mortgage Archives - Lazy Man and Money

Mortgages: To Pay Off Early or Not to Pay Off Early…

May 28, 2020 by Lazy Man 18 Comments

… that is the question. Whether ’tis nobler in the mind to be free of debt, or to invest, perchance to dream of outrageous fortune.

If you thought I was going to continue writing in pseudo-Shakespeare, you don’t know me very well. Or maybe you know me too well, because I do love a good writing challenge.

There’s a lot of debate in the personal finance community about whether you should pay off your mortgage early if you can afford to. I’ll share my opinion on that in a little bit. Before I do, I want to make it clear that this is a topic with no definitive answer. Even with my own strong feelings on this one, I can look at the other side and say, “I understand and appreciate your view.”

So if you aren’t going to find any definitive answers, why continue reading? It might help you decide what is best for you and your situation.

Let’s review what each camp has to offer:

Pay Off Your Mortgage Early

There’s a psychological weight to being in debt. While most will agree that mortgage debt (especially at current rates) is good, responsible debt, it is still debt. Until you’ve paid off your mortgage, it’s likely your biggest expense. After you’ve paid off your mortgage, it may be transportation, or food, or property tax. You are a lot closer to financial independence when you eliminate such a big expense like a mortgage.

There’s also a component of certainty. If you have a 5% mortgage, you are getting a guaranteed 5% return on your money by paying off the mortgage early. You can’t get that in a bank account – especially now. You can’t get any kind of guarantee in the stock market which can move in crazy directions from day to day. We’ve seen that happen a lot this year.

Invest the Mortgage Money Instead

Another school of thought is that it’s best to invest any extra money instead. Most people expect the stock market to earn about 7% or more over the long run. That’s a lot better than most of the mortgage rates out there which are probably around 4% (or could be less with refinancing).

Most mortgages are 30 years long – plenty long enough to smooth out the gyrations of day-to-day stock market. Even 15-years (like the other popular fixed mortgage option) is almost always enough time to see stronger returns on stocks.

Almost no one disputes the math of investing in stocks is better than mortgage debt. Even the people in the “pay off your mortgage early” camp typically won’t argue the math. Instead they’ll point to the psychological benefits of alleviating the burden of debt. They’ll also point to the guaranteed X% return noted above.

My Choice: Pay Off Mortgage or Invest?

I strongly prefer mathematical solutions to psychological ones. Sometimes our brains play tricks on us. Math is consistent – it doesn’t play tricks on us.

Let’s say that I have $200,000 left on my mortgage (4%) and somehow lucked into $200,000 (it’s hypothetical, work with me). That mortgage has 25 years left on it. If I pay off the mortgage right away, I’ll save myself from having to pay $533,167 in mortgage payments and interest [Calculation: ((1.04^25)*200000)]. That sounds like a great move. However, if I invest instead, I would have $1,085,486 [Calculation: ((1.07^25)*200000)]. There are some minor things like taxes and inflation to consider, but they are not enough to make up for the fact that investing is mathematically speaking almost twice as good as paying off early.

I’ve heard some people say that they are so happy that they paid off their mortgage – especially now*. With unemployment so high and income so uncertain, being mortgage-free has to be a great stress reducer.

However, we’ve been saving and investing since we bought our house in 2012. We’ve enjoyed a fantastic ride on the stock market. However, even if it was an average ride, we’d have enough saved up that we could choose to be mortgage-free as fast as the banks can make the money move.** Plus we’d have a lot of money left over. That’s what I consider my great stress reducer.

One of the problems I have with paying off your mortgage faster is that the money is gone right away. You don’t have the money under your control any more. If you put all $200,000 into paying off the mortgage, lose your job, and your car breaks down, can you come up with the money to fix it? If you’ve invested the money and still have control of it, you can continue to make mortgage payments, fix your car, and eat if you lose your job. You have the money to buy you time in making all those payments in such a terrible scenario.

As strong as I feel about investing, we went with a middle ground. We got a 15-year mortgage with a lower interesting rate (a very, very nice bonus!). This forces us to pay off the mortgage earlier than most people. This past weekend, a friend of mine said that she’d never be able to pay off her mortgage. (It’s done in 2037, which can feel like never, but probably comes up on us quicker than we think.) In 2012, it seemed like 2027 would be “forever”, but it doesn’t feel like that anymore.

