Author Topic: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!  (Read 63532 times)

Boofinator

  • Handlebar Stache
  • *****
  • Posts: 1066
Mathematically speaking I believe your net worth will likely be higher by having a 30 year mortgage and investing any surplus.  To me it gets a bit fuzzy for a few reasons: 1) projected salary duration; 2) simplicity; and 3) stress.  If you have a mortgage that you keep for 30 years, that means you have to make payments for 30 years.  That is fine during the accumulation stage, but I'm assuming that many in the forums plan to retire early.  What do those payments look like when you are in the withdrawal phase and/or when the stock market does not have a good year? 

If you can pay off the mortgage within 5 years, I believe it makes sense to knock it out and ramp up investments after it is paid off.  If it will take longer than 5 years, it makes sense to invest the money and revisit the decision based on personal preferences after the invested amount > mortgage balance.  This is assuming that in either scenario you are investing in retirement accounts and have a sufficient emergency fund.

And what if you have a sufficient emergency fund and maxed out all retirement accounts? Would it be the same if you are investing in a taxable account? That's where I get stuck in paying down my mortgage vs. using it to invest in taxable accounts.

It depends on what your objectives are and how much risk you are willing to take.

Let's take somebody who is early in their savings journey and wants to minimize the expected (average) time to FIRE. First off, this person should try to have some liquid funds (tax-advantaged funds could be liquidated, but this isn't ideal). I am a big proponent of having this "emergency fund" in equities, unless you have unsecure employment. Additionally, since this person is near the beginning of their savings journey, this money will likely compound for decades, reducing the risk even more (reversion to the mean). Finally, this strategy minimizes the expected time to FIRE (at current mortgage interest rates and considering historical equity returns). So for this person, he or she minimizes expected time to retirement and minimizes risk by investing in a taxable account over paying off their mortgage.

As one gets older, their objectives should change, due to both a declining desire to take risk (assuming you're mustachian and have a stash that can cover your needs) and a declining ability to take risk (the pleasures of aging). At this point, one can often reduce risk by paying off the mortgage even if the expected return is less than that for equities.
« Last Edit: April 08, 2019, 09:48:48 AM by Boofinator »

the_fixer

  • Pencil Stache
  • ****
  • Posts: 562
  • Location: Colorado
  • mind on my money money on my mind
I believe interest rates were around 6.5% for a 30 year in 2007.

Crazy thing is how many people had 0% down payment or low down payment style loans using 80/20 loans and ARM's just so they could buy a house.

Sent from my Pixel 2 XL using Tapatalk
« Last Edit: April 08, 2019, 09:47:20 AM by the_fixer »

nereo

  • Senior Mustachian
  • ********
  • Posts: 10800
  • Location: Just south of Canada
    • Here's how you can support science today:
I believe interest rates were around 6.5% for a 30 year in 2007.
This is broadly true.  For context the 10y US treasury rate also went above 5%.  Lenders (banks) want a return that is proportional with risk, and a 30 year mortgage is considered more risky than government bonds. Also for context when my parents originally financed their home in the early 1980s they had a prime rate of over 12%, yet within a few years the 10y went as high as 15%.

Crazy thing is how many people had 0% down payment or low down payment style loans using 80/20 loans and ARM's just so they could buy a house.
NINJA loans (no income, no assets, no job) were commonplace back them, as mortgage-backed securities made all mortgages seem less risky than they really were, and people were relying on an uninterrupted rise in home values to make their leverage seem sane. 

I would say this was the most ludicrous thing the lending industry has ever undertaken, but sadly such loans are making a comeback as the deregulation push takes hold.

techwiz

  • Pencil Stache
  • ****
  • Posts: 857
  • Location: Ontario
 
Quote
but sadly such loans are making a comeback as the deregulation push takes hold.

If true this could mean a repeat of 2008 housing crisis. I wouldn't think people in finance industry have that short of a memory?

nereo

  • Senior Mustachian
  • ********
  • Posts: 10800
  • Location: Just south of Canada
    • Here's how you can support science today:
Quote
but sadly such loans are making a comeback as the deregulation push takes hold.

If true this could mean a repeat of 2008 housing crisis. I wouldn't think people in finance industry have that short of a memory?
Sadly you would be mistaken.
The current drumbeat is that the regulatory oversight put into place after the mortgage-backed securities fiasco of 2008 is burdensome and an unnecessary headwind on profits.  This, despite record profitability in the banking sector. https://www.washingtonpost.com/business/economy/federal-reserve-proposes-changes-to-bank-regulations/2019/04/08/48da8fa2-5a01-11e9-a00e-050dc7b82693_story.html?utm_term=.efe02bad4360

Memories are short, and a large group of people still believe that 'market forces' will ensure that banks do what is in their best long term interest.  They argue that self-regulation will be the most effective. Meanwhile, our financial system continues to evaluate publicly traded companies based on quarterly (short term) profits above all else, and rewarding risky behavior.

IMO we won't have a repeat of 2008 - the bubble will burst someplace else, with some new vulnerability clever people have exploited to avoid 'onerous' regulation.

