Author Topic: Pay off house or continue growing 'stache?  (Read 1514 times)

Mini-Mustache

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Pay off house or continue growing 'stache?
« on: June 08, 2018, 12:24:03 PM »
Guys,

I'm new to this forum but not new to the mustachian life.

Over the years my wife and I have managed to build a 'stache of around 450K split between 401(K)s, Roth IRAs, HSAs and taxable investments. We also have a 600K mortgage left on a 1.1M house (we live in an expensive city). Between my wife and I, we will manage to save about a 180K this year after all expenses.

The question on my mind is whether we keep investing our savings or do we start making a dent on our mortgage and pay it off? Or do a mix of both?

We have a 7/1 ARM with a 3.125% interest rate. The adjustable period of the loan expires in 2022.

I'd love to get some advice here.

Cheers!

Catbert

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Re: Pay off house or continue growing 'stache?
« Reply #1 on: June 08, 2018, 02:54:17 PM »
One thing to consider is what interest rate you'd be willing to pay on the house.  4%? 5%?  6%?.  What year would your adjustable rate loan possibly reach that rate?  Then you might consider making extra payments such that it would be paid off (or the balance so low the rate wouldn't matter).  With 180K a year to save/invest any extra payments would be after maxing 401k/TSP/IRA accounts.

This assumes, of course, that this is your forever home.  If not, I'd be in no rush to pay it off.   

I was in no rush to payoff my primary residence until the balance got less than 100K.  This I tossed extra money whenever possible and paid off in a bit over a year.  I have a 7 year ARM at 3% on a second home.  I'm paying extra so that it'll be paid off when the rate is max 5%.

Mini-Mustache

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Re: Pay off house or continue growing 'stache?
« Reply #2 on: June 08, 2018, 08:59:55 PM »
Thanks Catbert. You make some really good points!

Grogounet

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Re: Pay off house or continue growing 'stache?
« Reply #3 on: June 12, 2018, 01:33:22 AM »
If you look at stats, all roads lead to investing.
But MMM himself paid down his mortgage too while continue investing. Why? To sleep better at night.

I'm doing both too for the same reason.

frugaliknowit

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Re: Pay off house or continue growing 'stache?
« Reply #4 on: June 12, 2018, 09:32:54 AM »
Questions:

1.  How long do you plan on keeping your house?  There's no such thing as a  "forever home".  A guess, at least?

2.  Do you have or do you add any bonds in your investment mix (the reason I am asking is that bond investing can be replaced by pre-paying mortgage).

3.  What's your estimated retirement/FIRE timeframe? 

boarder42

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Re: Pay off house or continue growing 'stache?
« Reply #5 on: June 12, 2018, 09:45:02 AM »
If you look at stats, all roads lead to investing.
But MMM himself paid down his mortgage too while continue investing. Why? To sleep better at night.

I'm doing both too for the same reason.

MMM didnt have a sub 4% interest rate.  the statment that he did it doesnt really hold much water here - it was a different environment.  If he were writing that article today with a mortgage from the last few years it would be a much different article.  and if it werent it would just be to get clicks and not offend all those people who refuse to look at the numbers or do and still choose feelings.

Dont pay down the mortgage you'll come out much farther ahead OP.  Paying it down with extra funds slowly over time also increases your risk of total financial failure vs investing. 

Follow the investment order and your house would fall under the dont ever pay down invest section of that. 
https://forum.mrmoneymustache.com/investor-alley/investment-order/

it really is that simple. 

Cromacster

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Re: Pay off house or continue growing 'stache?
« Reply #6 on: June 12, 2018, 09:51:56 AM »
If you look at stats, all roads lead to investing.
But MMM himself paid down his mortgage too while continue investing. Why? To sleep better at night.

I'm doing both too for the same reason.

MMM didnt have a sub 4% interest rate.  the statment that he did it doesnt really hold much water here - it was a different environment.  If he were writing that article today with a mortgage from the last few years it would be a much different article.  and if it werent it would just be to get clicks and not offend all those people who refuse to look at the numbers or do and still choose feelings.

Dont pay down the mortgage you'll come out much farther ahead OP.  Paying it down with extra funds slowly over time also increases your risk of total financial failure vs investing. 

