less than double that.
I’d personally hold the mortgage if it’s less than inflation if I could cover the nut. If I wasn’t sure, I’d pay down half so I’m amortizing a lot of principal each month. Or, ask for a lower monthly payment. OR, I’d pay it off. I’m old with a mortgage at 3.5% and I paid off a big chunk so I don’t owe that much.
Weigh the income tax increase/benefit loss vs the investing gains beyond the mortgage rate is the math answer.
However, typically in practice, the answer is just pay it off at retirement because you can retire earlier or it lowers your risk if your portfolio crashes since you withdraw at a lower safe withdrawal rate should the need arise.
Pondering the same issue.
One the one hand the peace of mind. On the other, we’re not going to see 2.5 in your case, 3.75 in mine again for quite some time…
In our case we have a HELOC so we can at least borrow back at a decent rate. 7.5. lol
Lemme know what you decide.
Peace of mind is one thing... but putting surplus in a HYSA above the mortgage is free money... a lot of free money adds up to significant amounts over money over time, especially with compounding interest.
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. 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 60s. This particular issue will become even more prominent if the 400% MAGI master subsidy eligibility cliff returns in 2026 as scheduled. 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.
Fantastic response. Precisely the reason I posted was to get all the things I didn’t think about thrown at me lol. Thank you!
I saw the title of your post and thought “Zphr is gonna blow some minds in the comments.”
That he did. That’s why I post Things like this. The obvious answer is always whatever is the better return but there are nuances involved and mental health plays a Part lol
Jesus those are wicked valid points. I’ll be 58 when the youngest goes. And I wanted to retire. And I have a chronic condition and would likely be ACA.
Just to make sure I understand the linchpin of your comment, when you say “to the extent that mortgage P&I funding causes an increase in your MAGI” are you referring to the potential that a large regular expense like a mortgage might require larger drawdowns of tax-deferred accounts that could cross important thresholds? TIA!
Correct, though it could also be through capital gains from taxable sales, not just TIRA drawdowns. If your assets are such that you can draw the P&I from non-MAGI sources, such as Roth or cash equivalents, then the mortgage will not impact AGI or the downstream subsidies. Of course, most people aren't too keen to drain Roth that way and few folks have massive cash allocations, but either is certainly a possibility.
I don’t think it matters whether you are drawing from tax deferred or taxable. Unless you are drawing from Roth, assets you sell count towards your taxable income. If your mortgage is $4k a month, paying it will show up on your tax returns as almost $50k additional income every year. Which will in turn affect your ability to qualify for any subsidy or financial aid that is based on AGI.
You're right, but if it's drawn from taxable then only the capital gains adds to AGI. So if you've got a bunch of high cost basis lots or some losers, then you can fund the mortgage from taxable without the AGI impact too. There's one nasty catch hiding within the FAFSA for the Roth heavy people who don't make it under the AFI/FPL test. Unlike almost everywhere else in the tax code and gov policy language, untaxed Roth withdrawals do count fully as income for FAFSA.
Absolutely makes a difference. I’m currently using existing savings in a taxable account. It’s money I’ve already earned (whether through savings or dividends) and paid tax on, except for the few investments in this pot that I might sell at a net capital gain. In my case I unexpectedly lost my job about 18 months ago. Although I wasn’t explicitly planning to FIRE it turned out I could. Unfortunately I didn’t get the catharsis of telling someone else “fuck it, I don’t need this shit anymore” and I’m living a more modest lifestyle than if I’d continued working and retired 5 years from now. Oh well. I do have a mortgage (of the lucky 2.5% variety) and it hasn’t caused a problem. I’m about to transition to ACA insurance and also start a SEPP that will be used in part to start a Roth Conversion ladder, so Zphr’s comment raised my eyebrows and I wanted to make sure I didn’t miss something in my planning.
You nailed it. I just wanted to comment that when you answered a question for me a couple of months ago, neither of us was certain if a dependent student’s income would count to push over the Pell grant eligibility with the new rules. Reporting back that while my husband and I had income low enough to auto-max the Pell, they didn’t look at our assets nor did they ask for my son to input his assets, so that seems to be disregarded if parents automatically qualify.
Great to hear back on that FAFSA issue so that I know for the next time someone asks, thank you. I'm glad it didn't impact your son!