ChpBstrd

  • Handlebar Stache
  • *****
  • Posts: 1508
Quote
but sadly such loans are making a comeback as the deregulation push takes hold.

If true this could mean a repeat of 2008 housing crisis. I wouldn't think people in finance industry have that short of a memory?
Sadly you would be mistaken.
The current drumbeat is that the regulatory oversight put into place after the mortgage-backed securities fiasco of 2008 is burdensome and an unnecessary headwind on profits.  This, despite record profitability in the banking sector. https://www.washingtonpost.com/business/economy/federal-reserve-proposes-changes-to-bank-regulations/2019/04/08/48da8fa2-5a01-11e9-a00e-050dc7b82693_story.html?utm_term=.efe02bad4360

Memories are short, and a large group of people still believe that 'market forces' will ensure that banks do what is in their best long term interest.  They argue that self-regulation will be the most effective. Meanwhile, our financial system continues to evaluate publicly traded companies based on quarterly (short term) profits above all else, and rewarding risky behavior.

IMO we won't have a repeat of 2008 - the bubble will burst someplace else, with some new vulnerability clever people have exploited to avoid 'onerous' regulation.

1) Financial crisis / recession
2) Democrats elected to regulate away the causes of the recession
3) Rapid economic growth
4) Growth cycle slows
5) Republicans elected to deregulate industry and increase growth
6) Repeat

nereo

  • Senior Mustachian
  • ********
  • Posts: 10800
  • Location: Just south of Canada
    • Here's how you can support science today:
Sadly, i don't think that's far off...

Neo

  • Stubble
  • **
  • Posts: 155
I didn't read all the replies so someone probably already said it but if you want to pay off the mortgage early my answer is to invest in index funds instead of paying down the mortgage early each month. Then pay the mortgage off in one shot from the investment account when it reaches the appropriate amount. Seems like the least risky way to do it.

Boofinator

  • Handlebar Stache
  • *****
  • Posts: 1066
I didn't read all the replies so someone probably already said it but if you want to pay off the mortgage early my answer is to invest in index funds instead of paying down the mortgage early each month. Then pay the mortgage off in one shot from the investment account when it reaches the appropriate amount. Seems like the least risky way to do it.

That's the generally recommended approach for those who want to pay off their mortgage. Given current interest rates, just about nobody should be paying off their mortgage early in their accumulation years if they are interested in FIREing as soon as possible (granted this is not everybody's objective).

nereo

  • Senior Mustachian
  • ********
  • Posts: 10800
  • Location: Just south of Canada
    • Here's how you can support science today:
I didn't read all the replies so someone probably already said it but if you want to pay off the mortgage early my answer is to invest in index funds instead of paying down the mortgage early each month. Then pay the mortgage off in one shot from the investment account when it reaches the appropriate amount. Seems like the least risky way to do it.

That's the generally recommended approach for those who want to pay off their mortgage. Given current interest rates, just about nobody should be paying off their mortgage early in their accumulation years if they are interested in FIREing as soon as possible (granted this is not everybody's objective).

To me it seems like good advice for anyone with a low-rate fixed mortgage still in the accumulation phase, whether they intend to FIRE or not...
Question:  When would you not recommend this strategy under these parameters?

Boofinator

  • Handlebar Stache
  • *****
  • Posts: 1066
I didn't read all the replies so someone probably already said it but if you want to pay off the mortgage early my answer is to invest in index funds instead of paying down the mortgage early each month. Then pay the mortgage off in one shot from the investment account when it reaches the appropriate amount. Seems like the least risky way to do it.

That's the generally recommended approach for those who want to pay off their mortgage. Given current interest rates, just about nobody should be paying off their mortgage early in their accumulation years if they are interested in FIREing as soon as possible (granted this is not everybody's objective).

To me it seems like good advice for anyone with a low-rate fixed mortgage still in the accumulation phase, whether they intend to FIRE or not...
Question:  When would you not recommend this strategy under these parameters?

I would recommend it 100% of the time. But I understand different people have different things that make them tick. Some people have a strong aversion to debt, and don't care that they're reducing expected return and increasing their risk of default by paying off the mortgage. I'm ok with that, it's certainly better than being a spendypants. So given that objective, to eliminate all debt independent of other objectives, I wouldn't object to somebody paying off their mortgage so long as they understand the risks associated with that approach relative to investing.

ender

  • Magnum Stache
  • ******
  • Posts: 4879
And what if you have a sufficient emergency fund and maxed out all retirement accounts? Would it be the same if you are investing in a taxable account? That's where I get stuck in paying down my mortgage vs. using it to invest in taxable accounts.

IMO it depends on your risk factors for:

  • Inflation
  • Income loss & mortgage payments

If inflation will not affect you as much this is less of a problem than if it can. If someone's home is 50% of their net worth, their inflation risk is higher.

Likewise, you need to have a plan for paying the mortgage/taxes/etc in the event of job loss.

Boofinator

  • Handlebar Stache
  • *****
  • Posts: 1066

IMO it depends on your risk factors for:

  • Inflation
  • Income loss & mortgage payments

If inflation will not affect you as much this is less of a problem than if it can. If someone's home is 50% of their net worth, their inflation risk is higher.

