Jan 24, 2013

What Would You Do - Mortgage

The ink's dry on my mortgage refi', softening the rate from 6.25% to 3.3%.  I should have done this a long time ago.

Now I've got the itch to polish this bad boy off.  The idea of no house payment is appealing, I hate all forms of debt.  There is no such thing as "good debt," including financing a home.

If I drain a stock account and do double+ house payments for 12 months, I should be able to finish the mortgage in about one year.

I see two downsides to selling stock:
  1. Capital gains tax on withdraw is painful, and might mean I'll owe federal tax next year vs. receiving a refund.
  2. Unloading the stock pretty much toasts my mid-range savings.  It would take several years to build it back up.  I'd leave my short-term emergency funds and long term retirement accounts intact.
What do you think, is it worth emptying a sloppy bucket of stock (taxed) and be under duress for a year to double down on house payments to close the loan early?
 
-Beard

57 comments:

  1. I wouldn't do it- 3.3% is a great rate- don't make yourself house poor or damage money you were planning to use for college or retirement down the road.

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    1. I wouldn't touch any retirement or college funds, those would stay put. There's a chance the stock $ could go towards retirement later vs. paying off the house now. It's really a mid-term pot of money I don't have allocated to anything in particular.

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  2. Oh wow Beard, I was thinking about this very thing today. You always hear people taking about good debt and bad debt -but I agree with you-no debt is better.

    If I were in a position to pay off our home in roughly a year, I think I would go for it.

    Although, if you're concerned about a heavy capital gains tax - what about withdrawing half of that so the penalty is not as high and drawing out the mortgage maybe another year to six months further than the super short term payoff?

    It gives you more time for adjustments and still keeps a good portion of your investment intact.

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    1. I like to challenge "conventional wisdom," including the notion that a mortgage is good debt. No debt is good, except to the bank. If you crunch the numbers and calc how much interest we pay over the years to the loan company, it aches. I'd rather wash my hands of it and funnel big numbers into savings.

      Your proposal to split the stock draw over two years is a good one. Halfsies in 2012 and 2013 is easier to stomach than one large tax bill.

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  3. I say it depends on the actual amount that paying it off early will save you in the long term. The rate is so low that I probably wouldn't do it since the mid-range savings might be useful for some (big) emergency like a move or illness and it seems like you'll pay off the house relatively quickly anyway. Essentially: if it's just the stress of paying a mortgage I would say no but if it's a significant amount of money (whatever that might be for you/your family - maybe a loooooong term wedding fund for pigtails or bucket-list type trip for the family?) that not paying more interest would save you then I would go for it.

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    1. Even a low rate of 3.3% interest adds up to thousands of bucks if paying on it for years. Wouldn't it be better to apply that 3.3% to the stock market and make a 12% return?

      Getting the loan paid off in 5 years would be less stressful, but isn't as sexy as being done in a year.

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  4. Shannon1/24/2013

    I agree with vron, crunch the numbers. Debt sucks, no two ways around it. But not having any cash in mid-term savings is quite dangerous in my opinion. I would funnel as much as you can toward the mortgage without harming your ability to weather an unexpected financial crisis. I've seen recommendations to have from 3-6 months of expenses set away in savings (we keep ours in higher interest bearing accounts). I personally would not accept additional tax liabilities just to pay a mortgage off early, especially one that has an interest rate this low. Does not make financial sense to me (just my two cents).

    For some reason based on a comment you had made previously, I thought you were a renter. I am impressed that you are this close to paying off your mortgage, though, that will feel spectacular.

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    1. I would keep a $12K short-term emergency fund intact, so feel like I wouldn't miss the stock being sold. Now true, some major unexpected crisis could crop up that would wipe out the $12K and I'd wish I had left the stock account intact.

