Ask the Readers: Should I pay off my Mortgage?

I had a recent email exchange with a reader about mortgages. Thanks Khunara for inspiring today’s question!

Screen Shot 2016-02-02 at 11.47.28 AM

This picture has absolutely nothing to do with this post, but I can’t come up with anything better at the moment.

I’m always yapping how I’ll never, ever, ever, EVER pay off my mortgage. I even wrote about it here. I’m having second thoughts though. Here are the details of my mortgage situation:

  • My home is worth about $400,000*.
  • I owe about $110,000 on the loan, so I have $290,000 in equity.
  • My mortgage is 3.25% (15 years) and I have 12 years of payments left.
  • I don’t have enough deductions to itemize, so I can’t write off my mortgage interest on my taxes.
  • Because I have a corporation (not W2 income), I can’t get a mortgage loan without 2 years of tax returns (mid 2017).
  • I have about $100,000 in cash.

The key point is the last one. I can get by on about $36,000/year, so $100,000 is a ridiculously large emergency fund. Except that it isn’t really an emergency fund.

Why I have $100,000 in cash

The Mrs. and I have been eyeballing a couple real estate transactions. Most of them are fix and flips, but one is a sweet rental 4-plex that I can’t quite pry out of the hands of the 80+ year old owner. I even wrote her a song**. That didn’t work.

I have $100,000 in cash to help purchase one of these properties. And it kills me. The money is wasting away, not even making 1%:

Screen Shot 2016-08-03 at 3.59.01 PM

Thanks for almost nothing online bank.

I may need the money at any moment, so I don’t want to throw it into an investment subject to big swings. Mr. Market could go down 20% tomorrow. Alas***, I have a new idea.

Ask the Readers: Should I Replace Cash with a Line of Credit?

I can get a line of credit (LOC) for 80% of my home’s equity. Here are the juicy details:

  • If I got a line of credit now against the $290,000 I have in equity, that would give me about $232,000 in borrowable funds.
  • If I paid off the home, the $400,000 in equity would give me $320,000 in borrowable funds. Instead of a cash reserve, I’d just use the LOC for a real estate transaction.
  • The LOC rate is currently 4%, but will go up with any Fed rate hikes.
  • There are no costs to the line of credit except for a $500 appraisal fee that the credit union refunds after the LOC goes through.

Advantages

  • My current mortgage is 3.25% and while that is a low rate, it is still 2.35% higher than I earn on my cash.
  • Paid off home! (how cool is that?)

Disadvantages

  • Because I can only borrow 80% of the equity, the $110,000 I use to pay off the loan would only give me $88,000 in LOC funds.
  • Rates will eventually go up, raising the amount that the online bank account pays in interest. I’d feel silly if I paid off my 3.25% mortgage only to have the bank paying 3.5% interest in 2020.

Questions for you:

  • Am I missing a better option for my cash? Remember that I need liquidity. I don’t want the money in the stock market or anything subject to big swings.
  • Are there any advantages of paying off my mortgage that I’m missing?
  • What would you do?

 

*In my performance updates, I’ve been valuing my home at $350,000. Based on recent sales on my street, I’m reasonably confident that I could get at least $400,000 for it. An upcoming appraisal will give me an accurate number.

**In case you didn’t see the song in the other post, here it is (sung to “In Your Eyes” by Peter Gabriel) that I wrote to the old landlady in an attempt to buy her 4-plex:

Real estate, I get so lost, sometimes,
Days pass and this emptiness fills my heart,
When I want to run away,
I drive off in my car,
But whichever way I go,
I come back to the 4-plex you own.

All my desires, they have grown,
It’s your 4-plex, I want to own,
20% down, I will provide,
I reach out from the inside.

(In your 4-plex) The light, the street
(In your 4-plex) My investments are complete
(In your 4-plex) I see the doorway
(In your 4-plex) Of a thousand retirements
(In your 4-plex) The resolution
(In your 4-plex) Of all the fruitless searches,
(In your 4-plex) Oh, I see the light and the street
(In your 4-plex) Oh, I want my retirement complete
(In your 4-plex) I want to touch the deed
The returns I see in your building.

***I’ll bet you don’t read many bloggers that work sweet words like alas into their prose. Pretty cool, eh? My bag of word tricks is still very much full. Coming soon: hence, flabbergasted and one of my favorites, komorebi.

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87 Responses to Ask the Readers: Should I pay off my Mortgage?

