Author Topic: DONT Payoff your Mortgage Club  (Read 169677 times)

FIreDrill

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Re: DONT Payoff your Mortgage Club
« Reply #1400 on: April 12, 2019, 11:17:35 AM »
Hey look, more money.... #Payday

4/12/19

726 to 401k
269 to HSA
605 to Espp (Minimum 15% discount. Profits will be taken right away at end of offering period)
462 to Taxable Brokerage

Investment Tracking
2/15/19   - $372,432
3/1/19     - $377,098
3/29/19   - $390,738
4/12/19   - $404,719


Been moving a lot of money around lately with rollovers and what not.  Pretty excited to break the 400k invested mark though! :) ...
That's quite a milestone...congratulations!
Thanks! Already have my sights set on 500k.  Really depends on the market but I'm hoping to get there in 12-18 months.  May have a couple big expenses during that time as well.. We will see.

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DadJokes

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Re: DONT Payoff your Mortgage Club
« Reply #1401 on: April 18, 2019, 08:30:45 AM »
Got a call from my lender yesterday, suggesting using the VA interest rate reduction program. The program is legit, but I am trying to determine how much of a benefit I am going to get from a refinance (we only got the house a year ago).

Current LoanRefinance
Balance310,588314,766
Rate4.375%3.875%
Remaining term350 months360 months
P&I1,572.251,480.15

So, the closing costs would get rolled into the principal, which accounts for the increase in balance. I would be taking on $4,178 in closing costs to reduce my P&I by $92.10 and extend the loan by another 10 months. If I am doing the math right here, adding 10 extra P&I payments of $1,480.15 and $4,178 in closing costs adds $18,979.15 to the total cost of the house. Saving $92.10 on P&I means that it will take 206 months (17.2 years) to break even.

Half a percentage point sounds nice, but this looks like a terrible deal. Am I missing something?

FIreDrill

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Re: DONT Payoff your Mortgage Club
« Reply #1402 on: April 18, 2019, 09:01:21 AM »


Got a call from my lender yesterday, suggesting using the VA interest rate reduction program. The program is legit, but I am trying to determine how much of a benefit I am going to get from a refinance (we only got the house a year ago).

Current LoanRefinance
Balance310,588314,766
Rate4.375%3.875%
Remaining term350 months360 months
P&I1,572.251,480.15

So, the closing costs would get rolled into the principal, which accounts for the increase in balance. I would be taking on $4,178 in closing costs to reduce my P&I by $92.10 and extend the loan by another 10 months. If I am doing the math right here, adding 10 extra P&I payments of $1,480.15 and $4,178 in closing costs adds $18,979.15 to the total cost of the house. Saving $92.10 on P&I means that it will take 206 months (17.2 years) to break even.

Half a percentage point sounds nice, but this looks like a terrible deal. Am I missing something?

I usually don't consider the extra payments added to the end of the loan on a break even. If you put your 92+ savings to extra principal payments you would eventually lower the amatorization to the original loan amount after the break even threshold was met.  That's usually why I don't count them in the break even. Also, with the current loan being so new you will probable be paying more principal payoff every month with the lower rate. Around 20 bucks or so from my quick estimate.

So you should look at how long it will take your savings to recoup the cost to refi (the 4k amount) Assuming 110/mo savings between decreased PI and increased principal paydown you would be at around a 37 mo break even which isn't too great.  I aim for 18-24mo break even when refinancing.  If you could get closing costs down to 2k the numbers would be much more favorable.

These are super rough numbers but it's the process I use for analyzing break evens during a refi.

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DadJokes

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Re: DONT Payoff your Mortgage Club
« Reply #1403 on: April 18, 2019, 09:08:55 AM »
Thank you, that was very helpful

SwordGuy

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Re: DONT Payoff your Mortgage Club
« Reply #1404 on: April 18, 2019, 09:13:36 AM »
Run the numbers if you pay the same amount on the new mortgage as you are on the old one.   That might save you some money.

DadJokes

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Re: DONT Payoff your Mortgage Club
« Reply #1405 on: April 18, 2019, 09:32:37 AM »
My calculation of the current payoff was based off of our last mortgage statement. When accrued interest is added, the current payoff is actually $312,428, which makes the closing cost only $2,338, giving a payoff by your calculation of 24 months.