      You make a good point, is the 15% to 20% capital gains tax on selling the stock worth knocking out a 3.3% mortgage? I'll get taxed on the stock when I sell it, regardless of whether I do it now or later. Short term vs. long term capital gains rate matters, looking at stock purchase dates and crunching more numbers now...

      I can see how you thought I might rent based on that post.

      http://www.beardandpigtails.com/2012/11/commonly-accepted-financial-principles.html

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  5. Emergency fund in check, I'd agree with selling the stock. I think capital gains will go up in the future (there was a lot of election discussion of increasing the capital gains rate), not down so you're saving money. Plus you can always pay the taxes ahead or minimize tax penalties to avoid giving the government a tax free loan. I always have a refund because I am too lazy to calculate my exact taxes throughout the year but refunds just for refunds aren't necessarily the best. Also, if you make more money in the future, will you be bumped into the 20% bracket?

    However, will these stocks grow or are they more volatile? Money now or potential for more/less later?

    Even CPA's don't have all the answers but paying off your mortgage is always good!!

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    1. True, the capital gains tax likely will go up under current leadership. There used to be an advantage to holding stock to get the lower long-term gains rate. Might be better to not worry about that and sell now if we think rates will increase.

      Also correct that it's best to not get a refund each year, as that is a free loan to the government. I'd rather get something back though than owe, so okay with a check coming this March.

      You are a wise sensei, the greater loss in selling stock now is the potential for more gains later if I held it.

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    2. Something about 4+ years of accounting and finance makes me think this way but either way it is a gamble which is why I don't invest beyond my 401(k). Our home is our best (and usually most reliable) asset. I'm using you as our guide for paying off our mortgage faster!

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  6. Anonymous1/24/2013

    What do you plan to do with your house long-term? If you got re-married would you buy a bigger house? (Sorry, I have no idea how big the current house is or whatnot!) What kind of condition is the house in (how likely is it that something mechanical would break in that year)?

    All of those would affect my decision/opinion...

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    1. If it was up to me, I'd stay in this house until my kid and any potential future kids are raised (convenient location right now). Then sell and build a home away from the city after the bird flies.

      Mi casa's a 1950s brick ranch, just under 1,100 square feet. I think she's
      light on her feet for being an old girl. The roof needs replaced this spring, I've got slush set aside for that pain.

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  7. Shannon1/24/2013

    Well, how far would 12K take you? (rhetorical, not trying to be nosy) Even if you have disability insurance, most doesn't kick in for 2-3 mo, and even then at only some percentage of your income - mine kicks in at 2 months disabled & only pays me 80% of my salary, and it's quite good insurance, at least in my line of work). At any rate, bad things happen even to young people, and especially as the primary (only?) breadwinner you have even more impetus to be as uber-secure as you can be financially. I absolutely agree, that includes minimizing/eliminating debt wherever possible.

    You make a good point about paying the piper on the stock sale now or later - I don't know enough about capital gains taxes to know if there are any changes in this part of our tax code potentially on the horizon? That may play into your decision.

    I think you are wise to really sit down and get through the data. For me, I'd have a hard time coughing up that cash out of pocket to eliminate a debt with such low interest. You have to consider what you are losing both in terms of interest earned on the investments as well as the tax burden.

    Yes, that was the post! You're full of surprises. ;)

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    1. $12k would last months, my house payment is only $460 per. No car payment, I cook most meals, we buy used clothing sometimes, I could string that amount along. Sure, it would dry up if I was unemployed or big medical bills cropped up.

      It's important to be prepared and have emergency funds there, just don't want to live in fear and pay on loans longer than needed in the name of "safety." There is risk in playing it too safe, if you know what I mean...opportunity cost.

      Thanks for sharing your thoughts, cheers!

