Seems like an odd question, since with no other information, it is not a prerequisite or necessary sufficient condition for retirement or being wealthy.
I didn't and don't want to. My mortgage rate is significantly lower than the rate of inflation, so my bank is essentially giving me free money. Paying it off faster would be insane.
This needs to be at the top.
If you locked in a 3% or under interest rate for 30 years it’s literally illogical to pay off your mortgage. That money would be better put to use in another investment or holding cash in a HYSA that yields over 3%.
The sub 5-6% interest rates were a result of the housing crash. Prior to 2008/2009 the rates were pretty much where they are now.
No one can for sure tell if we’ll ever see rates so low again.
Cheap/low interest debt is good when compare to inflation.
Too many variables in your question. However, I paid mine off about 7 years early. I am commenting anyway as a few posts lean towards not paying off early. I find it a great freedom knowing my work choices will not result in me losing my home. And yes, there is a 1000 other bad things that could happen. No mortgage is one thing for which I am grateful.
Mortgages in the UK are typically for 25 years, although longer ones are becoming more common.
Typically when you take out a mortgage you can fix the rate you pay for the first 1, 2, or 5 years. When that time expires you either go to a variable rate, or you might be able to lock in the rate of the day for another fixed period.
In my case I paid started paying double around 10 years in, and paid off my property in 15 years total. At the time my reasoning was that while I could invest and receive a higher return I could survive unemployment pretty well if my expenses were just gas, electricity, insurance, etc, rather than also including the mortgage.
As it turned out I made a good call, as when I owned the property outright I didn't have to receive permission from the bank to rent it out, when I later moved abroad.
Currently I'm in a foreign country and my interest rate is lower than inflation, so I'm investing instead. But I suspect I'll start overpaying in the near future, just because having no mortgage gives a lot of free monthly income and reduces life-risk.
Mathematically it was not the best decision. Housing was cheap and rates were good. The stock market had big gains in the following years. But I would do the same thing again as I love having a baseline of stability that is permanent. And true ownership.
There's a good feeling having all your income free and clear with no debts.
I think about this a lot. Of course, on paper it's a terrible idea to pay off a mortgage early (assuming a reasonably low interest rate). On the other hand, my mortgage is my only really significant monthly expense and not having that monthly expense would reduce my dependence on a moderately high developer salary and I'd feel more capable of either changing careers or being self-employed.
It depends on your mortgage rate and opportunity costs of other investments.
If you have a mortgage below the rate of inflation, that’s almost free money. Your fiat could potentially do better invested in assets with greater return potential. Paying your mortgage down is like a bond with a guaranteed rate of return, and the piece of mind you have from owning the house unencumbered might be worth the opportunity cost of missed returns depending on your risk tolerance, how well you sleep at night, and your desire to have a lower burn rate to enable more daily freedom (versus working a job you don’t care for to pay for bondholder returns on your note).
Less risk = pay the mortgage down or off. More risk = invest spare cash in investments.
Except my stock portfolio is down 30% and if I’d paid my mortgage off instead, I’d have several thousand dollars a month I could use to buy stock while the market is down, potentially realizing an even better return.
But the big thing we miss about these calculations is that if you’re well off enough to be thinking about the difference we’re already doing a lot better than the people who really get hurt in a recession so the biggest lesson is probably to be grateful for what you’ve got and do your best to look out for people who are less fortunate.
I am not a registered church person and this is not spiritual advice.
That’d be timing the market, which is hard to do. Your ongoing allocation strategy should be based on your overall financial goals, and if your goals or the macro changes, that’s when you pull the sails and adjust your tack.
Being financially independent allows you to do good from a position of power. “Fuck you money” is for the pre enlightened, you want “Do good money”, which means enough wealth to support yourself and then pouring the rest into those in need (if that’s your thing). The wealth, most regrettably, is a necessary evil in the current socioeconomic construct.
> Of course, on paper it's a terrible idea to pay off a mortgage early (assuming a reasonably low interest rate).
Why? The longer my mortgage lasts, the more interests I'm paying (no matter how low they are). If I could pay the entirely of my mortgage now, I would because it will be cheaper.
I don't think rich people (the really rich ones) pay their houses valued in 1 million, via mortgages. They pay them upfront (because they have the money). Why on earth would they apply for a mortage that lasts 10-20 years? They would end up paying 1 million + interests.
There's still better options. You can get a low interest loan against your portfolio. That way, your portfolio is accumulating interest faster than the loan rate. At Merrill Lynch, this is called a LMA, loan management account[1].
I'm not rich, so I'm not sure what other options the wealthy have.
My mortgage is at 2.625%. If I have the cash, even 1 month T-Bills are paying a higher rate than that (about 3.6%). Assume I have the cash to pay it off -- I'm strictly worse off if I pay off the mortgage vs. even investing in 1-month t-Bills.
Close. Depends on your marginal tax rate and returns post tax compared to the debt rate of interest. At higher tax rates, it gets closer to being a wash with the spread still low. If risk free rates continue to rise, the investment vs pay down benefit becomes more clear.
Wealthy people have access to lines of credit, secured against their wealth, at low interest rates unheard of to us common folk. This further widens the spread between a very cheap mortgage, and the average 6-7% expected returns from investments (which in turn are taxed cheaply at cap gain rates).