I feel dumb for not taking into account accrued interest. In my defense, it was late when we talked (and I was feeding a baby), and I'm currently fasting, so my brain is not functioning correctly.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #1406 on: April 19, 2019, 07:40:57 AM »
Well looky here, something interesting on Yahoo Finance:

https://finance.yahoo.com/news/pete-planner-pay-off-mortgage-100006133.html

nereo

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Re: DONT Payoff your Mortgage Club
« Reply #1407 on: April 19, 2019, 08:24:07 AM »
Well looky here, something interesting on Yahoo Finance:

https://finance.yahoo.com/news/pete-planner-pay-off-mortgage-100006133.html

The author has an interesting way of phrasing the decision: The known or the unknown. Itís been the fork in the road since the beginning of time.

Perhaps its this fear of the unknown that keeps many taking what is generally the more lucrative path. I see this crop up in discussions all the time (e.g. "I know what my finances will look like if I pay off the mortgage, but I just don't know what things will look like if I invest instead"). I've never personally had a problem with that kind of uncertainty, relying on history and probability to bolster my decision. But it's a big obstacle for others.

tyort1

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Re: DONT Payoff your Mortgage Club
« Reply #1408 on: April 19, 2019, 09:29:45 AM »
Well looky here, something interesting on Yahoo Finance:

https://finance.yahoo.com/news/pete-planner-pay-off-mortgage-100006133.html

The author has an interesting way of phrasing the decision: The known or the unknown. Itís been the fork in the road since the beginning of time.

Perhaps its this fear of the unknown that keeps many taking what is generally the more lucrative path. I see this crop up in discussions all the time (e.g. "I know what my finances will look like if I pay off the mortgage, but I just don't know what things will look like if I invest instead"). I've never personally had a problem with that kind of uncertainty, relying on history and probability to bolster my decision. But it's a big obstacle for others.

The funny thing is, the "unknown" stock returns don't even have to beat your 4% mortgage rate.  Because you need to account for inflation.  So 4%-2% = 2%.  Your "unknown stock returns" only have to beat 2% in order to beat paying off the mortgage.  That's a pretty freaking low bar. 

nereo

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Re: DONT Payoff your Mortgage Club
« Reply #1409 on: April 19, 2019, 09:46:43 AM »
Thinking about it more, it's not unlike my skeptical uncle, who holds almost his entire NW (6 figures easily) in a savings account, because he 'doesn't trust' the market.  He can plot what his money will be worth in 1, 2, 5 years (minus inflationary effects) and that brings him comfort.  The idea of not knowing what his portfolio would be worth in 5 years if he had it invested in, say, VFINX is too much for him.

I shudder to think what the opportunity cost of 40+ years of savings in his local bank ahve been.

tyort1

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Re: DONT Payoff your Mortgage Club
« Reply #1410 on: April 19, 2019, 10:17:58 AM »
Thinking about it more, it's not unlike my skeptical uncle, who holds almost his entire NW (6 figures easily) in a savings account, because he 'doesn't trust' the market.  He can plot what his money will be worth in 1, 2, 5 years (minus inflationary effects) and that brings him comfort.  The idea of not knowing what his portfolio would be worth in 5 years if he had it invested in, say, VFINX is too much for him.

I shudder to think what the opportunity cost of 40+ years of savings in his local bank ahve been.

I'm sure his bank thanks him for it!

CorpRaider

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Re: DONT Payoff your Mortgage Club
« Reply #1411 on: April 19, 2019, 12:53:06 PM »
Thinking about it more, it's not unlike my skeptical uncle, who holds almost his entire NW (6 figures easily) in a savings account, because he 'doesn't trust' the market.  He can plot what his money will be worth in 1, 2, 5 years (minus inflationary effects) and that brings him comfort.  The idea of not knowing what his portfolio would be worth in 5 years if he had it invested in, say, VFINX is too much for him.

I shudder to think what the opportunity cost of 40+ years of savings in his local bank ahve been.

See, a guy that like to me could maybe be a candidate for an annuity product maybe even like a variable one where basically you are letting the counterparty skim the heck out of the market returns in return for lower quoted volatility, just being cognizant of costs of course.  Like an annuity product with some I bonds and treasuries or CDs that he will hold to maturity.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #1412 on: April 20, 2019, 08:17:58 AM »
Well looky here, something interesting on Yahoo Finance:

https://finance.yahoo.com/news/pete-planner-pay-off-mortgage-100006133.html

The author has an interesting way of phrasing the decision: The known or the unknown. Itís been the fork in the road since the beginning of time.