Likewise, you need to have a plan for paying the mortgage/taxes/etc in the event of job loss.

Could you walk us through how inflation poses a risk here?

Adam Zapple

  • Bristles
  • ***
  • Posts: 456

IMO it depends on your risk factors for:

  • Inflation
  • Income loss & mortgage payments

If inflation will not affect you as much this is less of a problem than if it can. If someone's home is 50% of their net worth, their inflation risk is higher.

Likewise, you need to have a plan for paying the mortgage/taxes/etc in the event of job loss.

Could you walk us through how inflation poses a risk here?

Somebody will probably explain it better than me, but when you carry a 30 year mortgage and take the full 30 years to pay it off, you are using future inflated dollars to pay a fixed (non-inflated) cost, which is the original purchase price of the home.  When you pay the house off early, you give up this  benefit.

Albatross

  • 5 O'Clock Shadow
  • *
  • Posts: 46
Despite 8 pages of discussion, nobody appears to have mentioned risk relating to one's source of income!

The real 'risk' here isn't on the numbers or interest rates v stock market returns (because if that became an issue you could always start paying down your mortgage more aggressively and adjust). The real risk is that in a recession - wait for it - people can very well lose their income!

In a recession, obviously:

  • The likelihood of you losing your job, being paid less than inflation the following year, or being asked to work 'part time' increases dramatically, even if you're a senior member of a law firm.
  • Your dividend / stock income decreases.
  • If you have tenants paying off your mortgage, they might rent somewhere cheaper, or ask to pay less once the lease is over, because surprise surprise, they might have lost their jobs or other form of income.

People seem to have forgotten that THIS is the risk of not paying off loans and is particularly bad in a case of foreclosure where a bank will sell off your house for peanuts just to support their own balance sheet. I read somewhere previously that in good times, banks can let you default on mortgage payments for even a few months before commencing the foreclosure process but in bad times banks will take every penny they can get.

I get annoyed by people saying paying down your mortgage is wasting an opportunity. I get it, because from a pure numbers standpoint, it makes sense. I'm not saying you can't have a bit of both mortgage repayments and stock investing, but I don't think the 'invest on leveraged house' crowd really appreciates how quickly things turn in a recession. 


Telecaster

  • Handlebar Stache
  • *****
  • Posts: 1907
  • Location: Seattle, WA
Despite 8 pages of discussion, nobody appears to have mentioned risk relating to one's source of income!

The real 'risk' here isn't on the numbers or interest rates v stock market returns (because if that became an issue you could always start paying down your mortgage more aggressively and adjust). The real risk is that in a recession - wait for it - people can very well lose their income!

Exactly right!  Which is primary reason why you should never pay down your mortgage early.  If instead of paying down the mortgage you put the money in savings, in event of job loss you would be able to continue to pay the mortgage for many months or even years.  This is still true even if the markets are dramatically down. That gives you a major cushion which would allow you to get back on your feet.

If you were foolish enough to pay down your mortgage and lost your job, the bank gives exactly zero shits about how many early payments you made.  All they care about is if you are current. 

At this point someone usually says "you should have a huge cash emergency fund before you start paying down the mortgage."   Which is absolutely true.  But the cash drag will kill your investment returns over time.  And paying down the mortgage will also kill your investment returns over time.  So you need to kill your investment returns in order to safely kill your investment returns.  Uh, why is this smart? 

Bottom line is that paying down the mortgage early is an enormously risky strategy with almost no reward. 


Albatross

  • 5 O'Clock Shadow
  • *
  • Posts: 46
Interesting - I never though of it that way. I think I need to retreat into the mountains for a few hours to meditate on this.

My immediate gut reaction to that approach though, is that if you pay down your mortgage your monthly interest repayments also become less onerous, so even if you lost your CEO high chair, perhaps a gig at McDonalds + a sensible emergency fund will see you through to paying off the mortgage.

But I'll need to consider what you said in more depth.

Dicey

  • Senior Mustachian
  • ********
  • Posts: 10887
  • Age: 61
  • Location: NorCal
Interesting - I never though of it that way. I think I need to retreat into the mountains for a few hours to meditate on this.

My immediate gut reaction to that approach though, is that if you pay down your mortgage your monthly interest repayments also become less onerous, so even if you lost your CEO high chair, perhaps a gig at McDonalds + a sensible emergency fund will see you through to paying off the mortgage.

But I'll need to consider what you said in more depth.
Nope. Except for the inflation factor, which is explained succinctly by @Adam Zapple upthread, this is incorrect. If you're US based and have a fixed rate mortgage, the P&I portion of your payment is going to stay the same for the life of the loan. Throw in taxes and insurance and it only goes up. If your income goes down, the payment will be even more onerous. That's why you shouldn't buy more house than you can comfortably afford. At least that's something all mustachians can agree on.

Hope you had a nice mountain ramble.

