Should I pay off my mortgage early?

Submitted by Niko120 t3_11emrhz in personalfinance

Bear with me, a lot of numbers coming up. We bought our second home (very most likely our forever home) June 2021 at $300,000 with 50% down with a 3% interest rate. Traditional 30yr mortgage. Payment is $1,250 per month which includes taxes & insurance ($6,500 in taxes/$1,200 for insurance) Got a pretty good deal going on here, BUT, maybe I could do better. My wife’s family is planning on selling a home in their country of origin next year. Each sisters cut would be around 70k. We could take all of that money, I could take out about half of my savings which would be 50k and ask my parents to borrow 25k and pay off the mortgage in full. After that I would pay back my parents $500 per month for 5 years while also paying back my wife $500 per month for 6-7 years. Then I would be completely in the clear for what would be the remaining 20 years of the would be remaining 30yr loan term. This would save me around $80,000 of what is set to be the lifetime interest paid on the loan. This sounds like a great idea in theory. Just looking for some feedback on how this may or may not work out to my advantage

Edit: I know nothing about investing, and as a working class individual I would greatly value the the weight of a mortgage being off of my shoulders. This is where my line of thinking comes from

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wickedkittylitter t1_jaewurz wrote

I wouldn't pay off cheap debt. A 3% mortgage is cheap debt. Your wife would be better off investing the $70k and getting a decent return on her money. If you only pay your wife $500 per month for 6 years, she gets no return on her money for that entire time period.

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Niko120 OP t1_jaexp5b wrote

Even in a high yield savings account at 4% return (this is how we are currently investing) her 70+my 50 would would only get us $33,600 in that 6yr period that’s less than half of what we would save on the interest of the mortgage

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Rave-Unicorn-Votive t1_jaey7on wrote

But you don't "invest" $120k in a HYSA, you invest in the market which will likely pay more than 4% over the next 20 years.

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bassjam1 t1_jaexusr wrote

Nope, I'd never pay a dime of that off early.

Invest that $70k and it could be worth $1,000,000 in 30 years.

Which is a much better return than saving $80k on interest.

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Niko120 OP t1_jaeylfu wrote

Every one says INVEST! invest in WHAT? That 70k could be 1,000,000 with a 50% return over 30 years. Or it could be $0 with a 0% return

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bassjam1 t1_jaf2dne wrote

If your company offers a 401k and you aren't maxing it out I'd do that first and use this money to subsidize the lost income. Also a Roth IRA is a great option if you aren't over the income limit, $6500 is the most you can contribute annually. Both of those other tax advantages which is why you should focus on them first, but after that I'd just go through a regular taxable brokerage and put it in an index fund which tracks the s&p500.

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Niko120 OP t1_jaf3oca wrote

We don’t have a 401k unfortunately. We have a profit sharing plan and it sucks. As far as a Roth IRA I’m not necessarily trying to put a big chunk of my money towards retirement at 37 years old. There are still plenty of things we need the money for along the way. I’m definitely going to try to learn more about investments though

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bassjam1 t1_jaf4wf9 wrote

At 37 years old you absolutely need to be saving for retirement, especially if you have nothing saved yet. You're 25-30 years away from retirement which isn't as far away as it sounds as far as saving. And I'll be blunt, even turning that $70k into $1 million isn't going to be enough.

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wickedkittylitter t1_jaf0hf7 wrote

Invest in stocks. Read the Wiki linked at the top of this page. You need the information badly. $70k invested for 30 years at the market average return of 8% would end up being worth a bit over $700k. You need to learn about future value.

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Pretty_Swordfish t1_jaf494o wrote

Check out Boggleheads and the 3-fund portfolio for what specifically to invest in.

Personally, being in a very similar spot to you, we are not paying early. Instead, we put as much as we are comfortable with into the market and the rest into T-bills and I-bonds.

Also, note that you are comparing your 4% return at 6 years to the total mortgage term (30 years?). You clearly make more money at 4% rates than at 3% costs. The issue is that the 4% isn't guaranteed and the 3% is.

As well, if you have to borrow to pay something, it's hurting someone else who could have gotten me for their money, but they gave it to you instead. So if you want to borrow to pay it off, at least give them the rates they could have earned by putting it into a HYSA or T-bill, etc instead.

Finally, don't forget that insurance and taxes still get paid when the mortgage is done.

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Acrobatic_Ad_9937 t1_jaf3cw3 wrote

If you have the money in hand to payoff your home, only you can decide whether that freedom is worth it for you.

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ct-yankee t1_jaezfe9 wrote

I would not pay down a mortgage with such a fantastic rate. That is the right answer financially. You can do better than 3% with zero effort and low risk by dropping the cash in a HYSA.

Others see value in the security of owning their home and having no mortgage and that brings them peace of mind. Nothing wrong with that, but this is a financial sub.

I do not understand the "pay my wife back" part, but I guess thats a different matter entirely.

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