Perhaps its this fear of the unknown that keeps many taking what is generally the more lucrative path. I see this crop up in discussions all the time (e.g. "I know what my finances will look like if I pay off the mortgage, but I just don't know what things will look like if I invest instead"). I've never personally had a problem with that kind of uncertainty, relying on history and probability to bolster my decision. But it's a big obstacle for others.
I posted this article without details, because I wanted to let people form their own impressions. As usual, nereo, you've hit on the key point: fear of the unknown.

I vividly remember that early in the investment stage, small losses were really hard to take and made me very fearful. I see it on this forum whenever there is a pullback in the market. (I used to see it on the thread that's the opposite of this one, but I don't go there any more.) As my investments grew, they developed a kind of buoyancy. When my stache started earning more than I did in a month, things got really exciting. Once it grew to several year's salary,  I started to feel kind of giddy. When it exceeded my mortgage balance, I unexpectedly felt strong and mighty. When the markets tanked during the Great Recession, I increased my savings rate. When the markets recovered, I was suddenly FI. It made me feel bulletproof. I gave my employer the well-deserved middle finger and set out to enjoy the shit out of life. These days, I fear for nothing that money can cure. And having a shitload of money cures a LOT.

It wouldn't have happened as quickly if I was focusing on "killing" the mortgage. Had I just offed the mortgage, I'd have a paid-for house without the means to stop working. The glee one expects to feel when the house is paid off is fleeting, compared the the elation that comes from having more money than you ever dreamt possible.

If you're lucky enough to have some combination of high salary and moderate cost of living that you can max out all available savings options and still prepay your mortgage, then go for it! But the majority of zealous mortgage killers are unwittingly shooting themselves in the foot. For someone like me who was single, lived in a HCOLA, and never earned over 100k*, the fact that I'm now FIRE, with a stockpile of money is still a bit surreal. No, amazingly surreal. Every single freedom-filled** day.

I am forever grateful to the long-ago boyfriend who opened my steadfastly blind eyes to this concept. Wherever he is, I'm sure he hit FIRE long ago. Wherever he is, I thank him for helping me reach FIRE, too. I hang around here to help others do what he did for me. Just doin' my part to pay it forward.

*I have reported elsewhere on this forum that I broke the $100k mark once in my career.  A recent visit to the Social Security website has disproved that recollection. Which makes the size of my current stache even more unbelievable. This shit works, people!

** Those of you who have read my musings elsewhere (including my sorely-needs-an-update journal) may recall that my MIL has ALZ and lives with us. I still feel I live a freedom-filled life with many choices, because we have a big stache and so does she. We have the freedom to have her live with us (and pay cash for a clown house that suits our famiy's needs), because there is plenty of money. We make our choices based on what's best for our situation, not because it's all our finances will allow. That freedom is endlessly liberating. I want everyone to experience it.
« Last Edit: April 20, 2019, 01:12:39 PM by Dicey »

FIreDrill

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Re: DONT Payoff your Mortgage Club
« Reply #1413 on: April 20, 2019, 11:51:54 AM »
Well looky here, something interesting on Yahoo Finance:

https://finance.yahoo.com/news/pete-planner-pay-off-mortgage-100006133.html

The author has an interesting way of phrasing the decision: The known or the unknown. Itís been the fork in the road since the beginning of time.

Perhaps its this fear of the unknown that keeps many taking what is generally the more lucrative path. I see this crop up in discussions all the time (e.g. "I know what my finances will look like if I pay off the mortgage, but I just don't know what things will look like if I invest instead"). I've never personally had a problem with that kind of uncertainty, relying on history and probability to bolster my decision. But it's a big obstacle for others.
I posted this article without details, because I wanted to let people form their own impressions. As usual, nereo, you've hit on the key point: fear of the unknown.