Tyson

  • Handlebar Stache
  • *****
  • Posts: 2394
  • Age: 47
  • Location: Denver, Colorado
Worst case scenario is you pay extra to the mortgage, lose your job, and don't have sufficient savings.  Then you are well and truly screwed, because you CANNOT get your $$ back out of the house to live on during unemployment.

So, the solution is to take the extra $$, put it towards savings/investing instead of toward the mortgage, then if there's job loss you will have lots of money to get you though any rough patch re: employment.

The only time paying the mortgage makes ANY sense at all (from a risk standpoint) is if you have enough cash on hand to pay it off completely.  And even then, you're better off investing the $$ as you'll end up getting rich much faster by investing than by paying off the mortgage.  See the link in my signature to see exactly how much.  When I ran my numbers, it was a breathtaking difference.

Of course, I'm risk averse in some ways, so my plan is to hit FI using all extra money as investments until I hit $1.5m in the bank.  At that point I should have only $250k on the mortgage, so I'll pay off the mortgage with $250 of my $1.5m and I'll have $1.25m left.  I know from a pure numbers standpoint that EVEN THEN it's not optimal to pay off the mortgage, but it'll help me sleep better at night as I have job instability that seems to pop up at the most inconvenient times.

Boofinator

  • Handlebar Stache
  • *****
  • Posts: 1066

IMO it depends on your risk factors for:

  • Inflation
  • Income loss & mortgage payments

If inflation will not affect you as much this is less of a problem than if it can. If someone's home is 50% of their net worth, their inflation risk is higher.

Likewise, you need to have a plan for paying the mortgage/taxes/etc in the event of job loss.

Could you walk us through how inflation poses a risk here?

Somebody will probably explain it better than me, but when you carry a 30 year mortgage and take the full 30 years to pay it off, you are using future inflated dollars to pay a fixed (non-inflated) cost, which is the original purchase price of the home.  When you pay the house off early, you give up this  benefit.

We've been over the inflation bogeyman a few times already. Inflation will decrease the amount of your investment alternatives* as much as it will decrease your mortgage payments, so it does not act as an inflation hedge (even though psychologically it feels that way). This has been discussed in this thread and the don't pay down your mortgage thread.

https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/msg2353716/#msg2353716

*With the exception of TIPS.

Adam Zapple

  • Bristles
  • ***
  • Posts: 456

IMO it depends on your risk factors for:

  • Inflation
  • Income loss & mortgage payments

If inflation will not affect you as much this is less of a problem than if it can. If someone's home is 50% of their net worth, their inflation risk is higher.

Likewise, you need to have a plan for paying the mortgage/taxes/etc in the event of job loss.

Could you walk us through how inflation poses a risk here?

Somebody will probably explain it better than me, but when you carry a 30 year mortgage and take the full 30 years to pay it off, you are using future inflated dollars to pay a fixed (non-inflated) cost, which is the original purchase price of the home.  When you pay the house off early, you give up this  benefit.

We've been over the inflation bogeyman a few times already. Inflation will decrease the amount of your investment alternatives* as much as it will decrease your mortgage payments, so it does not act as an inflation hedge (even though psychologically it feels that way). This has been discussed in this thread and the don't pay down your mortgage thread.

https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/msg2353716/#msg2353716

*With the exception of TIPS.

Sorry, even after reading that link I am still having a hard time getting my head around that.  Are you able to put it another way?

Telecaster

  • Handlebar Stache
  • *****
  • Posts: 1907
  • Location: Seattle, WA
Sorry, even after reading that link I am still having a hard time getting my head around that.  Are you able to put it another way?

I *think* what Boofinator is saying is that inflation hits other investments as well, so inflation by itself is not a factor in deciding to pay off your mortgage or not. If anything, he might be understating the issue, because stocks tend to do poorly in times of high inflation for a variety of reasons.  The issue is the delta between the expected real return of paying of the mortgage vs. other investments.  It is fair to say that inflation is a wash when doing comparisons. 

But there is a little nuance I think should be included.  Namely, mortgages are long term, and even paying them off early takes a long time for most people.  As an  example, a $1,000/month mortgage might be the equivalent of $400 in 25 years (or whatever, but that's assuming historical rates of inflation). 

Forget about other investments for the moment.  That extra dollar you put on the mortgage right now might save you 40 cents in the future.  Is paying a dollar now to save 40 cents later a good idea?  You are giving up dinner and a movie now in exchange for a movie later.  That's not a good trade. 

And usual caveats apply.  We're talking about today's low mortgage rates.  If mortgages were 15% then this discussion would be totally different. 

bacchi

  • Magnum Stache
  • ******
  • Posts: 3942
Sorry, even after reading that link I am still having a hard time getting my head around that.  Are you able to put it another way?

I *think* what Boofinator is saying is that inflation hits other investments as well, so inflation by itself is not a factor in deciding to pay off your mortgage or not. If anything, he might be understating the issue, because stocks tend to do poorly in times of high inflation for a variety of reasons.

