Author Topic: Paid-off mortgage people: How long did it take you to pay off the house?  (Read 15200 times)

PizzaSteve

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Re: Paid-off mortgage people: How long did it take you to pay off the house?
« Reply #300 on: October 08, 2018, 11:41:33 PM »
Signed a 30yr at 3.625%.  Am in no hurry to pay it off since investments should better that, especially counting inflation.

Excellent deal on the mortgage. However, one comment on inflation: Inflation has nothing to do with the interest rate paid on the outstanding portion of the mortgage. Regardless of whether you pay early or not, you'll still owe 3.625% on the outstanding principle, which is the number to compare to expected stock returns (unless you can deduct some portion from your taxes).

Where inflation does help (in the case of mortgages) is that your cost of living related to your mortgage payment does not go up with inflation (minus the escrow portion, like property taxes and insurance), which tends not to be the case for rent.

Inflation does matter because I could pay in $1 of principle at today's value or I could pay (in 30 years) $1 of today's principle in dollar valuation 30 years from now...

A 1988 dollar bill is 49.29 cents today.  If I got a 100k 30-year mortgage in 1988, and paid it in full the next day, I would have spent 100k in 1988 dollars.  If I waited the full term, that last dollar of principle would have cost me $0.48 in 1988 dollars.  It applies.  Not fully, but mostly.

The only way to lose would be in a deflation scenario, but thats a worst case that none of this really works for...
Its a good point.  As an over simplification, but one could say expected inflation, expected stock returns, and the risk premium are all priced into the 30 year mortgage rate. 

So, for example, if we assume long term 7% stock returns and a 4% 30 year fixed mortgage in a 2% inflation, 3% long term 30 yr treasuries rate world, investors are requiring a 3% premium over treasuries for the capital risk of equities (primarily economic slowdown risk, etc).  Equities earn almost double the risk free return rate of of tbills, which makes sense because of the greater chances they lose their principal.  Banks make something like a 1% spread on their loan, assuming no fees or points, though the capital requirements allow them to loan more than they have, so they are getting equity like returns making loans.

So even though you pay some future dollars at a discount, that should be priced into the offered interest rate, which could be something like 1% without inflation.  In the 90s most Japanese banks made 0% loans available for quite a while as prices deflated hoping people would stay in the homes to avoid foreclosures, and because they made money at 0% in a deflationary period.  The yen was very strong then and appretiated, which really hurt their exports.

When inflation is low and under control, the risk premiums shrink and the future dollar vs current dollar discounts do as well.  It can invert, as it did in Japan, where future yen were more expensive than current yen for a bit.

https://www.poundsterlinglive.com/bank-of-england-spot/historical-spot-exchange-rates/usd/USD-to-JPY#charts

Which is exactly what I said...  Deflation. 

If you want to treat a paid-off house as a deflationary hedge, thats fine, but you need to admit that it is an under-performing asset in your allocation against a near-impossible risk.  Treating it as a security, however, and the mindset of housing as an investment is misguided and the "pay-it-off-at-all-costs" group doesn't seem to be willing to point out that fact.


As an over simplification, but one could say expected inflation, expected stock returns, and the risk premium are all priced into the 30 year mortgage rate. 

And if you don't believe in expected inflation and expected stock returns, then you can never FIRE and shouldn't be on this forum to begin with.  That math is what ALL of this is set up on anyway.  If you don't trust it over a 30-Year span, how will you ever trust it to FIRE?
Why do you want to put words into post mouth that I didnt type?

My point was that current mortgage interest rates include in their price any impacts of expected inflation.  So the idea that one will make bank by paying with cheaper dollars is a bit exaggerated.  That is priced into the current mortgage rate.  Since rates are low, expected inflation rates  are low.

Thats it.  I didnt say anything about advising a need for a deflation hedge.  I get tired of young advocates of carrying leverage debt thinking they know rates are priced advantageously vs stocks, without any basis other than faith and data about the past.

My point was that assuming one pays with cheaper dollars is a sort of double counting benefits.  Since you are paying interest, you own a negative bond.   That is loans 101.  No loan = no interest. Paying 0 dollars > paying devalued dollars, especially if they are only marginally devalued.

Investing and leverage are fire without exaggerating the benefits by claiming an inflation hedge is going to pay off better than the rate you negotiated.  It is a sort of market timing applied to interest rates. Why do you guys feel you cant time markets, but know enough about interest rate futures to kmow that the loan markets are favorable now?   

Please tell me how you know deflation is a near impossible risk?  I really am curious, because some European countries like Switzerland had it recently.  Where do i post that a home is a security?  In every post I call it consumption.  the loan is the security, not the home. If you dont get that, you are not thinking financially, but emotionally.

PS.  Regarding why am I posting, it is to stretch your thinking.  You`re are wrong that FIRE is purely based on the 4% Trinity Study.    My FIRE plan predates that study.  It is just a planning tool one can use to make their own assumptions, not gospel. Educate yourself, but understand the fundamentals.   FiRE depends on saving, based on a LBYM philosphy, pure and simple. Investing optimization is its own topic. How much is enough is variable based on an unknown future.  Each person makes their own choices and loan repayment is a fine one for those who want less market risk. FIRE is very possible using CDs and even 100% cash, it just takes more saving.  In some scenarios, cash outperforms stocks, just not recently.  Do what you like though.
« Last Edit: October 09, 2018, 12:08:33 AM by PizzaSteve »

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Re: Paid-off mortgage people: How long did it take you to pay off the house?
« Reply #301 on: October 09, 2018, 12:06:38 AM »
Signed a 30yr at 3.625%.  Am in no hurry to pay it off since investments should better that, especially counting inflation.