I vividly remember that early in the investment stage, small losses were really hard to take and made me very fearful. I see it on this forum whenever there is a pullback in the market. (I used to see it on the thread that's the opposite of this one, but I don't go there any more.) As my investments grew, they developed a kind of buoyancy. When my stache started earning more than I did in a month, things got really exciting. Once it grew to several year's salary,  I started to feel kind of giddy. When it exceeded my mortgage balance, I unexpectedly felt strong and mighty. When the markets tanked during the Great Recession, I increased my savings rate. When the markets recovered, I was suddenly FI. It made me feel bulletproof. I gave my employer the well-deserved middle finger and set out to enjoy the shit out of life. These days, I fear for nothing that money can cure. And having a shitload of money cures a LOT.

It wouldn't have happened as quickly if I was focusing on "killing" the mortgage. Had I just offed the mortgage, I'd have a paid-for house without the means to stop working. The glee one expects to feel when the house is paid off is fleeting, compared the the elation that comes from having more money than you ever dreamt possible.

If you're lucky enough to have some combination of high salary and moderate cost of living that you can max out all available savings options and still prepay your mortgage, then go for it! But the majority of zealous mortgage killers are unwittingly shooting themselves in the foot. For someone like me who was single, lived in a HCOLA, and never earned over 100k*, the fact that I'm now FIRE, with a stockpile of money is still a bit surreal. No, amazingly surreal. Every single freedom-filled** day.

I am forever grateful to the long-ago boyfriend who opened my steadfastly blind eyes to this concept. Wherever he is, I'm sure he hit FIRE long ago. Wherever he is, I thank him for helping me reach FIRE, too. I hang around here to help others do what he did for me. Just doin' my part to pay it forward.

*I have reported elsewhere on this forum that broke the $100k mark once in my career.  A recent visit to the Social Security website has disproved that recollection. Which makes the size of my current stache even more unbelievable. This shit works, people!

** Those of you who have read my musings elsewhere (including my sorely-needs-an-update journal) may recall that my MIL has ALZ and lives with us. I still feel I live a freedom-filled life with many choices, because we have a big stache and so does she. We have the freedom to have her live with us (and pay cash for a clown house that suits our famiy's needs), because there is plenty of money. We make our choices based on what's best for our situation, not because it's all our finances will allow. That freedom is endlessly liberating. I want everyone to experience it.

Thanks for sharing your story!  It's great to get insight into other peoples stories and how investing long term has given them so many options.

The psychology behind investing is absolutely fascinating to me.  Especially the fear of the market going down when that is the exact time those who are still in the accumulation phase should be extremely excited for discounted stocks.  I've been investing over paying down our "mortgages" (only 1 mortgage at a time) for about 6 years now and the level of confidence that I have in my investment strategy has only grown over that time.  I've seen a couple of dips of 10-20% in the market and with every dip, I have only gained the confidence that the market will return to previous highs eventually and the best action is to keep on investing.  It has actually gotten to the point that I get excited when I start to see signs of correction because I know the best possible scenario for us would be a 3-6 year correction where we can get stocks at a great discount while we are still contributing to investments.

I feel like those in the mortgage payoff club may not understand just how valuable it is to invest through a correction, downturn, volatility, whatever you want to call it.  High volatility can actually help boost long term returns while in the accumulation phase and if they decide to throw money at their mortgage during these times, it will have a huge effect on their portfolio over the long term.  And this doesn't even include the tax benefits you can get from harvesting losses during a downturn.... VTI to VOO anyone? Cough, cough...

The following graphs are a great example of the power of investing through a downturn.  Short example but great.  I hope to be able to invest through a larger downturn like you were able to do someday...  It will come, just have to stay patient and ready.


VTI through the latest dip.



PC NW while investing through the dip which has not fully recovered yet.



VTI Discount at time of NW recovery to the previous high.  Still, almost a 10% discount when my NW recovered!




All of this to say that the farther and longer the dip, the higher the recovery as long as you invest through it.

Your story was great cause I feel like it gave me a glimpse into my future if I stick to the path I am currently on.  Very encouraging and thanks again for sharing!

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #1414 on: April 20, 2019, 01:24:01 PM »
Love your charts @FIreDrill!

I like sharing my story, because even I can't believe how well this stuff works, and I'm six years post-FIRE. Pinch me, I must be dreaming.

It's so frustrating that we've effectively been banned from posting on the mortgage payoff thread(s). Over here, we're mostly preaching to the choir. We aren't the hard-headed ones (the way I was) that need to learn the lesson. By the time they figure it out, they will be many years away from this place and wishing one of two things. That they didn't have to work so long or that they had saved more money. Your primary home won't pay its own maintenance, taxes or utilities, nor will it buy groceries or cover your medical bills.