That's not quite true either. Stock values do reflect inflation...eventually. There's a known lag but it is there.

reeshau

  • Pencil Stache
  • ****
  • Posts: 618
  • Location: Dublin, Ireland
Of course, I'm risk averse in some ways, so my plan is to hit FI using all extra money as investments until I hit $1.5m in the bank.  At that point I should have only $250k on the mortgage, so I'll pay off the mortgage with $250 of my $1.5m and I'll have $1.25m left.  I know from a pure numbers standpoint that EVEN THEN it's not optimal to pay off the mortgage, but it'll help me sleep better at night as I have job instability that seems to pop up at the most inconvenient times.

I think this is the heart of the argument.  What people disagree on is the balance point:  at what level of comfort or discomfort is it worth it *to you* to get rid of your bank overlord?  At some point, the 'stache is "enough," and the peace / simplicity / security is worth the opportunity cost.  I appreciate that you make this observation @tyort1 , even as you argue generally for the other way.

dandarc

  • Magnum Stache
  • ******
  • Posts: 3472
  • Age: 36
Of course, I'm risk averse in some ways, so my plan is to hit FI using all extra money as investments until I hit $1.5m in the bank.  At that point I should have only $250k on the mortgage, so I'll pay off the mortgage with $250 of my $1.5m and I'll have $1.25m left.  I know from a pure numbers standpoint that EVEN THEN it's not optimal to pay off the mortgage, but it'll help me sleep better at night as I have job instability that seems to pop up at the most inconvenient times.

I think this is the heart of the argument.  What people disagree on is the balance point:  at what level of comfort or discomfort is it worth it *to you* to get rid of your bank overlord?  At some point, the 'stache is "enough," and the peace / simplicity / security is worth the opportunity cost.  I appreciate that you make this observation @tyort1 , even as you argue generally for the other way.
You can make a ton of mortgage payments with another $250K in the bank. Says the guy with a paid off house - may change that once we actually live in said house again.

Tyson

  • Handlebar Stache
  • *****
  • Posts: 2394
  • Age: 47
  • Location: Denver, Colorado
Of course, I'm risk averse in some ways, so my plan is to hit FI using all extra money as investments until I hit $1.5m in the bank.  At that point I should have only $250k on the mortgage, so I'll pay off the mortgage with $250 of my $1.5m and I'll have $1.25m left.  I know from a pure numbers standpoint that EVEN THEN it's not optimal to pay off the mortgage, but it'll help me sleep better at night as I have job instability that seems to pop up at the most inconvenient times.

I think this is the heart of the argument.  What people disagree on is the balance point:  at what level of comfort or discomfort is it worth it *to you* to get rid of your bank overlord?  At some point, the 'stache is "enough," and the peace / simplicity / security is worth the opportunity cost.  I appreciate that you make this observation @tyort1 , even as you argue generally for the other way.

Thanks man!  The other thing I should point out is that if one is trying to keep their FIRE income low because of taxes and also ACA subsidies, it makes sense to remove the mortgage.  For example, if I have $40k bare bones expenses without the mortgage, I can withdraw $40k and that's my income.  On the other hand, if I have a mortgage in FIRE, that's an extra $2200 per month, or $26k per year.  Which means my $40k income now must become $66k income, which may or may not affect ACA subsidies, but will definitely affect how much I have to pay in taxes. 

bacchi

  • Magnum Stache
  • ******
  • Posts: 3942
Of course, I'm risk averse in some ways, so my plan is to hit FI using all extra money as investments until I hit $1.5m in the bank.  At that point I should have only $250k on the mortgage, so I'll pay off the mortgage with $250 of my $1.5m and I'll have $1.25m left.  I know from a pure numbers standpoint that EVEN THEN it's not optimal to pay off the mortgage, but it'll help me sleep better at night as I have job instability that seems to pop up at the most inconvenient times.

I think this is the heart of the argument.  What people disagree on is the balance point:  at what level of comfort or discomfort is it worth it *to you* to get rid of your bank overlord?  At some point, the 'stache is "enough," and the peace / simplicity / security is worth the opportunity cost.  I appreciate that you make this observation @tyort1 , even as you argue generally for the other way.

Thanks man!  The other thing I should point out is that if one is trying to keep their FIRE income low because of taxes and also ACA subsidies, it makes sense to remove the mortgage.  For example, if I have $40k bare bones expenses without the mortgage, I can withdraw $40k and that's my income.  On the other hand, if I have a mortgage in FIRE, that's an extra $2200 per month, or $26k per year.  Which means my $40k income now must become $66k income, which may or may not affect ACA subsidies, but will definitely affect how much I have to pay in taxes.

The additional funds withdrawn are part basis and part LTCG so it's not all bad. If there aren't gains, there aren't additional taxes. The only real problem area is jumping over the ACA cliff.

And that's a hell of a mortgage payment. :)

Enigma

  • Bristles
  • ***
  • Posts: 482
  • Age: 40
  • Location: Clarksville, TN
There is a better argument in 2019 to paying your mortgage off early on your primary residence today than in 2017.

Used to be able to itemize and take the interest off your taxes (Single $6,350 - FY2017)
Now that the standard deducation has been raised individuals are hard pressed to exceed the standard ($12,000 - FY2018)
Interest is also now capped to $10,000 if you do itemize.  There used to be no cap.