Excellent deal on the mortgage. However, one comment on inflation: Inflation has nothing to do with the interest rate paid on the outstanding portion of the mortgage. Regardless of whether you pay early or not, you'll still owe 3.625% on the outstanding principle, which is the number to compare to expected stock returns (unless you can deduct some portion from your taxes).

Where inflation does help (in the case of mortgages) is that your cost of living related to your mortgage payment does not go up with inflation (minus the escrow portion, like property taxes and insurance), which tends not to be the case for rent.

Inflation does matter because I could pay in $1 of principle at today's value or I could pay (in 30 years) $1 of today's principle in dollar valuation 30 years from now...

A 1988 dollar bill is 49.29 cents today.  If I got a 100k 30-year mortgage in 1988, and paid it in full the next day, I would have spent 100k in 1988 dollars.  If I waited the full term, that last dollar of principle would have cost me $0.48 in 1988 dollars.  It applies.  Not fully, but mostly.

The only way to lose would be in a deflation scenario, but thats a worst case that none of this really works for...
Its a good point.  As an over simplification, but one could say expected inflation, expected stock returns, and the risk premium are all priced into the 30 year mortgage rate. 

So, for example, if we assume long term 7% stock returns and a 4% 30 year fixed mortgage in a 2% inflation, 3% long term 30 yr treasuries rate world, investors are requiring a 3% premium over treasuries for the capital risk of equities (primarily economic slowdown risk, etc).  Equities earn almost double the risk free return rate of of tbills, which makes sense because of the greater chances they lose their principal.  Banks make something like a 1% spread on their loan, assuming no fees or points, though the capital requirements allow them to loan more than they have, so they are getting equity like returns making loans.

So even though you pay some future dollars at a discount, that should be priced into the offered interest rate, which could be something like 1% without inflation.  In the 90s most Japanese banks made 0% loans available for quite a while as prices deflated hoping people would stay in the homes to avoid foreclosures, and because they made money at 0% in a deflationary period.  The yen was very strong then and appretiated, which really hurt their exports.

When inflation is low and under control, the risk premiums shrink and the future dollar vs current dollar discounts do as well.  It can invert, as it did in Japan, where future yen were more expensive than current yen for a bit.

https://www.poundsterlinglive.com/bank-of-england-spot/historical-spot-exchange-rates/usd/USD-to-JPY#charts

Which is exactly what I said...  Deflation. 

If you want to treat a paid-off house as a deflationary hedge, thats fine, but you need to admit that it is an under-performing asset in your allocation against a near-impossible risk.  Treating it as a security, however, and the mindset of housing as an investment is misguided and the "pay-it-off-at-all-costs" group doesn't seem to be willing to point out that fact.


As an over simplification, but one could say expected inflation, expected stock returns, and the risk premium are all priced into the 30 year mortgage rate. 

And if you don't believe in expected inflation and expected stock returns, then you can never FIRE and shouldn't be on this forum to begin with.  That math is what ALL of this is set up on anyway.  If you don't trust it over a 30-Year span, how will you ever trust it to FIRE?
Why do you want to put words into post mouth that I didnt type?

My point was that current mortgage interest rates include in their price any impacts of expected inflation.  So the idea that one will make bank by paying with cheaper dollars is a bit exaggerated.  That is priced into the current mortgage rate.  Since rates are low, expected inflation rates  are low.

Thats it.  I didnt say anything about advising a need for a deflation hedge.  I get tired of young advocates of carrying leverage debt thinking they know rates are priced advantageously vs stocks, without any basis other than faith and data about the past.

My point was that assuming one pays with cheaper dollars is a sort of double counting benefits.  Since you are paying interest, you own a negative bond.   That is loans 101.  No loan = no interest. Paying 0 dollars > paying devalued dollars, especially if they are only marginally devalued.

Investing and leverage are fire without exaggerating the benefits by claiming an inflation hedge is going to pay off better than the rate you negotiated.  It is a sort of market timing applied to interest rates. Why do you guys feel you cant time markets, but know enough about interest rate futures to kmow that the loan markets are favorable now?   

PS.  Regarding why am I posting, it is to stretch your thinking.  You`re are wrong that FIRE is purely based on the 4% Trinity Study.    My FIRE plan predates that study.  It is just a planning tool one can use to make their own assumptions, not gospel. Educate yourself, but understand the fundamentals.   FiRE depends on saving, based on a LBYM philosphy, pure and simple. Investing optimization is its own topic. How much is enough is variable based on an unknown future.  Each person makes their own choices and loan repayment is a fine one for those who want less market risk. FIRE is very possible using CDs and even 100% cash, it just takes more saving.  In some scenarios, cash outperforms stocks, just not recently.  Do what you like though.

yeah, but do you think I should take out a cash advance on my credit card and roll the dice?

