I want to pay off my 3.58% mortgage, how bad of a decision is it really?

think of it this way...with compounding interest ever dollar you put away becomes more powerful while your mortgage shrinks and become less powerful. You can put your money in some pretty boring mutual funds and really not have to worry about it (no individual stock picking, not much volatility etc). Reinvest all proceeds. Just go half fixed income half equity and you will be amazed how fast it will grow (much much faster than the 3.58% you are seeing). Pay off your monthly minimum than save as much as you can and invest. My broker charles schwab lets you trade a few mutual funds without fees so you can contribute every month. A few pay coupons every month and before you know it the funds from dividend payments will be bigger than your mortgage payments.

It's not a terrible decision. You can get higher returns in the market but they are not risk free. The most comparable safe bet to your risk free opportunity is the 10-year treasury bond, which is at 2.52% today. So you're well above that. Or maybe the 7-year would be more comparable since you expect to pay the mortgage off in 6-8 years. That's at 2.16%. An even better reason to pay off the mortgage.

Some people say that mortgages are a good inflation hedge. That's true. However you could also hedge against inflation by investing in TIPS (inflation-protected securities). So you don't necessarily have to keep the mortgage around to get that benefit.

There is also the psychological benefit of being out of the debt. That might be huge for you.

Would I pay off the mortgage? No. I would seek higher returns, but those come with higher risk. I'm just answering your question that paying off the mortgage is not a terrible, horrible idea.

You have 200k in cash sitting around? WTF?

that money needs to be invested. 200k in cash just sitting around is a huge waste of earning power.

There is really no advantage to paying off the mortgage early in my opinion. You could invest 150k of that and still have 50k that would represent a really nice emergency savings fund.

The interest rate on your mortgage is low in the grand scheme of things. If you can invest that money in a fund that returns >6-7% then you are making a much stronger long term financial decision.

You need to consider the opportunity cost of not-investing in a higher rate fund.

long term wealth you'll have mite money porting it in a very safe mutual fund (you can reasonably expect an average of 8%).

when you factor in the tax deduct ti get on the 3.58% it's really even lower than that. so, not much benefit to posting off early besides peace of mind

Think of this way too:a good high yield bond mutual fund will yield you about 6%. There is volatility but this should generate $12K a year if you can stomach watching your money move 1% up or down a year. You could almost pay down your mortgage using the distribution. Then whatever on top of your normal earnings so you said you paid $1,400 plus $1,000 then an extra $1,200 from the distributions from the fund. The other posters are right though having $200K sitting around is the most prudent use of your money.

Either invest it (which I would recommend) or pay down your mortgage.

https://www.google.com/finance?q=INDEXSP%3A.INX&ei=0qrsU6j7GI-08gbcroHIBQ

Remember all returns regress towards the mean. It took two years to recover from the depths of the crisis. If we get way above the normal range like 2013 you have a small pull buck (ie now). But much much much better place to park your money compared to a savings account.

The fact that you can pay your mortgage off should be of some comfort. If you can keep it like that then you should be nearly worry free. We are all waiting for inflation to rear its ugly head. Invest the cash and sleep well at night knowing that you always have the option to pay off the mortgage; you just don't have to.

renewed marathoner wrote:

when you factor in the tax deduct ti get on the 3.58% it's really even lower than that. so, not much benefit to posting off early besides peace of mind

That's true, but if you take the cash and invest it, you will have to pay capital gains tax (same rate as mortgage interest deduction for short-term, somewhat less for long-term). Still, your effective rate of interest on the mortgage is more like 2.5%, which is a great deal (I have a similar rate and don't have any intention of pre-paying).

You're effectively "in-the-money" on an interest rate swap, and when rates eventually increase you'll be even more so.

It's not horrible to be debt free. With your description of the stability of your job, I'd probably try to have it paid off in a year, instead of immediately. That way you've got more flexibility if the economy crashed hard in 6 months.

It is a great relief to know that you can quit/be fired from your job and know that you can live and support yourself and family by working at a minimum wage job, if you had to.

Start looking at investing that house payment and extra principal payment after another year post mortgage payoff and rebuilding your emergency fund. It's not the most profitable way to do it, but it has less risk. Sometimes sleep is worth more than a few thousand bucks.

It's the same reason I had a 30 year mortgage and paid it off in 7, I could pay more, but I didn't HAVE to pay more. Flexibility was worth an extra 0.25% on the rate.

Another Letsrunner with the problem of having $200,000 in cash sitting around and not knowing what to do with it.

The way you describe your job, I would pay off the house TODAY. Becoming debt free should ALWAYS be a PART of a good financial plan. It opens up SOOOO much money with which to do things...invest, have fun, etc.

If, after you pay the house off, you find you'd really like to have a mortgage, you could go get one. It's not like it's a done deal.

When people say they will pay their house of in X-Y years, it's usually Y years or even Z years. Let's say it would take you 8 years. If you pay this thing off today, you'll have $2400 a month (you were throwing $1,000 extra on top of the $1,400) to do stuff with. Let's say you invest it. At 9% return you will have $288,820.05 based on that.