  1. To “Sledgehammer”:

    You could have a paid house
    If you’d just lay down your cash
    You could keep an L-O-C open
    If you’d pay that mortgage back

    All I’d do is keep it
    You have all the cash you need

    You could have rate changes
    Going up and down, all around the Fed
    I would keep the stable rate, stable
    But the analysis never ends
    Matt @ The Resume Gap recently posted…Three Weeks in Hungary, Zagreb, and SloveniaMy Profile

  2. I’m actually in a similar situation with my mortgage. ~$122,000 left on a 15-year mortgage (10 years lefts) at 3.25% interest. I’m not planning to pay it off early. That LOC option is pretty tempting! I guess it depends on how much debt you and Mrs. 1500 feel comfortable taking on. As for earning more interest on your emergency fund, you could also explore money market deposit accounts, CDs, money market mutual funds, asset management accounts, U.S. treasury bills, or U.S. series EE bonds. I hate earning 1%, too! Some of these options are slightly less liquid, but may offer a little more interest.
    Kate @ Cashville Skyline recently posted…#GetMore with KasasaMy Profile

  3. Danny says:

    As someone who in previous “Ask the readers” posts is on the side of paying off their mortgage early, and is about to payoff his own mortgage at the end of the year, I would struggle with this situation as well. I think it really depends on how badly you and your family want to fix and flip homes (which it seems like a lot given what you’ve done in the past, how much you talk about it currently, and how great you and Mrs. 1500 are at it).

    Additionally, let me give you something else to think about as well. Based on the post you linked it appears you are paying $989 per month on your mortgage, or almost $12K per year. As you are nearing FIRE (you’re there right now anyway), I would assume cutting any expense(s) would be helpful. How helpful would it be in your situation to cut $12K per year of expenses for the next 11-12 years by just paying off the mortgage now?

    • 1500 says:

      Yeah, we really do want to fix and flip. The problem is good candidates are hard to come by. It may be years before we’re able to pull the trigger (on the air gun). However, we could come across a good opportunity tomorrow too. I want to make sure the money is ready to go at any moment.

  4. I’d pay off the mortgage.

    Disadvantage #1 seems irrelevant since you’d have access to the full value of your home for the LOC.

    Disadvantage #2 seems unlikely. Economists have thought interest rates were going to go up imminently 4 or 5 years ago and they still haven’t. I wouldn’t bet on them going up much in the next couple years.

    Another alternative to a home equity line is a personal line of credit. My bank will provide up to $100,000 in a personal LOC and I’d have access to it in less than a day.

    My vision of retirement has always been with a paid off mortgage. While it may not be a high returning asset, I could tap its value in times of recession to bet on the upswing in the stock market. It would be a nice reserve of value I could flex in times I know the market will be bouncing back up soon.
    The Green Swan recently posted…Why I Don’t Calculate my Savings Rate: My Savings Goal ExplainedMy Profile

  5. Mr SSC says:

    Our “FIRE” plans include having a paid off mortgage. While we may rent for a few years if we end up out West, ultimately, we plan on buying outright.

    We have done zero to put anything extra toward our current mortgage. We may see our property values increase, but we don’t trust that and therefore don’t “invest” in our property.

    Like you, I think it would be nice to get 1% or more return in a stable/liquid asset but I don’t know of any options beyond what’s been mentioned already. Like Green Swan, I don’t see interest rates getting anywhere near 3.5% by 2020. It’s like my industry ahs been talking about “the big crew change” since before I came into the industry. I’ll be retired and out of the industry (10+ years in it) and have yet to see a mass exodus of retirees that have been predicted. I see similar parallels with the rising interest rate – I’ll believe it when I see it. 🙂
    Mr SSC recently posted…Our money went where? July 2016 UpdateMy Profile

    • 1500 says:

      Yeah 3.5% seems like it may be a long way off. Even if Fed rates go up, banks don’t keep up 1 for 1 either.

  6. I don’t have valuable insight into your problem, but I did want to drop a comment with two notes:

    1. I really enjoy reading about these specific decisions in real-time. Especially when they are issues that the personal finance community disagrees on.

    2. I googled the definition of “komorebi” and it is a wonderful word.
    Matt @ Optimize Your Life recently posted…Happiness Through KindnessMy Profile

  7. TheMoneyMine says:

    Put another way, I think your question is whether or not you would lower your opportunity cost by using an HELOC. You place your cash in the markets and expect a return, and on the other hand you use an HELOC to buy another property.
    If your expected rate of return from the market and/or the rental property is much higher than 4% (let’s say 6%+), then it would be worth it to leverage with the HELOC.
    If you expect returns under 4%, then stay with your cash option. Somewhere in the middle will probably not move the needle.
    I recall that Jim Collins had a paragraph on this in his book and that was basically his conclusion.
    TheMoneyMine recently posted…5 Articles & 1 Podcast that made me smarter this monthMy Profile

  8. That’s so tough. I struggle with a small student loan the same way (much smaller scale though). Do I pay it off or let it ride since the interest rate is 2.75%? Math says to pay it slowly but sometimes I get annoyed with it when I see it when I open Personal Capital and it’s staring at me.