PizzaSteve

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Re: Paid-off mortgage people: How long did it take you to pay off the house?
« Reply #302 on: October 09, 2018, 12:10:16 AM »
Signed a 30yr at 3.625%.  Am in no hurry to pay it off since investments should better that, especially counting inflation.

Excellent deal on the mortgage. However, one comment on inflation: Inflation has nothing to do with the interest rate paid on the outstanding portion of the mortgage. Regardless of whether you pay early or not, you'll still owe 3.625% on the outstanding principle, which is the number to compare to expected stock returns (unless you can deduct some portion from your taxes).

Where inflation does help (in the case of mortgages) is that your cost of living related to your mortgage payment does not go up with inflation (minus the escrow portion, like property taxes and insurance), which tends not to be the case for rent.

Inflation does matter because I could pay in $1 of principle at today's value or I could pay (in 30 years) $1 of today's principle in dollar valuation 30 years from now...

A 1988 dollar bill is 49.29 cents today.  If I got a 100k 30-year mortgage in 1988, and paid it in full the next day, I would have spent 100k in 1988 dollars.  If I waited the full term, that last dollar of principle would have cost me $0.48 in 1988 dollars.  It applies.  Not fully, but mostly.

The only way to lose would be in a deflation scenario, but thats a worst case that none of this really works for...
Its a good point.  As an over simplification, but one could say expected inflation, expected stock returns, and the risk premium are all priced into the 30 year mortgage rate. 

So, for example, if we assume long term 7% stock returns and a 4% 30 year fixed mortgage in a 2% inflation, 3% long term 30 yr treasuries rate world, investors are requiring a 3% premium over treasuries for the capital risk of equities (primarily economic slowdown risk, etc).  Equities earn almost double the risk free return rate of of tbills, which makes sense because of the greater chances they lose their principal.  Banks make something like a 1% spread on their loan, assuming no fees or points, though the capital requirements allow them to loan more than they have, so they are getting equity like returns making loans.

So even though you pay some future dollars at a discount, that should be priced into the offered interest rate, which could be something like 1% without inflation.  In the 90s most Japanese banks made 0% loans available for quite a while as prices deflated hoping people would stay in the homes to avoid foreclosures, and because they made money at 0% in a deflationary period.  The yen was very strong then and appretiated, which really hurt their exports.

When inflation is low and under control, the risk premiums shrink and the future dollar vs current dollar discounts do as well.  It can invert, as it did in Japan, where future yen were more expensive than current yen for a bit.

https://www.poundsterlinglive.com/bank-of-england-spot/historical-spot-exchange-rates/usd/USD-to-JPY#charts

Which is exactly what I said...  Deflation. 

If you want to treat a paid-off house as a deflationary hedge, thats fine, but you need to admit that it is an under-performing asset in your allocation against a near-impossible risk.  Treating it as a security, however, and the mindset of housing as an investment is misguided and the "pay-it-off-at-all-costs" group doesn't seem to be willing to point out that fact.


As an over simplification, but one could say expected inflation, expected stock returns, and the risk premium are all priced into the 30 year mortgage rate. 

And if you don't believe in expected inflation and expected stock returns, then you can never FIRE and shouldn't be on this forum to begin with.  That math is what ALL of this is set up on anyway.  If you don't trust it over a 30-Year span, how will you ever trust it to FIRE?
Why do you want to put words into post mouth that I didnt type?

My point was that current mortgage interest rates include in their price any impacts of expected inflation.  So the idea that one will make bank by paying with cheaper dollars is a bit exaggerated.  That is priced into the current mortgage rate.  Since rates are low, expected inflation rates  are low.

Thats it.  I didnt say anything about advising a need for a deflation hedge.  I get tired of young advocates of carrying leverage debt thinking they know rates are priced advantageously vs stocks, without any basis other than faith and data about the past.

My point was that assuming one pays with cheaper dollars is a sort of double counting benefits.  Since you are paying interest, you own a negative bond.   That is loans 101.  No loan = no interest. Paying 0 dollars > paying devalued dollars, especially if they are only marginally devalued.

Investing and leverage are fire without exaggerating the benefits by claiming an inflation hedge is going to pay off better than the rate you negotiated.  It is a sort of market timing applied to interest rates. Why do you guys feel you cant time markets, but know enough about interest rate futures to kmow that the loan markets are favorable now?   

PS.  Regarding why am I posting, it is to stretch your thinking.  You`re are wrong that FIRE is purely based on the 4% Trinity Study.    My FIRE plan predates that study.  It is just a planning tool one can use to make their own assumptions, not gospel. Educate yourself, but understand the fundamentals.   FiRE depends on saving, based on a LBYM philosphy, pure and simple. Investing optimization is its own topic. How much is enough is variable based on an unknown future.  Each person makes their own choices and loan repayment is a fine one for those who want less market risk. FIRE is very possible using CDs and even 100% cash, it just takes more saving.  In some scenarios, cash outperforms stocks, just not recently.  Do what you like though.

yeah, but do you think I should take out a cash advance on my credit card and roll the dice?

Huh?   My answer would only be yes if you had rigged dice somehow.

Gambling odds are certain.  credit card interest rates are certain.  That is a pure math exercise.  Morgage rates vs stocks are different.  The odds and payoffs are not certain, hence a risk free paydown can be an equally sensible plan along with investing with leverage.

That is my only point.  Mortgage payoff and leveraged investing are both fine, depending on your market risk tolerance.

