Steve A. • November 26, 2018 • Newsletter, Real Estate
Last modified: May 4, 2019
You missed one very important part of paying off your first mortgage early you saved roughly $140,000 in interest. That would have been had you kept the house. You decided to sell 2 years later. Instead of paying $18,000 dollars to the bank as interest on the loan, you had that in equity and got that money back upon selling. Were your personal investments doing that well to have earned not only the $18k but enough to pay the potential capital gains taxes.
By paying cash for the second house, you have avoided about $310k in interest along with random fees for closing on a loan.
Could you earn that or more by investing that lump sum today? Maybe. But that is the game you play with investing. You have a known amount you just made/did not pay, today!
Your net worth has not decreased by paying cash. Your property has value. Could that value decrease? Yes. But the bank will not reduce your payment, interest, or overall debt if it does. You would still owe them the money no matter what.
Does this house cost you more? Sure. But are you happier here than where you were before? If so, than be happy. If not, than start planning for a change. But know you will not have to bring money to the table if you sell.
Thanks for your comment. The point about reducing net worth is in comparison to what our net worth would be if we had invested that money instead. If 4 years ago we had invested that money instead of paying off the mortgage, our net worth would be higher today than it is.
Sure, but that is only in hindsight. Had you paid your mortgage off in 2007, ahead of the last major recession, you’d sing a different tune.
We paid our house off in 2012, and moved up. We paid that house off in 2016.
I too said, well the market did very well AFTER we decided to pay off the house. In this case, our net worth would be higher too, but it can EASILY go the other way when markets go down. The peace of mind is worth it…and I don’t regret paying my house off one bit.
I have regular conversations with people who have the capacity to pay off their mortgages, but they’re not sure if they should. The best answer is usually found by applying simple math (can this money be put to use somewhere else that would yield a higher return?), but there’s an emotional component like you mentioned. The peace of mind is a big deal for many and an achievement of sorts.
You could have continued to pay the mortgage payment – to yourself! Then, you would have funds for investment.
I be curious to see the analysis. I think the numbers are very close: pay a $200 K mortgage at 4% fixed over remaining 25 years or pay off same mortgage in Year 5 of 30. One the one hand, you zero out the debt and save on the interest payments. On the other hand, you free up the monthly mortgage expense which you can invest. With interest rates around 4%, it is close. As interest rates go up, I would wager it is better to pay off the mortgage. Especially with the Trump Tax Plan.
You unknowingly benefited because the Trump Tax Plan created a standard deduction so high that most people won’t be able to donate their mortgage interest. I doubt most people recognize their mortgages no longer result in tax savings anymore. Many of them will learn when they file their income taxes next year.
Money to invest a specially in stocks should be a money that you can afford to lose. Paying your mortgage was right decision. Now do whot ever you want with whot ever you have.
You don’t say where you live, but we just bought solar panels for our home to reduce our electric bill…and it does the job. Costco also has a program where you purchase your electricity from a company that places their solar panels on your roof; no money up front.
I live in Pennsylvania. I’m not sure how well solar panels would work at our house because there is a lot of tree cover and shade.
Great article! I’m glad your blogs are doing well. Have a great holiday season!
Wow. Still trying to pay off my 100,000, 800 square footer, almost there!! Guess a 30 years of public service was a dumb idea. Just read an article about teachers in Oakland teachers making 46,000 a year. Bet they dont have to make that decision either.
I should have done something like start a blog.
You must feel fortunate to have the opportunity to make such a decision. Well played sir!
Good overall discussion. I had a few questions with your article, as I appreciate you detailing both sides. So many times there are arguments on both sides and it’s not specific to each situation. I think it’s important that an overall approach and strategy be used and not just a tunnel vision approach.
1. Do you think the bank can take better care of your money than you? 2. Is there anywhere else in your financial life where you would want money growing close to 0%? 3. Did losing control over your money and the opportunity to grow it bother you after you sold the first house, or not until you bought the second home? 4. What tools or resources do you have that could help you determine what’s best for you and your family in the future, instead of looking back at decisions and thinking there could have been a better choice?
If they weren’t following Dave Ramsey’s advice they would be millionaires many times over. Now they are debt free with zero income producing assets and then they go right into another mortgage. If they had used the money to buy investment properties instead, they would have cash flowing assets to offset the risk of him losing his variable income.
I too paid off my mortgage (30 yr mortgaged ended up paying in 9) and if I had used the extra money instead for investing I would have definitely come out financially ahead but that is only using the retroscope which always has 20/20 hindsight. Although odds are in favor of investing having more gains there was still a possibility you could have lost a lot more.
I am pretty conservative and would take the guaranteed return of my interest rate (it was high when I financed at 5.625%).
The freedom when you own every blade of Grass on your property gives me more non monetary reward than any market return could. Now I have more capital to invest as money coming into my house does not have a lenders name attached to it.
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