Author Topic: DONT Payoff your Mortgage Club  (Read 157355 times)

nereo

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Re: DONT Payoff your Mortgage Club
« Reply #1250 on: March 13, 2019, 10:03:06 AM »

Couldn't you argue that not having a mortgage and substantially lower monthly bills also helps weather economic crashes?  I'm not opposed to mortgages.  I see the value in the uber low interest rates currently offered.  I have a mortgage on one of my houses that I plan to keep.  I'm just questioning a lump sum option.  And I think it's more of a DCA question.  Could you be better off in a bull market paying off the house then DCA back in?

You could come up with scenarios where this might be true, but in general it is not.  What you gain by not having a mortgage is lower monthly expenses (ie better cashflow). Typically this is a 20-30% reduction in monthly expenditures for most people.  What you lose by paying off the mortgage is liquid assets (ie investments easily transferable to cash). While it's true that - should the SHTF - you may have to sell some investments at a loss, including some to continue paying off your mortgage, but that's really the worst-case scenario.  For perspective, one version of this scenario has you losing your income right as the markets crash and you have an emergency expense of ~$10,000. But even in such a scenario investments give you more ways of combating 'really bad stuff'.  Had you paid off your mortgage when both the economy dropped and you lost your employment you would be in a more precarious situation precisely because your smaller investment portfolio would also decrease, and that unexpected expense would cost just as much. You still have the majority of your monthly expenses to meet, but less cash on hand to do so.

The worst-case scenario (as RWD has already address) is if you start to aggressively pay off the mortgage while ignoring investments and then the SHTF.  Under such a scenario you have the worst of both worlds: higher expenses and less (or no) savings. 

I'll state the obvious, which is that if you are fortunate enough to have both a large investment portfolio AND no mortgage you'll probably be fine regardless, even though you'll still come out ahead most of the time by keeping the mortgage.

Lum sum:  JL Collins is good, but also check out the white paper put out by Vanguard .  Numerous threads on here and Bogleheads too.

Malkynn

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Re: DONT Payoff your Mortgage Club
« Reply #1251 on: March 13, 2019, 10:34:33 AM »

The market is hot right now and seemingly past due for a hit.  Could it possibly be a good strategy to pull money out of the taxable accounts, that are probably way up, and pay off a mortgage?  Then start dollar cost averaging back in to the market?


I wish I had $1 for every time a poster here talked about the markets being too "hot" and that a selloff was imminent.

If you pay off the mortgage you lose all future benefit. As the most common mortgages in the us are fixed and many in the 3-4.x% range the real (ie inflation adjusted) amount you pay each month steadily decreases, making it a fantastic inflation hedge.  What you are proposing is market timing followed by DCAing back into it.  Besides going against one of the central beliefs here ("don't try to time the market") the time frame involved will make it even more unlikely for you to come out ahead. 

For example, suppose you are paying $2k/month on a mortgage with $125k left.  If you decided to gut your taxable accounts to get rid of the mortgage it would take you over 5 years to pay it back with the $24k/year you "saved" from not having a mortgage.  You might even get really, really, really lucky and sell right before a big drop.  But five years later where is the market when you are still trying to buy your way back in? In most cases way above where it was when you started this whole exercise, even if you look at doing this just before a correction or recession.

Time in the market is much more important than timing the market.

A-fucken-men to that.

Plus, the less cash you have in your house, the easier it is to weather the economic crashes, possible job losses, provides more capital to jump on the many opportunities that crop up in crashes, etc, etc.

In a major crash, it's not like everything always just stays exactly the same and life chugs on like normal until recovery. The whole world gets all whacky and things can shift significantly in individual industries and regions. In a major crash, you want to be as flexible as possible in order to come out with the best outcome.

In fact, if everything did just stay the same and chug along until recovery, then leaving everything as-is is by far the best option.

Either way, if market timing was predictable, then we would have thousands of threads about all of the various approaches to market timing with countless of the local mathy-types posting endlessly about different statistical models, etc, etc.

Couldn't you argue that not having a mortgage and substantially lower monthly bills also helps weather economic crashes?  I'm not opposed to mortgages.  I see the value in the uber low interest rates currently offered.  I have a mortgage on one of my houses that I plan to keep.  I'm just questioning a lump sum option.  And I think it's more of a DCA question.  Could you be better off in a bull market paying off the house then DCA back in?

I see your logic, but it requires paying off the mortgage entirely, until the mortgage is gone, you are actually at higher risk.
A few months of covering a mortgage is not a huge amount of cash, so it doesn't take massive sums to have a lot of flexibility. Paying off the mortgage means trading off massive financial flexibility for a marginal gain in monthly cash flow. There's a net loss of flexibility.

If you have a ~200K mortgage, then a year of payments is ~12K. If you have 40K, you have a year's worth of living expenses with no income at all, regardless of how much is left on the mortgage. If you pay off your mortgage completely with that 40K, you still need income to pay for the rest of life. How long are you expecting to be jobless? Do you potentially lose out on opportunities by having to take whatever job you can get in order to pay those lower monthly expenses?
What happens if a 40K opportunity comes up? Like buying into a business, or buying more real estate? Downturns open A LOT of doors if you have cash because most people will be cash-strapped.

As for your DCA question...maybe you could make more money doing that?
It would all depend on your timing, which has been proven to be tremendously unlikely to pull off.

Regardless, I come back to my initial point, which is that if it was a predictably good strategy, then it would be discussed to death here, on finance blogs, in books, etc.
At the end of the day, it's market timing...'nuff said.

Boofinator

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Re: DONT Payoff your Mortgage Club
« Reply #1252 on: March 13, 2019, 11:32:03 AM »
What happens if a 40K opportunity comes up? Like buying into a business, or buying more real estate? Downturns open A LOT of doors if you have cash because most people will be cash-strapped.

Just want to point out that downturns occur more frequently and with higher magnitude in the stock market than in real estate (so if a downturn did occur, you'd presumably be selling your investments at a huge loss). That's why sequence of returns risk usually favors paying off a mortgage at early retirement rather than keeping the mortgage and increasing your stash.

That being said, if you don't have any liquid holdings, you should avoid paying any extra on the mortgage for a number of reasons (as noted by Malkynn and many others).

nereo

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Re: DONT Payoff your Mortgage Club
« Reply #1253 on: March 13, 2019, 12:20:52 PM »
What happens if a 40K opportunity comes up? Like buying into a business, or buying more real estate? Downturns open A LOT of doors if you have cash because most people will be cash-strapped.

Just want to point out that downturns occur more frequently and with higher magnitude in the stock market than in real estate (so if a downturn did occur, you'd presumably be selling your investments at a huge loss). That's why sequence of returns risk usually favors paying off a mortgage at early retirement rather than keeping the mortgage and increasing your stash.

That being said, if you don't have any liquid holdings, you should avoid paying any extra on the mortgage for a number of reasons (as noted by Malkynn and many others).
Intersting.  Are you certain this is the case?
From what I see, your personal residence is an un-diversified asset.  You cannot change where it is. I've also seen housing markets which have crashed and stayed depressed for generations - something that the broad market has not done.  Smaller towns are infamous for this but it happens in large cities as well (example: Detroit), and with considerable frequency.

Regardless, the value of my home only matters to me when I intend to sell or refinance. So there is that.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #1254 on: March 13, 2019, 12:39:14 PM »
What happens if a 40K opportunity comes up? Like buying into a business, or buying more real estate? Downturns open A LOT of doors if you have cash because most people will be cash-strapped.

Just want to point out that downturns occur more frequently and with higher magnitude in the stock market than in real estate (so if a downturn did occur, you'd presumably be selling your investments at a huge loss). That's why sequence of returns risk usually favors paying off a mortgage at early retirement rather than keeping the mortgage and increasing your stash.

That being said, if you don't have any liquid holdings, you should avoid paying any extra on the mortgage for a number of reasons (as noted by Malkynn and many others).
Intersting.  Are you certain this is the case?
From what I see, your personal residence is an un-diversified asset.  You cannot change where it is. I've also seen housing markets which have crashed and stayed depressed for generations - something that the broad market has not done.  Smaller towns are infamous for this but it happens in large cities as well (example: Detroit), and with considerable frequency.

Regardless, the value of my home only matters to me when I intend to sell or refinance. So there is that.
I think fluctuation is perhaps the better term. The stock market fluctuates much more than Real Estate. RE cycles tend to take years. Even in your example, there was little fluctuation, just continuous downward spiral. I agree that one shouldn't bank on RE going up continuously, but it's far less volatile than the Stock Market. It's not a diversified asset, but if you're planted in an economically strong area, and the numbers make sense, why not?

