low interest rates: Any reason to pay off home?

15 years ago

When entering this forum a few years ago, I asked a number of questions about whether I should pay off my home.

Well, I paid it off. Now it is sold and I'm buying another one.

Interest rates are more than two percentage points lower than what I had when I bought that first house. I was paying 6.75% then.... considered low... and my next mortgage is going to be 4.65% for 30 yrs.

In spite of my "debt free" philosophy, I'm not so sure I want to pay this one off at these rates. (also, I expect the inflation monster to show itself, too)

Sort by:Oldest

Comments (9)

weedyacres
15 years ago
Interest is still interest: money you pay someone else. Why do that, even if it's only 1%? And didn't you enjoy the security of knowing you owned your home free and clear with no payments? Why would you want to go back?
kangell_gw
15 years ago
A lot depends on your situation. If the interest is a write-off on your taxes then it equates to an even lower interest rate. And if you can borrow money at 4.65% and use the money to earn 6% then you're ahead even without the tax factor.

In my situation, I would take the mortgage. But there's something to be said for owning your home outright especially given our nation's shaky economic future. But then again 4.65% is ridiculously low especially if you can write if off your taxes.
Related Discussions
Pay down mortgage or pay off student loans--?
Q
Comments (10)
You can get either death or disability insurance on your mortgage, or both. There's about four times the possibility of disability for an extended period that there is of death ... and, while a funeral is expensive, dead people don't eat, but disabled people do ... and may need medical/rehabilitative costs, as well. Some prefer to buy a term policy for one or both, themselves, for if the bank sets it up, they are the payee, not the person(s) purchasing the home, whle if the homeowner purchases it, they are the payee and it will be their responsibility to pay the lender. Some prefer to have coverage at a specific level throughout, rather than the decreasing value as the principal gets paid off, as usually there is little difference in premium, and as the debt is reduced through regular payment down of principal, there is some extra available to support the family in a difficult time. When paying student loan, usually one knows what portion of the payent goes for interest and which goes to pay down principal owing. But the level of mortgage payment remains level throughout, which means that in the early days of the loan, when the balance owing is high, the amount that goes to interest each year must be high, meaning that little of each payment goes to pay off principal. Many people pay little attention to the amount of principal that is paid off annually through the first few years, though many of them received a schedule showing what the ratios were at the time of each payment, throughout. They are greatly surprised when they find out how little of the principal has actually been paid, at the end of each year. They are suprised to learn that, in those early years, if they made an additional payment of an amount equal to one of the month's payment, designating it as to reduce principal only, it would reduce the balance owing by a larger amount than did all of the other 12 monthly payments. With student loans, the amount allocated to principal and to interest is more easily identifiable, I think. Good wishes. ole joyful
...See More
ANOTHER reason not to pay off that mortgage
Q
Comments (19)
We paid the mortgage on our home several years ago. We've continued to save/invest the "mortgage payment" in all the years hence, and we've continued to save/invest in retirement vehicles and regular savings, as well. We live in an area that hasn't seen the wild fluctuations in real estate value that many other parts of the country have. I think paying off the mortgage was a good choice for us. We don't have "corpie jobs", military careers that would require us to pull up stakes and relocate at the drop of a hat. We are definitely firmly based in our community. With that in mind, when we decided to build a garage we put down some cash and we used the equity in our home to back the note. I don't see that "liquidity" is an issue for us, but maybe I'm missing/not understanding something really important. Again, this is just an example of how an "old-fashioned" approach to finances can work for you. It's called living below your means, day in and day out, and using your wits to minimize/meet your bills. Lower your daily/monthly expenses and BANK the money you don't have to spend. It ain't brain surgery, but it does require attention to details and strict adherence to the precepts. It's really pretty easy, actually. Do you "want" it or do you "need" it? Take care of needs first and foremost and set a priority list. "Want" is OK! as long as you take care of "need" first. Money is a wonderful slave, but a terrible master. (thanks for that quote, OJ).
...See More
What interest rate do you pay...............
Q
Comments (20)
Is she alert and astute regarding financial affairs, generally? Has she made some unwise use of her card ... or been conned by some shysters? Most regular credit cards have charged 15 - 19% in earlier times. Store-issued cards regularly have charged 25 - 29% up till recent times. Which is a business deal - no one twists anyone's arm to force them to participate. Many people pay the balance owing in full every month prior to the due date, then they pay 0%. Does she? Does she have a substantial balance owing, that she doesn't pay in full every month? That's when those interest rates apply. Maybe she can find a card offer that charges 0% ... or up to 3% or so, on debt that's transferred in ... for usually 6 - 9 months, then rising to the regular rate. But if she were to sign up for one and transfer ... don't buy anything using that card, for usually no payment will be credited to that new debt until the total amount of the amount transferred is paid off ... but it will have been accruing interest throughout that period, at the usual rate which that card charges. Often a card issued by a credit union charges a lower rate. Would her financial institution make her a loan, to pay off the balance owed on the card? Usually their interest rate would be a lot lower, even on an unsecured loan. If she were to give some stock or mutual fund certificates to the bank as collateral, the interest rate would be lower ... and it would likely be lower if she were to use her home as security ... but there might be costs associated with searching the title, having the property appraised, etc. How about you lending her the money ... if at 8%, that's less than half of her current rate, but triple what your money earns in the bank ... if at 6%, double what you earn now, and a third what she's paying. Thanks for helping her cope with this issue. ole joyful P.S. I'm somewhat frustrated ... I thought that I'd sent this post several hours ago ... but can't find it here. o j
...See More
Does it make sense to pay off the house?
Q
Comments (10)
One comparison you can make to help you decide whether it is worth paying off your mortgage is this: How much interest are you paying the bank for your mortgage versus how much can you earn in some investment? Over the long term (10-20 years) a portfolio invested 50% in stocks & 50% in bonds should produce a gain of about 7-8% a year. But of course you have to put up with the worry of market fluctuations, and the long-term averages differ from what you experience in the near term. So, if your mortgage interest rate is 6-7%, paying it off makes sense because you are giving yourself that 6-7% every time you prepay principle, which you can do a little at a time by just writing a separate check and telling the bank to apply it to unpaid principle. This assumes that your house value is stable and not adversely affected by the subprime mess, except indirectly as all real estate values have declined in the past year or two. I hope this prespective is helpful to you. It's the one I used to justify prepaying our mortgage a few years ago, & I've never regretted it.
...See More
weedyacres
15 years ago
Re the tax write-off: you have to spend $4 in interest to save $1 in taxes. Not a great business case.