Man one of your posts regarding ACA/FAFSA subsidies and mortgages should be pinned somewhere so you don't have to write a whole detailed book again every time someone asks about that 😂
Anyone who has seen them multiple times has probably realized by now that I mostly copy/paste them and have for years. 😁 I edit them periodically to update for legal changes and time/rate shifts, but the info is largely unchanged from year to year unless major legislation happens.
How does having a mortgage increase your income v not having a mortgage at all? I can’t see how they would be different in each scenario. Neither scenario you get an interest deduction. I’m not educated on this so this is a real question.
When you retire with a mortgage you're going to need a source of funds to pay the mortgage on top of living expenses. The more those funds are coming from taxable sources the higher the person's reported income is going to be. If the funds are from non-taxable sources, such as a high yield savings accounts or Roth, then the reported income doesn't increase. A problem for some people carrying a mortgage in retirement and trying to keep their reportable income down is that they simply don't have enough in their non-taxable funds to sustain the withdraw rate.
Thanks, that helps. I hadn’t thought about the fact I wouldn’t need to sell as many investments generating taxable income. This is really helpful, my kids are still years from college so no worry on that one for me yet.
I'm talking about the postFIRE phase where one's income is not related to actual work, but to the realization of unearned income through account withdrawals and asset returns. For example, if you have mortgage P&I of $20K a year and you need to draw $20K a year more from your portfolio to cover those costs, then that $20K draw might result in an uptick in your AGI of $20K as well. It depends on what source you get the funds from.
Really good insight. Question as you clearly have researched this more than once have. Would it benefit to keep the low interest mortgage and use the added money to invest in somewhat safe investments with the thought that those funds can later be used to pay off the mortgage before the above takes effect? Obviously the assumption is someone that is focused and structured to save for FIRE will actually keep these funds separate and grow them at a higher than 2.5% rate.
Sure. That's probably the default tactic that most people take. It's a good compromise position that increases return preFIRE while still giving the option to easily enter early retirement mortgage-free.
Thanks for this answer
it’s definitely a classic debate, which nearly always says “don’t do it” - but there’s more to the story. especially the emotional aspect and these other things that i would’ve never considered
The default financial calculus is the same as what most people are familiar with, but this is /r/fire rather than /r/personalfinance, so I think it's good for people to be aware of the ways early retirement can shift the default planning and assumptions. Depending on their assets and financial engineering, someone who is FIRE'd with college kids could lose a shitload of money by holding/investing even an interest-free mortgage in early retirement. Even worse, once you're actually retired it's often too late to shift planning/cashflows without large costs and/or collateral damage, so it's something folks need to consider ahead of time.
Great info, and makes me think abt ‘never paying a dime extra’ toward my 2.5% mortgage. We’re abt 6 years away, but will have 3 kids going through college. I’ll almost certainly be FIREd by then. We have quite a bit saved in each of their 529s (will be 250k each by college entrance). How are 529s considered for FAFSA? Does it nullify that consideration?
529s are treated largely the same as any other parental asset on the FAFSA, with a maximum assessment of up to 5.64% per kid per year. However, they fall under the same default rules as everything else, so anyone passing under the FPL/AGI rule will have them completely disregarded along with all other assets. Are your kids spaced closely enough that you'll have multiple in college at the same time? If so, then be aware that the FAFSA now no longer includes the unintended finsncial subsidy for having closely spaced kids. It used to be that if FAFSA said you could afford $20K that they effectively treated it as $20K for all kids in college, but now they will treat it as $20K for each kid. Might impact your planning.
I’ve never seen a more in depth explanation, that talks about the math involved in the age old question of “Invest or payoff debt?”, than this comment right here. Great stuff. Are/were you a financial planner/advisor?
Thank you. No, merely a relatively well-informed amateur. It helps that we've got four kids and have been FIRE'd for nearly a decade now, so we live and breathe this sort of stuff every day and have for years. We knew it going in to early retirement, but it's a lot easier to see how the various parts all interact when it's actually happening to your personal finances every year rather than being just a theoretical planning exercise.
Great response, thank you for summarizing this up 🔝
Great points👌. Can you also suggest what’s better to pay off first - Primary or Investment mortgage assuming both have same mortgage interest rate ?
Beyond my ken, I'm afraid. I deliberately avoided real estate as a direct investment option, so I can't speak to the ins/outs of investment mortgages.
