Author Topic: DONT Payoff your Mortgage Club  (Read 37774 times)

boarder42

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DONT Payoff your Mortgage Club
« on: February 27, 2017, 07:17:57 AM »
Lets do this the right way.  And spread the word about how great NOT paying down our mortgages are for our FIRE dates.

I have a 349k Left on my mortgage and i will be taking that the full 29 years left.  Who's with me!!

3.25% fixed for 30 years
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RWD

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Re: DONT Payoff your Mortgage Club
« Reply #1 on: February 27, 2017, 07:39:17 AM »
We have 14 years left (15 year mortgage) at 3.125%. Too good of a rate to pay down faster. Principal balance is about $178k right now.

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #2 on: February 27, 2017, 07:40:37 AM »
I've got a 5/1 ARM at 3% (through the 12/1/2018 payment), currently $187,000 loan balance. It really makes me nervous watching that balance go down so much, don't know how I'm going to deal with it if I have to start taking standard deduction on my income tax.

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #3 on: February 27, 2017, 07:42:00 AM »
Welcome.

I figure this thread will also come in handy during some rough market times which will hit sometime we wont know when... to help keep people on this path.
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swick

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Re: DONT Payoff your Mortgage Club
« Reply #4 on: February 27, 2017, 08:49:40 AM »
Okay, so I'm dipping my toe in to ask...is there a formula or something you can use to determine where the point is in which it makes sense to pay down your mortgage early?

I think people tend to think our situations are all special unique snowflakes as a way of justifying the psychological comfort of having a paid off house. I know we do. We have run some basic numbers and we think that it doesn't make too much difference to our FI numbers. But I'll be the first to admit we may be missing something.

So...can you guys make me feel better/make sense of our numbers?

We are in Canada so no PMI and no tax benefit to keeping the mortgage.
160,000 left at 4.33% 10-year fixed. We max out our RRSP contributions but do have some room accumulated in our TFSA accounts.

For our investments, we are mostly invested in VXC, with a little bit in VCN, VAB, and ZRE.

Does anyone have/use a spreadsheet that they can plug in their numbers to and model the different options? Or if we were to make one, what data should we be considering? 

Thanks!

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #5 on: February 27, 2017, 09:45:21 AM »
i dont have a spreadsheet. 

10 years vs 30 years is a huge difference.  Its really easy for me to say returns avg 7%+ after inflation over 30 years so unless my mortgage is over 7% i dont really need to be paying it down.  but my rate is so incredibly low at 3.25% i've never bothered to dig into this that much.  i wouldnt even consider looking into it personally until it hit 6%
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runewell

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Re: DONT Payoff your Mortgage Club
« Reply #6 on: February 27, 2017, 09:55:28 AM »
Okay, so I'm dipping my toe in to ask...is there a formula or something you can use to determine where the point is in which it makes sense to pay down your mortgage early?

I think people tend to think our situations are all special unique snowflakes as a way of justifying the psychological comfort of having a paid off house. I know we do. We have run some basic numbers and we think that it doesn't make too much difference to our FI numbers. But I'll be the first to admit we may be missing something.

So...can you guys make me feel better/make sense of our numbers?


Yes I can, I'll put the formulas in the next post.  The difference can be significant, but people are generally unable or uninterested to determine the difference - the opportunity cost.
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runewell

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Re: DONT Payoff your Mortgage Club
« Reply #7 on: February 27, 2017, 10:02:55 AM »
HOW TO CALCULATE THE SAVINGS BY NOT PAYING DOWN YOUR MORTGAGE (using the previous post as an example)
Let
B = Mortgage balance [$160,000]
P = Mortgage payment (should be principle and interest only, exclude property taxes, property insurance, PMI, or anything else in escrow) [1,645]
N = number of payments remaining [120 = 10 x 12]
IM = EFFECTIVE Interest rate on your mortgage [.0433]
II = Interest rate on investments [Assuming .07 per year]

Calculate M= Monthly Investment Interest rate = (1+II)^(1/12) = 1.07^.0833333 = 1.0056541

If you don't know P, you can either go to a calculator on the internet or in Excel Type in =-PMT(0.0433/12,120,160000) to get the answer.

Deciding between a payoff assumes you have $160,000 lying around to extinguish the mortgage.  The question is what is the difference at the end of 10 years between:
1) Leaving the $160,000 invested and regular making mortgage payments.
2) Paying off the $160,000 and immediately investing the newfound $1,645 each month at the investment rate.

Option 1 is easy to calculate.  At the end of 10 years you have 160,000 x 1.07^10 = $314,744.
Option 2 is more convoluted.  The first $1,645 payment grows by 1.07^10.  The second $1,645 payment grows by 1.07^9.917, etc.  The total is $282,973.