I agree...  Pay off your house.  If you have a rental property borrow every dime you can against it to pay off your house.  The reason that you would do that is because a rental (income - taxes - expenses = capital gains) (lower interest rate on the capital gains).

appleshampooid

  • Stubble
  • **
  • Posts: 244
  • Relentless Snacker
There is a better argument in 2019 to paying your mortgage off early on your primary residence today than in 2017.

Used to be able to itemize and take the interest off your taxes (Single $6,350 - FY2017)
Now that the standard deducation has been raised individuals are hard pressed to exceed the standard ($12,000 - FY2018)
Interest is also now capped to $10,000 if you do itemize.  There used to be no cap.
This is incorrect. The $10k cap applies to SALT (state and local income taxes paid). The cap on home interest is based on the value of your mortgage, I believe it's up to $750k but I don't recall exactly.

We deducted about $18k of mortgage interest on our 2018 taxes, plus the max on SALT, plus some odds and ends (donations) to land comfortable above the new $24k standard deduction. But our mortgage is insane for mustachian standards. Just a part of living in a big expensive metro area and wanting a house.

Enigma

  • Bristles
  • ***
  • Posts: 482
  • Age: 40
  • Location: Clarksville, TN
Now that the standard deducation has been raised individuals are hard pressed to exceed the standard ($12,000 - FY2018)
"The home mortgage deduction is a personal itemized deduction. You take it on IRS Schedule A of your Form 1040. If you donít itemize, you get no deduction.  You should itemize only if your total itemized deductions exceed the standard deduction....  About 30% of all 2017 taxpayers itemized. Of that number, about 74% took the mortgage interest deduction"  https://www.mileiq.com/blog/self-employed-deduct-home-mortgage-interest/


Enigma

  • Bristles
  • ***
  • Posts: 482
  • Age: 40
  • Location: Clarksville, TN
This is incorrect. The $10k cap applies to SALT (state and local income taxes paid). The cap on home interest is based on the value of your mortgage, I believe it's up to $750k but I don't recall exactly.

We deducted about $18k of mortgage interest on our 2018 taxes, plus the max on SALT, plus some odds and ends (donations) to land comfortable above the new $24k standard deduction. But our mortgage is insane for mustachian standards. Just a part of living in a big expensive metro area and wanting a house.
Most individuals IMO will not be able to surpass the Standard Deduction and Itemize (single ~ $250k+ or married ~ $500k+).  Plus instead of "it's up to $750k" it is actually down to $750k from $1MM.  SALT is big though because it helped from being taxed by both the state and the fed.  Instead you could pay everything to the state without a cap and then write everything off on your federal returns.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28025
  • Age: -999
  • Location: Seattle, WA
It's all very situation dependent.

I'm going to itemize in 2020 for the first time in my life. We could never get past the old 12k standard deduction. We had basically nothing to itemize besides (low thousands in) charitable deductions, which never exceeded the standard deduction.

Now we're getting a primary residence in mid-2019, and despite the SALT cap being irrelevant (state with no state income tax), we'll definitely exceed the 24k standard deduction, paying about 21k/yr in interest, and charity pushing us well above the 24k standard deduction.

Being able to finally count our charity as tax beneficial is a nice perk of not "paying off our mortgage" (aka paying cash on purchase).

It's all very situation dependent.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

seattlecyclone

  • Magnum Stache
  • ******
  • Posts: 4982
  • Age: 34
  • Location: Seattle, WA
    • My blog
...despite the SALT cap being irrelevant (state with no state income tax)...

Our family went very slightly over the SALT cap between property tax and the imputed sales tax for our income level. We do live in a relatively fancypants house, but your mortgage sounds like it will be about the same size as mine so maybe you'll be about there too with the taxes. It is very situation dependent I agree.

Buffalo Chip

  • Pencil Stache
  • ****
  • Posts: 578
  • Location: Tidewater Virginia
Not seeing why the topic of paying off your mortgage is controversial. You can make a case for both scenarios. Personally, I loathe debt. But I still maintain a mortgage. Made sense until the recent tax law ended the advantage.

The issue isnít the mortgage in my view. Itís home ownership. Home ownership is for suckers.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28025
  • Age: -999
  • Location: Seattle, WA
...despite the SALT cap being irrelevant (state with no state income tax)...

Our family went very slightly over the SALT cap between property tax and the imputed sales tax for our income level. We do live in a relatively fancypants house, but your mortgage sounds like it will be about the same size as mine so maybe you'll be about there too with the taxes. It is very situation dependent I agree.

Good point, thanks!
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

appleshampooid

  • Stubble
  • **
  • Posts: 244
  • Relentless Snacker
This is incorrect. The $10k cap applies to SALT (state and local income taxes paid). The cap on home interest is based on the value of your mortgage, I believe it's up to $750k but I don't recall exactly.