Follow the investment order and your house would fall under the dont ever pay down invest section of that. 
https://forum.mrmoneymustache.com/investor-alley/investment-order/

it really is that simple.

I know you have put a lot of thought and analysis into this Boarder and I typically agree with you on the matter.  Do you think anything changes when the OP has an ARM?  I would tend to think that risk goes up with ARM depending on the rate when the term expires.

acroy

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Re: Pay off house or continue growing 'stache?
« Reply #7 on: June 12, 2018, 10:32:59 AM »
The question on my mind is whether we keep investing our savings or do we start making a dent on our mortgage and pay it off? Or do a mix of both?
Keep investing in savings! this is why i do not pay off my mortgage:
- actually owning a house places a huge portion of your NW in a non-liquid asset, subject to local market variances. end up waaayyyy 'overweight' on real estate.
- interest payment is deductilbe
- the house is a leveraged asset: I get reap ALL the capital gains of the house (if any, if and when I sell) with 'only' 20% down and 360 easy payments on the rest ;)

anyway: congratulations on the financial status, savings, and good luck!

boarder42

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Re: Pay off house or continue growing 'stache?
« Reply #8 on: June 12, 2018, 12:12:33 PM »
If you look at stats, all roads lead to investing.
But MMM himself paid down his mortgage too while continue investing. Why? To sleep better at night.

I'm doing both too for the same reason.

MMM didnt have a sub 4% interest rate.  the statment that he did it doesnt really hold much water here - it was a different environment.  If he were writing that article today with a mortgage from the last few years it would be a much different article.  and if it werent it would just be to get clicks and not offend all those people who refuse to look at the numbers or do and still choose feelings.

Dont pay down the mortgage you'll come out much farther ahead OP.  Paying it down with extra funds slowly over time also increases your risk of total financial failure vs investing. 

Follow the investment order and your house would fall under the dont ever pay down invest section of that. 
https://forum.mrmoneymustache.com/investor-alley/investment-order/

it really is that simple.

I know you have put a lot of thought and analysis into this Boarder and I typically agree with you on the matter.  Do you think anything changes when the OP has an ARM?  I would tend to think that risk goes up with ARM depending on the rate when the term expires.

risk changes slightly but ARMs typically have maxes tied to them and if you're at a sub 4% the max they can adjust it is probably not too high.  its not like it goes from 3% to 7% the next year. - OP didnt provide enough detail in their personal situation to answer how much risk there is but i bet its minimal and is likely overstated by some.  other countries out side the US have sub 1% non fixed rates they have to go find a new one every 5 years i'd still not be paying that down b/c i have a higher risk tolerance but also holy hell sub 1% ??

Grogounet

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Re: Pay off house or continue growing 'stache?
« Reply #9 on: June 12, 2018, 10:39:35 PM »
If you look at stats, all roads lead to investing.
But MMM himself paid down his mortgage too while continue investing. Why? To sleep better at night.

I'm doing both too for the same reason.

MMM didnt have a sub 4% interest rate.  the statment that he did it doesnt really hold much water here - it was a different environment.  If he were writing that article today with a mortgage from the last few years it would be a much different article.  and if it werent it would just be to get clicks and not offend all those people who refuse to look at the numbers or do and still choose feelings.

Dont pay down the mortgage you'll come out much farther ahead OP.  Paying it down with extra funds slowly over time also increases your risk of total financial failure vs investing. 

Follow the investment order and your house would fall under the dont ever pay down invest section of that. 
https://forum.mrmoneymustache.com/investor-alley/investment-order/

it really is that simple.

I'm confused. Why is the reason you would not want to pay down your house as much as possible?

And I cannot relate to what was mentioned about MMM. In more recent interviews, he explained he paid down his house and his IP to mitigate risks... and in even more recent years he bought cash the warehouse to avoid credit.

I'm not entering an argument but as we're giving advice I just want to make sure we are all under the same comprehension. Every situation is different and risk tolerance is different to every one too.

boarder42

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Re: Pay off house or continue growing 'stache?
« Reply #10 on: June 13, 2018, 04:35:33 AM »
https://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/

Here is 12 pages on it. It's counterintuitive. It took me about bit to trupy understand. Read thru that and ask questions. Most people who talk about the risk don't understand they're actually increasing the risk they believe they are mitigating during the paydown period.  Mmm is fine and his blood brings in 500k a year. His situation is not closer to comprable to what anyone here is dealing with. He doesn't have to be efficient.  He can make the do whatever I want decisions. 

