Deciding to pay off house with retirement savings...

[2rocky]

Could you refinance for a 15 yr term and get an even lower APR?

Paying more than your minimum payment each month will reduce Principal faster as well.

I'm guessing your index fund is making you 7-10% per year? so you are giving up 2,5% to 6.5% each year if you pulled the money out of the market for that payment. If you anticipate a drop in stock values then diversify your savings with stocks, bonds and principal guaranteed savings.

 

[roadrunner]

I paid my mortgage off almost 5 years ago after doing a refi a year prior with a substantial contribution from my own savings. I am not 30, but far from retirement age by conventional wisdom.

Here are a few things to consider:

Are you wanting to stay in the area? If so, it could be a good plan. If not, the cash on hand can help you move and buy another home elsewhere until you peddle off the home you're currently in.

Property taxes, if you have them. Won't be wrapped up in escrow anymore and you will be responsible to pay a lump sum.

Homeowners insurance policy. Same as property taxes and escrow.

Your credit rating will take a hit.

The "peace of mind" was nice for a while, however, the substantial amount of cash could easily help us relocate from an area that is dying rapidly for good paying jobs. In the event of a financial setback such as unemployment, it would be easy to make a mortgage payment for a handful of months until you found something else.

I would refi at a much lower rate and add to your new lower monthly payment with extra funds to principle only to match your old payment and then test the waters again later. If I could do it all over again, I would not have paid mine off as quickly...

 

[Michael54]

The one peace of mind i have during this time is that I own my house free and clear and do not have a car payment. With that being said I'm definitely not a money expert by any means and my investments only involve my 401k at work.

 

[Hoot]

Pretty much everyone but Dave Ramsey would advise against it, but there are certainly pros and cons to using that money to pay off your mortgage. No matter what you decide, you are going to win!

You should be able to get a refi in the mid 2's right now, with inflation and tax write-offs, thats essentially a 0% interest loan over time. Have you thought about a 15 year fixed and pay a huge chunk of principal to make your payments at or less than they are now? Then you wont feel like you are throwing away 9k every year? (You're definitely gaining more than 9k/year on your 260k invested, so it's still net gain)

If you do pay off your mortgage and start over (assuming you maintain the same or increased savings rate), you'll be able to get back to where you are now by the time you are 33-34 I'd wager, so you're not going to miss out on much...

What ever you decide to do, I'd wager that if you keep at it, you'll still retire early and probably wont much notice a difference either way at age 45 say....

 

[bozeman]

Pay off the mortgage......no price tag on peace of mind......best of luck!

 

[wildcat33]

I was gonna say refi for 15yr at <2% but you got 260 liquid cash and 365 in your 401, it would be easy call to pay off the house and be done with it. Or save some of the cash and invest in something else, another property or whatever. Great position to be in either way.

But seriously, get a reco for a financial advisor and let them help you.....

 

[ben h]

I paid my house off instead of refi to get a better rate (and pay a bunch of costs/fees) and then got a Home Equity Line of Credit (HELOC) on 70% of the home's value in case I need the cash for something. My bank does these HELOC loans for $0 in closing costs; they are about 1% over prime, but I don't use it very much, so I pay about $2k, year in interest (and get paid significantly more than I pay). I've used some of the loan for investment purposes and I could just pay it off anyway, should the rate go up more than I'm comfortable with.

Some years back my banker told me "loans are easy to get when you don't need them". Get your loans in place before changes in career, some of which may be out of your control.

 

[huntnful]

Well, I called my loan company. My credit score would put me at 2.5% APR. That's unreal.

Here's the numbers.

Current Loan.
4.5% APR
23 years 6 months remaining
$261K Loan amount
$990 interest $590 Principle currently on payment. $1580 total.

Refi.
2.5% APR
23 years 6 months on new loan
$270K Loan amount. (3% worst case refi fees. Told them I will not refi at 3% and to give me the best rate possible for my area. Period.)
$540 interest $740 Principle starting on the first payment. $1280 Total.




This is honestly just too blatant of a great scenario to ignore. I come $0 out of pocket and immediately lower my payment and start crushing more money towards my principle and FAR less towards interest. I told them to proceed as long as they can get the refi down near 2% or lower. I'm a little upset about my decision to pull from the stock market, as I'd have mad another $30k just this month... but you live and learn. No point in dwelling on it!

 

[wildwilderness]

The other Major factor is you are only 30?!!

Time value of money invested- you can't get back years! You have time to weather any storm in the stock market! no need to go ultra conservative so young. Now if you were 65 and retiring that would be a different story.

Also as mentioned your house is not guaranteed investment either. Being so young I am sure you will move a few more times in your life! Real estate is not a liquid investment.

Remember CASH is KING!

 

[The Ri Guy]

This is honestly just too blatant of a great scenario to ignore. I come $0 out of pocket and immediately lower my payment and start crushing more money towards my principle and FAR less towards interest.

This is what I decided to do a couple weeks ago. Sold my house in Seattle for a stupid profit, bought a smaller house and farmland out in the country. Put most of the profits down up front and decreased my mortgage interest from 3.8% to 2.5%, combined that cut my monthly payment in half. Didn't have to touch either retirement account and came out with an extra $100k cash in hand to boot.