We are also able to save money each month to invest. We saved and invested a lot over the last decade. I feel that a 15 year mortgage is ideal if you have the income.

Final Thoughts on Paying Off Mortgages Early

I was inspired to write this by an article that had nothing to do with mortgages. Miranda Marquit wrote about her Taxable Investment Account/Emergency Fund and I thought, “That’s somewhat similar.”

Most gurus would say that you shouldn’t put your emergency fund in a taxable investment account. Emergency funds should be very safe liquid investments. However, she has a tiered approach with some safe liquid cash and more in invested in equities. It’s worked out very well for her and provides her with a larger emergency fund today than she would have had otherwise:

This tiered approach allows me immediate access to cash while I liquidate investments. It works for me because I end up with a higher rate of return with the money in a taxable investment account. For example, I’ve got a 13.3% cumulative time-weighted return with the taxable investment account, since the beginning of 2010, when my return with my savings account has been 3.6%.

Marquit has some safety, but also a lot of growth. This seems similar to investing with extra money instead of paying off your mortgage early. I feel I get that safety of control over the money, while growing my nest egg for more safety (or enjoyment) down the line.

What do you think? Let me know in the comments below.

* Is that the 4th or 5th time I made use of “especially now”?

** Most of our investments are in retirement accounts, so we would get a penalty if we cashed out to pay off our mortgage. However, we could do a partial cash out of a little of our investment profits to buy us a year or two of mortgage payments.

Pay Off Your Mortgage From Your Roth IRA?

September 29, 2014 by Lazy Man 5 Comments

Last week I wrote about the hidden emergency fund in your Roth IRA. In case you didn’t read that article, a huge takeaway was that you can take out contributions (not earnings) out of your Roth IRA penalty-free at any age.

In writing that article, I thought about how much accessible money I might have in my Roth IRA. I’ve been maxing it out for about 15-20 years. That’s a big chunk of change. Without adding it up, I’d estimate it is around $50,000 (some years the maximum contribution was $2000). What if I took all that money out to pay off my mortgage?

Personally, I’d never such a thing and here’s why. The math of the average returns in the stock market (7-8%) is more valuable to me than saving 3.5%, especially when the interest on that is tax-deductible. I’ll go with the math every time and twice on Sunday.

However, there are others who aren’t as focused on the math. Some people, such as those who follow finance “guru” Dave Ramsey hate debt and try to eliminate it as soon as possible. A mortgage is debt. I consider it good debt, but some of these people are against all debt. I understand their thinking, being free of debt can be huge psychologically. It can eliminate stress and that’s a good thing.

This left me wondering, has anyone ever considered making this move? On some level, it makes sense to eliminate your mortgage for peace of mind. You won’t need as big a retirement if you’ve eliminated your biggest expense, right? While all this is true, I’ll still go with the numbers and take the 7-8% compounding over many years vs. the 3.5% (minus the tax deduction) compounding over the same time.

I have to think someone has said, “I’m done with debt. I’m going to raid my Roth IRA and get this debt out of my life.” If you are that person, I’d love to talk to you. I think it’s an interesting option for debt-haters and I’ve seen it discussed.

On the other hand, what about the reverse situation? What if you had home equity and did a cash-out refinance or home equity line of credit (HELOC) for the sole purpose of investing the money to earn a higher percentage. As an entrepreneur, I have access to solo 401Ks and SEP-IRAs, but I often don’t max them out. Why? Because I need the cash to live on. Also, it can be tough to max them out because these types of accounts have higher limits.

Getting money out of your home to invest sounds risky, but it truly is the opposite of pulling money out of your investment to pay off your house, right? So maybe it isn’t so crazy?

What do you think? Let me know in the comments.

What You Can Learn from the 4 Events in 2012 That Changed my Financial Life

February 8, 2013 by Lazy Man 4 Comments

I’m rarely one to follow the pack. So when everyone publishes a review of 2012 in the first week or January, I say, “Let’s make em wait until February.” Also, rather than just give an update of what I did financially in 2012, I’m going to dig a little deeper and get a little Fat Alberty on you delivering a lesson or two.