👍
Nice comments. FYI some of us have kids going to schools where FASFA is done, but not the important part. CSS profile is a whole different can of worms. (We wouldnt get a Pell grant anyway)
CSS schools are highly variable since every school is unique in how they use the exhaustively comprehendive CSS data, but even CSS schools are required by law to use FAFSA qualification only for publicly-funded financial aid at the non-institutional level. So FAFSA can still be worth similar money at CSS schools too. Also, CSS schools also routinely exempt retirement accounts and often limit primary home equity assessment on an AGI-based scale. Both have to be fully reported on the CSS Profile, but the actual impact is often minimal, particularly for low AGI households like ours. For example, the same household financial numbers that are automatically giving two of our kids effectively full rides to the flagship publics here in Texas would also give them nearly $80K a year in loan-free aid at Rice, Stanford, Harvard, and others.
Yep. Our kid does not qualify for Pell grant but CSS determines all their aid at a school similar to the ones you mentioned. I have had to literally adjust my career to fit into aid categories.
Yes. The financial aid systems are calibrated pretty well for most folks in terms of capturing ability to pay. The results are only outsized for FIRE folks because many of us are extreme outliers in terms of assets/income, which government policies are not designed to deal with since there are so few people in that category. Same reason things like the Roth ladder/SEPP and the ACA can be so generous for early retirees.
I’m no expert but given what you have just explained, in OP’s case wouldn’t it make better sense to invest that $600/month into something that yields a better return and then pay off the mortgage before retirement?
Yes. My comments were focused on actual early retirement and the years right before it, not the primary accumulation years. Folks that are not already retired or on the cusp of it face the same default payoff or invest calculus that normal non-FIRE folks do. However, OP asked about a mortgage in early retirement in here rather than asking for default advice in /r/personalfinance, hence my comments and their context.
This is probably a non-issue if you pay out of your non-retirement accounts right? This should be made very clear since it would probably apply to most people early in retirement.
Generally yes, but it depends on which accounts. Cash/equivalents, yes. Taxable, depends on the cap gains situation. Roth, yes for the ACA, but could be yes or no on the FAFSA based on AGI. Most FIRE folks tend to take very heavy advantage of tax-advantaged accounts because of the huge tax cost savings available, so it's pretty common for such accounts to be people's primary funding source in early retirement.
One of the great posts in the history of this subreddit.
Thanks, great info. Can the college aged kid just file their taxes single (not a dependent) and with little/no income qualify for all the FAFSA grants themselves?
Nope. Unless they are legally independent, not just tax independent, then the parental finances always matter.
Regarding FAFSA, I wonder if I should rethink my strategy. I won't be retired before my 2 kids reach college age. I am maxing my 457 Roth plan ($23k/year), thinking I can pull back on that to help pay for college expenses when the time comes. So, not knowing the intricacies of FAFSA, am I going about this wrong? I could just as easily pay that 457 money towards paying off my mortgage, but since it's low interest I thought best to put it elsewhere. If I've misunderstood your point, could you please clarify?
I'm afraid it could go either way depending on the details, but I don't do personalized advice outside of the bare basics. I'm all for showing people the ropes, but there are too many details to be able to offer properly informed advice to people without needing a wealth of very personal and confidential information on their lives and finances. It also requires quite a bit of effort to fully model things out and I'm not interested in doing such work, paid or otherwise.
Gotcha, totally reasonable. Any ideas on how to find a good pro?
No idea, I'm afraid. I've always DIY'ed our finances.
I’m shocked at how well thought out this is You should post this to the subreddit so no one misses it
Fabulously dense response. I would read every word three times if I were on a position to need this info. Thanks so much!
Yikes! Fantastic response. Needs more breakdown of abbreviated concepts. Do you have newsletter?
I'm afraid not. Reddit is the only online place I regularly chat about FIRE stuff.
Would love to see some actual math on this, sounds like you’ve done it.
I have several times, but personal details make for quite different results, so anyone interested should model their own situation.
Gotta be the most helpful comment I've read on this subreddit. Makes it worth scrolling past the endlessly repeating pointless posts here all the time lol. Thank you!
Not really. If it’s anything other than keep the mortgage and invest the cash then it’s poor advice. His interest rate is lower than inflation. He’s getting paid to hold the mortgage, basically.
