<p>Sometimes peace of mind trumps financial calculations. I don’t think anyone ever lost sleep because they owned their home free and clear! Pay it off.</p>
<p>I wouldn’t pay off a loan with a low rate…I’ll keep taking the mortgage deduction and hopefully earn more than 4%</p>
<p>For us, peace of mind comes from maximizing our liquid assets and retirement funds. We don’t want to pay off our house, because if DH lost his job, we’d need the cash and there is no way we could get a home equity loan on my income alone. </p>
<p>A 15year mortgage right now is 2.875%, so in your situation, I’d probably put down 30% and mortgage the rest with the 15 year mortgage. With the mortgage interest deduction, the effective rate on that mortgage is likely around 1.75-2%. Knowing that, I’d feel MUCH more comfortable investing the cash, but I’d be careful to have a good chunk in a lower-risk vehicle of some sort. </p>
<p>Also, since I’m still in my 40s, we have time to weather fluctuations in the stock market When I’m in my late 50s, I get that I might have a completely different idea.</p>
<p>Every article I ever see in the media discusses “taking the mortgage deduction”. Depending on the price of housing where one lives, this deduction is often minimal or non-existent due to the increased standard deduction, low housing costs, and low interest rates.</p>
<p>We paid ours off. It wasn’t nearly as exciting as I thought it would be. However, it is very nice not to have the payment. I still have a land/farm payment though. I may be more excited when it is paid.</p>
<p>Historically indexes that contain a large portion of the market have averaged about 8.5% per year or 4.5% year after inflation. However, obviously there is a good deal of variance in this average. During the financial crisis a few years ago, the market lost more than half it’s value in less than 2 years and reached a 13 year low, then the market doubled it’s value returning to record highs over the next few years. If one invested a large sum at the wrong time, one might lose a tremendous portion of the value and not re-gain it for many years. Many withdrew their investments when the market was at it’s lowest, taking a tremendously long-term loss. Less risky investments have lower gains. Investments with negligible risk (money market, CD, …) have lower gains than your mortgage rate since the investor in your mortgage requires a higher rate to compensate for his risk. The best solution for the OP depends on his tolerance to this risk, which should vary with his financial situation, age, and personality among other things. The comparison should also include less direct influences from the mortgage, such as tax deductions from mortgage expenses and and whether there are mortgage expenses in proportion to the original mortgage amount instead of the fraction that has not been paid off, such as PMI insurance (in certain situations).</p>
<p>If it was me personally, I’d probably pay off the mortgage. I do not have a mortgage on my home and separately invest a flat amount per week to minimize exposure to market fluctuations over time.</p>
<p>NJRes – you and I seem to be the only ones who caught that murkiness in the original post. You can’t pay off a mortgage you don’t have. Everyone is responding “pay it off! pay it off!” but if I read the post correctly (still waiting for clarification from OP), there is nothing to pay off – he/she is contemplating whether or not to pay cash for the new house.</p>
<p>It’s not such a different situation, but paying off a loan early means losing an interest deduction (which may be small), but if the question is whether or not to pay cash, there’s another twist to this question which has substantial economic impact – in today’s tight lending environment, an all cash offer has a significant impact on negotiations. It’s unclear to me from the original post if the OP has entered into a contract to buy the new place. If not, being able to pay cash should enable the OP to get a better price.</p>
<p>If you take the $100K example, 20% down, $80K borrowed, 4%, $3,200 interest for the first year, $3,000 property taxes - you’re below the standard deduction amount. There is no mortgage interest deduction benefit here.</p>
<p>Any interest deduction that you could take if your loan amount is higher should be offset by the amount of the standard deduction less your other deductions. Those other deductions vary all over the place.</p>
<p>Tom is cool with a mortgage but he has state pensions to look forward too. So a little more market exposure might not be a bad thing. Those of use with lots of market exposure and that don’t have the benefit of a government guarantee via our 401Ks, probably already have lots of market exposure.</p>
<p>I was responding to the title of the thread “should we pay off our mortgage?” I’m sure I’m not the only one who is responding to THAT.</p>
<p>OP here:</p>
<p>I apologize for the lack of clarity. We have no mortgage on our current home and haven’t had one for at least 10 years now. We are building a new, smaller home. Initially, we will have a mortgage on the new home (minus the 20 percent we are using as a down payment), since we have not yet sold our current home. We have not even listed our current home, since we didn’t feel the need to hurry; we weren’t concerned about carrying two mortgages, since we do not have one on our current home.</p>
