Author Topic: Payoff mortgage vs Invest  (Read 2792 times)

boarder42

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Payoff mortgage vs Invest
« on: January 21, 2015, 01:03:34 PM »
i know this has been beaten to death and people who pay off their mortgages are generally considered to be more risk averse than those who choose to invest and carry a mortgage or car payment etc.

Some information i stumbled on today

Protected in Bankruptcy:
your 401k
Your IRA contrbutions up to 1MM (or all if rolled over)
in my state only 15k of your home is protected.  check your state here
http://www.nolo.com/legal-encyclopedia/the-homestead-exemption-your-state

cars arent protected anywhere that i know of.

So how is it ever smarter to pay off a low cost loan and tie your money up in assets that can be taken from you if you fall on the worst of the worst times vs. Investing in retirement funds.  How is this more risk averse? 

I'd argue there is far less risk not tying your money up into one asset that can be taken from you in bankruptcy.  And that the most risk averse home owners carry a debt against their home or should carry a debt.


Thoughts.
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whammer33024

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Re: Payoff mortgage vs Invest
« Reply #1 on: January 21, 2015, 02:16:51 PM »
if someone is doing well enough financially to be debating investing or mortgage payoff, my guess is bankruptcy isn't really a concern to them

boarder42

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Re: Payoff mortgage vs Invest
« Reply #2 on: January 21, 2015, 02:29:50 PM »
You may not see it coming for one reason or another depending on general life risk exposure.
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neil

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Re: Payoff mortgage vs Invest
« Reply #3 on: January 21, 2015, 02:59:05 PM »
There is no such thing as risk-free.  Checking accounts are only protected to the extent that the US government remains stable.  Do you want to better insure a safer retirement for the cost of your time?  If I was being ultraconservative, I can come up with reasons why $10M is not enough.

Some people might feel the reduced expenditure of paying off the mortgage offsets any chance their house might be targeted in a lawsuit or destroyed by uninsured means.  I don't think this is necessarily an incorrect answer.  Making the claim that you can FIRE with <4% SWR is itself somewhat depending on extreme circumstances not hitting your life.

I think if, for you, asset protection is just too important and this has some opportunity cost in having to pay out more in interest and maybe some overexposure in the stock market, I don't think there is anything necessarily wrong with that.
« Last Edit: January 21, 2015, 03:04:43 PM by neil »

neil

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Re: Payoff mortgage vs Invest
« Reply #4 on: January 21, 2015, 03:07:21 PM »
Your IRA contrbutions up to 1MM (or all if rolled over)

This seems to be state-dependent, since only 401Ks are covered by federal law (ERISA).  I looked this up recently for California and it seems to be at the discretion of the judge, and they are not obligated to protect your lifestyle in perpetuity.

I'm not a lawyer, but I thought this would be an important point to add for anyone reading.

boarder42

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Re: Payoff mortgage vs Invest
« Reply #5 on: January 21, 2015, 03:13:15 PM »
my money in my 401k is 100% protected if i end up being sued for millions same with my IRA .. my house isnt protected...

so say a 23 year old fresh out of school ... buys a house pays it down as fast as possible has a car accident kills 2 people deemed his fault.  they come after his house after the insurance is done paying...

same 23 year old ... invests in his 401k and IRAs vs paying down house has same accident.  Has 401k money and IRA money left. 

How is this not better. 

in what loss of everything situation does paying off your house first win?  In what dollar value over time situation does paying down your house first win? 

i dont see one. 
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Beaker

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Re: Payoff mortgage vs Invest
« Reply #6 on: January 21, 2015, 03:26:27 PM »
in what loss of everything situation does paying off your house first win?

The ones where your 401k, IRA, and other investments tank.

Imagine a stock market crash followed by losing your job. If you still have a mortgage you have to cover principal, interest, taxes & insurance every month. Fail and you lose your equity and house. You'll have to start renting somewhere which will almost certainly cost more than a paid-off house.

If your house is paid off you pretty much just have to cover taxes (you could drop insurance if you were truly desperate), which is quite cheap in most places. You could even start renting out rooms for side income.

I'm not saying this is necessarily a high probability scenario, but it's not impossible either.

RangerOne

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Re: Payoff mortgage vs Invest
« Reply #7 on: January 21, 2015, 03:33:37 PM »
Bankruptcy does not happen over night. Someone looking to pay down a house faster than 30 years is very likely to have no other debt besides the house.

If for some reason all hell broke lose and they lost your job or were unable to work and could no longer carry their mortgage, they would sell the house and find another living arrangement.