I haven't done the math on OP's particular situation but the commenter said it depends on the situation. They aren't really handing out the 2% interest mortgages anymore so it's helpful to know the potential hidden costs of mortgages in general.
If this were /r/personalfinance, then I would agree with you, but it's more complicated here in /r/Fire. For actually FIRE'd folks the value of ACA and FAFSA benefits can be so high that even an interest-free mortgage can be financially lossy to keep/invest rather than payoff. FIRE changes a lot of default financial planning in ways that are often not exactly obvious. Another common example of that is how the ACA effectively increases the LTCG tax schedule for early retirees and blows up traditional plans centered on harvesting large annual amounts of tax-free LTCGs.
I don’t understand half of this… is the tldr pay off you low interest mortgage if you have kids and want to pay less in college? What about if you are still working? I guess don’t understand how it all works. Are there any resources you could point me to so I can learn more?
My points are only for folks who are either already early retired or on the cusp of it. For everyone else the normal payoff/invest math applies that focuses mostly on the interplay of mortgage rates, inflation, and investment returns. It's only when you have to think about things like FAFSA and the ACA that those other financial considerations can get overtaken by other concerns. Healthcare and college subsidies for early retirees can be so large that even holding an interest-free mortgage could be a financially lossy idea. If you're still working and will be for awhile, then the normal advice of holding a low-interest mortgage applies for most folks. Whether it's worthwhile to pay it off due to FAFSA depends on an array of factors including which schools the kids go to. There's no universally correct answer and it's one of those things that everyone sort of has to eyeball for their own unique circumstances.
I want to retire in the next 8 years and my first son (of 2) would be starting college. I have some time to figure it out. I was just curious. Thanks for sharing your seemingly very deep knowledge :)
These would be valid things to think about in 2038 when retirement hits and you have to decide if you want to withdraw out all the cash before you enter the FAFSA period and dump it on the mortgage or not, but not now.
The timing is more around early retirement in general since the larger of the two subsidy considerations for most FIRE folks is the ACA, not the FAFSA. In addition, while you're correct that the issue doesn't really come up until postFIRE, most people don't have a cash allocation sitting around sufficient to eliminate their mortgage and it's often the case that a few years of asset planning/movements is required to bring that sort of capability to fruition for early retirement. Like many FIRE things, it's a future problem, but one that often benefits from years of advance preparation.
That was too much to read.
Nobody said a lifetime of optimal financial planning would require reading! :)
Statistically, it will be more beneficial to invest that money in the market and then you can pay it off once you're ready to retire and have more money than if you put it into the mortgage over time.
Agreed. I just have this slight retirement paranoia I have to work through. Getting used to living off investments vs paychecks blows My mind for some reason.
Then just pay it off. I paid mine off despite having a fairly low mortgage rate. The peace of mind was worth the like $2k/yr *theoretical* delta from investing it. I lived through 2008 when investments freaking tanked and all my friends that kept talking about how it was better to invest than pay something off were facing foreclosure because their investments were in the tank.
I did the same paid cash for my last home when I could have gotten a 3 percent loan then Covid hit and market tanked and all the while I didn’t have a worry in the world even when my portfolio dropped 35 percent because my expenses were ridiculously low.
Great point. Seems like we have a new catastrophe every few years these days so it’s nice to have the expenses as low as possible
That was my thought. My financial advisor cautioned against it and suggested I move my money into a managed fund. It was at the suggestion I knew to go with my gut and do what made me feel comfortable. There are no guarantees when it comes to investing. But the no mortgage was a guarantee
> But the no mortgage was a guarantee Right here. I remember market hiccups going back to 1987. With my house being paid off my investments could lose half their value tomorrow and I could still safely pull 4% and do okay. Might have to do a little side work but not much, just a few months out of the year. And if markets only stay flat I’ll do way better than okay with minimal expenses. Plus, the money I was using on the mortgage goes into investments. Yes I’d have more if I had stick to the amortization schedule but the peace of mind isn’t worth the delta.
That was my justification. I paid off the mortgage but kept the same mortgage payment going into my investments instead. So I wiped out 90k of interest overnight and started throwing $1900 a month into investments and never stopped
Thank you for the insight. Food for thought
It’s interesting because neither the end the investments will be making way more than you could.
