Re: How to be Setup for Life ?
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What would you do in this situation. I have a house worth $800k and I owe 180k I have the $$$ to pay it off right now, I have 29 years left on a 4.875% fixed rate. I want to pay it off but others have advised me not to.
...and be totally FREE AND CLEAR. I call that having F.U. Money. What do you think?
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Compare the after tax cost of your mortgage with the after tax cost of a duration matched risk free investment. Thirty year Treasuries are yielding about 4.55% and you will pay Federal income taxes on this income. Many people will make the critical mistake of comparing a risk-free cash flow stream (your mortgage payments) with the returns on a risky investment. These same people probably believe it is free money when you borrow at low short term rates and lend at higher long term rates (the carry trade). Avoid this mistake.
Obviously, you do not want to liquidate tax deferred retirement accounts to pay off your mortgage. There are penalties and opportunity costs associated with doing so.
Given the low rate of your mortgage and the similarly low rates on duration matched Treasuries, you will probably not be much worse off by prepaying your mortgage, unless you lose the ability to itemize other tax deductions.
So, if it gives you psychic benefits, you are probably justified in paying off the mortgages. I paid off my mortgage when I was forty and have never regretted it. With no mortgage payments, you should be able to to fully fund your retirement accounts and rebuild your financial assets (which is important in terms of diversifying your wealth).
If you decide to pay off your mortgage you should take out a home equity line of credit which has zero cost if untapped. This process usually involves zero closing costs and the line can be used for "emergency" liquidity.
Be careful about thinking you are "FREE AND CLEAR". One million dollars is not enough money to retire on - you are off to a good start but have a long way to go (particularly since alot of your wealth is tied to your principal residence).
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