And the 6% you earn gets reduced by taxes just as the 4.65% you pay does. So the difference is diminished. And the 6% is not guaranteed, so you could lose in the transaction.
sherwoodva
15 years ago
It is a very personal choice, but for us, having full control over our finances (no mortgage or other debt) is incredibly freeing. Although I love my job, it is nice to know that I could absorb a cut in pay/different job/retire without a problem. Remember what Ole Joyful always says about handcuffs.
Happyladi
15 years ago
If you can comfortably afford to not have a mortgage I see it as a positive to pay it off. This is assuming that you have plenty of other money, I would say at least a years worth of living expenses in non retirement accounts.

Honestly, there is no place you can safely get 4.65% interest anymore.
caavonldy
15 years ago
We paid off all our debts years ago. It is such a comfort to know that we will never lose our home no matter what happens in the future. Are you guaranteed a job forever? Can you afford to make mortgage payments if you lose your job or become disabled? My husband and I are retired. All we have to pay is the taxes, insurance, utilities and the maintenance.

With the economy the way it is, I just wouldn't take a chance with something as important at my home.
kymike
15 years ago
I am nearing retirement age. I could pay cash for the house that we are building, but it makes sense to me to retain as much flexibility as possible. A 30 year, low interest mortgage right now seems to make sense for me. I know that the interest rate on the loan is never going to go up. I also know that if investment returns remain low, or if the mortgage interest deduction goes away, I can pay off the mortgage early if I want to (the flexibility part of this) or if rates rise, I can invest and make more on my cash than I am paying on my mortgage.

There no guarantees on future rates or returns. But, I do have a guaranteed interest rate that is locked in on the mortgage.

If you pay cash for your house, then as long as you remain working, you will need to have the discipline to invest the portion of your paycheck that would have gone to pay your mortgage in order to continue to save for retirement.
Billl
15 years ago
"If you pay cash for your house, then as long as you remain working, you will need to have the discipline to invest the portion of your paycheck that would have gone to pay your mortgage in order to continue to save for retirement."

That is true the other way around too. It isn't like having a mortgage is a savings vehicle. If you have a big pile of cash, you have to be disciplined enough to not spend it and keep adding to it. Anyone who wants to gain wealth is going to have to be disciplined enough to stick with the plan in one form or another.
mojomom
15 years ago
Just a heads up (with no political comment intended and please no political comments in response). One of the things proposed in the debt ceiling negotiation are lower rates but with a reduction or maybe elimination of certain deductions including the home mortgage interest deduction. I have no idea whether that shakes out or not, but If it does happen, it would favor paying off home mortgages earlier.

Now, regardless of what happens, my opinion is that in general -- and there are always exceptions -- paying extra towards a home mortgage when you can is good fiscal discipline even though when you run the numbers their may be a slight advantage the other way. The only things that probably should come first, other than are higher interest rate debt ( if any) emergency reserves and retirement savings. As others have said, a debt free home is very liberating. It's also an emotional disincentive to overextending by trying to keep up with the jones. It's easy to rationalize moving into something more expensive if you've got a mortgage and moving up will only cost x dollars a month more, it's much harder to go from no mortgage even to a small one. Now this is where exceptions come in especially depending on where you are in life like a growing family that really need more room, but generally I think folks are happier with a mortgage free home, than one that may be slightly nicer/bigger.

Kymike does make a good point on flexibility. That's why when we bought a second home, after our primary was paid and the kid was out of college and with 45 percent down, we went with a 30 year mortgage, but ran a second amortization schedule for a ten year payoff. We're ahead of the ten year track slightly, but have the comfort of knowing that if bad times hit we will be okay. This also disciplined us not to over extend inthe first place and will have it paid for 4-5 years prior to retirement. It's also kept us more frugal on other nonessentials but those are sacrifices we can live with.

low interest rates: Any reason to pay off home?

Comments (9)

weedyacres

kangell_gw

Related Discussions

weedyacres

sherwoodva

Happyladi

caavonldy

kymike

Billl

mojomom

COMPANY

BUSINESS SERVICES

GET HELP

CONNECT WITH US