But in general you'll FIRE faster and be safer in FIRE with a mortgage than without. Oh and you'll decrease your risk of total financial failure on your way to fire. There are very rare cases where low fixed rate debt should be paid down instead of investing and they're few and far between. You're essentially betting on green on the roulette wheel when you pay down a mortgage over investing while the investors have both black and red on their side. The odds are actually wosre than that for a mortgage paydown. But I like the picture it paints

frugaliknowit

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Re: Pay off house or continue growing 'stache?
« Reply #11 on: June 13, 2018, 12:01:33 PM »
https://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/

Here is 12 pages on it. It's counterintuitive. It took me about bit to trupy understand. Read thru that and ask questions. Most people who talk about the risk don't understand they're actually increasing the risk they believe they are mitigating during the paydown period.  Mmm is fine and his blood brings in 500k a year. His situation is not closer to comprable to what anyone here is dealing with. He doesn't have to be efficient.  He can make the do whatever I want decisions. 

But in general you'll FIRE faster and be safer in FIRE with a mortgage than without. Oh and you'll decrease your risk of total financial failure on your way to fire. There are very rare cases where low fixed rate debt should be paid down instead of investing and they're few and far between. You're essentially betting on green on the roulette wheel when you pay down a mortgage over investing while the investors have both black and red on their side. The odds are actually wosre than that for a mortgage paydown. But I like the picture it paints

Fire safer if there's a 60% downdraft in the market?  I don't think so...Decrease risk of financial failure?  How so if your Fire Date is staring in your face and your portfolio is down 60% and you've still got a mortgage ?  The market may AVERAGE ~7%, but it does not GUARANTEE so each year (2000-2009 S&P was ~-4%).

Hey, I'm all for taking calculated risks, but I think some of what you say above is misguided, no offense.
« Last Edit: June 13, 2018, 12:17:17 PM by frugaliknowit »

acroy

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Re: Pay off house or continue growing 'stache?
« Reply #12 on: June 13, 2018, 12:32:51 PM »
Fire safer if there's a 60% downdraft in the market?  I don't think so...Decrease risk of financial failure?  How so if your Fire Date is staring in your face and your portfolio is down 60% and you've still got a mortgage ?  The market may AVERAGE ~7%, but it does not GUARANTEE so each year (2000-2009 S&P was ~-4%).
If the market is down 60% then house value is most likely down substantially as well, re:2009 meltdown. yes?
I would only pay off the house if it is 10% or less of my NW, and maybe not even then. why not keep those little green men working for me instead of tied up in a fixed illiquid asset?

boarder42

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Re: Pay off house or continue growing 'stache?
« Reply #13 on: June 13, 2018, 01:15:15 PM »
https://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/

Here is 12 pages on it. It's counterintuitive. It took me about bit to trupy understand. Read thru that and ask questions. Most people who talk about the risk don't understand they're actually increasing the risk they believe they are mitigating during the paydown period.  Mmm is fine and his blood brings in 500k a year. His situation is not closer to comprable to what anyone here is dealing with. He doesn't have to be efficient.  He can make the do whatever I want decisions. 

But in general you'll FIRE faster and be safer in FIRE with a mortgage than without. Oh and you'll decrease your risk of total financial failure on your way to fire. There are very rare cases where low fixed rate debt should be paid down instead of investing and they're few and far between. You're essentially betting on green on the roulette wheel when you pay down a mortgage over investing while the investors have both black and red on their side. The odds are actually wosre than that for a mortgage paydown. But I like the picture it paints

Fire safer if there's a 60% downdraft in the market?  I don't think so...Decrease risk of financial failure?  How so if your Fire Date is staring in your face and your portfolio is down 60% and you've still got a mortgage ?  The market may AVERAGE ~7%, but it does not GUARANTEE so each year (2000-2009 S&P was ~-4%).

Hey, I'm all for taking calculated risks, but I think some of what you say above is misguided, no offense.