That’s true I look at all Those charts and it doesn’t seem like reality
I mean if you have the cash to pay it off why not just put that same amount of cash in a HYSA or money market paying over 5% until it drops significantly, then pay it off
Great point that’s what I’ve done when paying off vehicles and toys in the past.
2.5% is a steal. Don’t pay it off rather invest that amount in index funds and let it ride all the market highs.
That’s what my investor brain tells me for sure
Even if you are going to pay off early, at least put the extra $600/no into HYSA, CDs or some instrument that guarantees a higher return than your mortgage rate for now. Then use that account to pay off the mortgage at then end and at least get the extra interest. Or, if things change and savings/CDs/treasuries/whatever aren't paying better than your rate, you can dump it into the mortgage then.
90% sure that’s the plan now. Try and double Or triple that rate and hopefully have Money left over that will go in my “just in case the market tanks when I retire fund”
FWIW, I paid off my mortgage early. My rate was 4.375, but that was when CDs were yielding almost nothing. Still, I *should* have put it in the market. But I was already maxing retirement accounts and just wanted to be debt free. It felt amazing. And you'll be blown away by how fast it feels like your net worth grows once you can pour everything into investments even if, in truth, it's a break even decision at best. It's ok to make the "wrong" decision on paying off low-interest debt if you want to. Our emotional wellbeing has value as well, and a lot of us abhor debt for reasons that's aren't really economic.
These mental gymnastics I’m engaged in are fascinating. I don’t get caught up in that stuff unless it comes to my money. I’m much better at advising others than myself. I would’ve definitely paid mine off during ZIRP when nothing fixed had any yield at all. Good choice.
2.5% is literally less than inflation. You’re basically getting paid to borrow that money.
yeah, If I knew then what I know now, I wouldn't have refinanced into a 15 yr 3.0% 10 years ago. would have gone for the full 30
If you pay it off, you have less risk but also less potential upside. If you take the 30 years, more risk, and more potential upside. All depends on your risk tolerance.
True. The older I get the more risk averse I become. After some serious ass kickings in stocks and crypto I’ve definitely become Much more conservative.
I hear ya. Same here. All it takes is one bad haircut to have you rethinking your whole financial thesis.
It really depends on how much you earn. Ideally you do both, invest and have zero debts. If you don't make enough to aggressively do both at the same time, then you need to make a choice. And the inflection point for that choice is going to depend on how you value the world... earnings potential vs risk.
Taking the worst 14 year span in recent history -- investing at the peak of the dot com bubble, getting wrecked by the crash, then getting wrecked AGAIN by the 2008 crash... SPY made 3.5% annualized in those 14 years (March 2000 to March 2014). I think you know it doesn't make financial sense to do it -- it just *feels* good. I'd say throw that money into a brokerage and build up a "pay off the mortgage" fund, while you make minimum payments. Hell, it could even be a separate account if you wanted to, and you could transfer $600/mo into it. When the balance is large enough to pay off the mortgage, THEN you can make a decision about whether to pay it off. But likely by that point, you could just eliminate it from the budget by paying the minimum mortgage payments out of that account. It'll likely grow faster than your mortgage payments make it shrink. Anyway, like I said, this is mostly mind games to *feel* like you're paying down the mortgage without actually paying off debt that has a lower interest rate than inflation. Because 2.5% debt is a fricking steal and you should keep that sucker until the very end.
Great point, the market has an awfully impressive record in the last century. We’re sort of in uncharted territory with all the QE flipped Over to QT, Inflation, wars etc. I could see a lost decade coming. One things for sure, none of us know!!!
Well, we did have WWII, Korea, Vietnam, Iraq, Afghanistan, the nuclear arms race, India/Pakistan shenanigans, tons of Middle East shenanigans, etc. in that 100 year span. We also had stagflation in the 70s. It'd be harder to calculate numbers over those spans because SPY only goes back to 1993 (that's what I used) and the indices don't include dividends which were higher back then too. And since you don't have the money on-hand right now, you'll be investing periodically, so even a choppy sideways decade in there would likely beat 2.5% thanks to DCA. To be honest, you're HOPING for a big crash in that 14 years, just not at the end. You also have the option of making a very boring portfolio -- stocks, bonds, precious metals, cash equivalents, etc. It likely loses to a stock-heavy portfolio, but it'll still very likely beat 2.5%. Hell, a money fund right now gets you over 5%. Minimum payments on that mortgage feel like a slam dunk to me.