Carry on, smart mortgage holders...

Oh yeah, my primary house may have been purchased for cash, but we still have mortgages on four other properties. Long live cheap, tax deductible mortgages!

FIREstache

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Re: DONT Payoff your Mortgage Club
« Reply #1415 on: April 20, 2019, 01:28:16 PM »

I've paid off some home mortgages, it's been many years back, so I've owned my home for nearly two decades.  It was a great feeling of accomplishment at the time.  Since I don't have a mortgage payment, I'll be able to keep my taxable income low during FIRE to qualify for nice ACA subsidies if the ACA is still around next year.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #1416 on: April 20, 2019, 01:30:23 PM »

I've paid off some home mortgages, it's been many years back, so I've owned my home for nearly two decades.  It was a great feeling of accomplishment at the time.  Since I don't have a mortgage payment, I'll be able to keep my taxable income low during FIRE to qualify for nice ACA subsidies if the ACA is still around next year.
Hmmm, how many years after you paid off the house did you continue to work?

FIREstache

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Re: DONT Payoff your Mortgage Club
« Reply #1417 on: April 20, 2019, 01:49:09 PM »

I've paid off some home mortgages, it's been many years back, so I've owned my home for nearly two decades.  It was a great feeling of accomplishment at the time.  Since I don't have a mortgage payment, I'll be able to keep my taxable income low during FIRE to qualify for nice ACA subsidies if the ACA is still around next year.
Hmmm, how many years after you paid off the house did you continue to work?

15 since the last one, but the loan was pretty small to begin with because I put so much down.  The interest rate was a lot higher than it is today.

FIreDrill

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Re: DONT Payoff your Mortgage Club
« Reply #1418 on: April 20, 2019, 01:50:43 PM »

I've paid off some home mortgages, it's been many years back, so I've owned my home for nearly two decades.  It was a great feeling of accomplishment at the time.  Since I don't have a mortgage payment, I'll be able to keep my taxable income low during FIRE to qualify for nice ACA subsidies if the ACA is still around next year.
I definitely see the advantage of paying off the mortgage before firing in order to get aca subsidies.  I also can acknowledge that your rate was probably far higher than what most of us have today.

I think my biggest concern with the mortgage payoff crew right now is that most are doing this because it "feels good".  The whole premise of FI is doing things that don't necessarily feel good in order to become FI.

As an investor, making decisions based on feelings is a horrible idea and it's why most people underperform the market.  "Oh man stocks are high, I should pull out now".  Then they miss the next 20% run up and get back into the market and loose all that gain.  Making the decision to pay off a low rate mortgage because it feels good makes me believe that they will not do as well as us once they actually get into the investing stage.  Fear will have more power over their decisions and it will likely translate to poor investment decisions and a AA tilted much heavier towards bonds and lower returns.  The thing I love most about invest instead of paying off the mortgage is that I have a head start on concurring that fear.  Market volatility has been teaching me valuable lessons with my very real money.  My stock fear level is much lower than it was 6 years ago.  We already have a head start on conquering this fear compared to the pay off your mortgage club.

If someone said they were going to change there AA from 90/10 to 30/70 because they feel like the market is going to stagnate or correct, we would all be ripping them apart.  But apparently paying down the cheapest debt you will ever aquire in you lifetime because it feels good is totally fine...  I just don't get it.

Also, I'm really not trying to say you did the wrong thing.  You probably did the right thing looking at the rates around when you paid off your home.  But with today's rates, it's a totally different story and equation to run.

Another disclaimer, I believe having a paid off mortgage when you FIRE can be a very good move. My main complaint is with people that have a long timeline for investing and achieving FIRE.

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« Last Edit: April 20, 2019, 01:58:45 PM by FIreDrill »

Boofinator

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Re: DONT Payoff your Mortgage Club
« Reply #1419 on: April 20, 2019, 03:42:30 PM »
Well looky here, something interesting on Yahoo Finance:

https://finance.yahoo.com/news/pete-planner-pay-off-mortgage-100006133.html

The author has an interesting way of phrasing the decision: The known or the unknown. Itís been the fork in the road since the beginning of time.

