<p>We are downsizing and selling our current house (25 years old) to move onto something smaller and brand new. We’ve had no mortgage on our current house for about 10 years now.</p>
<p>After selling our current house, we can almost completely pay off the new house. However, I’m wondering if that’s the right thing to do, since interest rates are so reasonable right now.Would it make more sense financially to pay off only a portion of it and invest the rest. I see the benefits to both of these scenarios.</p>
<p>We have about 10 years to work, all college expenses have been take care of, have a good amount in our retirement accounts and also have a substantial amount of cash in case of an emergency.</p>
<p>My inclination is to pay it off–since we’ve been mortgage-free to so long and we’ve become used to not having one.</p>
<p>Hi kef318,
When you say “After selling our current house, we can almost completely pay off the new house” does that mean you are about to close on the sale of your current home and you’re thinking of then taking the proceeds and paying cash for the new house? </p>
<p>If so, I would look at what you could earn on the proceeds if you invested it. You want to compare the interest you would gain on money (net of taxes you would pay on that interest) vs. the interest cost of paying for a mortgage (plus closing costs). Of course, the mortgage has the benefit of the tax deduction on the interest, but since rates are so low, the deduction is not a huge amount. So if you’re able to invest the proceeds and get a rate of return that is better than the debt service on the mortgage (net of tax benefit), then go ahead and take a mortgage. </p>
<p>Another option if you want to have access to the equity in your house but have no immediate need for the funds is to get an equity line of credit on the new house after you close. Many HELOCs are offered at or below Prime (which is at 3.25% right now). You only pay interest if you use the money. Yes, there are downsides to a HELOC (the interest rate is not fixed; Prime can change with market rates) but if you have no immediate need to have a mortgage, it’s better than paying principal and interest every month on money you don’t need.</p>
<p>Personally, I am inclined to pay it off, investments can go up & down, rates of return fluctuate, sometimes you even lose a lot (2008, 2001/2), if your house is paid off, you can’t lose that, barring natural disaster.</p>
<p>I recall the big talk in SoCal in the late 70s & early 80s, when home values skyrocketed. Everyone was saying to refinance, leverage & invest…yadayada. But there is something to be said for playing it safe, too.</p>
<p>Can you make a better guaranteed return on your cash over mortgage rates right now? Yes, the S&P 500 is up 18% this year but returns over the last 13 years are 13% (for all 13 years, not each year).</p>
<p>We paid our mortgage off around 1999 or 2000. It’s provided some nice peace of mind and it’s a bill that we didn’t have to pay every month and we didn’t have to deal with a mortgage service company that might have been a pain to work with.</p>
<p>We got caught in the CA slump- a month after purchasing a condo. (Taught us a lot.) I’m about to pay off the mortgage in the current home, which does represent a good tax deduction. Other reasons make it make sense.</p>
<p>Here’s the thing- our investments had the advantage of the bubble, first quarter, much less so, second. No one knows what’s coming in 4th quarter, after the new healthcare policies roll out. Whatcha think, BC?</p>
<p>Oh, gosh, for the sake of your children, pay cash for it. God forbid something happen to you, but if it does, it will make things so much easier on your kids.</p>
<p>The main healthcare piece affecting businesses has been delayed for a year.</p>
<p>I have a lot of thoughts about the economy and the stock market going forward but there are so many uncertainties that one can only analyze in major ideas - not certainties. In that kind of environment, I like to use a variety of approaches - depending on the amount of time I have to actively manage at the time. I’d love to have a set-it-and-forget-it portfolio but I don’t believe in those. Everything is a trade eventually.</p>
<p>If you take out a mortgage, the first years will be all interest. So unless home values appreciate, you won’t see any appreciation.</p>
<p>We once discussed this point with an investment advisor. It was back when interest rates were higher, but I think the principal is still the same. He said you can make an argument for carrying a mortgage and investing your extra money. Nonethess all of his top income clients had opted to pay off their mortgage.</p>
<p>Our scenario is that we are at the tail end of our 5% mortgage, mostly paying principal. We have decided to just stay the course… not refinance or pay it off.</p>
<p>We’ve paid off our mortgage early twice (2 different homes) and neither time did we ever regret it. I’m in the Pay It Off camp.
Good luck in your new home!</p>
<p>We were happy to have our mortgage paid in full before H retired. It’s very freeing and we highly recommend it. Our interest rate was 5%, and we often weren’t getting even that return on investments. We prepaid a bit each month, so paid our 15 year mortgage in 10 years. GREAT feeling!</p>
<p>I listen to a financial guy who always says “You can build a case against paying off a mortgage, but I’ve never met ANYONE who was sorry they did it!”.</p>
<p>I have a related question and I don’t mean to hijack so I’ll make it quick. My D is out of college two years and has saved almost enough money to pay off her student loan. Should she or is it better to keep that in the bank and pay it off slowly?</p>
<p>Isn’t the original question phrased incorrectly? You do not currently have a mortgage so there is nothing to pay off. You are wondering whether to purchase your next home with the cash proceeds of your sale or to take out a new mortgage. </p>
<p>We sold our home 5 years ago and used the proceeds to pay off our small mortgage and buy our current home without a mortgage. I really like not having a mortgage, and recommend it highly to anyone who can afford it.</p>
<p>It feels great to not hsve to make that monthly payment, especially as you head toward retirement and can funnel funds there instead. ;). Travel is another great way to spend money and create great memories. :)</p>
<p>Current mortgage rate(s) is 3.5-4.5%. If you don’t buy your house with cash, what could you earn if you were to invest extra cash in S&P 500? I bet you it is more than 5% over 5-10 years. We are in the process of buying another place. I want to put down as less as I possibly can in order to take advantage of low mortgage rate.</p>
<p>Example:
If you buy a house for 100k, put down 20K, you could invest 80K on something else which could possibly earn more than 5%. Ten years later, the house is worth 150K, if you were to sell it, you would get 70K back. You would have a scenario of investing 20K and get 70K gain (plus interest or ROI on the 80K), or you could invest 100K(buy the house with cash) and get 70K gain. I don’t think you need to be a genius to figure out which is a better scenario. Money (mortgage) is so cheap now, I don’t know why you wouldn’t want to take advantage of it.</p>