Not looking for the Dave Ramsey school of thought... I don't have spending or debt problems, I'm just looking to maximize my long-term potential regarding interest and taxes.

My financial background... no "extra" debt. I have my house payment and a very low interest loan for my truck (I chose to take the loan for my truck because I can do better in the market than the percentage rate of the loan). I basically have a $950/mo payment for my truck for 2 years because the interest was so low (1.49%) and to maintain my credit since I pay off my credit card bills every year. I'm 45 years old.

I max out my 401k at $18.5k every year plus I max out a Roth IRA. I have a bunch of my post-tax savings in the market in mutual funds and usually buy in more with surplus income every few months, so I'm balls-to-the-walls in investing.

I bought my house in 2000 for $115k with a 30 year mortgage at 5.65%. Yeah, I know that's kind of high but that's what the rates were back then. And I looked at refinancing, but the closing costs and fees would wash out any benefit for getting a lower rate. My payment is $750 a month. The current payoff amount is $74k.

I really don't want to stay here for life but I'll very likely be in this home for the next six years until my son graduates.

I'm looking at the amortization schedule and if I don't make additional payments, it'll cost me about $40k and I'll pay it off in 2033. If I put down about half ($37.5k), which I could do now without taking money out of my investments, that drops down to $7k.

I'm thinking that maybe I should just consider paying off the house for a $40k return over the next 16 years, but I don't want to miss out on a greater earning potential by spending that money now since I know that invested money + time =  retirement. However, if I pay off the house and the truck that's an additional $1700 per month I can invest. But how big are the tax implications for this if I don't have a mortgage deduction anymore? I WILL have to pay property taxes, for example, because as of right now they are rolled into my mortgage payment. My P/I portion is $569/mo out of the $750.

Just hoping to get some arguments on either side of the fence so I can sort this all out in my head...

You're looking at a guaranteed ROI of 5.65, or a possible 6+%. Personally I would pay off the house. With the markets current all time highs, and current climate (election year), now is not the time to be stuffing extra money into the market. I would continue to max your IRA and 401K, anything above that goes towards the house. Just my .02. But then again I'm only 22, and having my house paid off by 32 is my goal.


Then again, if you can refinance down to 2.5% or less with a 10 -15 year term this would be a different beast all together.

Thanks... I don't know if I can find a mortgage that low, and how much would I gain from doing that versus paying it off altogether?

It's just reassuring to have plenty of liquid assets in the bank.

Personally I would pay off as much as possible while still keeping 6 months of your average living amount in a liquid emergency fund (I only say this because you are currently maxing your roth space). If you want to see how much you would gain just ran a modified amortization schedule.

I looked further into it last night.

I file as head of household... a $12250 standard deduction.

My itemized deductions last year were only $350 more than the standard deduction. And, as the life of the mortgage goes on, that difference will shrink every year.

Rough, back of envelope calculations... 25% of the $350 difference is something like $87. So... apparently I'm paying $4500 a year in mortgage interest just to get an $87 tax break?? Is that right??

From a quick double check of your math, yes. The argument for keeping the mortgage of claiming on your taxes isn't very intelligent.

That is 100% correct.  Many people claim "but what about my tax break on the mortgage interest".... never accounting that you only get a deduction on the amount OVER the standard deduction.


Bottom line - it comes down to your appetite for risk, and if you might need the money.  If a guaranteed 5.x% interest over the life of the loan sounds good to you, do it.  If you think you can earn more than that in the market over the exact same period, do it.

How much risk are you willing to swallow?

I know what I would do in your shoes.... but you have to decide.


Here is a tip - once you pay off the house - you pay your own property taxes.  Depending on when they are due - you can pay them every other year.  For instance - I pay 2016 taxes in Jan 2017, then pay 2017 taxes in Dec 2017.  This allows me to double up in that tax year, and this puts me over the standard deduction, so I get a break on the property taxes every other year.

Personally, I'm OK with risk, but I haven't been performing gangbusters in the market. A 5+% mutual fund would be a keeper for me at this point.

I have a business that I'm in the process of closing down. I have a sale pending on a liquor license (about $40k), and a bunch of assets to sell off. If I wasn't able to find a buyer, I'd soon have to forfeit the license to the state, so I had kind of written off that money in my mind just to prepare myself if that day came.

I have been letting money sit around not doing much, but I'm going to more aggressively sock it away... checking electric providers every three months, stuff like that (they like to give you a great intro rate, then it climbs up slowly until you're paying double what you used to).