A few good questions to ask are these. 
* At what guaranteed rate of return would I rather invest in the sure thing, than in the stock market?
* At what interest rate would I not borrow money, because it would be too expensive?
*  At what rate would I loan money because It would be enough profit to make it worthwhile?

Just good questions to judge your risk premium assumptions.

Time for me to take a break from this forum. No need to help others, as people dont want education, just reenforcement of beliefs.

Namaste.
« Last Edit: October 09, 2018, 12:27:10 AM by PizzaSteve »

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Re: Paid-off mortgage people: How long did it take you to pay off the house?
« Reply #303 on: October 09, 2018, 12:28:45 AM »
Too bad, you gave solid advice, sorry to see you go

Dicey

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Re: Paid-off mortgage people: How long did it take you to pay off the house?
« Reply #304 on: October 09, 2018, 01:08:18 AM »
Too bad, you gave solid advice, sorry to see you go
Fear not, @One. Based on history, it is unlikely to be a permanent departure. 😄

TexasRunner

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Re: Paid-off mortgage people: How long did it take you to pay off the house?
« Reply #305 on: October 09, 2018, 09:02:43 AM »
@PizzaSteve - @One jumped in there and I think you thought he (her?) was myself. 

I didn't post this tidbit of useless sarcasm...
yeah, but do you think I should take out a cash advance on my credit card and roll the dice?

Anyways, kudos on your FIRE plan. 

TLDR:  To those who are watching, paying off a sub 5% 30 year fixed mortgage will delay your time to Fire by upwards of 1 to 10 years based on your specific savings rates, and can result in literally millions of dollars slipping through your fingers in lost opportunity, while also increasing your risk.  Do the math first.

I am on Year 2 of 30 and will ride it as long as I can...

PizzaSteve

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Re: Paid-off mortgage people: How long did it take you to pay off the house?
« Reply #306 on: October 09, 2018, 10:49:03 AM »
@PizzaSteve - @One jumped in there and I think you thought he (her?) was myself. 

I didn't post this tidbit of useless sarcasm...
yeah, but do you think I should take out a cash advance on my credit card and roll the dice?

Anyways, kudos on your FIRE plan. 

TLDR:  To those who are watching, paying off a sub 5% 30 year fixed mortgage will delay your time to Fire by upwards of 1 to 10 years based on your specific savings rates, and can result in literally millions of dollars slipping through your fingers in lost opportunity *, while also increasing your risk.  Do the math first.

I am on Year 2 of 30 and will ride it as long as I can...
Agreed *

*  If US equity markets perform as hoped.  Honestly, I have 7 figures in equity markets, so obviously I am placing the same bet.  That said, I dont tell people it is a guaranteed millions payoff vs holding bonds or paying down debt. No one knows that for certain.  A more conservative person might prefer more time, but a guaranteed time.  No offense taken as it is a helpful dialog and I am playing devils advocate for sure.

PizzaSteve

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Re: Paid-off mortgage people: How long did it take you to pay off the house?
« Reply #307 on: October 09, 2018, 10:50:09 AM »
Too bad, you gave solid advice, sorry to see you go
Fear not, @One. Based on history, it is unlikely to be a permanent departure. 😄
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Re: Paid-off mortgage people: How long did it take you to pay off the house?
« Reply #308 on: October 09, 2018, 12:59:49 PM »
Signed a 30yr at 3.625%.  Am in no hurry to pay it off since investments should better that, especially counting inflation.

Excellent deal on the mortgage. However, one comment on inflation: Inflation has nothing to do with the interest rate paid on the outstanding portion of the mortgage. Regardless of whether you pay early or not, you'll still owe 3.625% on the outstanding principle, which is the number to compare to expected stock returns (unless you can deduct some portion from your taxes).

Where inflation does help (in the case of mortgages) is that your cost of living related to your mortgage payment does not go up with inflation (minus the escrow portion, like property taxes and insurance), which tends not to be the case for rent.

Your point is correct, but inflation still matters (or will likely matter) in context because people often say that often say paying down the mortgage is a guaranteed return, so it is important to look at what the guarantee really is.   The historical long term inflation rate is about 3.5%.  Which means the real rate of return of paying off that 3.63% mortgage is very likely to be very close to zero, if not negative.     We haven't had much inflation for a long time so people have sort of forgotten about it, but it is complete reasonable to assume we'll have average inflation over the next 30 years. 

Similarly, the 10-year Treasury (risk free rate) is inching over 3% which again is pretty close to the 3.625% mortgage.   So again, if we get something close to average inflation, then return of paying down the mortgage will be less than the risk free rate.   Not good.   

RWD

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Re: Paid-off mortgage people: How long did it take you to pay off the house?
« Reply #309 on: October 09, 2018, 06:59:10 PM »
Similarly, the 10-year Treasury (risk free rate) is inching over 3% which again is pretty close to the 3.625% mortgage.   So again, if we get something close to average inflation, then return of paying down the mortgage will be less than the risk free rate.   Not good.

Wow, our mortgage rate (3.125%) is actually lower than the 10 year treasury note yield now. Crazy.

frugalecon

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Re: Paid-off mortgage people: How long did it take you to pay off the house?
« Reply #310 on: October 09, 2018, 07:09:00 PM »
Similarly, the 10-year Treasury (risk free rate) is inching over 3% which again is pretty close to the 3.625% mortgage.   So again, if we get something close to average inflation, then return of paying down the mortgage will be less than the risk free rate.   Not good.