I feel for our generation, but man as a financially smart 28 year old...what a time to be making moves. The amount I'm pocketing every month from that simple shuffle is absolutely insane, hoping to retire by 40 if I'm lucky enough.

 

[huntnful]

This is what I decided to do a couple weeks ago. Sold my house in Seattle for a stupid profit, bought a smaller house and farmland out in the country. Put the profits down up front and decreased my mortgage interest from 3.8% to 2.5%, combined that cut my monthly payment in half. Didn't have to touch either retirement account and came out with an extra $100k cash in hand to boot.

I feel for our generation, but man as a financially smart 28 year old...what a time to be making moves. The amount I'm pocketing every month from that simple shuffle is absolutely insane, hoping to retire by 40 if I'm lucky enough.

Good on you dude!!! Yeah my house is worth $300k more than when I bought it. But I’m already in the country so my only next move would be to build a home exactly how I want it and I’m just not ready to do that. So while I could make a huge profit, it just wouldn’t suit my current situation like it did for you! That’s awesome!

 

[Roosterstraw]

Pay it off. I will be doing the same at the beginning of the year however I will be using the money in my savings account. Don’t be concerned about the housing market, if it drops (which is hasnt) it will come back. It always comes back. I will be saving around 30-40k in interest if i pay it off now. Not having a mortgage payment or auto payment allows you to save some serious money. You could even take your mortgage payment you’re making now and pay back into your retirement account.

 

[GunsAreFun]

I honestly don’t think it is the wisest financial decision just based on the info you’ve given and current interest rates. There is such a thing as good debt

My advice would be to hire a financial advisor. You’re making a HUGE move here that can literally cost you hundreds of thousands...if not more...in the next 30 years. It would be worth spending a relatively small portion and get professional advice tailored to your situation.

My other piece of advice would be to consider a cheaper house. I am a similar age and have a similar goal to retire earlier than most (55). I bought our current house when our income was 40% less than what it is now. Sure, we could afford something bigger, and that would be nice. But I have a $750 mortgage and will be paid off in 12 years (just refinanced). The interest rate is 2.4%. I could write a check today to pay it off, but instead I’m going to invest that money. I’m very confident I will return way more than 2.4%.

 

[wind gypsy]

I'm sure there's peace of mind involved with owning a house but there's peace of mind having a bunch of liquid $$ available should opportunities arise or should you want to tell your boss to get bent. That's beyond the point that it is likely you'll earn more in the long term than you'll save in interest.

If rates are still anything like they were this summer there is no reason you should still have an interest rate above 3%. My wife re-financed her condo (typically have worse rates than a house) for 2.75% on a 20 year. I had a friend just get 2.5% on a house without having that great of credit.

 

[WhatToHunt]

Agreed on the index fund investing! But paying off the house by selling investments is a little odd. The market returns 7-10 percent depending on the number you use as average. More profitable investing in that than paying off a lower interest mortgage.
And whatever you do, I would strongly recommend against using a financial advisor. Even the best advisor will not help you outperform an index fund. Not only can they not predict the best funds, but their expenses on top of their suggested funds likely higher expense ratios will magnify the negative opportunity cost. A financial advisor has its time and place, but not for a 30ish year old who can stuff money in an index fund and build up retirement dough without any assistance.

 

[fwafwow]

Mmmm. Sounds like you are a good saver which is good. Talk to a financial advisor before you make that move.

IMHO this is the best advice on here. You may know someone who can give you free advice, or you could find someone and pay them for the advice. There is some good advice, and some debatable feedback in this thread, but everything depends on the totality of your situation.

Maybe it was an inadvertent choice of words, but there are no guaranteed investments - no matter how much you have to invest.

 

[elkyinzer]

Nails on a chalkboard, for the love of all that is holy! Do the math of your rate of return vs. interest. You would almost certainly be pissing money down the drain, and a shit ton of it. For what? To have the good feelz about no debt?

 

[huntnful]

Nails on a chalkboard, for the love of all that is holy! Do the math of your rate of return vs. interest. You would almost certainly be pissing money down the drain, and a shit ton of it. For what? To have the good feelz about no debt?

Hahaha I know, I know . It was in order to bring my monthly bills down to $1500. Knowing I could make that much money in any given circumstance. But I could also probably make $3500 in any given circumstances given my trade also lol

 

[Ranger619]

How much of the $50,000 will you have to pay in capital gains tax? I would imagine not all of the gain was made in 2020, but some was so there will be somewhat of a tax bill with cashing out the $260,000. Just something else to think of and confuse the situation.... We went through the same thing a few years ago, but the interest rates were higher at that time which made the decision to pay off easier. Good luck with the decision, it is a good problem to have.

 

[GunsAreFun]

Agreed on the index fund investing! But paying off the house by selling investments is a little odd. The market returns 7-10 percent depending on the number you use as average. More profitable investing in that than paying off a lower interest mortgage.
And whatever you do, I would strongly recommend against using a financial advisor. Even the best advisor will not help you outperform an index fund. Not only can they not predict the best funds, but their expenses on top of their suggested funds likely higher expense ratios will magnify the negative opportunity cost. A financial advisor has its time and place, but not for a 30ish year old who can stuff money in an index fund and build up retirement dough without any assistance.

The financial advisor is not to select funds. It’s to make sure he understands the returns and tax consequences of each decision (because they are enormous).