1. Having a Baby

One of the biggest events of a person’s life is when they give life another. This past year I got to experience that. And while it is fun to joke that Little Man is a nice little tax deduction, he’s a whole lot more than that. Having looked at the the cost to raise a child in the United States it looks like this USDA calculator estimates our costs to raise Little Man will be $28,500 a year.

We are only a little more than four months into Little Man’s life. I feel safe in saying that we are going to come in far under that… at least for the first year. Here’s a breakdown:

Housing – The USDA estimate is that it will cost us another $10,600 in housing. I don’t think our housing costs have gone up that much, but it’s hard to say since that’s related to the #2 event (our move).
Food – The USDA estimate is $2,450. I think we are under that, but it is hard to calculate because right now he’s on breastmilk. That indirectly leads to his mom eating more food.
Transportation – There’s an estimated $3,125 in transportation costs. We bought a new car due to our move to Boston, and part of that was because I felt I needed a safer car for Little Man. On the other hand, my 12 year old car probably need replacing soon anyway.
Clothing – Due to the generousity of friends and family, especially my own mother’s gift of amazing bargain hunting, we shouldn’t have to buy clothes for the next five years. The USDA budgets $1438 and I think we’ll avoid much of this expense.
Health Care – One of the best benefits the military has going is its health care. I think we’ll save a vast majority of the $1113 that the USDA has allocated. The exception is out of pocket things like baby Tylenol and the like.
Child Care and Education – The USDA estimates $7,538 and this is where my blogging career really pays off. I can be that child care provider. I had estimated day care for Little Man to be around $15,000 a year. Since that’s after-tax money, it’s almost like adding $20,000 in salary. However, as it turns out we might be able to get almost full-time coverage for $6,000 at a military base. We’ll see if that comes to pass.

I think the lesson here is that raising a child can be done on a budget. It certainly helps to plan ahead (be a blogger), have a great support system (thanks Mom!), and get a good breaks (military benefits rock). Oh and if you are going to be a new parent soon, here’s some of my favorite baby gear.

2. Moving Across the Country

This year we moved back to Boston, which has always been where my heart is.

One thing I can say about Silicon Valley. Having lived there, I understand how a foreigner would come to United States thinking that the “streets are paved in gold.” Silicon Valley is a lot like that too. There’s a ton of money due to all the successful technology companies such as Google and Apple. I don’t know if it is the money or great schools like Stanford, but there are a ton of very smart people there.

Not only is it a land of opportunity, but the three feet of snow that we are getting right now in Boston reminds me how wonderful the weather is in San Francisco.

As wonderful as that is there were two major downsides for us: 1) Our friends and family are in Boston 2) The price of housing is 3 times more than what we can get in the Boston area. That’s literally a million dollar difference.

It’s not like Boston is a horrible place either. With Harvard and MIT, there are some smart people here too. I’ll probably always wonder what life would have been have been like, not just for me, but for Little Man, if we stayed in San Francisco.

What’s the lesson here? It’s probably nothing new, but geography does play a huge role in personal finance.

3. Refinancing Two Mortgages

Lost in the birth of baby and the move back to Boston is the financial move that flew under the radar. I was able to use the government’s HARP program to refinance two mortgages. With the drop in value of real estate over the last 8 years, these properties no longer had 20% equity and we were paying on average 6% interest on them. We were able to keep the payments close to the same and change 22 year mortgages to a 15 year one. The reason we were able to do that? The interest rate of 3.5% on a 15 year lowers the payments to what we were paying on the 30-year at 6%.

It was extremely difficult, especially because I’m a self-employed blogger. I might as well be a third-class citizen to mortgage underwriters. The hours on the phone and email really paid off…

The result of eliminating 7 years of mortgage payments on two properties is tremendous. Some rough math tells me it will save us $225,000 in mortgage payments.

The lesson here is to take advantage of these low interest rates if you can.

4. Buying a New Car

In any other year, buying a car would trump the money moves. After buying a house, it is usually the biggest purchase someone makes. One month in, I still have no regrets on buying my Subaru Forrester.

Wait, maybe I do.