If you run into enough financial trouble to have to give up your home to bankruptcy there is likely no safe place for your money because if you had any the banks would take it.

TexasStash

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Re: Payoff mortgage vs Invest
« Reply #8 on: January 21, 2015, 03:42:56 PM »
You may not see it coming for one reason or another depending on general life risk exposure.

While this is technically true, MMM has done a number of articles that relate to whether we should be really trying to concern ourselves with every possible risk outcome. The safety margin one seems especially relevant. If you have a pretty large safety margin built up as is, and you realize that there are abundant ways to generate at least some income if you come across a hardship, you probably arent as exposed to having your home taken in a bankruptcy as you think. My safety margin currently consists of: cash on hand, taxable investments, $1MM umbrella insurance, auto liability insurance with medical payments coverage, homeowners insurance, etc. I would have to kill 2 people in a car accident and have them come full force against me (to use your example) to have any chance of exceeding this safety margin.

I'm in the middle camp. I pay extra on my mortgage and also contribute to an investment account every month on top of 401k and Roth contributions. I like spreading it out so that each part of my portfolio benefits.

But to answer your original question, I think it does make sense for a risk-averse investor to pay down the mortgage and get a guaranteed return (with the exception of possible bankruptcy). But I wouldnt advise them to stop contributing to retirement instruments to pay off the mortgage early.

It was said well in another place (possibly on today's Mr Toque blog post comment section). Life is not lived only according to spreadsheets. There is a tangible value (varies by person) associated with feeling free from a mortgage and outright owning your own property.

RangerOne

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Re: Payoff mortgage vs Invest
« Reply #9 on: January 21, 2015, 03:43:24 PM »
my money in my 401k is 100% protected if i end up being sued for millions same with my IRA .. my house isnt protected...

so say a 23 year old fresh out of school ... buys a house pays it down as fast as possible has a car accident kills 2 people deemed his fault.  they come after his house after the insurance is done paying...

same 23 year old ... invests in his 401k and IRAs vs paying down house has same accident.  Has 401k money and IRA money left. 

How is this not better. 

in what loss of everything situation does paying off your house first win?  In what dollar value over time situation does paying down your house first win? 

i dont see one.

A smart risk adverse person would likely not consider paying extra money on a mortgage unless they were already maxing out their 401k contributions. Granted you can stuff post tax money into it but why put everything in an account you cant touch till your 60.

Second if you kill 2 people in a car accident and get sued you would have to have done something pretty fucked up and illegal to get sued for so much that your auto insurance lawyers couldn't defend you and absorb the medical costs. Most cover you for millions in damages.

I mean we are talking manslaughter charges. They would garnish your future wages. Maybe they wont touch your 401k directly but the wage garnishment would eventually come out of your distributions.

A truly risk adverse person wouldn't drive drunk or break the law so this is an unlikely scenario. If you are risk adverse with your finance and not risk adverse with your life in the most basic ways well you are highly likely to get fucked.

boarder42

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Re: Payoff mortgage vs Invest
« Reply #10 on: January 21, 2015, 04:39:01 PM »
my money in my 401k is 100% protected if i end up being sued for millions same with my IRA .. my house isnt protected...

so say a 23 year old fresh out of school ... buys a house pays it down as fast as possible has a car accident kills 2 people deemed his fault.  they come after his house after the insurance is done paying...

same 23 year old ... invests in his 401k and IRAs vs paying down house has same accident.  Has 401k money and IRA money left. 

How is this not better. 

in what loss of everything situation does paying off your house first win?  In what dollar value over time situation does paying down your house first win? 

i dont see one.

A smart risk adverse person would likely not consider paying extra money on a mortgage unless they were already maxing out their 401k contributions. Granted you can stuff post tax money into it but why put everything in an account you cant touch till your 60.

Second if you kill 2 people in a car accident and get sued you would have to have done something pretty fucked up and illegal to get sued for so much that your auto insurance lawyers couldn't defend you and absorb the medical costs. Most cover you for millions in damages.

I mean we are talking manslaughter charges. They would garnish your future wages. Maybe they wont touch your 401k directly but the wage garnishment would eventually come out of your distributions.

A truly risk adverse person wouldn't drive drunk or break the law so this is an unlikely scenario. If you are risk adverse with your finance and not risk adverse with your life in the most basic ways well you are highly likely to get fucked.

There are many ways to touch this money before 60. All my 90% of my money will be in retirement accounts and I will have no issues using it when I retire at 35-40.

On a side note it amazes me how many people in these threads still think that this money is untouchable 
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