Boofinator

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Re: DONT Payoff your Mortgage Club
« Reply #1255 on: March 13, 2019, 12:45:51 PM »
What happens if a 40K opportunity comes up? Like buying into a business, or buying more real estate? Downturns open A LOT of doors if you have cash because most people will be cash-strapped.

Just want to point out that downturns occur more frequently and with higher magnitude in the stock market than in real estate (so if a downturn did occur, you'd presumably be selling your investments at a huge loss). That's why sequence of returns risk usually favors paying off a mortgage at early retirement rather than keeping the mortgage and increasing your stash.

That being said, if you don't have any liquid holdings, you should avoid paying any extra on the mortgage for a number of reasons (as noted by Malkynn and many others).
Intersting.  Are you certain this is the case?
From what I see, your personal residence is an un-diversified asset.  You cannot change where it is. I've also seen housing markets which have crashed and stayed depressed for generations - something that the broad market has not done.  Smaller towns are infamous for this but it happens in large cities as well (example: Detroit), and with considerable frequency.

Regardless, the value of my home only matters to me when I intend to sell or refinance. So there is that.

You are accurate, the purchase of a home is an undiversified asset, subject to many unique forces. It is similar to buying a single stock, which often go full belly-up. But most of us know better than to buy a single stock (with apologies to the professional traders on these boards), and buy a market fund instead. So stocks have the benefit of diversification as an asset class, which a single home purchase does not. If you compare apples to apples, or asset class to asset class, then real estate typically provides a much smoother ride: https://www.businessinsider.com/real-estate-vs-stock-market-investment-2018-9.

That being said, we are asking the question of whether or not one should pay off the mortgage, conditional to the home having already been purchased. In that case, I can't think of any scenario where the home value is relevant to the decision of whether or not to pay off the home (for a Mustachian with extra savings to invest). If anybody can think of a scenario otherwise, I'd be curious to hear about it.

EngagedToFIRE

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Re: DONT Payoff your Mortgage Club
« Reply #1256 on: March 13, 2019, 01:36:21 PM »
What a great conversation!

Nereo, "unexpected expense".  If you were to pay off your home, I would hope you would also have some liquid funds.  Paying off a home and having no emergency fund would be silly.  At the same time, a paid off home could have an equity line attached to it for emergencies as well as credit cards.

RWD/Malkynn.  I am not advocating for the $1,000/mo towards mortgage approach. I don't like that.  My original comment was in regards to another poster who said they could pay the house cash.  I also brought up my personal situation where I paid the mortgage off in full.  For anyone looking to pay their house off early, I would suggest putting the money in an index fund like VTSAX, once it's enough to pay the house off in full, consider selling the position and paying off the house.  I am not a fan of putting small amounts towards the mortgage here and there. 

I think this does come down to a market timing question.  If the markets are sky high and clearly on a bull run, taking in past volatility, is it a terrible idea to liquidate some of the gains, pay off the house IN FULL if able, and DCA back in to the market assuming, based on historical performance, that the market could very well have a large correction?

I'm not a fan of trying to time the top and bottom of a market.  It's always good to buy no matter what, which is why I am using my previous mortgage payment to DCA back in to the market.  But there can be some clear indicators that the market is due to go south.  It was obvious that it was a good time to sell my real estate assets when I did.  Very smart.  Worked out well but I don't think that was luck.  I bought when I knew the market was trashed and values were low but rents were fairly stable.  Once the market went back up, it made a lot of sense to cash out the properties and put the funds in to higher performing assets.  The problem, is that the stock market right now is on a long bull run.  I've read "historical".  I'm no expert, which is why I started the conversation to hear other opinions, but it seems to me to make sense to get the 100% 4.5% ROI on my primary residence and DCA that money in to the market assuming there may be some volatility and potential sales on stocks coming up.  If my mortgage was like some of those here, 2%+ then I would definitely not pay it off.  But mine was 4.5% which is still low, but not so low that it's a no brainer to keep it.

Am I right?  I have no idea.  My logic could be flawed.  I'm no expert.

Malkynn

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Re: DONT Payoff your Mortgage Club
« Reply #1257 on: March 13, 2019, 01:47:05 PM »
^um...

Paying off the house in full vs not was a very small part of my response...

The rest of my post gives my answer with respect to what you've posted above.

Telecaster

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Re: DONT Payoff your Mortgage Club
« Reply #1258 on: March 13, 2019, 06:51:23 PM »
I think this does come down to a market timing question.  If the markets are sky high and clearly on a bull run, taking in past volatility, is it a terrible idea to liquidate some of the gains, pay off the house IN FULL if able, and DCA back in to the market assuming, based on historical performance, that the market could very well have a large correction?


Yep, it is terrible idea. 

There are several misconceptions in your post, including one I see almost every day here.  Namely, because the market is now highly valued, there must be a big crash around the corner.  This notion is false.  There might be a big crash around the corner, or the market just might trend sideways for years.   Both have happened in the past.  You seem to be betting on a big crash in some future date, and you have no earthly idea if that will happen or not. 

We all know that stocks are supposed to be long term investments.  Therefore, the only rational way to value making a stock investment is over some long period of time.  Now, if stocks are valued higher than average, then we can reasonably expect the long term return will be lower than average.  That's okay.  You can't be above average all the time.  If you sit in cash waiting for a crash and then invest, you are also effectively lowering your long term rate of return by some amount.   Since we don't know how much, why bet against yourself?  The caveat is if you are close to the end of your mortgage, then the calculation changes.  Early in the term paying off the mortgage is nutso.   

DCA is almost always a bad strategy for too many reasons to get into here.  But basically you are again betting against yourself. 

TexasRunner

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Re: DONT Payoff your Mortgage Club
« Reply #1259 on: March 13, 2019, 07:36:17 PM »
There are several misconceptions in your post, including one I see almost every day here.  Namely, because the market is now highly valued, there must be a big crash around the corner. 

...

I'm just gonna point out that we had a 3.4% gain in less than a week...  If you weren't in the market then you missed out on that.

Even if its overvalued but it goes up 35% more before the next 30% correction, then there is no "I told you so moment", you will have lost out anyways not even counting dividends...

Its strange to me how many pay-off-the-mortgage types are also willing to try (and fail) timing the market...  :/

EngagedToFIRE

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Re: DONT Payoff your Mortgage Club
« Reply #1260 on: March 14, 2019, 07:26:50 AM »
There are several misconceptions in your post, including one I see almost every day here.  Namely, because the market is now highly valued, there must be a big crash around the corner. 

...

I'm just gonna point out that we had a 3.4% gain in less than a week...  If you weren't in the market then you missed out on that.

Even if its overvalued but it goes up 35% more before the next 30% correction, then there is no "I told you so moment", you will have lost out anyways not even counting dividends...

Its strange to me how many pay-off-the-mortgage types are also willing to try (and fail) timing the market...  :/

I would like to point out that Dollar Cost Averaging is all about not timing the market.  Everything I've read suggests dollar cost averaging is the way to go.  Telecaster, you made a comment that DCA is almost always a bad strategy.  We don't need to get in to tons of reasons why, but could you point me to an article that you like so I can better understand your position?

I'm not a "pay off the mortgage" type, per se.  I think finance is too dynamic for such rules.  As I said, I do still hold a mortgage on a second property.  It's not my plan to pay it off.  My dilemma was that I had a ton of cash.  I know, dilemma!  I had 3 options, assuming my goal is to invest it.  Invest it all at once in the market.  Hold the cash and DCA slowly, thus having lots of cash on hand losing value or in bonds/low risk investments that are substantially less than my mortgage interest.  Or third, pay off the house, then use the old mortgage payment to DCA in to the market.

All of my reading suggests DCA is a good idea.  Some here are challenging that idea and it's intriguing as I thought DCA was a well accepted good practice.  In my case, it seemed paying off the mortgage then making large monthly investments in to an index fund makes sense.

Whether the so called experts are right or wrong about us due a major crash, that's left to be seen.  I think their commentary and reasoning is convincing.  We all know the stock market can and does see huge corrections and crashes vs real estate which is why DCA is supposedly effective.  My comment ultimately is pretty simple.  Is it possible that it could be a good idea to harvest big gains during a long bull market and pay off a mortgage in full, providing a higher interest mortgage (4%+), then DCA your old mortgage payment back in to the market?  Considering the title of the thread, I was expecting contrarian opinions that would help expand my own understanding.  I like that and the insight is great.

