low interest rates: Any reason to pay off home?

behaviorkeltonJune 23, 2011

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)

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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?

    Bookmark   June 23, 2011 at 6:50PM
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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.

    Bookmark   June 23, 2011 at 11:54PM
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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.

    Bookmark   June 24, 2011 at 7:45AM
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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.

    Bookmark   June 24, 2011 at 8:36PM
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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.

    Bookmark   June 24, 2011 at 10:36PM
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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.

    Bookmark   July 19, 2011 at 2:56PM
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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.

    Bookmark   July 20, 2011 at 1:05PM
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"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.

    Bookmark   July 20, 2011 at 1:53PM
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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.

    Bookmark   July 20, 2011 at 3:03PM
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