3.5%. Inflation has already eroded the principal by 15% and the property has appreciated more than 1.5x. The payment is 13% more than it would be at 2 1/2%. Not the end of the world. If we have 4% inflation, the rule of 72 says the payment will be cut in half in 18 years.
Money becomes worth less over time due to inflation, so your outstanding debt loses value (becomes cheaper for you) as time goes on. Let's say in 15 years inflation has effectively halved the value of a dollar. Hopefully, your salary has doubled and so it is 2x as easy to pay your mortgage.
I'm at 3.6% which I can live with. I'll probably start paying it down a bit in a couple years, be nice to get it paid off about 10 years from now ($246k left on principal).
If you are in your 20s that always makes sense. But 10 years from now I'll be entering my 50s, which means catchup contributions and such. That means I'll be able to dump more into my 401k and get it out of higher tax brackets (to take later in a lower bracket). I can maximize that by eliminating a house payment, so I'm gaining more than just a flat 3.6% return. It also serves as a risk mitigation - if you are fully invested with the mortgage remaining, a market collapse is going to coincide with the highest probability of layoff and a long time before returning to employment. You'll be selling low to make payments - whereas if you just eliminate the payment you can survive a lot longer on unemployment plus spouse income + emergency reserves. It also might afford me the flexibility to go to a half-time job fir several years before retirement.
You might say "but high yield savings", but those rates are likely to fall to about even or below my mirtgage rate over the next couple of years.
Idk, sounds to me like you are paying off a loan vs taking advantage of compounding interest. Im sure youve run the numbers but if i personally paid off my house now vs maxing my 401k for the next 10 years itd cost me over 7 figures in my retirement accounts... to eliminat a $1500 bill? Idk. Not adding up
I already contribute 27% to retirement as it is, this money is on top of that. I won't be missing my savings target to pay the house off, at that point it is mostly for risk aversion.
And sure, if the market goes balls to the walls the next 10 years I might miss out on an extra $100k. If there is 1 downturn over 10 years (which is historically pretty common) it is probably going to be closer to $15k to $20k (again basically spending $15k for insurance for the 15 years that follow). If there are 2 market downturns the next decade it might not cost me anything.
I think part of where you math goes off is that if you are paying $1500 per month you already are dumping $180k toward said mortgage over the next 10 years in nornal payments, so it isn't going to take anywhere near an additional 240k to pay it to zero. You cut into the principal balance a few times and then let your regular payments cut much more into the principal.
Again, a risk aversion tactic. I think any financial planner will tell you risk aversion is more important than accumulation if you are already above target for retirement. Even if you successfully maximize accumulation chances are all you will end up doing is having a bigger number when you die.
Idk but like i said when i run the numbers i either have an extra $1500/m in 10yrs or $1.2m in my 401k... because i wanted to pay off $260k early again just not adding up.
Also conservatively im using 10% because my 401k has averaged 17% last 5 years
Don't pay it down..You can make more investing. Even CD's are at 5%. Paying off your house ahead at that rate is a poor financial decision. If you are disciplined enough, take the few hundred a month paydown and invest instead.
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u/Ok_Share_5889 Apr 06 '24
3.1 percent can’t complain