I'll bookmark this page of the thread, it would be interesting to see how this ages.
« Last Edit: March 14, 2019, 07:31:06 AM by EngagedToFIRE »

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #1261 on: March 14, 2019, 08:29:04 AM »
What makes real estate crashes more damaging isn't the price variation, but the leverage.

But here at the DNPYM club, we think about our mortgage debt as being set aside All our assets. Our ability to maintain a $200,000 loan is far stronger when it's backed by $300,000 of real estate and $100,000 of investments. And if those $100,000 of investments grow to $300,000, they pay for that mortgage completely, even if a weak local real estate market has sliced off 30% of your equity in the property.

terrifictim

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Re: DONT Payoff your Mortgage Club
« Reply #1262 on: March 14, 2019, 08:54:32 AM »
In regards to DCA - it's a good strategy when it's contributing a consistent amount out of your income (W2 or otherwise) and it's done over a period of years.
When it's done with a large lump sum, however, it's suboptimal because of "time in the market better than timing the market". Granted investing in a lump sum at once is statistically the better choice - but it doesn't guarantee a better outcome for a particular combination of financial parameters.

References:
https://jlcollinsnh.com/2014/11/12/stocks-part-xxvii-why-i-dont-like-dollar-cost-averaging/
https://www.madfientist.com/front-loading/
https://affordanything.com/why-dollar-cost-averaging-stinks/

Boofinator

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Re: DONT Payoff your Mortgage Club
« Reply #1263 on: March 14, 2019, 09:39:36 AM »
There are several misconceptions in your post, including one I see almost every day here.  Namely, because the market is now highly valued, there must be a big crash around the corner. 

...

I'm just gonna point out that we had a 3.4% gain in less than a week...  If you weren't in the market then you missed out on that.

Even if its overvalued but it goes up 35% more before the next 30% correction, then there is no "I told you so moment", you will have lost out anyways not even counting dividends...

Its strange to me how many pay-off-the-mortgage types are also willing to try (and fail) timing the market...  :/

I would like to point out that Dollar Cost Averaging is all about not timing the market.  Everything I've read suggests dollar cost averaging is the way to go.  Telecaster, you made a comment that DCA is almost always a bad strategy.  We don't need to get in to tons of reasons why, but could you point me to an article that you like so I can better understand your position?

I'm not a "pay off the mortgage" type, per se.  I think finance is too dynamic for such rules.  As I said, I do still hold a mortgage on a second property.  It's not my plan to pay it off.  My dilemma was that I had a ton of cash.  I know, dilemma!  I had 3 options, assuming my goal is to invest it.  Invest it all at once in the market.  Hold the cash and DCA slowly, thus having lots of cash on hand losing value or in bonds/low risk investments that are substantially less than my mortgage interest.  Or third, pay off the house, then use the old mortgage payment to DCA in to the market.

All of my reading suggests DCA is a good idea.  Some here are challenging that idea and it's intriguing as I thought DCA was a well accepted good practice.  In my case, it seemed paying off the mortgage then making large monthly investments in to an index fund makes sense.

Whether the so called experts are right or wrong about us due a major crash, that's left to be seen.  I think their commentary and reasoning is convincing.  We all know the stock market can and does see huge corrections and crashes vs real estate which is why DCA is supposedly effective.  My comment ultimately is pretty simple.  Is it possible that it could be a good idea to harvest big gains during a long bull market and pay off a mortgage in full, providing a higher interest mortgage (4%+), then DCA your old mortgage payment back in to the market?  Considering the title of the thread, I was expecting contrarian opinions that would help expand my own understanding.  I like that and the insight is great.

I'll bookmark this page of the thread, it would be interesting to see how this ages.

This is not a poor strategy in my opinion, presuming you have enough liquidity to cover any minor emergencies (and all financial emergencies are relatively minor if you live a Mustachian lifestyle). You're increasing your asset allocation to bonds (essentially) at a time when low returns and high volatility are expected in the stock market (ref Vanguard market outlook for 2019: https://personal.vanguard.com/pdf/ISGVEMO_122018.pdf). So you're essentially getting a risk-free rate of 4.5% when U.S. stocks are expected to return 3-5% (with a median volatility of 16.3%) over the next decade (per Vanguard).

Don't take it personally, but it seems that some people on these boards view any approach to investing that looks at anything other than historical data of U.S. market returns as "market timing". Theirs is not a bad approach for the layman investor, but at the same time one can make calculated risks with the knowledge available and not lose their Mustachian card.

(Note that if you were DCAing with cash, I would be singing a different tune.)

Boofinator

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Re: DONT Payoff your Mortgage Club
« Reply #1264 on: March 14, 2019, 09:47:34 AM »
I'm just gonna point out that we had a 3.4% gain in less than a week...  If you weren't in the market then you missed out on that.

I'm just going to point out that pointing out weekly blips in the stock market is not a way I would recommend to think about investing. (It's like pointing out minor weather fluctuations when discussing climate.)

TexasRunner

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Re: DONT Payoff your Mortgage Club
« Reply #1265 on: March 14, 2019, 10:36:43 AM »
I'm just gonna point out that we had a 3.4% gain in less than a week...  If you weren't in the market then you missed out on that.

I'm just going to point out that pointing out weekly blips in the stock market is not a way I would recommend to think about investing. (It's like pointing out minor weather fluctuations when discussing climate.)

Except very short periods of time can have huge impacts on returns.  The "Time in the market" argument is primarily focused on not missing out on the best days, as well as collecting dividends and riding the upward trend.

https://www.ifa.com/12steps/step4/missing_the_best_and_worst_days/

Boofinator

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Re: DONT Payoff your Mortgage Club
« Reply #1266 on: March 14, 2019, 10:56:40 AM »
I'm just gonna point out that we had a 3.4% gain in less than a week...  If you weren't in the market then you missed out on that.

I'm just going to point out that pointing out weekly blips in the stock market is not a way I would recommend to think about investing. (It's like pointing out minor weather fluctuations when discussing climate.)

Except very short periods of time can have huge impacts on returns.  The "Time in the market" argument is primarily focused on not missing out on the best days, as well as collecting dividends and riding the upward trend.

https://www.ifa.com/12steps/step4/missing_the_best_and_worst_days/

I don't disagree, but it cuts both ways. What if we had a 3.4%* loss last week? Or next week? (Or a 7.7% loss the week before Christmas?) Really none of the small movements matter if you're investing for the long-term. 100% agree with "Time in the Market", but that's to capture the long-term expected returns while completely ignoring the short-term noise.

*By the way, not sure which index you are looking at. S&P 500 returned 2.5% since last Friday's low.

K-ice

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Re: DONT Payoff your Mortgage Club
« Reply #1267 on: March 14, 2019, 11:19:57 AM »
I think the DCA argument depends on how you acquired that large chunk of cash.

a) An inheritance or something unexpected

b) You squirreled away a bunch of cash over time and are now asking what to do with it.

On the day you need to make your decision the cases are the same, but ideally you won't find yourself in situation b because you were DCA over the past year anyway.

I confess, I have been in situation b before Doh!

Telecaster

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Re: DONT Payoff your Mortgage Club
« Reply #1268 on: March 14, 2019, 12:26:01 PM »
I would like to point out that Dollar Cost Averaging is all about not timing the market.  Everything I've read suggests dollar cost averaging is the way to go.  Telecaster, you made a comment that DCA is almost always a bad strategy.  We don't need to get in to tons of reasons why, but could you point me to an article that you like so I can better understand your position?

Sure, here's a paper from Vanguard:

https://personal.vanguard.com/pdf/ISGDCA.pdf

Here's the basic logic:  The market goes up 2/3 and down 1/3 of the time.   So if you DCA in a lump sum, you lose 2/3 of the time.  And even if you DCA, eventually you will fully invested in the market anyway, right?   You only avoid volatility for the DCA period and then only for the part of your investment that isn't invested.   

Stocks of course are long term investments.   So if you look at your portfolio 30 years from now, do you think it would matter to the final value if you were fully invested in 2019 or on DCA'ed into 2020?   


Quote
Whether the so called experts are right or wrong about us due a major crash, that's left to be seen.  I think their commentary and reasoning is convincing.  We all know the stock market can and does see huge corrections and crashes vs real estate which is why DCA is supposedly effective.  My comment ultimately is pretty simple.  Is it possible that it could be a good idea to harvest big gains during a long bull market and pay off a mortgage in full, providing a higher interest mortgage (4%+), then DCA your old mortgage payment back in to the market?  Considering the title of the thread, I was expecting contrarian opinions that would help expand my own understanding.  I like that and the insight is great.