We deducted about $18k of mortgage interest on our 2018 taxes, plus the max on SALT, plus some odds and ends (donations) to land comfortable above the new $24k standard deduction. But our mortgage is insane for mustachian standards. Just a part of living in a big expensive metro area and wanting a house.
Most individuals IMO will not be able to surpass the Standard Deduction and Itemize (single ~ $250k+ or married ~ $500k+).  Plus instead of "it's up to $750k" it is actually down to $750k from $1MM.  SALT is big though because it helped from being taxed by both the state and the fed.  Instead you could pay everything to the state without a cap and then write everything off on your federal returns.
When I said "up to $750k" I meant the balance of your mortgage could go up to that value, not that it had increased. My bad on the wording there.

Everything in your last post is correct, and I agree that most individuals won't get any value from itemizing. Hell, it was already "most" BEFORE all the changes (70% took the standard on 2017 returns).

Dicey

  • Senior Mustachian
  • ********
  • Posts: 10887
  • Age: 61
  • Location: NorCal
Not seeing why the topic of paying off your mortgage is controversial. You can make a case for both scenarios. Personally, I loathe debt. But I still maintain a mortgage. Made sense until the recent tax law ended the advantage.

The issue isnít the mortgage in my view. Itís home ownership. Home ownership is for suckers.
Referring specifically to the bolded part: Dunno, a new listing just popped up in my feed this morning. Seller paid $440k in 2005. It's on the market with an excellent seller's agent, who's known for accurate pricing, for $1.45M. From the overall condition of the house and finishes, it looks fair to say that other than maintenance, they didn't do a helluva lot to it. If they put 20% down and just made their regular monthly payments for 14 years, their return on investment is far, far from sucker territory.

Hmmm, is home ownership really for suckers? It depends on a lot of factors, including location, location, and location. Home ownership (and long, fixed rate mortgages) most definitely got me to FIRE.
« Last Edit: June 06, 2019, 10:20:09 AM by Dicey »

Dabnasty

  • Handlebar Stache
  • *****
  • Posts: 1976
Not seeing why the topic of paying off your mortgage is controversial. You can make a case for both scenarios. Personally, I loathe debt. But I still maintain a mortgage. Made sense until the recent tax law ended the advantage.

The issue isnít the mortgage in my view. Itís home ownership. Home ownership is for suckers.

I always figured it's controversial because it's such a big decision. It's tough to look back at years of paying extra on your mortgage when someone tells you it may have been a suboptimal decision (or vice versa of course). Those who are still in the pre mortgage stage who haven't made a decision yet typically aren't as passionate about the question.

I think it's the same emotional reaction a lot of people have to the idea of saving a significant portion of their income. I've discussed the topic with a few close friends and from my perspective I'm saying "Great news everyone! you can save way more and it's not even that hard" but what they heard was "You could be out of debt and have a decent nest egg by now if you weren't so wasteful". forward looking vs. backward.

One case in particular we did some quick math and determined she could have completely avoided student loans if she had saved her pre college waitress income instead of eating out and buying clothes. I thought it was a fun exercise. She looked physically ill.

nereo

  • Senior Mustachian
  • ********
  • Posts: 10800
  • Location: Just south of Canada
    • Here's how you can support science today:

Hmmm, is home ownership really for suckers? It depends on a lot of factors, including location, location, and location. Hone ownership (and long, fixed rate mortgages) most definitely got me to FIRE.

In the area where we're currently looking, you can buy a 3 bd, 2 bath home in good shape for under $150k. Typical rents go for $1400+ for similar specs, in part because summer tourists and students prop up the rental market.  As long as you plan on staying in the area for > 3 years buying a home comes out way ahead - financially speaking - than renting, even after accounting for maintenence/repair/depreiation/buying-selling costs and time spent and ignoring any appreciation.

tl;dr - local market conditions really drive whether its a good finacial decision to own or buy. It's worth spending some time with Own vs Rent calculators to determine your circumstances.

reeshau

  • Pencil Stache
  • ****
  • Posts: 618
  • Location: Dublin, Ireland
Not seeing why the topic of paying off your mortgage is controversial. You can make a case for both scenarios. Personally, I loathe debt. But I still maintain a mortgage. Made sense until the recent tax law ended the advantage.

The issue isnít the mortgage in my view. Itís home ownership. Home ownership is for suckers.
Referring specifically to the bolded part: Dunno, a new listing just popped up in my feed this morning. Seller paid $440k in 2005. It's on the market with an excellent seller's agent, who's known for accurate pricing, for $1.45M. From the overall condition of the house and finishes, it looks fair to say that other than maintenance, they didn't do a helluva lot to it. If they put 20% down and just made their regular monthly payments for 14 years, their return on investment is far, far from sucker territory.

Hmmm, is home ownership really for suckers? It depends on a lot of factors, including location, location, and location. Home ownership (and long, fixed rate mortgages) most definitely got me to FIRE.

Actually, this example reinforces the sucker comment, to me.  How will the $1.45M buyer make money in the house?  By finding a bigger sucker.  The utility of a house is some place to live--it eventually gets down to an individual (or a family).  In the time the price tripled, did average household earnings also triple?  Nationwide, they barely moved.  So this house is appealing to a smaller market.  That will have a top, at some point.

On an individual basis, there are certainly wins to be had.  That can be said for any asset class.  But as a whole, over the long term, housing prices will rise in-line with wages, because wages pay for it through rental or mortgage.