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    2. Anonymous1/24/2013

      I would have to jump on the pay it off bandwagon, but I may be biased. After getting in way over our heads and going through a short sale, my husband and I got back on our feet, using a cash only budget. I wish we had known then what we know now, but hindsight is 20/20. We just bought a home in Sept (a 60s ranch, love me some midcentury!) and our payoff goal is 9 years. I cannot wait to be 100% debt free. I too have people tell me I am crazy, that a mortgage is good debt, or why not get a car loan when you can get 0-1% interest, but I would rather own what I have! On a side note, I noticed you put in IKEA cabinets, and I was wondering which ones you went with?

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    3. Mid-century modern rules, this.

      I mostly went with IKEA STAT and AKURUM cabinets. Okay quality, price is excellent. Really liking the oak butcher block counters, they add old fashioned warmth and character to an otherwise robot-modern kitchen.

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    4. Anonymous1/24/2013

      LOVE the butcher block. I love the look of my original cabinets, but the function not so much. Pretty sure the corner one is the rabbit hole to wonderland...not really sure how far it goes!

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    5. Also, love the chair, and from there I just linked to Beaverdale Vintage. How did I not know?? Guess I know what I am doing this weekend!

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    6. B. Vintage is the tightest antique store I've seen, the place only sells mint condition mid-century. I've picked up a few things, tell owner John that Beard sent you.

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  8. Hi. In broad terms, I am at the stage personally, where I say "pay that sucker off!!". Although, looking deeper, definitely crunch the numbers to ensure that you really are better off across the term you are considering. If you are a little nervous getting your feet wet taking all the stock, why don't you double down the payments for 6-12months and then reassess after that. I do like the suggestion to do 1/2 and 1/2 over 2 years, that would give you some room to breathe. Our next big financial goal is to pay our home mortgage out, 5-10 year plan at this stage.

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    1. It would take several years of doubling payments to hit goal, since tens of thousands remain on the mortgage. Perhaps stock split over 2013/14 like you agreed and maybe going slightly less aggressive, paying it off in two or three years instead of 365 days.

      The more the loan shrivels, the more anxious I am to be done with it.

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  9. You should consider what other purpose you might be able to put that extra money to before getting in a rush to pay off your mortgage. Between the incredibly low rates right now and the fact that you get a tax writeoff for the mortgage interest, mortgage money is "cheap". What sort of return could you get by taking that extra money and leaving/investing it in the stock market, mutual funds, or another accumulation mechanism? If I can funnel that same money into investments that return 8% on average per year, then I'm much better off in the long run doing that than getting in a hurry to be free of a monthly mortgage payment.

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    1. Money is cheap now, my monthly interest is $46 after refinancing. That still comes to $550 a year that I'd prefer investing vs. giving to the bank. And I'd be able to throw several thousand more into the stock market making 8% a year if the house payment goes away.

      I may end up compromising and taking a less aggressive approach, two or three years on the payoff so the stock account doesn't get completely wiped.

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  10. We're sort of in the same boat...our main problem is that we don't know if we'll stay here for a long time or eventually use this house as a rental and move somewhere closer to our jobs.

    House is our only debt and our house payment is super low. We double up payments and are on track to pay it off in 9 years as is but it would be fantastic to have it sooner.

    I think the feeling of being completely debt free would be worth any taxes...whether the numbers added up in favor of that or not.


    Good luck with your decision!

    Darci

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    1. Does the thought of renting out your house make you a tad nervous? While a steady monthly income would be nice, I'd worry about how well the tenants would take care of the place. And what happens if no renters, double mortgages for you?

      Nine years getting that puppy paid would be excellent, get it done!

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  11. If crunching the numbers more still doesn't leave a clear winner in the "Do this" category maybe you could double down for a year first, and then re-evaluate. If you're still not sure, double down for a few more months and see if being that much closer makes you even more eager to pay it off.

    Playing with the numbers more might give more options too. Downside 2 could be alleviated by maybe trying to pay it off in two years, and instead of doubling down every month, you pay a payment and a half of the mortgage and funnel the rest of what would have been a in the double down into mid-range savings.