Here's how you calculate it:  P x M x (M^N - 1) / (M - 1)
= 1,645 x 1.0056541 x (1.0056541^120 - 1) / (1.0056541 - 1)
= 1,654.30 x (1.96714 - 1) / 0.0056541
= 1,654.30 x 0.96714 / 0.0056541 (bit of rounding error) 

The difference here is $31,771.  Lower than other people's situations because (1) it's only a ten year mortgage, and (2) the interest rate is closer to 7% than many other people's mortgages.  But for some people that could be easily be a year's worth of expenses, so prepaying your mortgage could delay your FIRE date by a year in this instance.

One other thing you should take into account is the effective interest rate of your mortgage.  For those of us in the US that can deduct the interest rate on our mortgages (not everyone necessarily gets a benefit from this, you should check), that interest probably lowers your state and federal taxes.  This calculation isn't so simple because we automatically qualify for a standard deduction, so if you aren't already filing a Schedule A you might not see a full benefit.

Hope that helps.  If you can't be bothered to do the calculation, post your information here and I will try to help.  People with (1) longer mortgages and (2) lower interest rates and going to find more benefit in not paying down early.  I did this calculation for someone else on the forum and the difference was nearly TWO HUNDRED THOUSAND DOLLARS!

7% is the investment figure MMM has thrown around on the site, but you are welcome to tweak it depending on your age and risk tolerance.  Any mustachian this involved in making their finances go longer sooner owes it to themselves to do this calculation before paying down their mortgage.
« Last Edit: February 27, 2017, 10:37:43 AM by runewell »
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moof

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Re: DONT Payoff your Mortgage Club
« Reply #8 on: February 27, 2017, 10:07:22 AM »
14 years out of a 15 year left.  ~260k at 3.0%.  It was worth it to refi down from 4.75%.   In retrospect I should have done the 30 year, but whatever.  Will have just over 100k left at FIRE in 8 years.

I'm sticking with the plan that shows a the best outcome, which is to keep shoveling all the money I can into the market and letting it ride as long as possible.  Tax return went into the wife's IRA today, nearly maxing it out for the year.

Beating down the mortgage before FIRE would result in about a 10% worse safe withdrawal rate, even accounting for extra taxes on increased withdrawals for the first few years while I finish off the mortgage.

Edit:
Took the necessary payments to pay off my mortgage at FIRE ($1250 bigger payments for 8 years), ran the future value of that delta at my FIRE date.  Got $158k future value.  If I take that $158k and subtract off my ongoing monthly interest and principal of $1850 while growing the remainder at 7% I end up $71.4k ahead in 14 years.

I've done the same scenarios in in tools like cfiresim, and end up with about a 10% higher safe withdrawal rate.  I also pay few taxes now due to itemized deductions, which is a little harder to account for.  That itemization advantage vs. standard deductions is shrinking and will become null and void pretty soon, but it is nice in the meanwhile.
« Last Edit: February 27, 2017, 10:30:56 AM by moof »

swick

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Re: DONT Payoff your Mortgage Club
« Reply #9 on: February 27, 2017, 10:14:34 AM »

Yes I can, I'll put the formulas in the next post.  The difference can be significant, but people are generally unable or uninterested to determine the difference - the opportunity cost.

That would be awesome! This is one of those things we keep coming back to without really any idea of how to move forward on it. Throw in being raised by people who think the best investment is self-sufficiency and ammo and that the collapse of the economy is coming, it is hard to not let that have an influence. We want data and rational decision making, damnit!

The other complicating factor is we aren't totally sure on our path to FI, if we want to look at rentals and real estate or start up another business, so maybe having a paid off house and the cash flow to bankroll our other avenues makes more sense than just passive investing - In which case, does it make sense to be stuffing money into taxable accounts?
___

Thanks, Runewell. Does the 7% rate of return for investments include dividends? We haven't been sure how to include those in the calculations.

I'll see if your formula match what Hubs has been working with, numbers will be a little off since they aren't the starting amounts and we are on an accelerated weekly payment schedule.

the_fixer

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Re: DONT Payoff your Mortgage Club
« Reply #10 on: February 27, 2017, 10:28:15 AM »
Property valued at 365k
Loan 169K @ 2.875% APR with 14 years remaining of a 15 year loan.

Not in a hurry to pay it off since it will be paid off prior to our "real" retirement following the normal schedule.

However I have to admit that it does make me feel better knowing that I will not have to worry about a house payment in retirement.

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #11 on: February 27, 2017, 10:31:52 AM »
Good call Rune on the taking down the effective rate in the tax rebates.  thats 31% lower for me given 25% fed and 6% state.  but shouldnt we also account for standard deduction coming off of that as it would count either way.  the rest of my deductions without the mortgage interest get me there anyways.  so i can assume the full amount.  but others may not be able to assume the same.  so my 3.25% becomes 2.245%  that makes it even crazier to pay it down
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runewell

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Re: DONT Payoff your Mortgage Club
« Reply #12 on: February 27, 2017, 10:32:36 AM »

Thanks, Runewell. Does the 7% rate of return for investments include dividends? We haven't been sure how to include those in the calculations.