Yeah if the market does that shit in the first 5-10 then we're all fucked mortgage or not. congrats on discovering that!

Yes the one advantage for not having a mortgage is SORR but in every previous SORR time frame the person with or with out a mortgage failed. the person with the mortgage may have failed 5-10 years sooner but they still had to go back to work or cut their spending so to me this is a non starter and doesnt really matter.   

The guaranteed decrease risk of financial failure is during paydown periods.  doesnt matter if the market tanks 90% if you're paying down your house and i'm not i have more liquid capital to continue living my life until i find a new job or whatever needs to happen.

Compound this with the overly large E-Funds mortgage payer downers tend to keep in place to protect against losing their job in the situation above and you're further compounding the time to get to FIRE. 

No part of my statement is misguided if you actually look at history - which we all are assuming will continue to repeat with the 4% SWR.  i'm betting on black and red and you're betting on half of a green space.  too each their own but i'll take that 'calculated' (actually not risky) play

the least risky play is to lump sum pay off a house then you mitigate what i stated above but still have inflation risk in FIRE.  Inflation is a larger killer of staches than poor market returns.

Grogounet

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Re: Pay off house or continue growing 'stache?
« Reply #14 on: June 13, 2018, 07:33:59 PM »

The guaranteed decrease risk of financial failure is during paydown periods.  doesnt matter if the market tanks 90% if you're paying down your house and i'm not i have more liquid capital to continue living my life until i find a new job or whatever needs to happen.


This assumes you don't have to pay rent or live for free?
While guy N#1 might still be paying mortgage - and most likely by then would have a very little repayment because he is mustachian -, you will still be paying rent.

I understand the value of investing instead of paying back your mortgage.. Still I can't agree that we're giving advise to someone who might have a different risk tolerance than us.

We might be well happy during a dip of the market and seeing this as a potential opportunity to buy more.
Well, in reality 95% of other ppl will actually freak out, and be very happy if they don't have a mortgage to sustain on top of loosing their jobs.

We can enter the debate on why we buy houses in the first place in this crazy market - still this is not the debate since the question is from someone who's already bought a house.

boarder42

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Re: Pay off house or continue growing 'stache?
« Reply #15 on: June 14, 2018, 04:39:45 AM »

The guaranteed decrease risk of financial failure is during paydown periods.  doesnt matter if the market tanks 90% if you're paying down your house and i'm not i have more liquid capital to continue living my life until i find a new job or whatever needs to happen.


This assumes you don't have to pay rent or live for free?
While guy N#1 might still be paying mortgage - and most likely by then would have a very little repayment because he is mustachian -, you will still be paying rent.

I understand the value of investing instead of paying back your mortgage.. Still I can't agree that we're giving advise to someone who might have a different risk tolerance than us.

We might be well happy during a dip of the market and seeing this as a potential opportunity to buy more.
Well, in reality 95% of other ppl will actually freak out, and be very happy if they don't have a mortgage to sustain on top of loosing their jobs.

We can enter the debate on why we buy houses in the first place in this crazy market - still this is not the debate since the question is from someone who's already bought a house.

You still fail to see the risk go read the thread I posted if you still don't see that you're increasing your risk. The very risk you are talking about mitigating then I can help you your reply here is non sensical and grasping at random shit.

Grogounet

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Re: Pay off house or continue growing 'stache?
« Reply #16 on: June 14, 2018, 09:35:16 PM »
Ok, I read some of the pages, not all of them.
And, I still disagree with your approach. Just to be clear: I'm not saying that your figures are incorrect, they are (as stated in my first post, I too believe investing is the right answer).

The "approach" is what bothers me.
We can't just make such radical assumptions to someone who just joined the forum and ask him to read 12 pages (of what I would really call "random shit") of a post to understand it all.

The debate here is a wordy debate with the term "risk". I should have stated "emotion", not "risk".
It might actually be a lot more risky with a mortgage but we are dealing with emotions. And we are emotional, all of us, to a different degree. Without understanding the level of emotions that one will put to his investment future, we just can't state them not to repay their mortgage.