Wow, our mortgage rate (3.125%) is actually lower than the 10 year treasury note yield now. Crazy.

My mortgage rate is 3.125% as well, but it is no longer worth it for me to itemize deductions, so that would be equivalent to a somewhat higher Treasury yield, since Treasuries pay taxable interest (Federal anyway, but not state).

Boofinator

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Re: Paid-off mortgage people: How long did it take you to pay off the house?
« Reply #311 on: October 11, 2018, 09:07:40 PM »
Signed a 30yr at 3.625%.  Am in no hurry to pay it off since investments should better that, especially counting inflation.

Excellent deal on the mortgage. However, one comment on inflation: Inflation has nothing to do with the interest rate paid on the outstanding portion of the mortgage. Regardless of whether you pay early or not, you'll still owe 3.625% on the outstanding principle, which is the number to compare to expected stock returns (unless you can deduct some portion from your taxes).

Where inflation does help (in the case of mortgages) is that your cost of living related to your mortgage payment does not go up with inflation (minus the escrow portion, like property taxes and insurance), which tends not to be the case for rent.

Your point is correct, but inflation still matters (or will likely matter) in context because people often say that often say paying down the mortgage is a guaranteed return, so it is important to look at what the guarantee really is.   The historical long term inflation rate is about 3.5%.  Which means the real rate of return of paying off that 3.63% mortgage is very likely to be very close to zero, if not negative.     We haven't had much inflation for a long time so people have sort of forgotten about it, but it is complete reasonable to assume we'll have average inflation over the next 30 years. 

Similarly, the 10-year Treasury (risk free rate) is inching over 3% which again is pretty close to the 3.625% mortgage.   So again, if we get something close to average inflation, then return of paying down the mortgage will be less than the risk free rate.   Not good.

As long as you and everyone else are accounting inflation equally when comparing asset returns, I'm ok with it. But most are not. If you want to calculate inflation-adjusted (or "real") returns on mortgage interest rate, than the same should be done for stocks or any other investment asset. So 7% returns under 4% inflation = 3% "real" returns for equity (compare that to 0% mortgage real returns).

So my main point of confusion, is why are so many claiming the benefits of the inflation hedge when it comes to choosing equity over mortgage payoff? It isn't like equity is some great inflation hedge. https://seekingalpha.com/article/1489342-equity-returns-and-inflation

Now comparing a mortgage payment to rent would involve an inflation hedge in that rent tends to rise with inflation....

Dicey

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Re: Paid-off mortgage people: How long did it take you to pay off the house?
« Reply #312 on: October 11, 2018, 11:42:30 PM »
Signed a 30yr at 3.625%.  Am in no hurry to pay it off since investments should better that, especially counting inflation.

Excellent deal on the mortgage. However, one comment on inflation: Inflation has nothing to do with the interest rate paid on the outstanding portion of the mortgage. Regardless of whether you pay early or not, you'll still owe 3.625% on the outstanding principle, which is the number to compare to expected stock returns (unless you can deduct some portion from your taxes).

Where inflation does help (in the case of mortgages) is that your cost of living related to your mortgage payment does not go up with inflation (minus the escrow portion, like property taxes and insurance), which tends not to be the case for rent.

Your point is correct, but inflation still matters (or will likely matter) in context because people often say that often say paying down the mortgage is a guaranteed return, so it is important to look at what the guarantee really is.   The historical long term inflation rate is about 3.5%.  Which means the real rate of return of paying off that 3.63% mortgage is very likely to be very close to zero, if not negative.     We haven't had much inflation for a long time so people have sort of forgotten about it, but it is complete reasonable to assume we'll have average inflation over the next 30 years. 

Similarly, the 10-year Treasury (risk free rate) is inching over 3% which again is pretty close to the 3.625% mortgage.   So again, if we get something close to average inflation, then return of paying down the mortgage will be less than the risk free rate.   Not good.

As long as you and everyone else are accounting inflation equally when comparing asset returns, I'm ok with it. But most are not. If you want to calculate inflation-adjusted (or "real") returns on mortgage interest rate, than the same should be done for stocks or any other investment asset. So 7% returns under 4% inflation = 3% "real" returns for equity (compare that to 0% mortgage real returns).

So my main point of confusion, is why are so many claiming the benefits of the inflation hedge when it comes to choosing equity over mortgage payoff? It isn't like equity is some great inflation hedge. https://seekingalpha.com/article/1489342-equity-returns-and-inflation

Now comparing a mortgage payment to rent would involve an inflation hedge in that rent tends to rise with inflation....
Goddamnit! Why did B42 get hisself banned? I can't answer this succinctly, but I know there's a problem with the math in bold above.

And equity is not an inflation hedge, a fixed rate mortgage is. With inflation, the dollars you earn increase and each dollar buys less. But your fixed mortgage payment doesn't change. Ever. So as housing prices and rents increase on the rising tide of inflation, your mortgage payment does not. Equity is largely irrelevant.