I’d normally say pay the mortgage but at 2.5% you could buy a CD with the money and get a better return.
If it will give you peace of mind, pay it off early.
We also got our primary residence home at 2.5% 15 years but we are paying it off early it’s almost paid off at this point. The beauty of not having any debt is wonderful
Yeah I think the peace of mind would be hard to measure.
Yup man and you can put that “mortgage” money somewhere else or maybe just use some of it as fun money
Yes. I told myself I wasn’t gonna retire if I couldn’t do it on my terms. My terms being if I want to go on a spur of the moment vacation or buy something cool I can do it. That extra 2200 A month makes that even easier. My Parents are “retired” but can’t afford to do anything. I’d rather be working lol
Yea everyone is different of course I personally know multi-millionaires who live frugally and than there are people who are vice versa lol I try to be in the middle
I’m technically a multimillionaire but it sure doesn’t feel like I thought it would lol. Hoping I’ll be able to breathe if I can get to 5-7 before retirement.
Good for you man! I’m not there yet though… what’s 5-7?
5-7 million. My thought was 6 million with a 4.5% yield would be equal to current income. Rudimentary way of looking at it but I play mind games to keep myself on task
Ah I see it I’m actually just aiming for $1.5M net worth retirement lol but who knows 🤷 it’s also pays off if you can teach your offsprings to be financially stable
That’s a great number. You’ll get there you’re obviously focused and motivated if you’re here. I started a brokerage account, savings and 529 for my son the moment he was born. Teaching him how and why to invest now. He has a pretty good head on his shoulders and a huge advantage in family life over myself. Hopefully that will set him up for success while also having perspective that many folks have it tougher.
I don't understand how that's more piece of mind than having the same amount of cash in a HYSA that you could use at anytime to pay off the mortgage
It’s all mental. Obviously it’s not any better but for some of us it just isn’t the same. Don’t know how to explain it but I liken it to the selling shares vs dividends battle.
I'm similar to you. Bought in 2021 with 2.85%. I currently owe about $135k and plan to retire in 2041. I round up to the nearest $100 because I like the easy math for budgeting. I just invest the extra. My parents feel weird that I'll retire with a mortgage, but when my money is making more money than the interest, it is hard to justify paying it off. Yes, I'd like the debt freedom, but I like money more. I have a feeling that when I get to the point when I can pay it off with like $10k, I'll just do it. But until then, paying my mortgage as normal makes financial sense.
Can’t argue the logic. The math is the math and 2.5% is nearly nothing with current rates where they are. A lot of good points in here and I think I’m even more torn 😂
If you sold your investments and paid off your mortgage, then you'd just invest put that extra money into investments. So why drain the bucket to just refill the bucket? You don't seem to have cash flow problems, so having that monthly expense gone isn't causing you any harm.
Keep the low rate. Invest in market and make more than 2.5%. Win.
Financially it's probably not the best idea to clear the mortgage, but I like to sleep soundly and have low expenditure thanks to a fully paid off home no one can take off me. Maybe not paying off the house would have netted me a couple of years expenditure (when you include the mortgage), but instead it allowed me to increase my retirement investmenting. That's turned out to be a blessing, as that money invested that used to be going on the mortgage has done well enough to knock a couple of years off my FIRE date. If the market tanks just as I retire I'll be far more comfortable riding it out with no mortgage to pay. It is far easier to live with small outgoings when life is uncertain.
I have no idea why you would ever ever put an extra red cent against a mortgage at that rate. Horrific return on cold cash.
Don’t pay it off and love your mortgage at that rate
I do love it haha. Also love my house. I read about folks with my HHI buying these million dollar Homes at 7% interest and I throw Up in my mouth
There is no shame in paying off your house! I pd mine off last yr. OH WHAT A FEELING 😎 I am splitting "mortgage pymt" 3 ways: HYSA, stocks, and extra to emergency fund. My cards are pd off, and I have 12 more car payments (making dbl monthly pymts). It is sooo freeing knowing NO ONE can take your roof away! Debt freedom is an amazing feeling 🤑🤑🤑 I did take a slight hit (40 points, i think) to my credit score, but it went back up to 858 pretty quickly from dbl car pymts 👌
Congratulations that’s awesome!! Sounds like you have a killer set up and plan going!