On a side note, I learned a ton on the 12 pages post. Here in OZ, we can't lock in our interest rate more than 5 years, don't deduct interest rates off mortgages, etc etc... Would be worth to make the calculation based on assumptions and see the difference taking into account the differences. I'm sure we'll come ahead, I'd like to know by how much

boarder42

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Re: Pay off house or continue growing 'stache?
« Reply #17 on: June 15, 2018, 04:28:00 AM »
Ok, I read some of the pages, not all of them.
And, I still disagree with your approach. Just to be clear: I'm not saying that your figures are incorrect, they are (as stated in my first post, I too believe investing is the right answer).

The "approach" is what bothers me.
We can't just make such radical assumptions to someone who just joined the forum and ask him to read 12 pages (of what I would really call "random shit") of a post to understand it all.

The debate here is a wordy debate with the term "risk". I should have stated "emotion", not "risk".
It might actually be a lot more risky with a mortgage but we are dealing with emotions. And we are emotional, all of us, to a different degree. Without understanding the level of emotions that one will put to his investment future, we just can't state them not to repay their mortgage.


On a side note, I learned a ton on the 12 pages post. Here in OZ, we can't lock in our interest rate more than 5 years, don't deduct interest rates off mortgages, etc etc... Would be worth to make the calculation based on assumptions and see the difference taking into account the differences. I'm sure we'll come ahead, I'd like to know by how much

This entire fucking blog and forum is based on controlling emotions for acheivement of FIRE. Whether it's controlling spending or changing how you feel about low interest debt. So when someone asks should I stop spending money going out to eat we don't say it depends we say yes stop it. People don't flock in saying if you attempt to do this youre more likely to end up going to capital grille more often and spending more to treat yourself if you try to curb this spending. People should be presented with the best option.  And then decide how they move forward with it we're not a financial advisor talking to a typical person in the us. And this person here is actually asking this question which means we should give them the answer that benefits them the most.

nottoolatetostart

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Re: Pay off house or continue growing 'stache?
« Reply #18 on: June 15, 2018, 04:45:14 AM »
Looks like the conversation took a different turn, so I will offer my two cents.

I was with Boarder & the "keep the mortgage crowd" on maintaining our mortgage for the last couple years but a few life changes happened in the last few months. DH left his cushy $200K/yr job, we moved to another lower cost of living city for DH's passion project, had enough cash to buy a property outright since we would not qualify for a mortgage without actual income. So instead of renting, we bought a beautiful fixer upper property in cash, beautiful neighborhood, awesome central location, great school district for kiddos, and renovated it. Now that are officially debt free, honestly, I love it. I don't think I could do a mortgage again.

You only have one shot at life. Mortgage took up WAY too much mental clutter for me (e.g. do I pay it off? do we keep investing? is now the time to pull the trigger?). Life is simpler. It's just not how I wanted to live anymore. Even if we came out ahead financially by keeping a mortgage, there is a COST to keeping it (those constant conversations with DH about whether we should have pulled the trigger on the mortgage, internal thoughts, etc). Life is complex enough....we just did not want it anymore.

We are FI, still in our 30s, our annual drawdown is between 25-30K, we are below 4% SWR, and DH has high income potential going forward on something that he is crazy passionate about. You can tell me that I supremely effed up my life by buying a house in cash....but there is such a thing as enough. We are not gambling on our house. I could never go back. That feels too risky to us.

Also, I know that we are merely leasing the land from the government. Our property taxes are amazingly $800 and change per year.....so a very low threshold to avoid losing the house.

Maybe we could refi one day...but I don't see that happening. What would I do with that cash out refi? I would start constantly thinking about paying it off and those internal debates would start again.  It reminds me of the story of the businessman and the Mexican fisherman...   sorry, but this feels too good.

boarder42

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Re: Pay off house or continue growing 'stache?
« Reply #19 on: June 15, 2018, 05:40:00 AM »
there is a big difference between you @nottoolatetostart and someone building wealth you're FI who gives a shit what you do with your money at that point.  when you're not FI you should be looking to maximize your path there.  also you lump sum paid it off which lowers risk - SORR since you are FI then thats a bigger deal.  to someone building wealth your advice doesnt hold a lot of weight in my opinion. 

it feels really good to go rent 1MM dollar yachts each weekend too.  and buy expensive cars for some - but we dont advocate doing those things here.