The 7% is just the total return you are getting so assume that number includes dividends and any taxes you may have to pay along the way.  Once the mortgage is paid off, that frees up an income stream that has been post-tax.
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runewell

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Re: DONT Payoff your Mortgage Club
« Reply #13 on: February 27, 2017, 10:33:48 AM »
Good call Rune on the taking down the effective rate in the tax rebates.  thats 31% lower for me given 25% fed and 6% state.  but shouldnt we also account for standard deduction coming off of that as it would count either way.  the rest of my deductions without the mortgage interest get me there anyways.  so i can assume the full amount.  but others may not be able to assume the same.  so my 3.25% becomes 2.245%  that makes it even crazier to pay it down

Right thanks for the catch, I would have gotten a standard deduction anyway, so the benefit is only what is in excess of that.  I knew that, I just forgot it.  But I'd better change my post.
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Friar

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Re: DONT Payoff your Mortgage Club
« Reply #14 on: February 27, 2017, 10:51:37 AM »
Not only am I not paying off my mortgage early, I'm considering extending the term this year.

Mortgages in the UK are generally a little different to those in the US. The most common* type in the UK is called a "Fixed Rate" with which you get a mortgage (of however many years, up to 35) with an introductory, or "Fixed", rate typically last between 2 and 10 years. The longer the fix, the higher the interest rate. Currently I am 14 months into a 25 year mortgage, 2 year fix, with 15% down, at the rate of 2.49%. A 5 year fix with the same parameters would be around 2.9-3.0%.

After this period ends you revert to the standard variable rate (SRV) that can be whatever the provider wants it to be; currently 3.69%. As the name alludes to this rate can be changed at the whim of the lender. So if interest rates hike up the lender can choose to boost their returns as well.

Although switching mortgage providers during the fix generally incurs a penalty, as soon as the fix is over you are free to move fee free. So what tends to happen is that, after their fix, customers move lenders to one with preferential terms.

It comes down to a gamble between a shorter fix with a lower interest rate and the hope that interest rates don't rise before you remortgage, or a longer fix with a higher interest rate to mitigate against the same scenario. The longer fix also gives you payment stability which isn't to be sniffed at.

All that as a preface to why I'm remortgaging after such a short period of time.
What I'm planning to do when I remortgage in a few months is to extend the term from 25 years to 30, or 35 years and a slightly longer fix of 5 years at around 2.9%. Still with the same amount down, or perhaps 20% rather than the 15% based on the equity I've built up and the valuation of the house, this would reduce my monthly payments by about 20-25%.

If I pick a provider that allows unlimited fee-free over payments, as my current lender does, this allows two key features:

1) I can choose to "overpay" to the tune of my current payment but with the flexibility of scaling back if the situation calls for it.
2) I can choose to funnel the savings into investments or high interest savings accounts (many banks in the UK are offering 4-5% risk free cash savings in the UK) and profit from the difference between interest rates.

*Based on my friends and relatives

SwordGuy

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Re: DONT Payoff your Mortgage Club
« Reply #15 on: February 27, 2017, 10:53:15 AM »
HOW TO CALCULATE THE SAVINGS BY NOT PAYING DOWN YOUR MORTGAGE (using the previous post as an example)
Let
B = Mortgage balance [$160,000]
P = Mortgage payment (should be principle and interest only, exclude property taxes, property insurance, PMI, or anything else in escrow) [1,645]
N = number of payments remaining [120 = 10 x 12]
IM = EFFECTIVE Interest rate on your mortgage [.0433]
II = Interest rate on investments [Assuming .07 per year]

Calculate M= Monthly Investment Interest rate = (1+II)^(1/12) = 1.07^.0833333 = 1.0056541

If you don't know P, you can either go to a calculator on the internet or in Excel Type in =-PMT(0.0433/12,120,160000) to get the answer.

Deciding between a payoff assumes you have $160,000 lying around to extinguish the mortgage.  The question is what is the difference at the end of 10 years between:
1) Leaving the $160,000 invested and regular making mortgage payments.
2) Paying off the $160,000 and immediately investing the newfound $1,645 each month at the investment rate.

Option 1 is easy to calculate.  At the end of 10 years you have 160,000 x 1.07^10 = $314,744.
Option 2 is more convoluted.  The first $1,645 payment grows by 1.07^10.  The second $1,645 payment grows by 1.07^9.917, etc.  The total is $282,973.

Here's how you calculate it:  P x M x (M^N - 1) / (M - 1)
= 1,645 x 1.0056541 x (1.0056541^120 - 1) / (1.0056541 - 1)
= 1,654.30 x (1.96714 - 1) / 0.0056541
= 1,654.30 x 0.96714 / 0.0056541 (bit of rounding error) 

The difference here is $31,771.  Lower than other people's situations because (1) it's only a ten year mortgage, and (2) the interest rate is closer to 7% than many other people's mortgages.  But for some people that could be easily be a year's worth of expenses, so prepaying your mortgage could delay your FIRE date by a year in this instance.