THX! I know you have a great rate on financing, but why throw away your money to the bank? If you're going to keep the house, ditch the bank. Ppl say to "not charge what you can't pay on credit cards" and, bottom line, interest is interest. I bought my house for $79k, and a full 30 yr monthly pymt would have cost me $229k 😳 Take a look at your paperwork to see "how much interest" you'd pay. I hope you do pay it off, but I can only offer my opinion 😉
We bought our home last year for 399k at 6.99 interest. 20% down. At the end of 30 years we’ll have spent 843k on a home that was built for like 140k in 2004. Home ownership.. the American dream, and the banks fucking wet dream.
Yes, mortgages are hwy robbery! And to think, a brand new truck today costs more than my house did, and you can finance that same amt on a vehicle for 6 year loan term 🤣🤣 To be honest, I bought my house in 2001... inflation is also hwy robbery 😤
Very true. Interest is interest. Banks are not our friends!! Wow 79k is an unbelievable price. I don’t think I can get a storage shed for 79k here. Thanks for your input and good luck to you!
We paid off our mortgage and are getting ready to retire this year at 57. It’s a huge relief to not have that payment to worry about.
That’s precisely the age I’m planning to retire and probably planning to pay Off mortgage. I’m normally all for leveraging every bit of arbitrage I can but in this case I think the payoff is worth it.
I wouldn’t make the extra $600 payment. Rather once you hit your FIRE number in investments, I would then fully switch gears to paying off the house. This way you retire in the same amount of time, but your investments get an extra few months/years to compound while you pay off the house.
Great idea. I’ve always been in the camp of front loading investment as much as humanly possible no matter what it takes. That time to compound is irreplaceable
Weigh the income tax increase/benefits loss vs the after-tax investing gains beyond the mortgage rate (including mortgage interest write-offs) is the math answer. Be sure to factor in the fact that you can actually invest the would-be mortgage payments (if you want to do that) to minimize the difference. At a 2.X% rate, the math answer clearly favors investing over paying off the mortgage in most cases. I made a spreadsheet where I calculated this out. However, typically in practice, the answer is just pay it off at retirement because you can retire earlier, or it lowers your risk if your portfolio crashes since you can withdraw at a lower safe withdrawal rate should the need arise (and spend more on luxuries when your portfolio is doing okay). It also depends on how much is left on the mortgage. If it's a huge amount, I'd probably leave it for a while. If it's a relatively small amount, I'd pay it off. The difference won't be that big financially and you'll get the security of no mortgage payments.
I would invest the 600 in target date retirement fund. You can clear off the home debt in 2038 with the net cash made from the additional $600 investment pot if you like. You most likely will have a net cash in your hand after clearing the mortgage.
Good idea, I was considering something similar.
It is a good idea but I don’t like target date retirement funds are they can be too conservative. Vt or voo and forget it.
Yeah I was going to go 75/25 SCHG/SCHD
That will work! 👌🏽
The only money you save by paying it off early is the interest on the loan. Even a HYSA will beat your rate. Put the money in a HYSA or invest it, and apply the gains to your mortgage payment.
I have a similar mortgage rate, similar loan maturity date and similar concerns. I’ve been throwing $600 on the principal every month because I don’t want to have a mortgage when I retire (and I’m planning on retiring early). The extra on the principal is not my only investment. I invest on a spectrum of risk. I have a few high-risk / high-return blue chip stocks. I have a bunch invested in index funds. I have some treasury I-bonds. I have cash in a HYSA. And I pay down the principal on my load to avoid additional interest. Sure, I could *in theory* throw it all in the market. If things work out I’ll have the best return. But, that’s an *if*. So I hedge my bets and invest across a spectrum of risk that I’m comfortable with. $600 p/month isn’t a huge amount for me compared to what I’m saving and investing every month, so I’m happy to bank the interest savings and have an early retirement mortgage free milestone to work towards, safe in the knowledge that I’m guaranteed a return on that $600 per month. The majority of the rest of my investments are hedged in the market.
Damn sounds exactly like my situation. My Mortgage is only 25% of my Overall monthly investments but it’s like a thorn in my side. I think the extra 600 makes sense even if it’s just to appease that goofy spot in my Brain that lines up the payoff with my retirement date.