Within a few years of buying my apartment. I was actually in a dilemma due to conflicting advice. My dad was of the view that one should not be in debt for long. And my colleagues were of the view that instead of clearing the debt, that fund can be invested elsewhere. I finally took my dad's advice and cleared the mortgage.
In your situation was the debt ever going to last 30-40 years? I imagine that your ability to pay off an apartment purchase within a few years means that even with planning to leverage interest rates you still would have had the means to invest and pay slower on the debt while ALSO beating the term of the loan. I'm making assumptions, but I'm genuinely curious - I promise!
You control the rate of money returned in beating the term of your home mortgage. You don't control the rate of gain in the markets. If you want to balance it you could just pay slow at first and pay into an investment account with extra money. At year, idk 10 (just pick) -- pay off your home mortgage aggressively. That's my 2-cents. Doing the math on things like cars, homes, investments -- beating the system is incidental. Much less in your control than you think. IDK maybe you'd end up with $5k more in 2040.
The best advice I've heard is if you can get better interest rates with savings/investments then put your money there, if the interest on your debts are higher then pay them off with your spare money.
When paying off your debts you want to pay off the debt with the highest interest rate first (after you've met all your minimum payments of course).
Things to be wary of with paying off your mortgage is that some times there are penalty clauses in your contract so if you pay off too much you have to pay an additional fee (more common for the fixed period of fixed rate mortgages, but always check before overpaying your mortgage).
Bought 7 houses in the US. Never took more than 5 years. Bought 5 houses in Asia. Paid cash for all of them. See comment by foobarbaz33 for my reasoning:
27 comments
[ 3.4 ms ] story [ 60.5 ms ] threadI used a bunch of spare cash to pay down my a lot of my mortgage a few years ago, which I now regret.
The sub 5-6% interest rates were a result of the housing crash. Prior to 2008/2009 the rates were pretty much where they are now.
No one can for sure tell if we’ll ever see rates so low again.
Cheap/low interest debt is good when compare to inflation.
Typically when you take out a mortgage you can fix the rate you pay for the first 1, 2, or 5 years. When that time expires you either go to a variable rate, or you might be able to lock in the rate of the day for another fixed period.
In my case I paid started paying double around 10 years in, and paid off my property in 15 years total. At the time my reasoning was that while I could invest and receive a higher return I could survive unemployment pretty well if my expenses were just gas, electricity, insurance, etc, rather than also including the mortgage.
As it turned out I made a good call, as when I owned the property outright I didn't have to receive permission from the bank to rent it out, when I later moved abroad.
Currently I'm in a foreign country and my interest rate is lower than inflation, so I'm investing instead. But I suspect I'll start overpaying in the near future, just because having no mortgage gives a lot of free monthly income and reduces life-risk.
Mathematically it was not the best decision. Housing was cheap and rates were good. The stock market had big gains in the following years. But I would do the same thing again as I love having a baseline of stability that is permanent. And true ownership.
There's a good feeling having all your income free and clear with no debts.
If you have a mortgage below the rate of inflation, that’s almost free money. Your fiat could potentially do better invested in assets with greater return potential. Paying your mortgage down is like a bond with a guaranteed rate of return, and the piece of mind you have from owning the house unencumbered might be worth the opportunity cost of missed returns depending on your risk tolerance, how well you sleep at night, and your desire to have a lower burn rate to enable more daily freedom (versus working a job you don’t care for to pay for bondholder returns on your note).
Less risk = pay the mortgage down or off. More risk = invest spare cash in investments.
(not investing advice)
But the big thing we miss about these calculations is that if you’re well off enough to be thinking about the difference we’re already doing a lot better than the people who really get hurt in a recession so the biggest lesson is probably to be grateful for what you’ve got and do your best to look out for people who are less fortunate.
I am not a registered church person and this is not spiritual advice.
Being financially independent allows you to do good from a position of power. “Fuck you money” is for the pre enlightened, you want “Do good money”, which means enough wealth to support yourself and then pouring the rest into those in need (if that’s your thing). The wealth, most regrettably, is a necessary evil in the current socioeconomic construct.
(YMMV, n=1)
Why? The longer my mortgage lasts, the more interests I'm paying (no matter how low they are). If I could pay the entirely of my mortgage now, I would because it will be cheaper.
I don't think rich people (the really rich ones) pay their houses valued in 1 million, via mortgages. They pay them upfront (because they have the money). Why on earth would they apply for a mortage that lasts 10-20 years? They would end up paying 1 million + interests.
I'm not rich, so I'm not sure what other options the wealthy have.
[1]: https://www.ml.com/solutions/lma-account.html
20 years was the time-frame.
When paying off your debts you want to pay off the debt with the highest interest rate first (after you've met all your minimum payments of course).
Things to be wary of with paying off your mortgage is that some times there are penalty clauses in your contract so if you pay off too much you have to pay an additional fee (more common for the fixed period of fixed rate mortgages, but always check before overpaying your mortgage).
Great decision in the end - I know people who have their monthly payments almost doubling because their loan rates are going from 2.25% to 6%.
For me the security and peace of mind of being able to quit my job at any time and support my family even on minimum wage is worth it.
https://news.ycombinator.com/item?id=33561001