One other thing you should take into account is the effective interest rate of your mortgage.  For those of us in the US that can deduct the interest rate on our mortgages (not everyone necessarily gets a benefit from this, you should check), that interest probably lowers your state and federal taxes.  This calculation isn't so simple because we automatically qualify for a standard deduction, so if you aren't already filing a Schedule A you might not see a full benefit.

Hope that helps.  If you can't be bothered to do the calculation, post your information here and I will try to help.  People with (1) longer mortgages and (2) lower interest rates and going to find more benefit in not paying down early.  I did this calculation for someone else on the forum and the difference was nearly TWO HUNDRED THOUSAND DOLLARS!

7% is the investment figure MMM has thrown around on the site, but you are welcome to tweak it depending on your age and risk tolerance.  Any mustachian this involved in making their finances go longer sooner owes it to themselves to do this calculation before paying down their mortgage.

First of all, THANK YOU.   That's very useful information.

I would like to posit a 3rd case.

I have $160,000 which will be invested, but I will pull the monthly payment from that amount that is invested.

So, I invest $160,000 and it makes money for a month.  I pull out my mortgage payment from the balance.  Whatever is left makes money for a month, then I pull out the 2nd payment, etc.    And, of course, if this is based on stock market returns, how do we test this for sequence of return risks?

runewell

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Re: DONT Payoff your Mortgage Club
« Reply #16 on: February 27, 2017, 11:16:26 AM »
First of all, THANK YOU.   That's very useful information.

I would like to posit a 3rd case.

I have $160,000 which will be invested, but I will pull the monthly payment from that amount that is invested.

So, I invest $160,000 and it makes money for a month.  I pull out my mortgage payment from the balance.  Whatever is left makes money for a month, then I pull out the 2nd payment, etc.    And, of course, if this is based on stock market returns, how do we test this for sequence of return risks?

You are most welcome!

This "3rd case" is simply having the $160K invested ($314,744 10 yrs from now) minus the future value of the payments ($282,973).  It will still come out to $31,771.  To be fair that $31,771 is a future value.  Assuming 2.5% inflation that's only about $25K today (if you wanted that savings in today's dollars at some safer discounted rate)
« Last Edit: February 27, 2017, 11:19:23 AM by runewell »
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SwordGuy

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Re: DONT Payoff your Mortgage Club
« Reply #17 on: February 27, 2017, 11:34:54 AM »
Um.. I think that amount is in today's dollars, since 7% is the after inflation return.

Since the mortgage payment remains the same, shouldn't we compare it to a 10% including inflation to get tomorrow's dollars?

runewell

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Re: DONT Payoff your Mortgage Club
« Reply #18 on: February 27, 2017, 11:59:14 AM »
Um.. I think that amount is in today's dollars, since 7% is the after inflation return.

Since the mortgage payment remains the same, shouldn't we compare it to a 10% including inflation to get tomorrow's dollars?

Is it?  I really can't tell because although he uses that number from time-to-time he doesn't always explain what it implies, perhaps someone could quote the details.

My calculation shows you what a 7% return would look like.  All I'm assuming is that you have 7% more than the year before.  This is something we should nail down, as it could be stated in today's $$ or future $$ depending on the assumptions.
« Last Edit: February 27, 2017, 12:28:59 PM by runewell »
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tyort1

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Re: DONT Payoff your Mortgage Club
« Reply #19 on: February 27, 2017, 12:31:39 PM »
Yes, 7% is an after-inflation number.  Pre-inflation I'd assume would be 10% to 11%.
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Pylortes

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Re: DONT Payoff your Mortgage Club
« Reply #20 on: February 27, 2017, 01:35:08 PM »
I'm in (as you probably saw in the other thread)!   If you believe inflation will be higher in the future (as I do) paying off a mortgage slowly over time and leaving the balance invested in stocks will even further juice returns.

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #21 on: February 27, 2017, 01:37:31 PM »
Um.. I think that amount is in today's dollars, since 7% is the after inflation return.

Since the mortgage payment remains the same, shouldn't we compare it to a 10% including inflation to get tomorrow's dollars?

Is it?  I really can't tell because although he uses that number from time-to-time he doesn't always explain what it implies, perhaps someone could quote the details.

My calculation shows you what a 7% return would look like.  All I'm assuming is that you have 7% more than the year before.  This is something we should nail down, as it could be stated in today's $$ or future $$ depending on the assumptions.

since mortgage payments dont increase with inflation i would think post inflation numbers would be more usefull right?  this is the one case where adding in inflation and talking future dollars makes more sense.
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bluewater

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Re: DONT Payoff your Mortgage Club
« Reply #22 on: February 27, 2017, 02:36:41 PM »
Does anyone weigh the chance of a long term deflationary environment when choosing to not pay off your mortgage?  I get the idea of the power of a long term fixed rate mortgage at today's rates but honestly don't understand the true chances of a sustained deflationary environment occurring. Sure, do some googling and Japan is a prime example but should we be at all concerned in the US?