But, and here's the main reason for why I think you should pay the house off...you said the mortgage is "pressure". Yes, if you invested $200,000 today and it did better than the interest you are paying on the house, you would come out ahead, but there is larger RISK there. Pay the house off and you are GUARANTEED to save the 3.58%. I'd pay the house off if I were you.

Do I THINK you would LIKELY make more money if you didn't pay the house off and just invested that $200,000? Yes. But, peace of mind is worth a lot, AND you will have a lot more money with which to invest AND potentially also have fun with.

Pay off the house.

Flagpole that is awful advice.

Debt at under 4% is not bad debt. You can make on average 8-9% in stocks, the last two years 20+%.

You lose money by paying too quick for a house or car at under 6% APR loan.

People who are paying cash for things right now... Bad call.

Ignore the other guys.

I don't know how you got 200k just sitting away, but however you do, that's awesome man. Use that to pay off your house.

You said you owe 1400 a month, but add an extra 1000 to pay it off faster. That's 2400 a month, that's $28800 a year. Just imagine having an extra $28800 a year? You'd be very comfortable financially and able to start putting some of your money into stocks and other assets to receive a return on investment. I don't know what job you could possibly have to afford this, but whatever it is, you must have worked hard to earn it and for that I say nice job sir.

Pay off the mortgage. The stock market is a Ponzi scheme.

Basically, your low interest home loan is giving you the opportunity to invest $1000 a month at a very minimal cost in terms of interest payments. Ask any small business owner if they would take out a loan for their business at 3.58% and watch their jaw drop. 3.58% is pretty much free money from a bank, especially factoring in the tax benefit. And, with 200k in the bank, you worries about job security are a bit irrational. Also, if you are in a good real estate market that will be strong for the foreseeable future, inflation will eventually make your mortgage payment look like the cable bill. My father bought a condo in Boston in the late 1980s. The payment was a stretch at that time. By 2000, his neighbors were paying more a month for a parking space in the alley behind the building. So, you are basically using the bank's money to bet against future inflation. It is a great deal with almost no downside.

To add, with compounding interest any investments you make will explode and become more powerful the earlier you get it in.

It isn't totally irrational for him to pay off his mortgage. No one has asked (or maybe I missed this) is this floating rate debt? Because if it is, might not be a bad call to pay it all off in this environment.

The tax deduction benefit is overstated. 3.58 percent on 150K is 5 grand. If our hero is married, the standard deduction is like 12 grand. While he gets to deduct property taxes and state income taxes in addition to mortgage interest, unless he lives in a very high tax state, I'm guessing he's not much above the standard deduction-if at all. If he's not married-it's a little better-but not much.The mortgage tax deduction helps people who borrow a million-and pay many tens of thousands of dollars in interest-not people who borrow 150K and pay a few thousand dollars in interest.Even if the deduction did work, why give a banker a dollar so the government gives you a quarter? The liklihood of earning 8% in the stockmarket-a year after it returned 30% is low. Reversion to mean. 3.58 percent guaranteed ain't bad. OP could also split the difference-pay it down by 75K or 100K, and invest the remainder.

renewed marathoner wrote:

long term wealth you'll have mite money porting it in a very safe mutual fund (you can reasonably expect an average of 8%).

when you factor in the tax deduct ti get on the 3.58% it's really even lower than that. so, not much benefit to posting off early besides peace of mind

Bad advice. I would think Flagpole would understand.

This is good advice...see link!

'The list of positives to paying off your mortgage discussed earlier are easy for anyone to see, but the negatives require a fair degree of financial sophistication'

more at:

http://financialmentor.com/financial-advice/pay-off-mortgage-early-or-invest/7478#sthash.swyJ2OlE.dpuf

Paying off the mortgage early is the intuitively obvious solution but it isn't the smartest one.

11 reasons to carry a mortgage:

http://www.edelmanfinancial.com/education-center/articles/1/11-great-reasons-to-carry-a-big-long-mortgage

former Coach mid-major wrote:

Flagpole that is awful advice.

Debt at under 4% is not bad debt. You can make on average 8-9% in stocks, the last two years 20+%.

You lose money by paying too quick for a house or car at under 6% APR loan.

People who are paying cash for things right now... Bad call.

Well, you got some things wrong.

1) ALL debt is bad debt, even at ZERO percent interest. Debt takes away future earnings and it is money you OWE. Some debt is better than others, but it is ALL bad.

2) I'm all for the stock market, but it should only be a PART of your overall financial picture, and while 8-9% over time is a pretty good guess on how the market will do, that's not a guarantee, ESPECIALLY over the short time frame of 6-8 years. If you end up in retirement with $3 million dollars in stocks but you have $3 million in debt, then that's not really good. Goal should be to have a lot of money AND no debt. If the guy pays off the house, not only does he eliminate that risk, but he now has $28,800 a year to do something else with that he didn't have before. He was going to pay off his house in 6-8 years anyway, so he was throwing money at the house (not investing any extra) and he had $200,000 sitting in cash. He should pay off that house and then start investing. He will have $28,800 a year extra now with which to do that.

3) THIS IS THE MOST IMPORTANT PART. He said he felt "pressure" having the mortgage. Sometimes people have irrational fears, but a mortgage is still a potentially bad thing, and if it is causing him grief, he should pay it off.