    Major congrats on being in this position in the first place though, just having the potential to get it paid off that soon must be exciting.

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    1. You are right, if some doubt there I need to be careful and not push it too hard. I'll run some more numbers, we shall see.

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  12. I have to disagree with you on some things Beard. Debt might not feel good but sometimes it can be good. If you have low interest debt, like your 3.3% mortgage, then you can likely take money you would use to pay off that loan, invest it and make more than the 3.3% on your investment than you are essentially paying to borrow that money. In my mind its all about making the most out of your money. I have approached my college loans the same way. As a single guy without kids I have a good amount of excess income every month. Now I could direct all of it towards my very low interst student loans and get them paid off, or I can invest that money, make a greater return than I owe on my loans, and in the long run ed up better off.

    Assuming your return on investment is greater than the interest rate you owe than mathematically your investment income is always greater than your loan interest "loss" (i.e. the fee you are paying for the opportunity to make your investment) and you are ending up on top.

    I get the desire to banish the debt but I think with such a low interest rate you would be better off putting some of that money (assuming it isn't emergency fund cash -- don't touch that) into a low risk mutual fund and paying your debt off slower.

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    1. You can look at debt and stock in two ways:

      1) Continue paying low rates on the mortgage for a longer period of time, since that money is cheap.

      2) Pay off the debt sooner rather than later, so you can devote more money to stock that gets a higher return.

      Or some combination, so you sell some (but not all) stock now to get rid of the debt earlier so more can be concentrated at investments that pull a greater return.

      The opportunity cost of selling stock now is what's holding me back. Since nobody can predict the future stock rise/fall, it is a difficult decision.

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  13. One thing to think about is that we're basically at the bottom of the stock market right now. I don't know when you bought your stock--was it pre-crash in early 2008, was it when the market was way down in early 2009, or did you buy it in early 2011, when the market was relatively high and then crashed again in late 2011? I know you're looking at the timing for cap gains purposes, but it's also important from an opportunity cost perspective. Even if you've broken even by now or gained a little, the market is likely to keep going up over the next few years, so the opportunity cost of selling out of your portfolio might be higher than usual given the very low mortgage rates / interest tax breaks / etc.

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    1. The stock market bottomed out in recent history Feb. 2009. The Dow's actually back to near record highs right now, 13,800, with a peak of 14,000 in 2007. Depends on what stocks were purchased when on whether the ole stock account is looking like a bear or bull. In general, my accounts are doing okay, losses on some stocks but most gaining. My Netflix stock rose almost 60% in two days this week, if you can believe that.

      There is definitely an opportunity cost if I sell now, as I expect the market to dip and bounce, dip and bounce but in the long run continue an upward trend.

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  14. Here's the way I see it. You saved up a pot of money for a reason. It was to be used wisely for the future. If you don't use it now, what in the world were you working so hard to save it for?!? Saving is such an important and valuable thing. But saving for the sake of saving longer never made sense to me. As long as you still have enough saved in other locations for retirement, college, emergencies, etc., I don't see the point in paying a billion dollars in interest.

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    1. Interest is running me $46 a month now after the refinance, which is a low rate. But still money the bank is getting and not me putting towards investments.

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  15. Michelle McCormick1/25/2013

    If paying off the mortgage is important, juust be glad you don't live in So Cal on the beach! We'll never ever EVER pay off a house at the prices here. We live in a 1600 square foot house with a 1 car garage and you don't even wanna know how much it costs. But then again, we live about 20' from the ocean, so it softens the blow a little.

    But needless to say, paying off a house in the million dollar range just to say we are debt free isn't in our near future. The only people that own their house free and clear inherited it from a relative that bought the land in 1920 for $50k. So we'll just have to stick to investing in other things :)

    We do, however, live on all cash besides that, so that counts right??

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    1. Your example is one of several reasons why I don't think I could live in California. Great place to vacation, but the house prices are comically high in many towns. Incomes are generally higher too, but not nearly enough to close the spread. Iowa!