The last lesson is that before you buy a new car, look at what is coming down the pike in the near future. It’s something that I think about whenever buying technology, but I somehow forgot about it with buying a car. I think it was because I was going in with the intention of buying a slightly used car and saving on depreciation. However, they made the new car a lot better deal because they had dealer incentives and 0% financing for 63 months.

It wasn’t until a few days later, I found out that they are coming out with a 2014 Forester in a couple of months that is going to get 5 miles more per gallon. As it turns out waiting wasn’t a good fit for us because we need to snow-worthy cars in New England, but doing some rough math, the money that I saved with the 0% financing is about what I was likely to save on gas through the life of the car.

I might still come out ahead if Subaru bumps up the price of the 2014 Forester as many expect they will.

Putting it All Together

Most years, I don’t make too many big financial moves. Obviously some of them like taking a new job or having a baby are common life milestones. Other things such as taking advantage of historically low interest rates (particularly for mortgages and cars) fits in the category of making the most of opportunity presented.

Now it’s time to take a year to settle down.

We Bought a House!

June 15, 2011 by Lazy Man 8 Comments

Okay, that title is a little misleading. We have a signed purchase and sale agreement on a home. I wrote at far too much length in a multi-part series at: Buying a Vacation/Retirement Home (Part 1 of ?).

The process for looking in a home in a historic place like Newport, RI (and surrounding towns) brought us to look at probably over three dozen homes. It was a polarizing experience for us. My analytical side was looking for value in terms of objectively measurable numbers like price per square foot. My wife was looking for the, “Can I see myself waking up and having a cup of coffee each morning?” value. I think we both recognized that each side has its merits. In fact, I’d lean towards her side being more important, but I wanted to stand my ground on getting a good value. After all, with an unlimited budget there are many great places to wake up and have a cup of coffee.

On this trip, we found a three places that fit both of our objectives. This is a big change from the one that stood out last time. (I’m not going to count another house that stretched our budget too far, but still a good “value” in terms of price per square foot and aesthetics). We felt like we were on an episode of House Hunters.

One was really close to the beach, 5-10 walk, but the floor plan wasn’t what we were hoping for. It wasn’t in “show” condition as the current renters were there in the midst of the chaos of dealing with 3 small children. It would have needed a little work including some new kitchen appliances. In addition it stretched our budget quite a bit.
Another was a 15 minute drive to the beach. It also was in a bit of chaos at the time of the showing. The kitchen as new, but other parts of the house needed some work. The price was favorable – due in part to the condition and the location of course.
The last place was about a 5 minute drive to the beach. It was a little smaller (300 square feet) than the above two. However, it needed the least amount of work. In fact, we really couldn’t see doing much to it at all. We would prefer a bathroom to have a different color vanity and a larger deck. It would be nice if there was already a fence in place for our dog. Everything else looked like it had been done in the last 3-4 years. It’s asking price was a little higher than the average of the previous two.

I’m betting from that description you can guess which one we went for. It was the third one. While the first one seemed to have the best location, we believed the third place was really the best. It would have been great to walk to the best, but when we looked at other factors like distances to shopping and schools and the neighborhood itself, it passed the first in terms of location.

We eliminated the second house due to the distance from the beach. My wife brought up the scenario of dropping hypothetical kids (since we have no real kids) off and picking them at the beach. That would be a half hour trip there and back… and then another half hour trip. It would be an hour out of your day. That might not be the most common scenario, but it was a good the point in my mind. With the third house, such a scenario is 20 minutes (4 trips of 5 minutes each). Plus hypothetical kids could bike to the beach when they are old enough.

Finally the third house, the one we agreed to had the most amount of land. My wife was on the deck while I walked out and she said, “You are getting too small, I can’t see you.” It was clearly exaggeration on her part, her point was again quite valid. This was a huge selling point.

The last obstacle was to agree on a price. The asking price was already pretty good and it hadn’t been on the market long. When considering the condition of the home, we didn’t feel like we comfortable going too low. We went the lowest we thought we could, while trying to make a strong offer with the other terms of the agreement. It turned out it worked. Their counter was lower than we anticipated. This put in position to try to recounter with our dream price, but we decided to go a little up from there and hope they take it. At that point, the difference was only going to be about 1% of the house’s price anyway. They accepted our counter offer.