    For your scenario, that is tough! I’d probably pay it off since you have no idea when you’ll do a real estate transaction. It could be tomorrow or it could be in 3 years. LOC will also give you the option to do an all-cash offer if that is ever needed which you couldn’t do with the $100k alone.
    Fervent Finance recently posted…The Stigma of SubsidizedMy Profile

    • 1500 says:

      “I’d probably pay it off since you have no idea when you’ll do a real estate transaction.” Yep, I don’t think it will happen this year.

      And yeah, I have to get the LOC no matter what to pull off the transaction.

  9. Daninave says:

    In our case, we decided to pay the flat as soon as possible. We made some calculations as you, and perhaps to pay off the mortgage is less efficient than investing, sure.

    However, when you do not have to pay mortgage anymore, you feel that you really got a step forward to freedom. It is a great change, priceless.

  10. grkkeb says:

    It is interesting because I think that once your net worth gives you that warm fuzzy feeling that you can weather any storm, even though the math is clearly advantageous to keep a low interest mortgage…98% of people opt for a paid off home. The piece of mind and the feeling of actually owning something outweighs the marginal gain you are attempting to get by beating the rate by few percentage points in various investments. The best analogy on the subject I have ever heard (and maybe he stole it from somebody himself lol) was Dave Ramsey “if your home was paid off, would you go borrow $110,000 from the bank at 3.25% interest to go invest in the market?” Sometimes the answer could be yes, I get that, but with real estate back to its pre-recession highs and the stock markets at their highest ever, my guess (and that is all it is) is that now is not one of those times.

    Personally I like your thought of how you are going to deploy this $100k when the opportunity presents itself. I’m laying in the weeds waiting for the next cycle before deploying more cash, whether that is 1 month or 3 years its fine, because the real money is made at your entry and exit points, not just the ride along the way.

    • 1500 says:

      Yep, the market and real estate valuations are scary. Regarding the latter, that is why I like the fix and flip versus rentals. The risk is that prices correct downward before I was able to sell it, but I would turn it quickly.

    • I agree, although I think you meant “peace” of mind.

  11. Mrs PoP says:

    Tough call. We have our HELOC open against our duplex, but have struggled with whether or not we should close that down since we’re not using it and because the bank requires us to keep flood insurance on that property, it does actually end up costing us something every year.

    And I’ve also started playing around with some numbers as to what it might look like if we paid our mortgage off right around when we get ready to RE or right after. That’s around the same time that we’re hoping to unload our lot, and it might simplify matters to have fewer bills to worry about and less cash flow to make sure we’re generating each month. Honestly I’m pretty glad so many other folks will be RE-ing before us (like you!) so we can learn from what they did. =)
    Mrs PoP recently posted…Happy Friday – Happy Anniversary, Florida!My Profile

  12. Mr. PIE says:

    I wonder if patiently waiting for another 12 months and assess your options then when you have a mortgage loan option in play and perhaps a better opportunity in the housing market to strike at. The old landlady will be another year older by then…..oh come on, just stating a fact…..!!
    Mr. PIE recently posted…Good Reads from Mr. PIE – Summer 2016 EditionMy Profile

    • 1500 says:

      Yep, punting the decision may very well happen. Dunno about the old lady as she is going very strong at the moment…

  13. Don’t confuse the long term earning power of that cash with its short term earning power.

    Sure, in the short term it’s not earning much. But long term that cash will be invested and earn you a return….for the next 40 years or so.

    I think the question is a simple matter of determining where the best place to invest it is.

    A LOC is not cash. It’s another loan, and any investment you make with a LOC will have reduced cash flow because of that. Such calculations might make the investment cash flow negative for years! It might even make you pass up the return with the best long-term rate of return given those negative economics.

    If you have guessed, I wouldn’t pay off the house. Cash gives you opportunity. Opportunity to capture the best return when it arises. It also gives you a certain amount of stability if you encountered job loss or some other economic misfortune.
    Mr. Tako @ Mr. Tako Escapes recently posted…Brought To You By the Letter ‘V’My Profile

    • 1500 says:

      I should have explained that the LOC is a way to make a quick deal. In our neck of the woods, there are loads of cash buyers. If I had a LOC, I could buy a home with that and refi afterwards.

  14. Eric Bowlin says:

    It’s a really tough one and it depends on your goals.

    If I planned to quit working, I’d pay it off. Though financially it makes sense to leverage your house to invest in other places, I wouldn’t want to create risk in the place I reside (more on that below). If it’s paid off you can never lose it (as long as you pay those pesky taxes).

    If I plan to keep working, I’d leverage it into other investments. but… I can say, I wouldn’t put it into a line of credit. I have a couple of them on some properties, and they are great for a little while, then they really suck.

    You will have super low, interest only payments for the first 5 or 10 years, then it converts to a short term mortgage. My first one was 5 year draw with 10 year payoff.