Also, as a Florida resident I've heard/read about the generous protections afforded to homeowners here in the event of bankruptcy but don't understand the law well enough to see how it might apply to me. If I'm struck with some terrible disease and fall deeply into medical debt could I declare bankruptcy and essentially start over by selling my home? My understanding is I could keep my home and its equity but I'd lose the rest (stocks, cash, other investments, etc.) Unlikely sure, but shouldn't I factor that in during my decision to pay off or hold leveraged debt?

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #23 on: February 27, 2017, 02:53:26 PM »
Does anyone weigh the chance of a long term deflationary environment when choosing to not pay off your mortgage?  I get the idea of the power of a long term fixed rate mortgage at today's rates but honestly don't understand the true chances of a sustained deflationary environment occurring. Sure, do some googling and Japan is a prime example but should we be at all concerned in the US?

Also, as a Florida resident I've heard/read about the generous protections afforded to homeowners here in the event of bankruptcy but don't understand the law well enough to see how it might apply to me. If I'm struck with some terrible disease and fall deeply into medical debt could I declare bankruptcy and essentially start over by selling my home? My understanding is I could keep my home and its equity but I'd lose the rest (stocks, cash, other investments, etc.) Unlikely sure, but shouldn't I factor that in during my decision to pay off or hold leveraged debt?

the home stead part varies by state.  very few states are full homestead states.  Texas is maybe florida is as well.  The federal reserve keeps a pretty close watch to make sure we have inflation.  the reigns are pretty tight there.  long term deflation fear is like not investing in the market and siting 2008 and 2000 etc as your examples of why it is bad and volatile. 

you may as well say but what if our markets fall into a state like japan's ... well then FIRE fails for 95% of us anyways.
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Re: DONT Payoff your Mortgage Club
« Reply #24 on: February 27, 2017, 06:06:00 PM »
Lets do this the right way.  And spread the word about how great NOT paying down our mortgages are for our FIRE dates.

I have a 349k Left on my mortgage and i will be taking that the full 29 years left.  Who's with me!!

3.25% fixed for 30 years
Sorry it took so long for me to join ;)

Just refinanced my home.  203,000 mortgage at 4.125 with a 30 year term.  Purchased 2.75 years ago and in that time I have increased my tax advantaged investments from 24k to 225k.

Bring on 300k invested!

I have actually considered refinancing right before FIRE (if I have enough equity) and using that money for my 5 year Roth IRA conversion ladder.  We'll see!

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boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #25 on: February 27, 2017, 06:25:03 PM »
Round numbers are fun. We're going to tip 500k here in a month or so.
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FrozenBits

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Re: DONT Payoff your Mortgage Club
« Reply #26 on: February 27, 2017, 06:34:18 PM »
Round numbers are fun. We're going to tip 500k here in a month or so.
Nice!  We may be able to hit 300k this year depending on market movements.  Hoping to contribute at least 60k to investments this year.

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nottoolatetostart

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Re: DONT Payoff your Mortgage Club
« Reply #27 on: February 28, 2017, 04:16:18 AM »
The name of this thread amuses me so much. Love it!

I have posted about this before and no one has really given me a good answer, maybe you all can since you guys have spent a lot of time thinking about this.

Are you planning on having your mortgage payment x 25 (4% swr) for retirement so you can keep paying your mortgage? How are you planning on paying your actual mortgage payment in retirement?

For example, if you have 200k balance, refinance today at 4.125% for 30 years is just around a payment of 1,000 per month (for math simplicity). Will you just save the 200k or save for the 12k * 25 = 300k for your retirement in order to keep making those payments? It is easy to have a mortgage while working but what are actual plans for making payments when you are actually retired? I am reading many saying they will have lower balances or have paid off house when they retire, so I am interested in the 30 yr mortgage crowd.

Thanks in advance.


Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #28 on: February 28, 2017, 04:31:16 AM »
I am so in. Full disclosure: our primary home was purchased with cash in 2013. We sold two mortgaged and appreciated homes to buy it. We are FI, I am RE. We still hate that we don't have a big, fat mortgage. However, being mortgage free has enabled us to acquire two more single family homes as rentals, for a total of three SFH rentals, all with mortgages. Our goal is five, so having no mortgage on our primary has helped us to qualify for these loans, which we would not have otherwise.

Tl;dr: We have 3 properties with mortgages.

Here's an example of why we are real estate + mortgage fans. When we were shopping for our primary home in late 2012/early 2013, this foreclosure was on the market:

https://www.coldwellbankerhomes.com/ca/walnut-creek/2612-buena-vista-ave/pid_16656361/

It closed in May of 2013 for about $585k. It is just on the market again for $845k. The agent said they will be accepting offers later this week and expect it to go for well over asking. (It will. There's very little under $1M inventory available that isn't a total fixer.) In three and a half years, the homeowners installed new HVAC, a tankless water heater, gutters and some French Drains. That's it. No other landscaping, no paint, no other interior renos.

Assuming 20% down and a 4% loan, their mortgage outlay has been about $255k. (Disclaimer: This is insomnia powered, back-of-the-napkin math. Rough number does not include any tax deductions on the mortgage interest, because...insomnia and too many variables.) Rough guess is they will make about $225-250k on this deal, maybe more. Tax Free. Plus, they freaking lived in the house!