Hmmm, is home ownership really for suckers? It depends on a lot of factors, including location, location, and location. Hone ownership (and long, fixed rate mortgages) most definitely got me to FIRE.

In the area where we're currently looking, you can buy a 3 bd, 2 bath home in good shape for under $150k. Typical rents go for $1400+ for similar specs, in part because summer tourists and students prop up the rental market.  As long as you plan on staying in the area for > 3 years buying a home comes out way ahead - financially speaking - than renting, even after accounting for maintenence/repair/depreiation/buying-selling costs and time spent and ignoring any appreciation.

tl;dr - local market conditions really drive whether its a good finacial decision to own or buy. It's worth spending some time with Own vs Rent calculators to determine your circumstances.

This is more of a situation that says it is not a sucker's bet.  It is more reasonable than renting, both for yourself and, if you have the capital, for investing into rentals.

Dicey

  • Senior Mustachian
  • ********
  • Posts: 10887
  • Age: 61
  • Location: NorCal
Not seeing why the topic of paying off your mortgage is controversial. You can make a case for both scenarios. Personally, I loathe debt. But I still maintain a mortgage. Made sense until the recent tax law ended the advantage.

The issue isnít the mortgage in my view. Itís home ownership. Home ownership is for suckers.
Referring specifically to the bolded part: Dunno, a new listing just popped up in my feed this morning. Seller paid $440k in 2005. It's on the market with an excellent seller's agent, who's known for accurate pricing, for $1.45M. From the overall condition of the house and finishes, it looks fair to say that other than maintenance, they didn't do a helluva lot to it. If they put 20% down and just made their regular monthly payments for 14 years, their return on investment is far, far from sucker territory.

Hmmm, is home ownership really for suckers? It depends on a lot of factors, including location, location, and location. Home ownership (and long, fixed rate mortgages) most definitely got me to FIRE.

Actually, this example reinforces the sucker comment, to me.  How will the $1.45M buyer make money in the house?  By finding a bigger sucker.  The utility of a house is some place to live--it eventually gets down to an individual (or a family).  In the time the price tripled, did average household earnings also triple?  Nationwide, they barely moved.  So this house is appealing to a smaller market.  That will have a top, at some point.

On an individual basis, there are certainly wins to be had.  That can be said for any asset class.  But as a whole, over the long term, housing prices will rise in-line with wages, because wages pay for it through rental or mortgage.



Hmmm, is home ownership really for suckers? It depends on a lot of factors, including location, location, and location. Hone ownership (and long, fixed rate mortgages) most definitely got me to FIRE.

In the area where we're currently looking, you can buy a 3 bd, 2 bath home in good shape for under $150k. Typical rents go for $1400+ for similar specs, in part because summer tourists and students prop up the rental market.  As long as you plan on staying in the area for > 3 years buying a home comes out way ahead - financially speaking - than renting, even after accounting for maintenence/repair/depreiation/buying-selling costs and time spent and ignoring any appreciation.

tl;dr - local market conditions really drive whether its a good finacial decision to own or buy. It's worth spending some time with Own vs Rent calculators to determine your circumstances.

This is more of a situation that says it is not a sucker's bet.  It is more reasonable than renting, both for yourself and, if you have the capital, for investing into rentals.
Reeshau, you're in Ireland. Totally different ballgame. Here, mortgage interest is tax deductible. Upon sale, the first $500k over the basis (purchase price + acquisition costs +improvements) is TAX FREE. For whatever reason (scarcity, foreign investors, cheap mortgages), prices in this region are not as closely tied to wages as one would expect. Our house, for example, cost ten times what DH makes. We paid cash, because we sold two other highly appreciated properties to buy it. Plus we have as much or more in other investments.

Your decision must be made with intimate knowledge of your own market. If it's a sucker's bet where you are, I'm not going to doubt you. But RE* made us FI/FIRE, and we aren't suckers.

*Per the misunderstanding below, specifically HOME OWNERSHIP made us FIRE.
« Last Edit: June 08, 2019, 09:44:24 AM by Dicey »

reeshau

  • Pencil Stache
  • ****
  • Posts: 618
  • Location: Dublin, Ireland
@Dicey , I am in Ireland, but I'm from Michigan.  Actually, Dublin is very similar to US coastal cities:  real estate is more than 200% up from the bottom, and indeed is over 2008 levels by about 15%.  The problem is, nobody can qualify for a new mortgage now, so appreciation has slowed from 12% annually to 3%.  The same is happening in a lot of US cities.  And when the next recession comes, there will be again a class of people who stretched for a house as a life goal, and are underwater in their mortgage.  It will still be useful to them, but will have been a very bad investment.

You are right, all real estate is local.  But it is also cyclical, and still comes back to affordability vs. wages.  People my want to live in a particular place, in a particular house, but they eventually have to pay for it.  You might say I am reading this narrowly, but I take this view as @Buffalo Chip said home ownership was for suckers, not real estate.  People do get caught up in other factors you mention,  but they are generally paying for their home with wages.