In an online financial forum, a user is worried that by paying off their mortgage early, they might have less available money for other things. They're concerned that putting so much money towards the mortgage might limit their ability to comfortably cover their other expenses, which is sometimes called “house poor.” They want to make sure that focusing on paying off the mortgage early won't negatively impact their overall financial situation. His concerns trigger several reactions from other users.
1. Managing Mortgage and Concerns
The person is currently making monthly payments of $2500 for their 30-year mortgage on a house that costs $600,000. Their mortgage interest rate is around 5%. On top of this, they're voluntarily paying an extra $1000 every month to pay off the mortgage faster. This additional payment reduces the total amount they owe on the house and decreases the interest they'll have to pay in the long run. However, the person is concerned that adding this extra $1000 to their mortgage payment might be spending too much of their income on the mortgage, leaving them with less money for other expenses.
2. Balancing Liquidity and Investment
Another user mentions that putting extra money into paying off the mortgage can reduce available cash, leading to a loss of liquidity. They argue that having readily accessible funds is important, especially during unexpected situations like job loss. Rather than having a fully paid-off house without immediate access to funds, they prefer to keep some money available for emergencies. This way, they can navigate uncertain times without financial strain.
3. Investment vs. Home Equity Debate
One individual states that stocks often outperform a 5% mortgage rate. They highlight how money invested in a home is tied up until sold or refinanced, potentially hindering quick access to funds. In contrast, stocks offer liquidity and can serve as an extra emergency fund. They critique what they see as a “poverty mindset” in favor of paying off mortgages. Instead, they advocate for smarter investing, particularly in stocks like VTI. They suggest that these investments can yield 10-20% returns on average, emphasizing that it's a suitable time to buy even in market downturns.
4. Rate of Return Comparison
For another person, while a 5% mortgage rate offers a guaranteed return, it's pretty modest compared to other possibilities. They contrast it with higher returns like 12-20%, which they consider good rates of return. They assert that a 5% return only slightly surpasses inflation, implying that it might not be as advantageous in the long run.
5. Defining “House Poor”
Another user disagrees with the idea of being “house poor.” They suggest that true house poverty would mean having no money left each month after paying the mortgage. According to this user, a 5% mortgage rate is acceptable. They stress that there's no need to consider “pretax” percentages; what's crucial is the portion of your take-home pay. With the user's well-managed financial accounts, they maintain that paying off the mortgage early is not the wrong decision. They believe the situation might be different if the mortgage rate were 3% or lower.
6. Considering Risk Tolerance
Someone asks about risk tolerance, emphasizing that the decision revolves around whether to stick with the 5% risk-free rate by paying off the mortgage or invest in the market, which yields higher returns on average. At age 33, they say, “My choice is to participate in the market returns because I have a long road to retirement. However, if I were age 53 and 5 years from retirement, I would take the 5% risk-free return rate, and aggressively pay off home loans.”
7. Cost Analysis Over 30 Years
Another user provides a cost breakdown. They state that with a 5% interest rate over 30 years, the original poster will have paid approximately $1.2 million for their house. This calculation focuses solely on principal and interest, disregarding property taxes and maintenance expenses. They contend that if he invested the difference in stocks, he would have an asset that he could utilize to purchase a house.
8. Debt Erasure and Safety Debate
Erasing debt is not safer, according to one commenter. They explain that there is a significant amount of time between when you pay down your mortgage and when you have greater equity in your home. However, home equity can be tough to access during economic downturns due to tightened lending standards and falling home prices. They note that taking out a home equity loan or failing to pay property taxes could lead to losing the house. Instead, they propose that the extra savings from not paying off the mortgage could be a substantial emergency fund. This fund could cover mortgage payments and other expenses for an extended period, providing financial security.
9. Considering Risk-Adjusted Returns and Diversification
One user advises considering factors beyond “total return” and emphasizes risk-adjusted returns, opportunity costs, and when money will be needed. They highlight that despite a “guaranteed risk-free 5% return,” selling property involves exposure to real estate market shifts. They discuss weighing the real estate portion of their net worth due to possible housing price declines from interest rate increases. They mention equity advantages like liquidity, control over after-tax investments in selling scenarios, and tax benefits such as loss harvesting, all contributing to a comprehensive investment approach.
10. Liquid Form of Investment
This commenter sees paying off a mortgage as a form of investment, albeit one with low liquidity. They explain that the returns on this investment aren't realized until the house is sold or the mortgage is fully paid off. In other words, the financial benefits are tied up in the property and aren't immediately accessible like more liquid investments.
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Source: Reddit.