In that time, Google-fu says the S&P 500 has averaged 10.27% (annualized, dividends reinvested, adjusted for inflation, YMMV). An S&P 500 account opened in May of 2013, with $117,000 initial investment (20% down payment) plus $3,000 added per month (PITI) since then would be worth roughly $335,000, for a gain of roughly $80k. Nowhere near as good a result and that's not including that taxes will be owed on the gains. And you can't live inside the S&P 500.

This is just a rough estimate, using a real-life example in my HCOLA. Per disclaimer above, I'm just entertaining myself until the caffeine I accidently ingested today wears off and I can fall asleep. I am no spreadsheet jockey, but one of you experts might want to play around with this data. I will add details of the final selling price once the deal closes.
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Laura33

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Re: DONT Payoff your Mortgage Club
« Reply #29 on: February 28, 2017, 04:48:12 AM »
Ok, I'm in.  Convert here -- i prepaid all mortgages until this one.  Then again, my first mortgage was 8 7/8%, so that was a somewhat different world.

Currently about 12 years remaining on 15-yr at 2 7/8%, which was low enough to give even pessimistic me zero desire to prepay.  I figure if the markets don't do better than that over the next decade, I have much bigger problems.  Will probably pay it off when we pull the plug,  it who knows?
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boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #30 on: February 28, 2017, 05:40:42 AM »
The name of this thread amuses me so much. Love it!

I have posted about this before and no one has really given me a good answer, maybe you all can since you guys have spent a lot of time thinking about this.

Are you planning on having your mortgage payment x 25 (4% swr) for retirement so you can keep paying your mortgage? How are you planning on paying your actual mortgage payment in retirement?

For example, if you have 200k balance, refinance today at 4.125% for 30 years is just around a payment of 1,000 per month (for math simplicity). Will you just save the 200k or save for the 12k * 25 = 300k for your retirement in order to keep making those payments? It is easy to have a mortgage while working but what are actual plans for making payments when you are actually retired? I am reading many saying they will have lower balances or have paid off house when they retire, so I am interested in the 30 yr mortgage crowd.

Thanks in advance.

my current plan is to just have my mortgage balance as extra.  i know this increases risk a bit with sequence of returns but that is currently my plan, we have 5-7 years til FIRE and will obviously re-evaluate at that point.  The other issue is i cant quit mid year (i can but i get a huge bonus that makes me stick around til the end of the year)  so we'll likely reach our goal mid year and then have a gravy cushion building
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runewell

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Re: DONT Payoff your Mortgage Club
« Reply #31 on: February 28, 2017, 06:28:04 AM »
As we get older, we probably accept less return in exchange for less risk.  My 15-yr mortgage will be paid off in 2028 when I am 56.  At that point I will probably be happy to have no mortgage and will probably be settling for a lower rate of return.  Plus, mortgage rates may not be quite so low then either.  I do think there comes a point in one's life where taking on a 3-4% loan to try and get 7% becomes unnecessary risk, but I'm not convinced the people on this site prepaying their mortgages are in that situation.

Another thing you hear of is the Dave Ramsey debt snowball.  People pay off small loans and when those debts are paid off there is more money per month available to discharge other loans.  People talk about the psychological benefit of paying something off.  But mathematically you should always throw your money at the highest interest rate unless you have serious cash flow issues.  This is another example where lack of discipline causes people to unnecessarily throw money away.
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Stachetastic

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Re: DONT Payoff your Mortgage Club
« Reply #32 on: February 28, 2017, 06:59:10 AM »
I ponder this all the time, and I think we have a somewhat unique situation around this forum:

The mortgage on our primary residence is currently a balance of 50k at 4.5% with 27 years left. 50k seems like it would be relatively easy to wipe out and just be done with, but our payment is just under $300.

Saving $300 a month doesn't seem like that big of a deal compared to the flexibility of having money easily accessible, or investing it. Or finally updating our kitchen. (We do have a HELOC open on the property, but have never used it.)

Our balances on our 2 rentals are $24k and $59k respectively. The payment on the smaller balance is under $175/month.

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #33 on: February 28, 2017, 07:14:16 AM »
I ponder this all the time, and I think we have a somewhat unique situation around this forum:

The mortgage on our primary residence is currently a balance of 50k at 4.5% with 27 years left. 50k seems like it would be relatively easy to wipe out and just be done with, but our payment is just under $300.

Saving $300 a month doesn't seem like that big of a deal compared to the flexibility of having money easily accessible, or investing it. Or finally updating our kitchen. (We do have a HELOC open on the property, but have never used it.)

Our balances on our 2 rentals are $24k and $59k respectively. The payment on the smaller balance is under $175/month.

i dont get whats unique about it.  math is math regardless of mortgage size.
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Stachetastic

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Re: DONT Payoff your Mortgage Club
« Reply #34 on: February 28, 2017, 07:51:48 AM »
I ponder this all the time, and I think we have a somewhat unique situation around this forum:

The mortgage on our primary residence is currently a balance of 50k at 4.5% with 27 years left. 50k seems like it would be relatively easy to wipe out and just be done with, but our payment is just under $300.