There is a little bit of nuance to the "don't pay off the mortgage" philosophy, but basically the key is that mortgages are long term.   If your remaining term is short, then maybe paying it off isn't a terrible idea.  Otherwise it really doesn't make sense.   Remember that 4% mortgage payment is hit by inflation every year.  Inflation is around 2% currently, so you don't really have a high bar to clear to find better performing investments.   

TexasRunner

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Re: DONT Payoff your Mortgage Club
« Reply #1269 on: March 14, 2019, 12:32:43 PM »
There is a little bit of nuance to the "don't pay off the mortgage" philosophy, but basically the key is that mortgages are long term.   If your remaining term is short, then maybe paying it off isn't a terrible idea.  Otherwise it really doesn't make sense.   Remember that 4% mortgage payment is hit by inflation every year.  Inflation is around 2% currently, so you don't really have a high bar to clear to find better performing investments.

Along this line of thinking, I just took advantage of CIT Banks savings account at 2.45% (with 25k+ in the account or at least a $100 deposit each month).  Stacked with the average inflation rate of 2.0% across the last three years I'm getting 4.45% FDIC insured....  And MUCH more liquid in an emergency then equity in the house.

In other words, a low rate fixed mortgage is a terrible investment vehicle for mustachians (but good for non-savers as it forces some version of savings).

Boofinator

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Re: DONT Payoff your Mortgage Club
« Reply #1270 on: March 14, 2019, 12:40:09 PM »
There is a little bit of nuance to the "don't pay off the mortgage" philosophy, but basically the key is that mortgages are long term.   If your remaining term is short, then maybe paying it off isn't a terrible idea.  Otherwise it really doesn't make sense.   Remember that 4% mortgage payment is hit by inflation every year.  Inflation is around 2% currently, so you don't really have a high bar to clear to find better performing investments.

Along this line of thinking, I just took advantage of CIT Banks savings account at 2.45% (with 25k+ in the account or at least a $100 deposit each month).  Stacked with the average inflation rate of 2.0% across the last three years I'm getting 4.45% FDIC insured....  And MUCH more liquid in an emergency then equity in the house.

In other words, a low rate fixed mortgage is a terrible investment vehicle for mustachians (but good for non-savers as it forces some version of savings).

Are you saying your savings account is indexed for inflation?

ETA: I apologize for the sarcasm. I didn't get much sleep last night. That being said, you can't reasonably subtract inflation from your mortgage and talk about 'real returns' and in the next breath add inflation to the investment alternative (even if it was indexed to inflation, whereas yours I'm quite certain isn't).
« Last Edit: March 14, 2019, 12:47:45 PM by Boofinator »

Boofinator

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Re: DONT Payoff your Mortgage Club
« Reply #1271 on: March 14, 2019, 12:55:39 PM »
I would like to point out that Dollar Cost Averaging is all about not timing the market.  Everything I've read suggests dollar cost averaging is the way to go.  Telecaster, you made a comment that DCA is almost always a bad strategy.  We don't need to get in to tons of reasons why, but could you point me to an article that you like so I can better understand your position?

Sure, here's a paper from Vanguard:

https://personal.vanguard.com/pdf/ISGDCA.pdf

Here's the basic logic:  The market goes up 2/3 and down 1/3 of the time.   So if you DCA in a lump sum, you lose 2/3 of the time.  And even if you DCA, eventually you will fully invested in the market anyway, right?   You only avoid volatility for the DCA period and then only for the part of your investment that isn't invested.   

Stocks of course are long term investments.   So if you look at your portfolio 30 years from now, do you think it would matter to the final value if you were fully invested in 2019 or on DCA'ed into 2020?   


Quote
Whether the so called experts are right or wrong about us due a major crash, that's left to be seen.  I think their commentary and reasoning is convincing.  We all know the stock market can and does see huge corrections and crashes vs real estate which is why DCA is supposedly effective.  My comment ultimately is pretty simple.  Is it possible that it could be a good idea to harvest big gains during a long bull market and pay off a mortgage in full, providing a higher interest mortgage (4%+), then DCA your old mortgage payment back in to the market?  Considering the title of the thread, I was expecting contrarian opinions that would help expand my own understanding.  I like that and the insight is great.


There is a little bit of nuance to the "don't pay off the mortgage" philosophy, but basically the key is that mortgages are long term.   If your remaining term is short, then maybe paying it off isn't a terrible idea.  Otherwise it really doesn't make sense.   Remember that 4% mortgage payment is hit by inflation every year.  Inflation is around 2% currently, so you don't really have a high bar to clear to find better performing investments.

Regarding DCAing: EngagedToFIRE did lump-sum. He just lump-summed into his mortgage, rather into stocks. It's not like he's hoarding cash.

Regarding inflation and mortgages: I thought we beat this to death already. All that matters is the expected return and volatility of your investment alternatives (unless your alternative investment is linked to inflation, like TIPS). Imagine a hypothetical credit card with an APY of 10% and interest-only payments. 'Bob' has a $100,000 balance. Should Bob pay this off as quickly as possible, or hold on to it for as long as possible because inflation will eventually reduce his payments to a pittance in real terms (and of course he'll invest the difference in equities)?

EngagedToFIRE

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Re: DONT Payoff your Mortgage Club
« Reply #1272 on: March 14, 2019, 02:30:56 PM »
I would like to point out that Dollar Cost Averaging is all about not timing the market.  Everything I've read suggests dollar cost averaging is the way to go.  Telecaster, you made a comment that DCA is almost always a bad strategy.  We don't need to get in to tons of reasons why, but could you point me to an article that you like so I can better understand your position?

Sure, here's a paper from Vanguard:

https://personal.vanguard.com/pdf/ISGDCA.pdf

Here's the basic logic: The market goes up 2/3 and down 1/3 of the time.   So if you DCA in a lump sum, you lose 2/3 of the time.  And even if you DCA, eventually you will fully invested in the market anyway, right?   You only avoid volatility for the DCA period and then only for the part of your investment that isn't invested.   

Stocks of course are long term investments.   So if you look at your portfolio 30 years from now, do you think it would matter to the final value if you were fully invested in 2019 or on DCA'ed into 2020?   


Quote
Whether the so called experts are right or wrong about us due a major crash, that's left to be seen.  I think their commentary and reasoning is convincing.  We all know the stock market can and does see huge corrections and crashes vs real estate which is why DCA is supposedly effective.  My comment ultimately is pretty simple.  Is it possible that it could be a good idea to harvest big gains during a long bull market and pay off a mortgage in full, providing a higher interest mortgage (4%+), then DCA your old mortgage payment back in to the market?  Considering the title of the thread, I was expecting contrarian opinions that would help expand my own understanding.  I like that and the insight is great.


There is a little bit of nuance to the "don't pay off the mortgage" philosophy, but basically the key is that mortgages are long term.   If your remaining term is short, then maybe paying it off isn't a terrible idea.  Otherwise it really doesn't make sense.   Remember that 4% mortgage payment is hit by inflation every year.  Inflation is around 2% currently, so you don't really have a high bar to clear to find better performing investments.

I like this explanation.  But to reiterate, I would never suggest holding cash then DCA over a long period of time.  My strategy was to take the 4.5% on my mortgage as a guaranteed return, then use the previous mortgage payment ($6,000/mo) to buy in to the market over a period of time.

I only had this mortgage for 3 years.  That said, I do plan on keeping my other mortgage for the term, which has 28 years left.  I have a Fundrise investment equal to the original mortgage amount that more than covers that mortgage along with the expenses for that house, essentially giving us a free vacation house which is a much better return than paying off the mortgage.  In fact, it provides a surplus that I reinvest.

Boofinator,

If the market outlook is about the same as my mortgage, then it seems I was probably reasonable in my approach of getting rid of the 4.5% mortgage.  I'll continue investing every month, often several times per month.  Maybe we'll get a big drop and cheaper prices, who knows.  Time shall tell.

Boofinator

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Re: DONT Payoff your Mortgage Club
« Reply #1273 on: March 14, 2019, 02:54:56 PM »
If the market outlook is about the same as my mortgage, then it seems I was probably reasonable in my approach of getting rid of the 4.5% mortgage.  I'll continue investing every month, often several times per month.  Maybe we'll get a big drop and cheaper prices, who knows.  Time shall tell.