    So your $200/month payment suddenly jumps to $1200 when it comes due. If you quit working, good luck refinancing it… And if you tie up your cash into other investments, you may not have the cash laying around to pay the huge note. If I kept working, I might take this risk since I can cover it with my paycheck or refinance it if necessary.
    Eric Bowlin recently posted…Real Estate Investing Update Aug 2016My Profile

    • 1500 says:

      Yeah, I’d probably refi out of the LOC very quickly of pay it off very aggressively. I don’t want the ball hanging around my neck.

  15. I would personally prefer to pay off the mortgage, or at least pay down the mortgage. Mostly because I know your goal is to retire pretty soon; having no mortgage payments or less mortgage payments could be a pretty nice boon for a retiree.
    Mrs. Picky Pincher recently posted…What a Frugal Weekend!My Profile

  16. just a thought says:

    Since you aren’t itemizing on your taxes, I would pay it off now or very quickly as the interest expense is a drag on your total returns as well as inflates the amount of income you need your portfolio to produce.

    Furthermore, if your mortgage is paid off, think of how much easier it will be to get a loan on another property.

    Lastly, does this 4-unit give you a better cap rate than a basket of REITs? Don’t forget to take into account your time. Personally, I am having a hard time finding real estate that will provide enough of a return to make it a worth while exercise.

    • 1500 says:

      With the 4-plex, it depends on what she’d sell it to us for. The returns would have to be substantially better over what I could get with the REIT to justify the time I’d spend on it.

  17. ESI Money says:

    I paid off my mortgage over 20 years ago and have never regretted it.

    I went on to save/invest a ton and buy properties like you want to (though I keep mine for rental income).

    There’s a lot to be said for being debt free and if you ever want to retire early, it’s a vital step.

    Good luck!

  18. Clint says:

    Hmmm…tough choice, I mean that $260 you made is going to be tough to give up;)

    In all seriousness, if you paid off the house now, couldn’t you just go get a heloc later if needed…and by that time maybe you have the cash saved again anyway?
    Clint recently posted…Net Worth Report: July 2016My Profile

    • 1500 says:

      I could get one later, but it takes a month to secure. I want to be able to move quick on a deal. There are loads of cash buyers here and I need to be able to compete with them.

  19. Jay O says:

    I would keep the money and stash it in the Vanguard short term investment grade fund (VFSUX). Might as well earn 2% or so. Average annual returns over the last 3 years have been right at 2.5%. The worst 3 month period is -6% and that’s when the world was coming to an end in the financial markets.

    If you get 2.5% you’ll earn 75% of what you’re paying in interest and you’ll keep your cash (before tax).

    Another option is Vanguard Intermediate muni fund (VWIUX). It’s trailing 12 month yield is 2.8%. The return is a little less than many but Vanguard leans to quality so it’s worse 3 month return is -4. It’s low fees keep it in the top 1/3 of total return in the category. AND…No taxes.

    • 1500 says:

      Yeah, 2.5% is much better than .9%. At that point, I’m keeping up with inflation or close to it anyway. Thank for the suggestions!

  20. dwasch says:

    Financially, the pay off or not pay off decision seems like a push.
    If so, it becomes an emotional decision, and only you and your gal can make that call.

  21. We have a goal of having a paid off mortgage. There are a lot of factors beyond the numbers that went into our decision. 1) We live in a lower cost of living area. If the average mortgage was $400-600K around here, it would sink a lot more money to pay it off. We have about $130K left on ours, which makes me less squeamish about payoff versus investing than having $330-430K left. 2) My husband is nearly 50 and is closer to real retirement age. Our kids will be in college at the same time he hits his 60s. We don’t want a mortgage when retirement and college are happening at the same time. Add in aging parents who may need to live with us, and we really, really want to keep expenses low. 3) I have a chronic autoimmune disease that is status quo now but comes with a high risk of disability, including blindness. Bad scenario would be I am disabled and cannot work in any capacity. Even worse scenario is I am disabled and something happens to my husband, who is the primary breadwinner. Having no mortgage means we have a stable home and manageable expenses even if surviving on investments and disability.
    Jen@FrugalSteppingStones recently posted…Frugal Step: Make A MenuMy Profile

  22. For what it’s worth, we did pay off our mortgage and went in the other direction, doing a cash out refi for a new 30 year mortgage. Our new plan is simply never to pay it off, and keep the requisite funds in investments. If we change our minds, we can always pay it off…but going the other direction is harder…getting loans costs money & hassle.

    I enjoyed having a paid off home for the few years we had it. But the longer I get to know our personalities as they relate to personal finance, the more I hate equity. It’s not that helpful. It just sits there, doing nothing & earning nothing…like cash. But unlike cash, it can’t be used for anything without going through ridiculous hoops to get a loan.