Saving $300 a month doesn't seem like that big of a deal compared to the flexibility of having money easily accessible, or investing it. Or finally updating our kitchen. (We do have a HELOC open on the property, but have never used it.)

Our balances on our 2 rentals are $24k and $59k respectively. The payment on the smaller balance is under $175/month.

i dont get whats unique about it.  math is math regardless of mortgage size.

By unique, I wasn't insinuating we get special math. But looking at this thread alone, those who listed their current mortgage balances: 349k, 178k, 187k, 160k, 260k, 169k, 203k.



talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #35 on: February 28, 2017, 08:21:42 AM »
I really like Runewell's calculation, but I do think it's incomplete.

Servicing a mortgage is about balancing cash flow in the present versus the progress on the balance sheet in the long-term. That cash flow is measured in a world in which the monthly mortgage payment is weighed against an income from work (or investments) that is increasing, and part of that income--for followers of the mustache--is what is being set aside to "pre-pay" future expenses for FIRE.

The rate of inflation and income growth should be part of an optimal payoff calculation, with mortgage balances above that amount implying paying the mortgage down.

tyort1

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Re: DONT Payoff your Mortgage Club
« Reply #36 on: February 28, 2017, 08:26:33 AM »
Thanks to this thread, I just realized we almost have enough saved and invested that we could actually pay off our mortgage with it, if we had to and cashed out.  Our house was $459k when we bought it 2.5 years ago, we owe $330k on it.  We have about $300k in the markets, and we should get above $330k pretty easily this year. 

Obviously we'd never actually do that (especially with penalties on our tax sheltered accounts), but it's nice to see investments are about to overtake house debt.  2 years ago when I discovered MMM I didn't even think something like this was possible, let alone was within reach.
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nottoolatetostart

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Re: DONT Payoff your Mortgage Club
« Reply #37 on: February 28, 2017, 08:47:05 AM »
I ponder this all the time, and I think we have a somewhat unique situation around this forum:

The mortgage on our primary residence is currently a balance of 50k at 4.5% with 27 years left. 50k seems like it would be relatively easy to wipe out and just be done with, but our payment is just under $300.

Saving $300 a month doesn't seem like that big of a deal compared to the flexibility of having money easily accessible, or investing it. Or finally updating our kitchen. (We do have a HELOC open on the property, but have never used it.)

Our balances on our 2 rentals are $24k and $59k respectively. The payment on the smaller balance is under $175/month.

i dont get whats unique about it.  math is math regardless of mortgage size.

By unique, I wasn't insinuating we get special math. But looking at this thread alone, those who listed their current mortgage balances: 349k, 178k, 187k, 160k, 260k, 169k, 203k.

What is great about your balances is that many people have car pyments bigger than your mortgage(s). It probably kind of feels like it is already paid off.

FrozenBits

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Re: DONT Payoff your Mortgage Club
« Reply #38 on: February 28, 2017, 08:52:22 AM »
Thanks to this thread, I just realized we almost have enough saved and invested that we could actually pay off our mortgage with it, if we had to and cashed out.  Our house was $459k when we bought it 2.5 years ago, we owe $330k on it.  We have about $300k in the markets, and we should get above $330k pretty easily this year. 

Obviously we'd never actually do that (especially with penalties on our tax sheltered accounts), but it's nice to see investments are about to overtake house debt.  2 years ago when I discovered MMM I didn't even think something like this was possible, let alone was within reach.
I had the same thing happen to me.  I realized this January that our investments had overtaken our mortgage balance.  We bought a house 2.75 years ago and owed 211k on the mortgage.  In January our investment accounts were around 205k, up from 24k 2.75 years ago, and the mortgage balance was 203k.  I had an Oh shit moment that I'll never forget.  This shit really works.....

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boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #39 on: February 28, 2017, 11:34:46 AM »
yes it works incredibly well we probably crossed the point where our invested networth was 1x our mortgage balance around april last year.  we will cross 2x around this time next year.
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ToTheMoon

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Re: DONT Payoff your Mortgage Club
« Reply #40 on: February 28, 2017, 11:48:25 AM »
Posting to follow - some great info in here to ponder when I have more time!

tyort1

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Re: DONT Payoff your Mortgage Club
« Reply #41 on: February 28, 2017, 12:16:11 PM »
yes it works incredibly well we probably crossed the point where our invested networth was 1x our mortgage balance around april last year.  we will cross 2x around this time next year.

1x last year and 2x next year?  Holy crap that's amazing!
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MasterStache

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Re: DONT Payoff your Mortgage Club
« Reply #42 on: February 28, 2017, 12:24:05 PM »
I'm in. Our mortgage balance is a measly 118K. Bought a nice fixer upper (near foreclosure) for less than 150K with 20% down to avoid PMI. Rate is 4.00% with 28 years left.