RWD

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Re: Paid-off mortgage people: How long did it take you to pay off the house?
« Reply #313 on: October 12, 2018, 07:46:16 AM »
So 7% returns under 4% inflation = 3% "real" returns for equity (compare that to 0% mortgage real returns).
Where are you getting 7% nominal from equities and 4% inflation?
The SP500 has returned 7% after inflation, not 3%. 9-10% nominal returns.
Inflation has been ~3.13% since 1913.

Boofinator

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Re: Paid-off mortgage people: How long did it take you to pay off the house?
« Reply #314 on: October 12, 2018, 08:10:32 AM »
So 7% returns under 4% inflation = 3% "real" returns for equity (compare that to 0% mortgage real returns).
Where are you getting 7% nominal from equities and 4% inflation?
The SP500 has returned 7% after inflation, not 3%. 9-10% nominal returns.
Inflation has been ~3.13% since 1913.

True. But which 7% are Mustachians using? The average historical returns (7% inflation-adjusted), or the worst-case (7% non-inflation adjusted)? This article has a nice table showing how low returns can be over an extended period of time. https://www.mrmoneymustache.com/2011/06/06/dude-wheres-my-7-investment-return/ MMM hedged the risk of stock market returns in his early retirement by paying off his home, having a rental home, and working side gigs.

Boofinator

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Re: Paid-off mortgage people: How long did it take you to pay off the house?
« Reply #315 on: October 12, 2018, 08:18:35 AM »
Signed a 30yr at 3.625%.  Am in no hurry to pay it off since investments should better that, especially counting inflation.

Excellent deal on the mortgage. However, one comment on inflation: Inflation has nothing to do with the interest rate paid on the outstanding portion of the mortgage. Regardless of whether you pay early or not, you'll still owe 3.625% on the outstanding principle, which is the number to compare to expected stock returns (unless you can deduct some portion from your taxes).

Where inflation does help (in the case of mortgages) is that your cost of living related to your mortgage payment does not go up with inflation (minus the escrow portion, like property taxes and insurance), which tends not to be the case for rent.

Your point is correct, but inflation still matters (or will likely matter) in context because people often say that often say paying down the mortgage is a guaranteed return, so it is important to look at what the guarantee really is.   The historical long term inflation rate is about 3.5%.  Which means the real rate of return of paying off that 3.63% mortgage is very likely to be very close to zero, if not negative.     We haven't had much inflation for a long time so people have sort of forgotten about it, but it is complete reasonable to assume we'll have average inflation over the next 30 years. 

Similarly, the 10-year Treasury (risk free rate) is inching over 3% which again is pretty close to the 3.625% mortgage.   So again, if we get something close to average inflation, then return of paying down the mortgage will be less than the risk free rate.   Not good.

As long as you and everyone else are accounting inflation equally when comparing asset returns, I'm ok with it. But most are not. If you want to calculate inflation-adjusted (or "real") returns on mortgage interest rate, than the same should be done for stocks or any other investment asset. So 7% returns under 4% inflation = 3% "real" returns for equity (compare that to 0% mortgage real returns).

So my main point of confusion, is why are so many claiming the benefits of the inflation hedge when it comes to choosing equity over mortgage payoff? It isn't like equity is some great inflation hedge. https://seekingalpha.com/article/1489342-equity-returns-and-inflation

Now comparing a mortgage payment to rent would involve an inflation hedge in that rent tends to rise with inflation....
Goddamnit! Why did B42 get hisself banned? I can't answer this succinctly, but I know there's a problem with the math in bold above.

And equity is not an inflation hedge, a fixed rate mortgage is. With inflation, the dollars you earn increase and each dollar buys less. But your fixed mortgage payment doesn't change. Ever. So as housing prices and rents increase on the rising tide of inflation, your mortgage payment does not. Equity is largely irrelevant.

I miss B42 as well. His pomposity was my reason for joining the forum.

RWD

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Re: Paid-off mortgage people: How long did it take you to pay off the house?
« Reply #316 on: October 12, 2018, 09:23:47 AM »
So 7% returns under 4% inflation = 3% "real" returns for equity (compare that to 0% mortgage real returns).
Where are you getting 7% nominal from equities and 4% inflation?
The SP500 has returned 7% after inflation, not 3%. 9-10% nominal returns.
Inflation has been ~3.13% since 1913.

True. But which 7% are Mustachians using? The average historical returns (7% inflation-adjusted), or the worst-case (7% non-inflation adjusted)? This article has a nice table showing how low returns can be over an extended period of time. https://www.mrmoneymustache.com/2011/06/06/dude-wheres-my-7-investment-return/ MMM hedged the risk of stock market returns in his early retirement by paying off his home, having a rental home, and working side gigs.

Depends on the Mustachian, as there is a very large range here between conservative and aggressive. But those of us that are not paying off our mortgage are expecting the statistical probability of 7% real stock market returns over the long fixed term (typically 30 years) mortgage with the knowledge that 90% of the time we'll get at least 4.45% real. The worst 30 year period of all time was still a 1.9% real return (same source), which is better than the return for paying down most recent mortgages.

Most FIRE plans (the reason we're here) that rely on the stock market are requiring long term real returns of only 4% (Trinity study, cFIREsim, etc). If we hit the historical average money will be flowing out of our ears. I would expect the more conservative people planning on a 3% WR are the same people that are paying off their mortgage early, but that isn't necessarily the case. Humans are contradictory and irrational.

