Save me from myself :-)

[wideopenspaces]

So I definitely fall on the side of being debt averse, probably to a fault. Right now we have a 30 year mortgage (only debt) at 3.6 percent but we've been paying an extra 1k/ month on it so it will be paid off in 15 years. We've been in the house nearly 3 years now, so about 12 years left to pay. However, property values have increased significantly since we bought (yay!) and we recently had the house appraised. Turns out we now have about 230k in equity. Which is great. However, now our net worth is basically half mortgage equity and I feel like maybe that's a problem? I think the right answer is probably to take that extra monthly mortgage payment and invest it instead- we have a ton of tax protected retirement space and we don't max it out each year, so we def have room to throw another 12k/ year in there. But then I get sad thinking about taking longer to pay off the mortgage. Someone help me to stop being crazy.

[CM]

You should definitely max out your retirement space. Don't be crazy. 

Hope that helps.   

[jfoxcpacfp]

Please put this $ toward retirement. I fear you will look back in 15 years, when you pay off your mortgage, and wish you had made the most of your retirement savings. You cannot get those years of bypassed retirement contributions back. And what if you don’t even live in this house for another 15 years? 

It might also help to examine what exactly you’re sad about. Perhaps it is difficult for you to change course after you’ve made a choice? Or does it go back to an experience you saw your parents or other family members experience, losing a house or poor money decisions?

Focus on the fact that your net worth just went up rather than the proportion of your net worth that is now equity in your home. Besides, the obvious way to do something about that is to put more into your retirement accounts! 

[Lithium]

Well, I dislike debt as well, but I'm pretty obsessed with maximizing tax breaks, and it would psychologically devastate me to leave $12k in retirement space on the table.  That's an extra $3-5k of taxes every year!  And I say that as someone who is putting about $10k toward my mortgage every month (now that I've maxed my retirement accounts out).

This might be worth a read to help soften the debt aversion: https://www.amazon.com/Value-Debt-Manage-Balance-Maximize/dp/1118758617

[StarTrekDoc]

If you're talking about max efficiency on savings - max out all pretax, roth rollover, and 529 prior to paying down cheap financed debt.  No reason to get house rich.

 

[wideopenspaces]

Ok, I'm glad I posted! This really is helpful. Nothing like a little public shaming to get you to do the right thing ;-) . . . I'm going to change our paycheck allocations now so that the extra payments go to our retirement accounts.

[Zaphod]

Just put your assets and liabilities on paper and then compute your net worth. Move stuff around enough times until you feel it in your bones that its all the same no matter where the money is (net worth wise), but the trade offs arent. Very little to be had in having your house paid off so early if retirement isnt already maxed, and about 1000x worse if not maxing them out.

First ask yourself a couple questions. What is the reasoning behind paying off mortgage so fast? Is this actually the best way to achieve it?

Unless your answers are you're looking to put the most valuable dollars you'll ever own into a highly illiquid asset with high transaction costs to access that money, have inflation work against you on both ends and avoid utilizing the tax code to your benefit then maybe its not the best plan.

[Shamwow]

My $0.02:

1. Put the extra 12K per year into retirement.

2. Save $3-5 K per year (on the front end) in taxes

3. Put that $3-5 K towards mortgage

4. Smile because you are killing it!

 

[Hatton]

I agree with the other posters.  Never leave tax protected accounts unfilled!  Yes having no debt is nice psychologically but in this case the math very much favors filling the retirement space first.  Your mortgage is going to be paid off at a young age already so any extra money should go to a taxable account.  I think a reasonable mortgage is the only debt you can feel ok about after student loans are paid off.

[Kamban]

Agree with the others. You are not doing a reappraisal and fresh mortgage or loans taken against the house, with added costs. All you are doing is adding extra money to the retirement instead of the mortgage. Make sure the retirement funds are good ones and not crappy ones.

 

[VagabondMD]

The value of your home is important on two days— the day you put a contract on it and the day the next person puts a contract on it.

Other than that, I would add that you are early enough in your financial life to fix small missteps and that it is hard to go broke living in a paid off house (not exactly true, but close enough).

[The White Coat Investor]

wideopenspaces wrote:

So I definitely fall on the side of being debt averse, probably to a fault. Right now we have a 30 year mortgage (only debt) at 3.6 percent but we’ve been paying an extra 1k/ month on it so it will be paid off in 15 years. We’ve been in the house nearly 3 years now, so about 12 years left to pay. However, property values have increased significantly since we bought (yay!) and we recently had the house appraised. Turns out we now have about 230k in equity. Which is great. However, now our net worth is basically half mortgage equity and I feel like maybe that’s a problem? I think the right answer is probably to take that extra monthly mortgage payment and invest it instead- we have a ton of tax protected retirement space and we don’t max it out each year, so we def have room to throw another 12k/ year in there. But then I get sad thinking about taking longer to pay off the mortgage. Someone help me to stop being crazy.

Click to expand...

First of all, no reason to feel guilty or bad or whatever. You're doing fantastic and choosing between two good things. There's no "wrong" answer here. Far better to be worrying about stuff like this than not care about it at all. 

Second, it is entirely possible that you will come out ahead in the next 5 or even 10 years by putting that money toward the mortgage instead of investing it. And I'm not even talking on a risk adjusted basis. So it MIGHT NOT even turn out to be the wrong move taking your guaranteed 3.6% return (probably a little less after tax). 

But I would argue you're probably making a mistake if you're paying extra INSTEAD of contributing to a tax-advantaged retirement account such as a Roth IRA, HSA, 401(k) or even defined benefit/cash balance plan, just because of where you're at right now in your life. If you had $200K in equity and $2M in liquid assets, I don't think I'd make that argument. 

Finally, I think maybe you should compartmentalize things a little bit. For example, some people worry about whether they should invest money in taxable or put it in a 529. If you're saving for college, put it in a 529. If you're saving for retirement, put it in taxable. It's that simple. So in your case, is the money you are saving going toward the goal of having a paid off home in 15 years? If not, then invest it. If so, then it's a matter of whether you want a guaranteed 3.6% (actually pretty good given bond rates) or take a little more risk in hopes of a higher return over those 15 years (quite possible.) If you're not sure, split the difference. 

[StarTrekDoc]

@WCI - I think you missed this part "we have a ton of tax protected retirement space and we don’t max it out each year, so we def have room to throw another 12k/ year in there".  It's not a mortgage payoff vs taxable -- which we all know is a long held debate here  

OP isn't maxing out his tax deferred space and paying down fixed asset debt.  Don't know where he is on the timeline.   What's interesting is that he got this officially appraised recently -- so something about that in movement of home vs refi to 15 yr (probably).

[CM]

The White Coat Investor wrote:

So in your case, is the money you are saving going toward the goal of having a paid off home in 15 years? If not, then invest it. If so, then it’s a matter of whether you want a guaranteed 3.6% (actually pretty good given bond rates) or take a little more risk in hopes of a higher return over those 15 years (quite possible.) If you’re not sure, split the difference.

Click to expand...

I think the risk-free return on accelerated mortgage payments is a better choice than extra savings in a taxable brokerage account (because of low expected stock and bond returns) and I've advised my sibs to put extra funds into their mortgages, but I'd still max out retirement accounts first.

My marginal rate is almost 50% and physicians in many states have it worse. The rate will be much better for most of us in retirement and the OP will benefit from many years of tax-free compounding on gains before required minimum distributions.

[Dr. Mom]

Max retirement before prepaying house at this early stage of your career!  Weren't you talking about going to New Zealand in a recent post?  So, why the rush to prepay the mortgage?  Best wishes.