    All in all, I’d say keep your current mortgage until you’re sure, really really sure, that you want to pay it off. Cash gives you options. Equity, not so much. But just my $0.02.
    Done by Forty recently posted…Writing it DownMy Profile

    • We paid off our mortgage recently but we were looking for cash flow not liquidity. I would probably just sit tight with the money waiting for the 4 plex deal (or another good deal!) And now I have Peter Gabriel in my head, which is an improvement over the haiku and limericks of a few weeks ago 🙂
      Vicki@Make Smarter Decisions recently posted…Is Just Making the Cut Worth the Cost of the Dream?My Profile

    • 1500 says:

      DbF, this is great:

      “But the longer I get to know our personalities as they relate to personal finance, the more I hate equity. It’s not that helpful. It just sits there, doing nothing & earning nothing…like cash. But unlike cash, it can’t be used for anything without going through ridiculous hoops to get a loan.”

      It is interesting to hear this view from someone on the other side of the fence. Thanks!

    • Exactly! Well said.

  23. Cwall says:

    I think having a paid off house is a good feeling and although the equity doesn’t seem to do much for you when it is stuck in a house it is still saving you tons of money on interest you would of otherwise be paying if you had a loan. So it’s not useless to have the equity in the house because you’re still saving thousands even after its paid off.

  24. Lawman says:

    Look at your tort exposure with your company. Then place your house into either a Domestic Asset Protection Trust, or keep your home equity under your state’s bankruptcy homestead exemption.
    FWIW, I do both, holding the house in trust and keeping the equity down, with much of my cash held in bankruptcy protected assets.

    • 1500 says:

      Interesting thought. Is this something I can only do if the home is paid off?

      • Lawman says:

        Most lenders won’t allow you to place a mortgaged home into a DAPT. However, you can usually place a mortgaged home into a revocable (living) trust. This can really simplify estate planning and give your family flexibility before your estate settles.
        My house is in a revocable trust until the equity exceeds the bankruptcy limits for my state. My job puts my personal assets at risk, not to mention the risks attendant to participating in society (car accidents, premises liability, etc.), therefore I spend a lot of time thinking about self-help tort reform. If you do pay off your house, put as much cash as you can into a Roth IRA and carry a good umbrella policy.

        • 1500 says:

          Thanks for this, I appreciate the suggestion. I’m pretty open about by net worth, but not around some of my subpar neighbors for the reasons you suggest: “Hey, I slipped on your sidewalk! Give me $50,000!”

  25. Tawcan says:

    Without going into the math too much I think paying off the mortgage is a good idea.
    Tawcan recently posted…Parental struggles during vacationMy Profile

  26. So, you’re risking your own home with a heloc to buy a rental property? That’s just not smart in my book. Never risk assets you need or want to get an investment. I don’t care what the interest rates are. And writing off mortgage on taxes, for every $10,000 you spend on the mortgage you save $3,000 in taxes. If you want to give me $10,000, I’ll gladly give you $3,000 back.

    You should be making way more than 1% on your cash, that’s just silly. You could put it into REITs that pay between 7-15% dividends at the moment, or even throw it into blue chips that pay 2-3%. Or throw it into an ETF and make 4-7% a year on average without doing anything and with little risk. I have a lot of money, none of it is in a bank. Ever.

    Personally, I hate real estate, it takes too much time, too much taxes, too many fixes and upkeep costs, too much insurance, too many acts of God, too many bad tenants, too many legal issues to get bad ones out and too much risk when you can buy REITs and get way less risk and guaranteed dividends at half the tax rate, but that’s just me.

    As for paying off your house, if you’re going to live there for a long time because it’s your dream home, may as well pay it off and give yourself the monthly increase in cash from not making payments and then put a sign in your front yard that says, “I have $500,000, but I can’t buy a cup of coffee with it because it’s locked up in this house forever, but I’m happy.”

    If you aren’t going to live there, mortgage it to the hilt and invest the money in ETFs and REITs and you’ll be a millionaire in a few years.

    • 1500 says:

      “So, you’re risking your own home with a heloc to buy a rental property? That’s just not smart in my book.”

      It isn’t much of a risk because I have a portfolio of $1,200,000 excluding all real estate. About $500,000 of that is after tax, so I have a buffer that I’m extremely comfortable with.

      Sure, REITs pay more, but they fluctuate. I’d like to have cash in something a bit more stable.

    • Darren says:

      Some comments on this post,

      “..can buy REITs and get way less risk and guaranteed dividends”

      I’m not so sure about this. The dividends are definitely not guaranteed. I presume this refers to the obligations implicit in a REIT structure. However, this is only of earnings before net income. To get the large yields you are mentioning, the REIT is paying substantially above its required amount (even Simon Property Group does this and it is a very conservative REIT). Less risk is subjective.

      The tax rate is also a bit questionable. Depreciate the asset and shelter your rental income.