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    2. Michelle McCormick2/04/2013

      I agree mostly, but my husband is one of the lucky ones, he makes about 6 times out here than he did in Texas. (We moved here from TX about 2 /12 years ago for his job)

      So it's not so bad - we just realized that we probably still won't be able to pay off a million+ dollar house in our lifetimes....

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  16. Dave Ramsey usually asks callers in this situation if they would take out a mortgage to buy stock. If the answer is no, then he usually says to sell the stock and pay off the house. I'd make sure I have 3-6 months of emergency fund in place before you start paying off the house, though. It's nice to have a cushion if something falls apart.

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    1. Dave Ramsey also says to shred credit cards, which I think is dumb for people that can use them wisely. I get $400 or $500 back a year on my card since the balance is paid off each month and they fork back a % of all purchases. And debit cards are terrible, this.

      I like your quote of Dave's about would you take a mortgage to buy stock. Makes me think of the loan from a different angle.



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  17. As with any financial decision, do the math! What is your return on the stocks? What is your base for capital gains (in other words, is it possible that you could even take a loss on the stocks)? I would talk to my CPA and get them to run the various numbers to figure which is going to put you in the best tax and savings position.

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    1. The math is fuzzy, it's not black and white. The market moves daily, the future gains and losses are unpredictable, some of my stocks are taxed short, others long-term gains. The only static factor here is I pay 3.3% a month in interest on the house, that plus payments I could otherwise be diverting to investments.

      Still running some rough numbers and plugging in expected/best guess future assumptions on gains/losses. It's tricky.

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  18. Do it, because you want to do it. You've shot down all dissenting opinions. When I do that, it's a sign that I just wanted to talk it out with myself rather than be convinced to do otherwise.

    However, please keep in mind that although there isn't a such thing as good debt, there is indeed a such thing as necessary debt. We live in a world that measures debt to determine creditworthiness, and not having any debt can sometimes, situation dependent, negatively impact your credit score and ability to get credit if you need it. I don't know the ins and outs of not having a mortgage loan for the long term - I'd check with an accountant on that if I were you, so you can make whatever additional preparations to your coffers that might be necessary.

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    1. I'm certain about paying off the house early, although I haven't decided how aggressive to get on this. I appreciate the input from readers, it makes me think through options from different angles. The main problem with selling stock now is the opportunity cost of what the pot could become if I let it bake for 20 or 30 years vs. draining now. That and interest rates are so low right now.

      Most likely, I'll take a mixed approach and sell some stock stock now to pay down the debt, but keep a fair amount in the account so it continues to bake.

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  19. Anonymous1/26/2013

    Double down for a few months and see how you feel. If you come into "extra" money, take that and throw it at the mortgage. You just refied so spread those refi costs over a couple of years. As far as emergency funds, I recommend more like 12 months....there is usually a reason for the emergency and that reason probably isn't helpful for getting quickly back into income earning mode. Reset the goal to pay off the mortgage by the time you hit 40 or pigtails hits high school.

    That said, I paid cash for the last house. No mortgage is means those funds get plowed into savings/investments. Amazing how fast that grows. You know that question, "do you own your house or rent?" Lots of people answer that they "own" thier house but they really don't. The bank owns it with them. I OWN my house.

    finally, while I've worked hard and saved, gotta thank the big guy upstairs. Good health, loving family, great job......Lots of people don't have that good. I try to remember to be greatful for what I've got.

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    1. That seems like a reasonable approach, and congratulations for smartly purchasing your home with cash. From this point forward, I plan to do the same.

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  20. I look at it a little different I guess. I have a degree in accounting/business so I get the points people are making. While 3.3% is low interest and mortgage debt is "good" debt.

    But the crucial thing is mortgage debt is "good" debt, only when compared to other debt. After having an emergency fund, and a retirement plan well in place, debt is still debt. Paying on debt - no matter the reason - is never better then paying yourself in some way.