Now it’s time to get a home inspection and a mortgage. I don’t anticipate either to be as much fun as the house hunting was (though the inspection should go well.)

Ask the Readers: Ethics and Lowering a Mortgage…

May 11, 2010 by Lazy Man 18 Comments

Today, I’d like to feature an email from a reader. With your help, perhaps we can guide her to making the right decision for her.

Nicole writes:

“My husband and I own a duplex that we bought three years ago that is strictly used for investment and because of our interest rate that is almost at 7%, we are looking to refinance.
However, these are the problems that we are faced with. When we called our bank to possibly refinance we found that they are willing to do it, but not at the prime rate. Because it is a rental property, the interest rate will still be a bit higher that prime, but still a 1% lower than what it is now and saving us about $120.00 a month.
Well, then through conversation, we realized that the LTV (Loan-to-value) was 80% and the PMI would be dropped, saving us another $91.00/mo. However, with their steep closing cost, (again due to it be an investment property) that they add that in to the new refinanced mortgage, that would take us back to the less than 20% invested to have the PMI removed. SO, we then asked them about just doing a rate modification, which would save us on closing cost, get our rate lowered and also allow us drop PMI. In order to do so, they gave our information to a mediation company that will lower our rate to 3% for the term of the entire loan, making our mortgage payment 700.00/mo including everything, bringing in an extra 1000.00/mo The catch is we would have to stop paying the mortgage for 2mos. while they attempt to prove a hardship. Is it worth the gamble and is it worth defaulting and hurting our credit? We are really honest people, who, for the most part, play by the rules. We feel we are getting the short end of the stick. Do we take advantage of this opportunity the way the rest of the world has?”

[Note: I’ve cleaned up some of Nicole’s informal email for grammar, spelling, and formatting for posting here…]

Before I give my thoughts on Nicole’s situation, I should clarify a few things. It’s been 4-5 years now since I’ve done anything mortgage-related. I’ve simply been making payments each month. Additionally, I’m not licensed to give financial advice, so I will give more broad commentary on what I might do.

Nicole’s situation is a little closer to mine than most questions I receive. For instance, my wife and I both own investment properties. The difference is that we didn’t buy them strictly for investment purposes and are rates are at or below 6% – locked in for 30 years. While we have noticed some lower rates out there… as Nicole mentions since it’s a rental property, we aren’t likely to get the lower rate and save any money by going in that direction.

The most interesting aspect of Nicole’s question comes from the advice she received to stop making payments to prove a hardship. I had a friend tell me that it was possible to do a similar thing. That led me to write about lowering your interest rate without refinancing. There I openly wrote about the ethics problem I had with the idea of fabricating a hardship. My rationale in the comments was that people who were doing the wrong thing were coming out in better situations than I was. I often pretend we live an ideal world, where people doing the right things are rewarded… when that doesn’t happen it tempts me to the dark side. Fortunately, I realized this and decided not to go through with it. Part of my rationale was the old adage that two wrongs don’t make a right.

I don’t want to impart my ethics on Nicole, so I won’t. She seems to have an idea where she stands with comments like being honest people and playing by the rules. If she does decide to go the route of proving a hardship, I’d take caution. It sounds like she’s getting a shady offer that’s not going to be put in writing. My experience with such offers is that they tend to disappear. It reminds me of a game of chicken where she is hoping that by continuing forward she’ll reap the rewards of a much lower rate. The downside is an ugly crash that ends with bad credit and not being able to improve on her 7% rate at all.

Personally, I’m very much the chicken who would take the small gains rather than risk it (especially with the ethics involved). I would try to find a bank with fewer closing costs. That’s always a nice, but not realistic option. Secondly, I would suggest living extra lean for a couple of months so that they can get under that PMI. Perhaps most realistically, do the refinance to knock it down to 6% under the condition that the bank will agree to drop the PMI when they get the loan amount under a certain number. The reason I would get this in writing is that you don’t want the bank to turn around and drop the value of the home, keeping the LTV above 80%. This would still save her over $210 a month and seems to come with no risk.

What do you have to say?