I'd say it would be a reasonable approach, depending on your financial situation. If you consider market outlook and are close to FI, I think you've probably made the optimal investment; if you don't consider market outlook (and there is a very good case that can be made for this approach) and are close to FI, I think you've probably made a wise decision (one that does not result in the highest expected return, but it does provide a hedge against sequence of returns risk); and if you aren't close to FI, I would not recommend putting money into a mortgage at that rate, as you have a long time horizon and should be eager to take risk.

"Time shall tell", indeed. However, if I may get philosophical for a moment, hindsight confirmation is perhaps not the best way to view a decision-making process. You can make an optimal decision and come out behind most of the time. (Insurance is a good example of this.)

nereo

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Re: DONT Payoff your Mortgage Club
« Reply #1274 on: March 14, 2019, 03:54:36 PM »

"Time shall tell", indeed. However, if I may get philosophical for a moment, hindsight confirmation is perhaps not the best way to view a decision-making process. You can make an optimal decision and come out behind most of the time. (Insurance is a good example of this.)

I'd just like to say how glad I am to see someone else stress this.
All too often I hear people say things like "I got an inheritance and invested it, but then the market dropped almost 10% - turns out I made a bad decision investing then".
No!  This person made a good decision given all that was known or knowable at the time.  Just because an outcome is bad doesn't mean the underlying decision was bad.

Telecaster

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Re: DONT Payoff your Mortgage Club
« Reply #1275 on: March 14, 2019, 04:32:54 PM »
Imagine a hypothetical credit card with an APY of 10% and interest-only payments.'Bob' has a $100,000 balance. Should Bob pay this off as quickly as possible, or hold on to it for as long as possible because inflation will eventually reduce his payments to a pittance in real terms (and of course he'll invest the difference in equities)?

That 10% APR is being reduced by about 2% a year, so 8% real.  So, if you know of an investment that will return greater than 8% after inflation, then you should put money to that investment instead of paying off your credit card. 

I'm baffled why this is such a difficult concept for some. 


Boofinator

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Re: DONT Payoff your Mortgage Club
« Reply #1276 on: March 14, 2019, 06:09:24 PM »
Imagine a hypothetical credit card with an APY of 10% and interest-only payments.'Bob' has a $100,000 balance. Should Bob pay this off as quickly as possible, or hold on to it for as long as possible because inflation will eventually reduce his payments to a pittance in real terms (and of course he'll invest the difference in equities)?

That 10% APR is being reduced by about 2% a year, so 8% real.  So, if you know of an investment that will return greater than 8% after inflation, then you should put money to that investment instead of paying off your credit card. 

I'm baffled why this is such a difficult concept for some. 


US stocks have historically returned about 11% on average. What city do you live in? I'd be happy to fly out and meet you personally if you'd like a six-figure loan at 10%.

In all seriousness, you probably are aware that this would be a really bad investment (ignore for the moment that you could certainly get cheaper money). Why?

By the way, the concept of real versus nominal returns is not difficult at all. It is the application of that concept to investment decisions which seems to be difficult for some.

EngagedToFIRE

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Re: DONT Payoff your Mortgage Club
« Reply #1277 on: March 15, 2019, 08:30:43 AM »
If the market outlook is about the same as my mortgage, then it seems I was probably reasonable in my approach of getting rid of the 4.5% mortgage.  I'll continue investing every month, often several times per month.  Maybe we'll get a big drop and cheaper prices, who knows.  Time shall tell.

I'd say it would be a reasonable approach, depending on your financial situation. If you consider market outlook and are close to FI, I think you've probably made the optimal investment; if you don't consider market outlook (and there is a very good case that can be made for this approach) and are close to FI, I think you've probably made a wise decision (one that does not result in the highest expected return, but it does provide a hedge against sequence of returns risk); and if you aren't close to FI, I would not recommend putting money into a mortgage at that rate, as you have a long time horizon and should be eager to take risk.

"Time shall tell", indeed. However, if I may get philosophical for a moment, hindsight confirmation is perhaps not the best way to view a decision-making process. You can make an optimal decision and come out behind most of the time. (Insurance is a good example of this.)


I am already FI and semi RE.  Business owner with a business that 98% runs itself.  I am not sure I'll ever fully retire since I have almost all of the freedom one would want when retiring already.

My comment about "time shall tell" was more about curiosity than any sort of confirmation.  It seems my financial decision was reasonable and made when there are multiple "correct" decisions that could be made.   Time will tell which one comes out ahead.

Boofinator

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Re: DONT Payoff your Mortgage Club
« Reply #1278 on: March 15, 2019, 08:44:58 AM »
If the market outlook is about the same as my mortgage, then it seems I was probably reasonable in my approach of getting rid of the 4.5% mortgage.  I'll continue investing every month, often several times per month.  Maybe we'll get a big drop and cheaper prices, who knows.  Time shall tell.

I'd say it would be a reasonable approach, depending on your financial situation. If you consider market outlook and are close to FI, I think you've probably made the optimal investment; if you don't consider market outlook (and there is a very good case that can be made for this approach) and are close to FI, I think you've probably made a wise decision (one that does not result in the highest expected return, but it does provide a hedge against sequence of returns risk); and if you aren't close to FI, I would not recommend putting money into a mortgage at that rate, as you have a long time horizon and should be eager to take risk.

"Time shall tell", indeed. However, if I may get philosophical for a moment, hindsight confirmation is perhaps not the best way to view a decision-making process. You can make an optimal decision and come out behind most of the time. (Insurance is a good example of this.)


I am already FI and semi RE.  Business owner with a business that 98% runs itself.  I am not sure I'll ever fully retire since I have almost all of the freedom one would want when retiring already.

My comment about "time shall tell" was more about curiosity than any sort of confirmation.  It seems my financial decision was reasonable and made when there are multiple "correct" decisions that could be made.   Time will tell which one comes out ahead.

I didn't want to imply in my statement on decision-making that it was directed at you. Apologies that I didn't better generalize it.

As nereo reiterated, the decision-making process is inherently forward-looking between options with uncertain outcomes. Some people think (or imply) hindsight should be used to judge the value of a decision, but instead hindsight should just be used to inform future decisions.

Telecaster

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Re: DONT Payoff your Mortgage Club
« Reply #1279 on: March 15, 2019, 06:10:01 PM »
Imagine a hypothetical credit card with an APY of 10% and interest-only payments.'Bob' has a $100,000 balance. Should Bob pay this off as quickly as possible, or hold on to it for as long as possible because inflation will eventually reduce his payments to a pittance in real terms (and of course he'll invest the difference in equities)?

That 10% APR is being reduced by about 2% a year, so 8% real.  So, if you know of an investment that will return greater than 8% after inflation, then you should put money to that investment instead of paying off your credit card. 

I'm baffled why this is such a difficult concept for some. 


US stocks have historically returned about 11% on average. What city do you live in? I'd be happy to fly out and meet you personally if you'd like a six-figure loan at 10%.

In all seriousness, you probably are aware that this would be a really bad investment (ignore for the moment that you could certainly get cheaper money). Why?

By the way, the concept of real versus nominal returns is not difficult at all. It is the application of that concept to investment decisions which seems to be difficult for some.

You're right.  It is totally foolish to consider the effects of inflation. 
« Last Edit: March 15, 2019, 06:13:35 PM by Telecaster »

Boofinator

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Re: DONT Payoff your Mortgage Club
« Reply #1280 on: March 15, 2019, 08:05:27 PM »
Imagine a hypothetical credit card with an APY of 10% and interest-only payments.'Bob' has a $100,000 balance. Should Bob pay this off as quickly as possible, or hold on to it for as long as possible because inflation will eventually reduce his payments to a pittance in real terms (and of course he'll invest the difference in equities)?

That 10% APR is being reduced by about 2% a year, so 8% real.  So, if you know of an investment that will return greater than 8% after inflation, then you should put money to that investment instead of paying off your credit card. 

I'm baffled why this is such a difficult concept for some. 


US stocks have historically returned about 11% on average. What city do you live in? I'd be happy to fly out and meet you personally if you'd like a six-figure loan at 10%.

In all seriousness, you probably are aware that this would be a really bad investment (ignore for the moment that you could certainly get cheaper money). Why?

By the way, the concept of real versus nominal returns is not difficult at all. It is the application of that concept to investment decisions which seems to be difficult for some.

You're right.  It is totally foolish to consider the effects of inflation.

I never said that inflation doesn't matter, only that it doesn't matter when considering two asset classes that don't correlate well with inflation. Read my previous posts. But to get into it again....