      Owning real estate directly is of course much more work. But describing equities as little risk is a bit reckless and seems like a comment born of a short memory.

      Darren

  27. MMGL says:

    I am recently widowed, left with a$180K mortgage @ 5.25% int. rate. I won’t live long enough to pay this off! I want to stay in my home for as long as I can. Would you rather have my problem, as opposed to yours? Anyone know a philanthropist, who is seeking a tax deduction?

    • 1500 says:

      I’m sorry to hear about your situation. If you have enough equity, a reverse mortgage may lighten your burden.

  28. I’m in a similar situation and thinking the same: we have about the same in cash because I want to be able to quickly snag a new rental if one comes up but as you know, there’s a lot of waiting in this waiting game. Since I just refinanced our mortgage, the interest rate is under 3% and while I want to kill that debt off, it’s less appealing in the sense of opportunity cost.

    Our buffer isn’t quite as healthy as yours but it’s not sad either.

    For now, me being you? I’d continue to wait it out for the possible deal while considering other good options to hold the money. Less inclined to do a LOC just because I’m debt averse generally and would rather pay the cash. Seems like lost opportunity cost of holding the cash is, given the vagaries of the short term market among other options, will still be less than the cost of new debt.
    Revanche @ A Gai Shan Life recently posted…10-year Celebration & GiveawayMy Profile

  29. Jason says:

    Maybe it comes down to this. I mean you are waiting and hoping that another flip comes along. And it is possible that this will open up, but are you willing to wait for another few years and your money is making nothing. I mean by paying off the mortgage you get an instant 3.25% return. So your mortgage is done.

    The way you save money I bet you could replenish a good chunk of that $100k within the next few months and if you decide to continue working (which might happen) you can still contribute to that fund. I mean if you knew that you were going to use that money in six months I would keep it, but why not put it to good use. And if tomorrow the opportunity comes along then you get the Heloc….flip the house sell it and pay down the HELOC.

    It just seems like the $100,000 is “wasted” money because you are anticipating something happening that may or may not happen. I would write a check tomorrow. Be done with the mortgage and then just decide to reduce the 401k contributions for a bit and save maybe $20-40k in the next few months. Like I said I bet you guys could get there by early next year easy. Just my two cents.
    Jason recently posted…My Tribute to ZachMy Profile

  30. A little late to the party here, but I’ll throw in my two pennies.

    I would not pay down the mortgage because nothing speaks louder than cash in real estate. You say you want a quadplex, but you might be able to find a duplex or single family home for around $100-$150K. You could close quickly. Your wife can teach you all about driving for dollars for fun and profit, and eventually you’ll have the time too.

    Keep the cash, use the LOC to finish financing a property. Eventually opportunity will open up. That’s why we have two houses when we intended to have zero.

    • 1500 says:

      Yeah, you hit the nail on the head. Cash is everything and that is the main reason we’ll get the HELOC no matter what we do; it would allow us to compete with cash buyers. No mortgage contingency baby.

  31. Dr-in-Debt says:

    I think you are not asking the right question. The question should be: Do I enjoy the challenge of finding, fixing and landlording a 4-plex over the next 10 years? That process is not a retirement, that is starting a new career in real estate.

    Or do you want to enjoy the freedom and flexibility of not having a mortgage to pay each month giving you time and freedom to dabble in multiple hobbies/writing.

    I just found your blog so I don’t know your entire background but have you flipped houses before? Are you going to do the work yourself? How are you going to do the work with renters? If this is an income property, each month you have a unit vacant to fix it, you are losing money. So you better be quick with repairs yourself or you will be paying people with cash to fix things quickly. You will need the cash to purchase and fix the 4-plex. Good construction always costs more(money,time or both), trust me, I learned the hard way. But, after a few years and some good tenants you would be pretty much on autopilot.

    So, If you want to retire and write, I would pay off my mortgage. Think of it like this, you free up ~900/month of cash flow by paying off the mortgage, 900/month invested @ 1% for 10 years is something like $130,000. Either way in 10 years you would have a paid off house and about 100k in cash.

    If I wanted a project for the next 10 years, I would keep the cash for that next opportunity.

    What are you going to do?

    • 1500 says:

      Hey Dr.!

      Yeah, I’ve flipped many homes and even been a landlord. I liked it all.

      Regarding fix and flips, I’d buy a home where I could do all of the work. I may hire out, but I’d probably do it myself.

      It isn’t quite retirement, but it’s a meaningful activity to fill my time. The key is that it wouldn’t fill most of my time like my job does currently. Landlording would be a couple hours per week. A flip would be a lot of time, but I’d only do it if the numbers were outstanding (profit of $50,000 for 3 months of work).

      • Dr-in-Debt says:

        In that case, I would just stay put:

        1. You have a good mortgage, 15 year @ 3.25%. You might be able to find something a little lower but costs would eat most of the savings.