Our house is appraised at around 220K now and we have more than 3 times invested than our mortgage balance. But no way am I paying it off.   

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #43 on: February 28, 2017, 12:36:20 PM »
yes it works incredibly well we probably crossed the point where our invested networth was 1x our mortgage balance around april last year.  we will cross 2x around this time next year.

1x last year and 2x next year?  Holy crap that's amazing!

well we have really high incomes to go along with the high mortgage.  we save over 100k per year so its not a long shot to jump from 500k to 650k give or take by this time next year.  i mean the market must cooperate.  though i'd rather it just goes flat for the next 5 years til i retire. 
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DirtDiva

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Re: DONT Payoff your Mortgage Club
« Reply #44 on: February 28, 2017, 05:23:39 PM »
I request consideration for membership to the DPOYM club.

28.5 years left on a 30 year loan @ 3.8%.  332k balance.

We have about 91k in taxable savings now.  I just opened our first taxable investment account to invest in index funds, instead of adding extra $ to the mortgage payment.  It's going to take me a while to grow this account large enough to pay off the mortgage (but of course on the other end of the equation, the mortgage balance will slowly fall).

This is scary for me.  I have never blinked while investing steadily into tax-deferred savings accounts starting in 1991.  I've never jumped in or out of the market, through many ups and downs.   

But this money seems more real, for some reason. 

#psychology

AnswerIs42

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Re: DONT Payoff your Mortgage Club
« Reply #45 on: February 28, 2017, 05:35:36 PM »
Mortgages in the UK are generally a little different to those in the US. The most common* type in the UK is called a "Fixed Rate" with which you get a mortgage (of however many years, up to 35) with an introductory, or "Fixed", rate typically last between 2 and 10 years. The longer the fix, the higher the interest rate.

I'm so lucky. I'm in the UK too, bought my flat in 2002, I had a 2-year fix initially. When that came up for renewal in 2004, I want into the building society, to see what kind of a deal they would offer me. They ended up giving me a deal for the entire rest of the term of the 25 year mortgate, of BoE base rate + 0.65%. Even at the time, I thought that was a pretty good deal. Now, it's outstanding. I'm paying 0.90% PA :O

Suffice to say there's no way in hell I'm paying this off early.

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #46 on: February 28, 2017, 05:44:35 PM »
Mortgages in the UK are generally a little different to those in the US. The most common* type in the UK is called a "Fixed Rate" with which you get a mortgage (of however many years, up to 35) with an introductory, or "Fixed", rate typically last between 2 and 10 years. The longer the fix, the higher the interest rate.

I'm so lucky. I'm in the UK too, bought my flat in 2002, I had a 2-year fix initially. When that came up for renewal in 2004, I want into the building society, to see what kind of a deal they would offer me. They ended up giving me a deal for the entire rest of the term of the 25 year mortgate, of BoE base rate + 0.65%. Even at the time, I thought that was a pretty good deal. Now, it's outstanding. I'm paying 0.90% PA :O

Suffice to say there's no way in hell I'm paying this off early.

We call these ARMs you can get them in all shapes and sizes. 5/1 3/1 10/2 etc.
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rpr

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Re: DONT Payoff your Mortgage Club
« Reply #47 on: February 28, 2017, 05:47:23 PM »
Current balance is roughly 260K, 30 year FRM at 3.5% with about 25 remaining years. Every month we save extra into a taxable account what we could have prepaid the mortgage with.

The plan is to be FI at 25x expenses (without mortgage payments) + Mortgage balance.


boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #48 on: February 28, 2017, 06:27:10 PM »
Current balance is roughly 260K, 30 year FRM at 3.5% with about 25 remaining years. Every month we save extra into a taxable account what we could have prepaid the mortgage with.

The plan is to be FI at 25x expenses (without mortgage payments) + Mortgage balance.

Same way I look at it.
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Friar

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Re: DONT Payoff your Mortgage Club
« Reply #49 on: March 01, 2017, 08:48:48 AM »
Mortgages in the UK are generally a little different to those in the US. The most common* type in the UK is called a "Fixed Rate" with which you get a mortgage (of however many years, up to 35) with an introductory, or "Fixed", rate typically last between 2 and 10 years. The longer the fix, the higher the interest rate.

I'm so lucky. I'm in the UK too, bought my flat in 2002, I had a 2-year fix initially. When that came up for renewal in 2004, I want into the building society, to see what kind of a deal they would offer me. They ended up giving me a deal for the entire rest of the term of the 25 year mortgate, of BoE base rate + 0.65%. Even at the time, I thought that was a pretty good deal. Now, it's outstanding. I'm paying 0.90% PA :O

Suffice to say there's no way in hell I'm paying this off early.

We call these ARMs you can get them in all shapes and sizes. 5/1 3/1 10/2 etc.

They're fantastic when the base rate is low! My parents are on something crazy like AnswerIs42 and only pay ~13 interest a month on their mortgage.

I prefer the security of a fixed payment that the fixed rate gives me over the slightly improved rate of a tracker.