Historic stock returns do not correlate well with inflation (there might be some very delayed (10+ years) correlation). At very high inflation and deflation, stocks have done horribly (in nominal terms). So, when you have two asset classes that do not correlate with inflation (mortgage and equities), please tell me how inflation comes into this debate?

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #1281 on: March 17, 2019, 11:22:06 AM »
Wow, for once Yahoo Finance picked up something interesting. Good food for thought.

https://www.yahoo.com/finance/news/7-reasons-not-pay-off-165620088.html

7 Reasons Not to Pay Off Your Mortgage Before Retiring
Money Talks News  Emmet Pierce,Money Talks News 2 hours 36 minutes ago
Reactions  Reblog on Tumblr  Share  Tweet  Email
Paying off a home mortgage before you retire is a common goal, but it isn’t always the best financial strategy.

It could end up costing you in the long run — such as by leaving you without cash savings to cover an unexpected expense or without the flexibility to take advantage of an opportunity to earn a better return on your money.

What follows are some financially shrewd reasons to carry your mortgage debt into retirement.

1. You plan to sell your home
Many people decide to downsize before or in retirement. They find that a smaller, less expensive home better fits their retirement lifestyle, as we detail in “7 Unexpected Benefits of Downsizing in Retirement.”

If you think you may be selling your home soon, think hard before you pay off the mortgage on your current home. That’s because selling your dwelling may give you the money you need to repay your home loan without having to deplete your savings.

2. You plan to rent out your home — or a room
Does your retirement plan include relocating and renting out your present home? There’s no pressing need to pay off your home loan if the tenants’ rent payments will cover your future mortgage costs.

You could avoid tapping into your savings to pay off the loan. You may even realize a profit after your mortgage bill is paid each month.

That could be true even if you remain in your home and simply rent out a spare room through a vacation rental site like Airbnb.

A 2018 analysis by Homes.com found that in some cities, a homeowner could make enough money by renting out a room just four or five nights per month to cover a monthly mortgage payment. We detailed the analysis findings in “Do This a Few Days Each Month and Watch Your Mortgage Disappear.”

3. It’s more important to repay debts with higher interest rates
Before you commit to paying off a mortgage, determine whether there are better ways to spend your money.

For example, if you’ve purchased or refinanced a home in the past decade, your home loan likely has a relatively low interest rate. And if that’s the case, you will be better off financially if you first repay debts with higher interest rates, such as credit cards debt.

Paying off the debt with the highest interest rate first will save you more money in interest payments over the life of your debt.

4. You’re still saving for retirement
Not everyone completes their career with enough money to enjoy a comfortable retirement. That’s why many Americans continue to work after age 65, the traditional retirement age.

If you’re contributing to a retirement account, such as an IRA or a 401(k), it may make more sense to use any extra money you have to build your retirement savings rather than to repay your mortgage ahead of schedule.

Retirement accounts are tax-advantaged. So, saving money in one will likely enable you to lower your taxable income now or avoid taxation when you withdraw funds from the account in retirement, depending on whether the account is Roth or traditional.

To learn more, check out “Confused by Retirement Accounts? Roth, Regular IRAs and 401(k)s Made Simple.”

5. You’re low on cash reserves
Maintaining an emergency fund is critical for financial stability. If paying off a mortgage will drain your cash reserves, it could leave you in a weakened position. No one can predict when an emergency will happen.

Corey Vandenberg, a mortgage banker in Lafayette, Indiana, says people who pay off their mortgages early often end up with lots of home equity but no money in the bank.

“This position is not financially healthy,” he tells Money Talks News. “You have to have an emergency fund for life’s unexpected events.”

6. You’d rather maximize your income through investments
If you pay off your mortgage, you will have less cash to invest. Much of your wealth will be tied up in the value of your home. The only way to get at it will be to sell the home or take out a loan against your home equity.

Without any liquid funds on hands, it will be more difficult to take advantage of an investment opportunity.

Watch the video of ‘7 Reasons Not to Pay Off Your Mortgage Before Retiring’ on MoneyTalksNews.com.

7. You want to deduct your mortgage interest
One of the benefits of being a homeowner is the ability to deduct the interest you pay on your home loan.

The Tax Cuts and Jobs Act of 2017 — the federal tax reform law — placed new limits on the deduction, but it’s still beneficial to homeowners, says Eric Tyson, co-author of “Mortgages for Dummies.”

For loans taken out after Dec. 15, 2017, most homeowners can deduct the interest they paid on up to $750,000 of qualified personal residence debt on a first and/or second home, Tyson tells Money Talks News. Married couples filing separate tax returns can deduct up to $375,000.

The previous limits were $1 million and, for married taxpayers filing separately, $500,000. If you took out your home loan before Dec. 16, 2017, you’ll be allowed to deduct interest under those old limits.

Mortgage interest is an itemized deduction, however. That means you can only take advantage of it if you itemize your deductions, as opposed to taking the standard deduction. And tax reform substantially increased the standard deduction — to as much as $24,000 for the 2018 tax year.

As a result, Congress’ Joint Committee on Taxation has estimated that far fewer taxpayers will opt to itemize deductions on their 2018 tax returns, since claiming the new standard deduction will gain them more money. That would mean far fewer homeowners stand to gain by itemizing deductions like mortgage interest.

This article was originally published on MoneyTalksNews.com as '7 Reasons Not to Pay Off Your Mortgage Before Retiring'.

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #1282 on: March 18, 2019, 07:19:29 AM »
I cannot help but feel like item #6 should have been more like item #1., i.e. all of the other things involve minor decisions in life, but "maximizing investment returns" is really the only one that truly focuses on what the opportunity cost of those mortgage payments is.

nereo

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Re: DONT Payoff your Mortgage Club
« Reply #1283 on: March 18, 2019, 07:29:53 AM »
I don't really understand why #2 would be part of the equation. 
You can rent out a room in your home regardless of whether you have a mortgage or not. 

Boofinator

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Re: DONT Payoff your Mortgage Club
« Reply #1284 on: March 18, 2019, 08:28:46 AM »
I cannot help but feel like item #6 should have been more like item #1., i.e. all of the other things involve minor decisions in life, but "maximizing investment returns" is really the only one that truly focuses on what the opportunity cost of those mortgage payments is.

For an article titled "7 Reasons Not to Pay Off Your Mortgage Before Retiring", and stating "What follows are some financially shrewd reasons to carry your mortgage debt into retirement", maximizing investment returns should not be priority #1. Minimizing the risk of going broke and having your children pay your way should be priority #1, and maximizing returns contingent to meeting #1 should follow as #2.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #1285 on: March 19, 2019, 09:15:29 AM »
Wow, for once Yahoo Finance picked up something interesting. Good food for thought.

https://www.yahoo.com/finance/news/7-reasons-not-pay-off-165620088.html

7 Reasons Not to Pay Off Your Mortgage Before Retiring
Money Talks News  Emmet Pierce,Money Talks News 2 hours 36 minutes ago
Reactions  Reblog on Tumblr  Share  Tweet  Email
Paying off a home mortgage before you retire is a common goal, but it isn’t always the best financial strategy.

It could end up costing you in the long run — such as by leaving you without cash savings to cover an unexpected expense or without the flexibility to take advantage of an opportunity to earn a better return on your money.

What follows are some financially shrewd reasons to carry your mortgage debt into retirement.

1. You plan to sell your home
Many people decide to downsize before or in retirement. They find that a smaller, less expensive home better fits their retirement lifestyle, as we detail in “7 Unexpected Benefits of Downsizing in Retirement.”

If you think you may be selling your home soon, think hard before you pay off the mortgage on your current home. That’s because selling your dwelling may give you the money you need to repay your home loan without having to deplete your savings.

2. You plan to rent out your home — or a room
Does your retirement plan include relocating and renting out your present home? There’s no pressing need to pay off your home loan if the tenants’ rent payments will cover your future mortgage costs.

You could avoid tapping into your savings to pay off the loan. You may even realize a profit after your mortgage bill is paid each month.

That could be true even if you remain in your home and simply rent out a spare room through a vacation rental site like Airbnb.

A 2018 analysis by Homes.com found that in some cities, a homeowner could make enough money by renting out a room just four or five nights per month to cover a monthly mortgage payment. We detailed the analysis findings in “Do This a Few Days Each Month and Watch Your Mortgage Disappear.”

3. It’s more important to repay debts with higher interest rates
Before you commit to paying off a mortgage, determine whether there are better ways to spend your money.

For example, if you’ve purchased or refinanced a home in the past decade, your home loan likely has a relatively low interest rate. And if that’s the case, you will be better off financially if you first repay debts with higher interest rates, such as credit cards debt.