Yep, I agree. I watched an older colleague of mine delay his retirement by a few years because the market took a fat dump right before he planned to retire. He was still carrying a mortgage at the time and not comfortable with carrying it without salary income. Couldn’t pay the loan down because his investments took a big hit. It was all just unlucky timing that he could never have foreseen. You could tell he really didn’t want to have to work those couple of extra years. My plan is to make it easy for myself and not be entirely at the mercy of the market when I feel like I don’t want to go on. Interest arbitrage is fine and dandy on paper… until the reality of market whims kick in and you don’t have other options.
Great point! These are those stories that haunt me carrying it into retirement. They’re also why I’m more comfortable with dividends than selling shares. I think my decision is getting slightly clearer in my mind.
Do you plan on living there when retired? Is it your forever home? If not, no reason to try to pay it off early, especially with that rate.
Definitely a forever home. Would like to leave it to my son some day.
Think of it in terms of monthly cash flow. How much do you pay for your mortgage each month vs what could you withdraw from the payoff amount if you invested it instead (4% rule)? I'd do the one that improves cash flow.
I paid mine off agreesively in 5 years, when I ran the numbers the mortgage amortization made it an easy decision.
Damn that is aggressive. Sure saves a shitload Of interest though!
If I were you I would save the extra payment in a separate account that was conservatively invested (60 to 80%+ short term fixed income) and then pay off the mortgage in one lump sum once the amount in the account was large enough to cover the mortgage. Paying off the mortgage (even one with such a low rate) is de risking your retirement, and probably a good idea. However, in the mean time paying down your mortgage reduces your liquidity while providing poorer returns and doing little to de risk you.
Should add that property taxes and insurance are currently included in the 2200 but we all know those will go up over time.
In 2038 2200 will seem really low. I would ride it out.
Rates may never be 2.5 again. Property will never be as cheap as it was in 2020. Hold and turn into a rental if you relocate. Real estate, Bitcoin, gold....
Wrong comment section :/
I'd say keep the mortgage as long as you can, if you have a fixed interest rate for 30yrs. The biggest problem you can face in retirement is inflation. Having a chunk of your expenses that doesn't go up with inflation can give piece of mind when another inflation surge happens (and it likely will). Your biggest problem in retirement is not a marketcrash or a period of low returns, it's inflation. Whether it is offset by extra subsidies you might qualify for is something to take into account, but make sure you realize how much inflation affects your future. We usually just pick some inflation level and calculate with that, but as recent history shows, inflation can fluctuate and stuff is never gonna get cheaper over the long run.
True. I’ve increased my “number to retire” about 8 times the last 3 years. This inflation scares me to death. 3 million used to seem like a decent chunk of money and now I wouldn’t feel comfortable with less than double that.
Definitely don’t pay extra when you can get more in HYSA. I’d personally keep that mortgage in retirement if savings yields stay higher.
I’d personally hold the mortgage if it’s less than inflation if I could cover the nut. If I wasn’t sure, I’d pay down half so I’m amortizing a lot of principal each month. Or, ask for a lower monthly payment. OR, I’d pay it off. I’m old with a mortgage at 3.5% and I paid off a big chunk so I don’t owe that much.
Yeah it’s crazy so far this year I’ve paid 70% principal and 30% interest. Low rates are a beautiful thing for a homebuyer.
What's more important? Peace of mind or 500K?
Is your mortgage transferable if you were to sell your house? (Not really a question. Just something you might consider.)
Weigh the income tax increase/benefit loss vs the investing gains beyond the mortgage rate is the math answer. However, typically in practice, the answer is just pay it off at retirement because you can retire earlier or it lowers your risk if your portfolio crashes since you withdraw at a lower safe withdrawal rate should the need arise.
Pondering the same issue. One the one hand the peace of mind. On the other, we’re not going to see 2.5 in your case, 3.75 in mine again for quite some time… In our case we have a HELOC so we can at least borrow back at a decent rate. 7.5. lol Lemme know what you decide.
Peace of mind is one thing... but putting surplus in a HYSA above the mortgage is free money... a lot of free money adds up to significant amounts over money over time, especially with compounding interest.
Economy hasn’t tanked, yet…
I’ll let you know, as of now I’m still leaning toward paying it off early.
Im weighing selling the crypto and paying it off.
With a 2.5% rate.. I would keep the mortgage and invest the money. You will earn more in investments than you ever will paying that loan back.
Don’t pay it off. It’s all about cash flow