Telecaster

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Re: Paid-off mortgage people: How long did it take you to pay off the house?
« Reply #317 on: October 12, 2018, 11:36:46 AM »

True. But which 7% are Mustachians using? The average historical returns (7% inflation-adjusted), or the worst-case (7% non-inflation adjusted)? This article has a nice table showing how low returns can be over an extended period of time. https://www.mrmoneymustache.com/2011/06/06/dude-wheres-my-7-investment-return/

Uh, there's this thing called the "4% Rule."  You probably haven't heard about it because it is top secret.  No one ever talks about it.  It takes into account inflation AND the sequence of returns risk you mentioned.  That's what most Mustachians use.   

Now, if you think the future will be worse than the past and 4% won't apply, I've got no quibble with that.   

And if you think that it can be a good idea to diversity your portfolio into things like real estate I've got no quibble with that either (in fact, I do that my self).

However, I don't cotton to bad assumptions.  If you assume future real stock market returns will be on the order of 7% because you are subtracting inflation, then the only way to make a meaningful comparison to the real cost of your mortgage is to also subtract inflation.  So a 3.5% mortgage is likely to cost you very close to, if not actually 0% over the next 30 years.    Getting to use hundreds of thousands of dollars for FREE for 30 years is the deal of a lifetime.   Why would anyone try to retire the deal of a life time as quickly as possible???

And if inflation increases above your mortgage rate, then you are getting paid to borrow money.   While you are looking up historical tables, look at the inflation rate in the 1970s and early 1980s.   That sounds like a long time ago, but it still within living memory of a lot of people on this board.   If anything even close to that happens again, a 3.5% mortgage will feel like owning a winning lottery ticket.   

TexasRunner

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Re: Paid-off mortgage people: How long did it take you to pay off the house?
« Reply #318 on: October 12, 2018, 03:19:59 PM »

True. But which 7% are Mustachians using? The average historical returns (7% inflation-adjusted), or the worst-case (7% non-inflation adjusted)? This article has a nice table showing how low returns can be over an extended period of time. https://www.mrmoneymustache.com/2011/06/06/dude-wheres-my-7-investment-return/

Uh, there's this thing called the "4% Rule."  You probably haven't heard about it because it is top secret.  No one ever talks about it.  It takes into account inflation AND the sequence of returns risk you mentioned.  That's what most Mustachians use.   

Now, if you think the future will be worse than the past and 4% won't apply, I've got no quibble with that.   

And if you think that it can be a good idea to diversity your portfolio into things like real estate I've got no quibble with that either (in fact, I do that my self).

However, I don't cotton to bad assumptions.  If you assume future real stock market returns will be on the order of 7% because you are subtracting inflation, then the only way to make a meaningful comparison to the real cost of your mortgage is to also subtract inflation.  So a 3.5% mortgage is likely to cost you very close to, if not actually 0% over the next 30 years.    Getting to use hundreds of thousands of dollars for FREE for 30 years is the deal of a lifetime.   Why would anyone try to retire the deal of a life time as quickly as possible???

And if inflation increases above your mortgage rate, then you are getting paid to borrow money.   While you are looking up historical tables, look at the inflation rate in the 1970s and early 1980s.   That sounds like a long time ago, but it still within living memory of a lot of people on this board.   If anything even close to that happens again, a 3.5% mortgage will feel like owning a winning lottery ticket.

Not to mention that mortgage debt in the US is non-callable.  Fixed.  Permanent.  Guaranteed.  That is the whole point of not paying it off.  You know, today, exactly what your mortgage costs will be for the next 30 years, which is kind of a huge deal.

If it comes out to 6% interest, or anywhere that the math breaks near-even, even or positive, pay that sumobich off.  You'll get no qualms from this forum for doing so.  But if it is going to cost you at least $100,000 or more, then you kinda need to step out of the FIRE boat, because you aren't trying to retire early.  Do the math first and see how it goes.

effigy98

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Re: Paid-off mortgage people: How long did it take you to pay off the house?
« Reply #319 on: October 12, 2018, 03:59:11 PM »
Just made last payment... 330k in 10 years.

Our strategy was to:
- Max Two 401ks
- Max HSA,
- Max one backdoor roth (not offered at other employer).
- Pay recurring bills, food, business expenses, etc
- Make principle payment with left over

We were set back by 3 years when I took equity loan from main house to buy a rental that was down the street and too good to pass up. Both properties were foreclosures and have since almost 4x the purchase prices.
« Last Edit: October 12, 2018, 04:02:55 PM by effigy98 »

effigy98

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Re: Paid-off mortgage people: How long did it take you to pay off the house?
« Reply #320 on: October 12, 2018, 04:06:14 PM »
My mortgage rate is 3.125% as well, but it is no longer worth it for me to itemize deductions, so that would be equivalent to a somewhat higher Treasury yield, since Treasuries pay taxable interest (Federal anyway, but not state).

Nobody seems to factor this in, it is always "FREE MONEY"... Nice to see someone get it.

TexasRunner

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Re: Paid-off mortgage people: How long did it take you to pay off the house?
« Reply #321 on: October 12, 2018, 04:22:15 PM »
My mortgage rate is 3.125% as well, but it is no longer worth it for me to itemize deductions, so that would be equivalent to a somewhat higher Treasury yield, since Treasuries pay taxable interest (Federal anyway, but not state).