        2. You want to buy something to fix and have done it before. You know your market and you are going to need the cash to purchase and renovate. Once you make that transaction, take your reserves and then optimize them.

        The best opportunities come in a crisis. Warren Buffet profited immensely during the financial crisis because he had cash he could loan to banks and buy shares. Same thing for the next crisis.

        Paying off your mortgage will give you more cash FLOW but may not give you enough of a lump sum for a purchase opportunity. The HELOC is a good idea to open but I would not expect to draw on that in times of crisis. There are lots of stories from 2009 of businesses and individuals expecting a line of credit to be available that ended up vanishing.

        Some times its best to have a little slack in the system. Yes having everything optimized for returns is best. Yes you may be paying an opportunity cost of a couple thousand dollars to keep your powder dry. The biggest challenge is being patient. The fact that people are finally climbing out of the bunker from the last crisis says more about where we are in the cycle than anything.

        Let us know when the opportunity strikes…..
        Dr-in-Debt recently posted…How a Doctor Gets $1,000,000 Dollars in DebtMy Profile

  32. Tyler says:

    Heres another perspective. Get the seller of the 4 plex to sell it to you on contract. Use your cash as money down and leave the banks outta the situation. You now have a 4 plex and they have some money coming in from you using them as the bank. Ive got a number of properties ive aquired this way. Just a thought

    • 1500 says:

      I love that option and ran it by the owner. She was open to it, but still hasn’t sold anything.

      • Tyler says:

        Looking into my crystal ball (i am making this part up) i believe that the market has to take a down turn within the next 24 months. I want to be right so i can pick up some more properties. Rentals are great because rents in my area (do your local research) dont care about real estate prices going up or down. Personally I would pay off my house and start accumulating my cash for the down turn. It will happen then you can benefit by buying more for your $1

  33. Chris says:

    “I may need the money at any moment, so I don’t want to throw it into an investment subject to big swings.”

    Can’t get any more liquid than cash, so that makes any other options pointless to my mind. If you asked the question again without the liquidity requirement, I’d say that betting your single largest personal asset (and LOC certainly adds considerable risk when used to finance other investments) for incremental gains elsewhere is a mistake.

    Save the cash for a good investment without putting your home at risk. Putting cash into an account and establishing an LOC for accessing it is a roundabout way of making investments. It adds another layer of fees and complexity without any benefits.

  34. Elizabeth says:

    Banker here. I’m wrestling with a similar issue. We have just over 6 figures in cash earning next to nothing and a 2.75% mortgage (on which we can deduct interest). I’m very comfortable with leverage, but I’m still debating throwing all our excess cash toward the mortgage until it’s paid off in a few years for a few reasons.

    One, the stock market and real estate markets and bond markets are all at or near all time highs. Sure, that could continue, but there will also be a recession or reset or dip at some point in the future of my life. And that time will probably be better than this time to dump a bunch of cash into any given investment.

    Two, I tend to jump too eagerly into any investment opportunity that presents itself. If I had a paid off house that I had to borrow against in order to invest, I think I’d consider the opportunity much more carefully. Technically borrowing against a home to invest is the same as not paying off a home to invest, but psychologically there is a difference.

    Three, the reason we are keeping cash if similar to yours: the desire to invest the money in some unknown future time and place. Saving even 2.75% in interest in the meantime is probably worth doing given we have no current plans to move or buy a business or rental, and our easy access to a home equity loan (you can get a fixed term loan or a line of credit by the way) means that we can use that 6 figures now to save interest and then take it back out of the house later if something actually does work out investment-wise.

    You need to tap your home equity in any event to complete a quick cash transaction, so what’s the difference between making it a small heloc with cash or simply a larger heloc when the time comes? The total mortgage debt you end up with will be the same, if not less, and you’ll save some interest expense in the meantime.
    Elizabeth recently posted…Five Important Life Decisions for Building WealthMy Profile

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  36. Casey says:

    Just like you, I have wrestled with this one. I just found your blog, but am a little older 47… I have several rental properties and am down to just two with smaller mortgages. It is a great feeling.
    I feel like I missed the boat though as I have a mortgage on my house that I really should have addressed first. My analysis is quite simple. I can deduct the interest on the rental properties against any rental income.
    My house on the other hand is not deductible really in the same manner. My itemized deductions get limited due to my income level. Therefore, if I pay off my 260k mortgage early (Next 4 years I hope), this is like a tax free return in my money. The rate is 3%, but if it is paid off it is similar to getting a higher rate of return on an investment. May be I am missing something but I say pay it off!