Paying off the debt with the highest interest rate first will save you more money in interest payments over the life of your debt.

4. You’re still saving for retirement
Not everyone completes their career with enough money to enjoy a comfortable retirement. That’s why many Americans continue to work after age 65, the traditional retirement age.

If you’re contributing to a retirement account, such as an IRA or a 401(k), it may make more sense to use any extra money you have to build your retirement savings rather than to repay your mortgage ahead of schedule.

Retirement accounts are tax-advantaged. So, saving money in one will likely enable you to lower your taxable income now or avoid taxation when you withdraw funds from the account in retirement, depending on whether the account is Roth or traditional.

To learn more, check out “Confused by Retirement Accounts? Roth, Regular IRAs and 401(k)s Made Simple.”

5. You’re low on cash reserves
Maintaining an emergency fund is critical for financial stability. If paying off a mortgage will drain your cash reserves, it could leave you in a weakened position. No one can predict when an emergency will happen.

Corey Vandenberg, a mortgage banker in Lafayette, Indiana, says people who pay off their mortgages early often end up with lots of home equity but no money in the bank.

“This position is not financially healthy,” he tells Money Talks News. “You have to have an emergency fund for life’s unexpected events.”

6. You’d rather maximize your income through investments
If you pay off your mortgage, you will have less cash to invest. Much of your wealth will be tied up in the value of your home. The only way to get at it will be to sell the home or take out a loan against your home equity.

Without any liquid funds on hands, it will be more difficult to take advantage of an investment opportunity.

Watch the video of ‘7 Reasons Not to Pay Off Your Mortgage Before Retiring’ on MoneyTalksNews.com.

7. You want to deduct your mortgage interest
One of the benefits of being a homeowner is the ability to deduct the interest you pay on your home loan.

The Tax Cuts and Jobs Act of 2017 — the federal tax reform law — placed new limits on the deduction, but it’s still beneficial to homeowners, says Eric Tyson, co-author of “Mortgages for Dummies.”

For loans taken out after Dec. 15, 2017, most homeowners can deduct the interest they paid on up to $750,000 of qualified personal residence debt on a first and/or second home, Tyson tells Money Talks News. Married couples filing separate tax returns can deduct up to $375,000.

The previous limits were $1 million and, for married taxpayers filing separately, $500,000. If you took out your home loan before Dec. 16, 2017, you’ll be allowed to deduct interest under those old limits.

Mortgage interest is an itemized deduction, however. That means you can only take advantage of it if you itemize your deductions, as opposed to taking the standard deduction. And tax reform substantially increased the standard deduction — to as much as $24,000 for the 2018 tax year.

As a result, Congress’ Joint Committee on Taxation has estimated that far fewer taxpayers will opt to itemize deductions on their 2018 tax returns, since claiming the new standard deduction will gain them more money. That would mean far fewer homeowners stand to gain by itemizing deductions like mortgage interest.

This article was originally published on MoneyTalksNews.com as '7 Reasons Not to Pay Off Your Mortgage Before Retiring'.
I didn't say it was a perfect list. However, it is a damn good one, considering the source. Amazing for them, actually. Anything that increases awareness and fosters learning is a win in my book. Just as there's no single path to FIRE, there's not an absolute one-size-fits-all answer to this question.

FIreDrill

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Re: DONT Payoff your Mortgage Club
« Reply #1286 on: March 20, 2019, 08:52:40 AM »
I'm in an interesting situation.  Looking to refinance but property values have taken a dive in my area.  So in order to refi, we would liquidate 50k to pay down the mortgage balance to 95% ltv.

Current rate is 4.75% and our rate lock is at 3.875%.  According to the loan estimate, our pmi would drop as well.  Essentially we would lump sum 50k to refinance and it would lower our mortgage payment by a little over 550/mo or 6,600 per year.

This seems like a no brainer to me but I wanted to get this groups opinion.  Oh, and obviously we would pay the minimum and invest the extra for the 30 year term after the refi ;)

Sent from my moto g(6) using Tapatalk
Did you buy with nothing down? How does a $50k payment only get you to 95% LTV? Where's the $50k coming from? How much will you have left after that huge hypothetical payment, both loan balance and other assets? How long do you plan to stay? Much more info is needed for the most helpful answers, but good for you for asking here.

Purchased with 5% down at the peak of the market in the Seattle area in 2018.  Sales at the time of purchase comped the house at 640-670k.  We purchased the home for 640k. 

Recent refinance attempt fell through due to the appraisal coming back low at 590k but now I'm thinking it could be worth it to drop 50k down in order to refinance since rates have fallen even further.  Throwing the 50k at it would bring the principal balance down to 560k.  The 50k would cover approx 43k of paydown and 7k in closing.

Current investments and cash are just over 400k spread out across taxable, roth, & traditional accounts.  Gross yearly income is around 200k.  No plans to leave anytime soon.

It's a shitty situation for sure... But hey... It's what we got lol.


Here is an update everyone.  Looking for advice.

We ended up having to get a new appraisal because the old lender would not release the appraisal that fell through from the first refi attempt.  New appraisal came back 50k higher and hit our original purchase price.  So we could do 95% LTV and still drop our payment significantly or we could put some extra money down to get to 90% LTV which would drop our payment even further and lower our PMI by about 40/mo.  Each scenario laid out below.

Current Mortage
Loan balance = 602k
Mortgage Payment = 3,903 (136 PMI)
9 months in on 30 year term

Refi Option 1
Loan balance = 608k
Mortgage Payment = 3,576 (122 PMI)
Cash to close = 7k(5k with be recouped from old escrow)

Refi Option 2
Loan balance = 576k
Mortgage Payment = 3,388 (84 PMI)
Cash to close = 39k (5k with be recouped from old escrow)


Putting an extra 32k into the mortgage would decrease the monthly payment by 188/mo or 2,256/yr which results in a guaranteed yearly return of 7.05% on that money.

I feel like both options are pretty good and I'm leaning towards option 2 but wanted to see what you all thought.  See if I was missing anything obvious.





talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #1287 on: March 20, 2019, 09:28:15 AM »
If it were me, I'd choose option 1, then open an ETrade Account, and put the extra $32,000 into ticker symbol $QYLD. It's an index fund that sells covered calls on the NASDAQ and yields approximately 9% on cash. You'd get approximately double the difference in your monthly payments in yield each month, leaving you ahead, even accounting for taxes.

(disclosure: I am long $QYLD)

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #1288 on: March 20, 2019, 09:35:19 AM »
What are the interest rates?

FIreDrill

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Re: DONT Payoff your Mortgage Club
« Reply #1289 on: March 20, 2019, 09:41:40 AM »
What are the interest rates?
Interest rates on both refi options are the same at 3.875%.  The big difference is the pmi premium you pay on 95% ltv vs 90% ltv. Although that difference is only there until you get to 20% ltv and pmi drops completely.  About 8 years of payments I believe.

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ender

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Re: DONT Payoff your Mortgage Club
« Reply #1290 on: March 20, 2019, 09:47:20 AM »
This thread is making me consider doing a taxable investment for "mortgage payoff" (as compared with a high interest savings).

Hm. Hmmm.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #1291 on: March 20, 2019, 09:51:41 AM »
What are the interest rates?
Interest rates on both refi options are the same at 3.875%.  The big difference is the pmi premium you pay on 95% ltv vs 90% ltv. Although that difference is only there until you get to 20% ltv and pmi drops completely.  About 8 years of payments I believe.

Sent from my moto g(6) using Tapatalk
I'd go with @talltexan's advice. At your income level, I'd set it and forget it (just ignore the PMI). Then I'd focus on salting as much away as possible in taxable and retirement accounts. Once your taxable accounts exceed your mortgage balance, you can revisit the topic. By then, you'll be in a much more balanced position.

BTW, thanks for asking! It's actually fun to help others figure this stuff out. You know, mustachian fun. Costs us nothing but a few moments of time, and hastens your trip to FIREland. Win-win.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #1292 on: March 20, 2019, 09:53:05 AM »
This thread is making me consider doing a taxable investment for "mortgage payoff" (as compared with a high interest savings).

Hm. Hmmm.
The worst that happens is that you acquire a shitload of money that has longer to compound. What's not to like?

ender

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Re: DONT Payoff your Mortgage Club
« Reply #1293 on: March 20, 2019, 09:55:13 AM »
This thread is making me consider doing a taxable investment for "mortgage payoff" (as compared with a high interest savings).