    You have retirement and emergency funds cared for - the rest is slushy in my opinion.

    How long would it take to rebuild your "middle savings" if you paid your house payment amount to it? What if you doubled down?

    If some crazy emergency came up that wasn't covered by your emergency fund - you could always take a home equity loan and be in the same place as now.

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    1. It would take about three years to reload the stock account if I drained it. I'm with you on the "good debt" thing, get out of that prickly yoke as quickly as possible.

      The flip side others are challenging is the opportunity cost of selling stock now to finish off a low interest mortgage. Pretend I cut $8K in mortgage interest by paying the house early. But there's the possibility the stock account would gain $12K on returns if it sat rather than emptying to pay the loan. In that case, might be better to let the money cook in stocks and pay longer on the house.

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    2. True - but stock market rates are not a guarantee.

      If you paid it off slower - in the three year range - draining some stock and paying more to the principle - what would your estimated position be then vereses now?

      There is something to be said for the unquantifiable freedom in having no mortgage. But either way - financially you are sound.

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    3. Right on, can't wait to be 100% debt free...hard to put a number on that one!

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  21. How long would it take to pay off without going along the 'draining stock accounts' route?
    That's a fantastic interest rate that you're on... very jealous of that!!! Like some others have said, what if something happens and you can't afford to pay for whatever it is, because you've drained your stock accounts?
    I guess it comes down to what the difference is in times between draining route, and carrying on as is.
    Go you for having paid off so much already though. I'm only 1 year into house ownership/mortgage paying... so the idea of owning outright is a long way off for me.

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    1. It would more than 5 years to pay the house off without the help of flow from selling stock. I'm really not interested in chewing on the mortgage for more than 3 or 4 years.

      While there is risk to selling stock now and being without the "middle savings" if a money emergency cropped, there is less of a burden on the outflow side if I have no house payment. Monthly expenses would be low for the basics: food, utilities, insurance and the like.

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  22. You won't regret being debt free. That said, I'd take the time to up the emergency fund to 12 months, since you are close to that anyway- you've a kid, which is reason enough to play it conservative and double down on the emergency fund. Once that is done, I'd go balls out and live dirt cheap, paying off house as fast as possible. I don't know anyone who regretted paying off the house. If you keep on that budget for a while after you pay off the house- you will replace that investment money pretty quickly. You won't notice staying on the uber tight budget a little longer- you'll be use to it by that point.

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    1. Balls out and dirt cheap, got it.

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  23. I know Beard is in good financial shape, but I want to offer a rebuttal to Roz Lyons's statement that no one ever regretted paying off a house. My parents had a 15-year mortgage. The higher payments meant that there was less money for things like food and clothes and life insurance. When my dad died at 5 years old my mom had a paid-off house, yes, but only had income from her part-time job to feed and clothe herself, put gas in her car, pay her health insurance premiums, property taxes, etc. She also said the money problems put a lot of strain on their marriage. I bet if she could go back she would opt for the longer loan and more happiness and stability. Just another side of the coin...

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    1. I personally slot term life insurance as a top-3 financial item to secure for the family, above paying off a house early. It sometimes gets the axe when money is tight, the hard scenario your family went through helps articulate why every household needs coverage.

      I'm sorry your dad died when he was so young.

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  24. Oops, my dad was 51 years old when he died--not five.

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  25. Anonymous4/12/2013

    I am retired. My husband was a farmer and we had to live on cash only, other than the house payment. After 2 years in the house we built on the farm, we started paying $2000 extra off the principle each year. As it happens we only owed $5000 when the farm had to be sold for highway projects. We never regretted having been debt free at 40 years of age. We have never had another mortgage and enjoy cash only now. Just another way to look at your possibilities. Good luck in your thinking.

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Thanks for the note, check back for my response!