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Low rates and payoff debates

Singletary’s co-decision to pay off her mortgage well ahead of schedule came after her husband retired. The couple felt ready, having set aside pre-retirement money for the last decade. They ultimately used funds from two retirement accounts from previous employers.

According to the Federal Reserve Bank of St. Louis, 30-year fixed mortgage rates sat at 5% or less between 2010 and the first quarter of 2022. Meanwhile, 15-year mortgage rates sank below 3% for several stretches during that same period — including when Singletary and her spouse refinanced in September 2016.

The Federal Deposit Insurance Corp. (FDIC) suggests that, as a rough guideline, lenders will want to see a mortgage payment that’s inclusive of property taxes and insurance fall between 25% and 28% of monthly gross income.

Singletary and her husband found themselves in a comparable situation, as their mortgage took up 20 percent of their net monthly expenses. "By getting rid of it, we eliminated the biggest expense in our budget," she wrote.

But the real question posed to Singletary by some of her readers is: could the couple have made a better financial choice?

The math can get tricky as mortgage rates have a somewhat illusory quality. That’s because 2.75%, while a relatively low number, doesn’t accurately convey the interest you pay upfront.

Mortgages are amortized, which means more of your payment goes toward interest in the early years. This U.S. Bank mortgage calculator shows that, with monthly payments of $3,298 on the same type of 15-year loan Singletary had, $657 goes toward interest and $2,058 to principal.

Retiring the loan means saying goodbye to the interest and opening avenues for post-payoff investing. In this scenario, that might be roughly $2,700 a month (after annual taxes and insurance totaling $7,000).

That’s a tremendous argument for retiring the mortgage, especially if the freed-up money pays off, say, a high-interest credit card debt.

If you invested in an S&P 500, for example, $32,400 (a year’s worth of mortgage savings) could grow into nearly $113,000 in 10 years, based on the 12.74% annual return of the exchange between 2014 and 2024.

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A peaceful state of mind

One Washington Post commenter, who went by the username Data Analyzer, made a case for leveraging a money market against the mortgage.

"Given that a Vanguard Federal Money Market fund, which is invested in Treasuries, yields 5.3%, it's pretty easy to get the 5.3% return and pay the 2.75% rate. That's like printing free money and should be continued until the yields drop below the mortgage rate," they wrote.

However, is “printing” money really as advantageous as shredding debt? Picking the right strategy depends largely on which data you analyze — especially if the numbers include, say, blood pressure and heart rate. Or, the number of sheep counted at night.

A 2023 survey of 1,000 people by Sleepfoundation.org found that 77% lost sleep over money concerns at least some of the time, while nearly half (41%) said it happens all or nearly all of the time.

A 2019 survey of more than 2,200 people by CreditWise from Capital One found that three in four (73%) cited finances as a major stressor — above politics (59%), work (49%), and family (46%).

“Carrying debt has always made me feel constrained and cranky,” Singletary wrote, noting that peace of mind has been “another very tangible benefit to being mortgage-free.”

She no longer worries about property tax hikes, soaring home insurance costs or unforeseen home repairs that might otherwise rock the monthly budget.

“Investing means taking on risk,” Singletary wrote. “We opted for the guaranteed return of an early mortgage payoff.”

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Lou Carlozo Freelance writer

Lou Carlozo is a freelance contributor to Moneywise.

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