Hm. Hmmm.
The worst that happens is that you acquire a shitload of money that has longer to compound. What's not to like?

we have to buy a bigger vehicle to carry the shitload around? :-)

Boofinator

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Re: DONT Payoff your Mortgage Club
« Reply #1294 on: March 20, 2019, 10:35:09 AM »
If it were me, I'd choose option 1, then open an ETrade Account, and put the extra $32,000 into ticker symbol $QYLD. It's an index fund that sells covered calls on the NASDAQ and yields approximately 9% on cash. You'd get approximately double the difference in your monthly payments in yield each month, leaving you ahead, even accounting for taxes.

(disclosure: I am long $QYLD)

I try not to judge individuals' investment recommendations, but at least be forthcoming with the risks involved. Like in this case, for that 9% yield, somebody is paying you to take all of the downside but little of the upside. And that this stock is down 10% over the last 6 years (by comparison, the S&P 500 is up nearly double in that time period). And that it has a 0.6% expense ratio.

FIreDrill

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Re: DONT Payoff your Mortgage Club
« Reply #1295 on: March 20, 2019, 10:39:03 AM »


What are the interest rates?
Interest rates on both refi options are the same at 3.875%.  The big difference is the pmi premium you pay on 95% ltv vs 90% ltv. Although that difference is only there until you get to 20% ltv and pmi drops completely.  About 8 years of payments I believe.

Sent from my moto g(6) using Tapatalk
I'd go with @talltexan's advice. At your income level, I'd set it and forget it (just ignore the PMI). Then I'd focus on salting as much away as possible in taxable and retirement accounts. Once your taxable accounts exceed your mortgage balance, you can revisit the topic. By then, you'll be in a much more balanced position.

BTW, thanks for asking! It's actually fun to help others figure this stuff out. You know, mustachian fun. Costs us nothing but a few moments of time, and hastens your trip to FIREland. Win-win.

Yeah I hope to see more people asking these types of questions.  It's always fun to play with the numbers :)

I think we are going to go with option 1 and put the money in taxable investments as a "mortgage flexibility" account.  Like how I phrased that? Lol

Probably a mix of stock/bonds as we are currently extremely stock heavy... As in 100% on a 375k portfolio.  So we may add some bonds to the mix somewhere.  Then again we may just stick with 100% VTSAX and call it good....

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couponvan

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Re: DONT Payoff your Mortgage Club
« Reply #1296 on: March 20, 2019, 10:43:35 AM »
What are the interest rates?
Interest rates on both refi options are the same at 3.875%.  The big difference is the pmi premium you pay on 95% ltv vs 90% ltv. Although that difference is only there until you get to 20% ltv and pmi drops completely.  About 8 years of payments I believe.

Sent from my moto g(6) using Tapatalk

Are these 5/1, 15 or 30?  Just curious as I am shopping rates right now and the 30 is 4.1, 15 is 3.55, and a 5/1 is 3.8 (dropped from 3.9 this morning).

Boofinator

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Re: DONT Payoff your Mortgage Club
« Reply #1297 on: March 20, 2019, 11:02:38 AM »
I'm in an interesting situation.  Looking to refinance but property values have taken a dive in my area.  So in order to refi, we would liquidate 50k to pay down the mortgage balance to 95% ltv.

Current rate is 4.75% and our rate lock is at 3.875%.  According to the loan estimate, our pmi would drop as well.  Essentially we would lump sum 50k to refinance and it would lower our mortgage payment by a little over 550/mo or 6,600 per year.

This seems like a no brainer to me but I wanted to get this groups opinion.  Oh, and obviously we would pay the minimum and invest the extra for the 30 year term after the refi ;)

Sent from my moto g(6) using Tapatalk
Did you buy with nothing down? How does a $50k payment only get you to 95% LTV? Where's the $50k coming from? How much will you have left after that huge hypothetical payment, both loan balance and other assets? How long do you plan to stay? Much more info is needed for the most helpful answers, but good for you for asking here.

Purchased with 5% down at the peak of the market in the Seattle area in 2018.  Sales at the time of purchase comped the house at 640-670k.  We purchased the home for 640k. 

Recent refinance attempt fell through due to the appraisal coming back low at 590k but now I'm thinking it could be worth it to drop 50k down in order to refinance since rates have fallen even further.  Throwing the 50k at it would bring the principal balance down to 560k.  The 50k would cover approx 43k of paydown and 7k in closing.

Current investments and cash are just over 400k spread out across taxable, roth, & traditional accounts.  Gross yearly income is around 200k.  No plans to leave anytime soon.

It's a shitty situation for sure... But hey... It's what we got lol.


Here is an update everyone.  Looking for advice.

We ended up having to get a new appraisal because the old lender would not release the appraisal that fell through from the first refi attempt.  New appraisal came back 50k higher and hit our original purchase price.  So we could do 95% LTV and still drop our payment significantly or we could put some extra money down to get to 90% LTV which would drop our payment even further and lower our PMI by about 40/mo.  Each scenario laid out below.

Current Mortage
Loan balance = 602k
Mortgage Payment = 3,903 (136 PMI)
9 months in on 30 year term

Refi Option 1
Loan balance = 608k
Mortgage Payment = 3,576 (122 PMI)
Cash to close = 7k(5k with be recouped from old escrow)

Refi Option 2
Loan balance = 576k
Mortgage Payment = 3,388 (84 PMI)
Cash to close = 39k (5k with be recouped from old escrow)


Putting an extra 32k into the mortgage would decrease the monthly payment by 188/mo or 2,256/yr which results in a guaranteed yearly return of 7.05% on that money.

I feel like both options are pretty good and I'm leaning towards option 2 but wanted to see what you all thought.  See if I was missing anything obvious.

I'd recommend running the figures in a spreadsheet to see how much you need to earn in returns to come out ahead in either option. As my gift to you, random internet stranger, I went ahead and ran them myself.

<Drum roll...>

It looks like if you could get a steady 7%, Option 1 and Option 2 are pretty close to break-even over the course of the loan. Higher than 7%, Option 1 wins; lower than 7%, Option 2 wins. So if I were in your shoes, I'd ask myself whether or not I'd take on debt with a 7% interest rate to invest in stocks. For myself, the easy answer would be no, though others might come to different conclusions.

ETA: 7.1% to be precise.
« Last Edit: March 20, 2019, 11:05:11 AM by Boofinator »

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #1298 on: March 20, 2019, 11:50:17 AM »
If it were me, I'd choose option 1, then open an ETrade Account, and put the extra $32,000 into ticker symbol $QYLD. It's an index fund that sells covered calls on the NASDAQ and yields approximately 9% on cash. You'd get approximately double the difference in your monthly payments in yield each month, leaving you ahead, even accounting for taxes.

(disclosure: I am long $QYLD)

I try not to judge individuals' investment recommendations, but at least be forthcoming with the risks involved. Like in this case, for that 9% yield, somebody is paying you to take all of the downside but little of the upside. And that this stock is down 10% over the last 6 years (by comparison, the S&P 500 is up nearly double in that time period). And that it has a 0.6% expense ratio.

Agreed. QYLD is poor choice for total return, but the need for cash flow in this case is important. Someone who doesn't want to make this tradeoff would do better with the "lower payments" approach.

Boofinator

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Re: DONT Payoff your Mortgage Club
« Reply #1299 on: March 20, 2019, 12:25:14 PM »
If it were me, I'd choose option 1, then open an ETrade Account, and put the extra $32,000 into ticker symbol $QYLD. It's an index fund that sells covered calls on the NASDAQ and yields approximately 9% on cash. You'd get approximately double the difference in your monthly payments in yield each month, leaving you ahead, even accounting for taxes.

(disclosure: I am long $QYLD)

I try not to judge individuals' investment recommendations, but at least be forthcoming with the risks involved. Like in this case, for that 9% yield, somebody is paying you to take all of the downside but little of the upside. And that this stock is down 10% over the last 6 years (by comparison, the S&P 500 is up nearly double in that time period). And that it has a 0.6% expense ratio.

Agreed. QYLD is poor choice for total return, but the need for cash flow in this case is important. Someone who doesn't want to make this tradeoff would do better with the "lower payments" approach.

Cash flow is important, unquestionably. In the OP's case, it will probably come from his $200k income, but in the event of job loss he has a taxable account he could pull from if necessary. So, in this specific case, I don't think that cash flow is an overriding factor.

In the hypothetical case where cash flow was an overriding factor, my advice would be to get a smaller house until you have a decent stash and can ensure cash flow in a downturn.