<p>Once we sell our current home, we will have enough cash to pay off the new mortgage in its entirety. The question is: should we? </p>
<p>The mortgage interest deduction really is not that significant, given that interest rates are so low. </p>
<p>As I read through these posts, I’m still a bit conflicted, but I’m leaning towards paying the whole thing. We haven’t had a mortgage payment in many years, and I’m not sure I really want one again.</p>
<p>In the event of an emergency, we still have substantial liquid assets, in addition to retirement savings.</p>
<p>Thanks everyone for your opinions. I thoroughly enjoy these types of discussions.</p>
<p>Pay it off. </p>
<p>I paid off the mortgage on my old home and used the proceeds to purchase a smaller home in a better community with retirement in mind. I invested the difference, and also invest and save funds that would have gone to mortgage payments on my previous home.</p>
<p>I enjoy worrying about a mortgage payment looming into my retirement years, and that I can put away almost all of my current income into investments and savings.</p>
<p>As I mentioned before, if you have significant equity (which you surely will if house is paid off) getting HELOC is pretty easy and straight forward. Many lenders write them at absolutely no charge or fee to borrower. Our local banks and Schwab are among those with NO charges or fees until you start borrowing (you can just have your HELOC for peace of mind).</p>
<p>Sounds like you have many good options available. Congrats on working towards your dreams and goals–seems like they’re getting closer and closer.</p>
<p>While I think that the answer is not clear and, as a number of other posters have noted, depends to a large extent on nonfinancial, psychic considerations, I believe that the best way to look at this question is to consider the house as part of your overall portfolio of investments. Paying off the house would place it in the “safe” portion–the equivalent of buying an illiquid asset that has a guaranteed return of about 3.5%.</p>
<p>That having been said, I don’t like the idea of considering the possibility of taking a HELOC later as an important part of the equation. Too much uncertainty about the future of interest rates. If you think that there is a substantial likelihood that you are going to need the money later, I believe that take advantage of the low interest rates today.</p>
<p>In your case I would pay it off. </p>
<p>BC you are correct about my situation. I have saved enough in a separate retirement account to pay the mortgage and other carrying costs of my home. I have to decide at retirement if I take monthly withdrawals to pay the mortgage or the entire cost mortgage plus taxes and insurance.</p>
<p>kef, We had a similar situation. We bought a building lot fourteen years ago for our future retirement home. The lot is not in the town where we currently live. Three years ago, we built the “retirement home” and have been using it for weekends/vacations.
We will move there fulltime when DH retires next year.
The mortgage on our original home was paid off. </p>
<p>We made payments on the new house for two years. It took us awhile to think through the options and get the house ready to sell.
We then sold the original (paid off) home and paid off the new retirement home with the proceeds. We are currently renting until DH retires next May. </p>
<p>We have no regrets about paying off the new home mortgage. We are still paying rent here til DH retires but were glad to get the sale of house #1 and it’s homeowners insurance/tax costs off our backs. Now when we are ready to move to house #2, all we have to do is pack our bags and make the move. All of the financial logistics are done.</p>
<p>Thanks for clarifying, kef318. It sounded like your purchase and sale were not overlapping – you’re closing on your purchase before you sell your current home. So right now, your plan is to close with a mortgage on the new place then pay it off when you sell your current home. </p>
<p>That all makes sense – just try and avoid any optional mortgage related closing costs (such as discount points to lower your interest rate) because if you’re planning on paying it off quickly, it doesn’t make sense to pay points. And make sure the new loan doesn’t have any prepayment penalty (it probably doesn’t, but double check just to make sure). </p>
<p>Enjoy your new home!</p>
<p>I’d pay it off and also set up a no fee home equity line that may never be used.</p>
<p>I like HImom’s idea of a no-fee HELOC on your current home to fund the new house purchase, which will then be paid off when you sell. Quick, cheap and easy.</p>
<p>^ Yes, if the OP hasn’t already yet taken out a construction loan on the new house, it would be cheaper to finance the construction with a LOC on the old house. Upfront costs on construction loans (appraisals, points, etc.) are more expensive than simple LOCs.</p>
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<p>Doesn’t sound like a HELOC is needed here.</p>
<p>It’s nice to read about people doing well financially, mortgage paid off or effectively paid off, liquid assets to take care of emergencies and well-funded retirement accounts. I know that there must be a lot of people out there like this but they’re usually not the people that you hear about in the news and media.</p>
<p>These folks are in our communities, tho they rarely get much or any press. Glad to read about folks who have a range of nice options available.</p>