I would have been sitting pretty if it weren't for that business... it makes me sick to think about it. All I can do is to do the best I can moving forward...

I would pay every penny I could to the mortgage. A guaranteed 5.65 % return on your money beats rolling the dice on investments which may or may not beat that. Historically they beat it over the long haul but why plow so much into investments that may or may not do good when you have a guaranteed 5.65% at your fingertips? It would sure suck to invest that 18.5k and lose 10% on a down year in the market and pay 5.65% interest on that 18.5k on your mortgage that you could have paid off.

Just to clarify, I would still be maxing out my 401k and Roth IRA each year, even if I pay off my house. I'll be using cash sitting in a money market account.

Then it really is a no brainer. What is your money market earning 1%? You are paying 5.65% on your debt so you can have your cash earning 1%? What sense does that make?

I would not stop a 401k with a match  but if in your shoes I would seriously shift my efforts to the mortgage. With that high of a rate your odds of outpacing it with investments isn't that great or significant. This isn't Dave Ramsey theory talking I am just looking at the numbers. You said it yourself you are not doing better that in the market. Why not do the guaranteed return and pay that sucker off and then you can divert a lot more to retirement in the future when you have no debt obligations? With the amounts you are putting into retirement I bet you could pay it off in three years if you diverted funds.

Yeah I'm about sure I'm going to do it once my business liquidates in the next couple months and I get the spare cash to do it with no problem.

My trouble is that I do stuff like saying, "Well, I can beat that in the market," then I have all that money sitting on the sidelines and I try to trickle it in over a long period of time to dollar cost average. Meanwhile I could have paid off stuff like this, and made the "sideline" money back with increased residual money because of the decreased expenses every month...

Great job on the math here guys! So many people think they are "saving on taxes" by paying interest on a home.

Dude. I would take things in a different direction...

Do a cash out refi on that bad boy and lever up with a 30 yr fixed mortgage for somewhere ~3%... Your interest is tax deductible, lowering the effective rate that you'll actually pay, and now you have a pile of cash you can do whatever you want to with to earn more than 3% on (do something smart of course). This is called positive carry...

Why would you want to put all of your financial eggs in one asset? You said your current rate is 5.65%, if you pay it off you're getting an effective return of less than that after the tax deduction, but it's still a decent return - that perspective should change when the number is more like 3%.

Paying off a house when you can borrow against it at historically low rates for 30 years is not the right play. At the end of day paying off your house is fully investing in it, what return are you getting for that investment? Today, that return would be 3% * (1 - your effective tax rate). That's a shit return dude. Nothing will change that fact...

Of course there is risk in levering up via a cash out refi, but if you don't do stupid shit with a portion cash you got from it. i.e. Keep 20% LTV equity in the house after the refi, and hang on to an additional 10% of the total value on hand from the cash out proceeds to cover if you need to move and housing prices drop

Borrowing money to invest is never a good idea.  

Great advice so far.



Also factor in opportunity costs.



Aside from standard investing potential, that liquidity creates/allows for other opportunities (pay down unexpected bills, mitigate loss of a job, etc).



Regardless of what you decide, congratulations for being in a position to consider the options!

um.. that's the strategy of every company... ever. If you want to grow you utilize leverage.

How I would run a company is vastly different than I run my personal life and assets.

A figure that cannot be valued is the peace of mind knowing that the house is paid for.  When my father was laid off, my parents were OK because the house was paid off and it allowed him time to figure out what he was going to do.  You have a great return of 5% by not having to pay interest.  In a few years when you want to sell and move on it will be paid for and from experience it is easier when moving if the house if paid for versus trying to pay one off and starting a new mortgage on the next.

the whole warm and fuzzy feeling from paying off your house because you get laid off doesn't always make sense, since you shouldn't be considering that unless you have 6-12 months of living costs socked away. Couple that with your unemployment benefits YOU pay for and would collect if laid off and unless you are horrible at budgeting, you shouldn't lose your home.

compound interest is a much stronger force than simple interest, and that's what people lose sight of.

It's also not a direct comparison to compare fixed rate debt to variable rate/return investment.

My eggs aren't all in one basket. Between my tax-advantaged accounts and a taxable investment portfolio, I have a few hundred K saved up.

I'm just trying to do what makes more sense in the long run. Watch the pennies and the dollars take care of themselves, and all that...

I've been maxing out my 401K for years and paid off the house a year before my oldest child started college.
I really enjoy not having a mortgage payment to factor in my monthly budget.