Nobody seems to factor this in, it is always "FREE MONEY"... Nice to see someone get it.

The point is to do the math first.  If your IPS is for 70% / 30% towards stocks, and you want to treat your house as a secure form of asset (like one would treat bonds), then you have probably already done the math first and recognize the 'lost opportunity'.  The point is to do the math first (just like with an "overly" conservative portfolio) and recognize what you are giving up for stability.  That is hardly ever recognized from the pay-it-off crowd...

As far as deductions go... Tax savings from losing itemization isn't even included in the math examples above still isn't enough to offset 300k worth of investment gains over 30 years.

Boofinator

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Re: Paid-off mortgage people: How long did it take you to pay off the house?
« Reply #322 on: October 13, 2018, 07:02:54 PM »

True. But which 7% are Mustachians using? The average historical returns (7% inflation-adjusted), or the worst-case (7% non-inflation adjusted)? This article has a nice table showing how low returns can be over an extended period of time. https://www.mrmoneymustache.com/2011/06/06/dude-wheres-my-7-investment-return/

Uh, there's this thing called the "4% Rule."  You probably haven't heard about it because it is top secret.  No one ever talks about it.  It takes into account inflation AND the sequence of returns risk you mentioned.  That's what most Mustachians use.   

Now, if you think the future will be worse than the past and 4% won't apply, I've got no quibble with that.   

And if you think that it can be a good idea to diversity your portfolio into things like real estate I've got no quibble with that either (in fact, I do that my self).

However, I don't cotton to bad assumptions.  If you assume future real stock market returns will be on the order of 7% because you are subtracting inflation, then the only way to make a meaningful comparison to the real cost of your mortgage is to also subtract inflation.  So a 3.5% mortgage is likely to cost you very close to, if not actually 0% over the next 30 years.    Getting to use hundreds of thousands of dollars for FREE for 30 years is the deal of a lifetime.   Why would anyone try to retire the deal of a life time as quickly as possible???

And if inflation increases above your mortgage rate, then you are getting paid to borrow money.   While you are looking up historical tables, look at the inflation rate in the 1970s and early 1980s.   That sounds like a long time ago, but it still within living memory of a lot of people on this board.   If anything even close to that happens again, a 3.5% mortgage will feel like owning a winning lottery ticket.

Please reread what I wrote. I stated there are expected returns and actual returns. The actual returns are tied to the top secret 4% rule (which by the way you've just jeopardized your clearance by mentioning). In general I agree with you, if your time period is 30 years, and your mortgage rate is less than 4% plus inflation, you are highly likely (though not guaranteed) to be better off investing. But if your time period is significantly shorter than 30 years (the case for many if not most Mustachians who plan to FIRE), or your mortgage is high, there is significant risk taken off the table by paying off the mortgage early, which results in an earlier expected FIRE date. (You know, sequence of return risk.) And don't forget to consider that marginal utility of wealth means that left-skew risk is more damaging than right-skew risk is rewarding.

PizzaSteve

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Re: Paid-off mortgage people: How long did it take you to pay off the house?
« Reply #323 on: October 14, 2018, 09:24:32 PM »
Good post.  A good economics for dummies summary to help explain real vs nominal rates (both for prices and investment returns) would really be a helpful addition to the 4% rule discussions.

It is important to undertand that an average rate, is one that includes data from periods of very high nominal interest rates.  These data skew the numbers high.  In other words, expecting an average rate of return during a low inflation period is not a good assumption, at least according to economists.  It is better to use data based on an average of time periods with similar inflation characteristics. That is unless you expect exactly the 70s, 80s and 90s to reoccur, including a return to 18% morgage rates, followed by almost 0% rates.  With modern fed govt. money supply management in place, this seems unlikely.

Current economists use better factors than averaging the past, because complex systems like economies require more sophisticated work.  I might read up on what top analysts and economists say is a reasonable assumption, then factor that in.
« Last Edit: October 17, 2018, 11:00:31 AM by PizzaSteve »

evanc

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Re: Paid-off mortgage people: How long did it take you to pay off the house?
« Reply #324 on: October 16, 2018, 12:55:29 PM »
30 yr mortgage will be paid off in 10yrs, 10mos - as of January, 1, 2019. Can already taste the freedom :)

jengod

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Re: Paid-off mortgage people: How long did it take you to pay off the house?
« Reply #325 on: October 16, 2018, 01:28:43 PM »
Thanks to @effigy98 and @evanc for sharing your personal experiences relevant to the original question.  :)

mies

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Re: Paid-off mortgage people: How long did it take you to pay off the house?
« Reply #326 on: October 17, 2018, 05:12:22 AM »
We paid off our mortgage in about 8.5 years. It has been great for our cash flow and confidence. We used to spend around $1200/month on our mortgage payment. We still set aside $600/month for property taxes, insurance, and maintenance. Not having a mortgage gave me more money to invest, but more importantly, it gave me the confidence to invest more than I did when we had a mortgage.

Before anyone jumps on me, I understand that paying off a mortgage early isnít always the optimum use of your money, but it isnít the worst use either. If you or your spouse are extremely risk averse, paying off a mortgage is better than letting your money rot in a savings account. Perfect is the enemy of the good.