  37. Hmm, I’m with you. We have just paid $100k off our mortgage (from an insurance settlement) leaving us with a 77k loan on a property worth 250kish. We use an offset mortgage and have approx 60k in cash so we only pay interest (currently around 5.5% in New Zealand) on the difference – 17kish. Each month the interest portion of our mortgage ranges between $40-70, depending on the balance of our accounts. I’m holding the 60k cash right now because it feels like a very uncertain time, and I am drip feeding into index funds. I plan to pay the absolute minimum (principal and interest) on the mortgage loan from here on out. It’ll still be paid down within a decade and I sleep better at night knowing we have a large cash cushion.

    Whilst I know we could access a LOC, it still needs to be applied for and banks are constantly changing their conditions. I think you should stay the course, that old lady could be on the verge of changing her mind. Especially once she hears the song 😉
    Emma | Money Can Buy Me Happiness recently posted…7 Kiwi Personal Finance Blogs You Need to Check OutMy Profile

  38. Luis Alberto says:

    If you are up for a little risk, banks in my country (Peru) currently offer between 4 to 5.5% annual interest in cd deposits, and financial institutions (called Cajas Rurales) up to 7.5% to 8%. Dunno the requirements for non peruvians, I leave that for you to research. Big plus is that both are government insured (but only up to 30,000 usd), so if anything happens to the bank (unlikely at least for the next 5 years), the insurance pays your money back. The only catch is that you must convert them to local currency first. You can also get cds in us dollars, but only pay about 1% interest.

    On rhe other note, wow! 3% mortgage? Really? You cannot get anything less than 9 to 9.5% if you have excellent crédit records here… I’ve seen mortages to be in the 12-14% range quite common…

  39. Chris says:

    Every time I read someone’s idea for financial arbitrage using consumer loans (e.g. take the 2% car loan and invest for a “guaranteed” return of 6% on sponsoring stock car racing or peer-to-peer lending), it reminds me that wealthy people rarely carry any personal debt.

    Would you be comfortable taking out a $250K HELOC (or whatever equity is left) and investing all of it tomorrow at a higher “guaranteed rate”?

    It might makes sense punching the numbers into an investment calculator, but I’d never do it. I prefer owning things without being concerned about having them taken away for unforeseen circumstances. Tens of millions of people are still recovering from foreclosures less than ten years ago, yet people are still giving advice about investing using HELOCs. They probably weren’t part of the foreclosure crowd.

    Cash and liquid assets provide risk reduction and the opportunity to pick and choose good investments. Borrowed money increases risk and reduces your investment options because it costs you to have the money sitting idle and you have to cover the cost of money. Brokers have to pick riskier investments than index funds to cover their fees.

    Personally, I’d pay off the mortgage with 3-5x that much in the bank ($300 – $500K investible cash in your case). That question is a great financial litmus test for risk tolerance and how someone thinks about money.

  40. Jen says:

    Just sold a property I’d purchased with $250k in HELOC funds against 2 paid off rentals. Property had solid rental history but 10 year draw period on my HELOCs was about to end, and I’d only been paying interest while using all rental proceeds to pay student loans and medical debt. Was overall a good investment plan, but sleeping way better now that I’m out of debt. Should be able to cover all expenses with my existing rentals but will keep my day job until I’ve built up funds for retirement, which at this point probably won’t be early… Baby will need private schools if I stay in my current city.

    As long as you have your savings and aren’t under water on the HELOCs, they’re a great tool. If you open them and the housing market tanks, the bank may reduce your credit line, so make sure your 100k is a small enough percent of the value of your property then you should be able to count on funds being available when she or her family are ready to sell.

    Please don’t badger an old lady for wanting to keep the property of your dreams. It might be giving her more of a sense of financial stability than cash would, for some reason. We women sometimes think differently. I’ll probably be her someday with my rentals.

    • 1500 says:

      Thanks for your comments! You give me hope that the plan will work out. Like you said, I see little risk if we have the money to back it up. Leveraging is all we’re doing.

      Our badgering of the old lady was limited to one letter we sent a couple years ago. She called us a couple days later and we had a nice conversation.

  41. Chris says:

    I have come to the same conclusion very recently regarding my mortgage. While I haven’t made it through all of your site, I have read quite a bit and find myself very similar. I too am a computer programmer and don’t want to really stop working, but I would really enjoy more flexibility in my schedule. That aside I have been a avid saver, but mostly in 401k only. Reason being it’s really to just keep the tax man at bay. Since both me and my wife have above average jobs I have nearly all my savings in my tax deferred retirement accounts. I am 45, and as I continue to save I do worry someday about means testing which could cheat me out of social security or just put a cap on retirement savings. My question to you is % wise what do you have in deferred accounts versus taxable accounts and would you allocate the same or different if you had it to do over. I’m thinking going forward I will max roth iras before putting more tax deferred money in although that doesn’t alleviate my means testing fear someday.

    Love the blog, please keep blogging even though you met your goal. I think your year of financial independence will be interesting to read about.

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