Perhaps its this fear of the unknown that keeps many taking what is generally the more lucrative path. I see this crop up in discussions all the time (e.g. "I know what my finances will look like if I pay off the mortgage, but I just don't know what things will look like if I invest instead"). I've never personally had a problem with that kind of uncertainty, relying on history and probability to bolster my decision. But it's a big obstacle for others.

The funny thing is, the "unknown" stock returns don't even have to beat your 4% mortgage rate.  Because you need to account for inflation.  So 4%-2% = 2%.  Your "unknown stock returns" only have to beat 2% in order to beat paying off the mortgage.  That's a pretty freaking low bar.

In order to beat 4%, you need to get better than 4% returns in your alternative investment. Inflation has practically nothing to do with it.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #1420 on: April 20, 2019, 04:38:52 PM »

I've paid off some home mortgages, it's been many years back, so I've owned my home for nearly two decades.  It was a great feeling of accomplishment at the time.  Since I don't have a mortgage payment, I'll be able to keep my taxable income low during FIRE to qualify for nice ACA subsidies if the ACA is still around next year.
Hmmm, how many years after you paid off the house did you continue to work?

15 since the last one, but the loan was pretty small to begin with because I put so much down.  The interest rate was a lot higher than it is today.
Sorry, my question wasn't specific enough. Are you FIRE? If so, for how long?

Brother Esau

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Re: DONT Payoff your Mortgage Club
« Reply #1421 on: April 20, 2019, 04:53:31 PM »
Wow, I love this thread even more than "Top is in". Thank you Dicey.

PS.....hope Boarder is doing fine as well

tyort1

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Re: DONT Payoff your Mortgage Club
« Reply #1422 on: April 20, 2019, 05:21:25 PM »
Well looky here, something interesting on Yahoo Finance:

https://finance.yahoo.com/news/pete-planner-pay-off-mortgage-100006133.html

The author has an interesting way of phrasing the decision: The known or the unknown. Itís been the fork in the road since the beginning of time.

Perhaps its this fear of the unknown that keeps many taking what is generally the more lucrative path. I see this crop up in discussions all the time (e.g. "I know what my finances will look like if I pay off the mortgage, but I just don't know what things will look like if I invest instead"). I've never personally had a problem with that kind of uncertainty, relying on history and probability to bolster my decision. But it's a big obstacle for others.

The funny thing is, the "unknown" stock returns don't even have to beat your 4% mortgage rate.  Because you need to account for inflation.  So 4%-2% = 2%.  Your "unknown stock returns" only have to beat 2% in order to beat paying off the mortgage.  That's a pretty freaking low bar.

In order to beat 4%, you need to get better than 4% returns in your alternative investment. Inflation has practically nothing to do with it.

Historically stocks with dividends reinvested will return about 9%.  Then people say you must count for inflation and so they subtract 2 or 3 percent to get ďreal returnsĒ.  So if you do that for stock returns you need to do it for the mortgage interest too, so itís a consistent comparison. 

Or if you donít want to include inflation in any of the calculations then 9% return for stocks really crushes 4% for paying the mortgage.

Boofinator

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Re: DONT Payoff your Mortgage Club
« Reply #1423 on: April 20, 2019, 05:51:11 PM »
Well looky here, something interesting on Yahoo Finance:

https://finance.yahoo.com/news/pete-planner-pay-off-mortgage-100006133.html

The author has an interesting way of phrasing the decision: The known or the unknown. Itís been the fork in the road since the beginning of time.

Perhaps its this fear of the unknown that keeps many taking what is generally the more lucrative path. I see this crop up in discussions all the time (e.g. "I know what my finances will look like if I pay off the mortgage, but I just don't know what things will look like if I invest instead"). I've never personally had a problem with that kind of uncertainty, relying on history and probability to bolster my decision. But it's a big obstacle for others.

The funny thing is, the "unknown" stock returns don't even have to beat your 4% mortgage rate.  Because you need to account for inflation.  So 4%-2% = 2%.  Your "unknown stock returns" only have to beat 2% in order to beat paying off the mortgage.  That's a pretty freaking low bar.

In order to beat 4%, you need to get better than 4% returns in your alternative investment. Inflation has practically nothing to do with it.

Historically stocks with dividends reinvested will return about 9%.  Then people say you must count for inflation and so they subtract 2 or 3 percent to get ďreal returnsĒ.  So if you do that for stock returns you need to do it for the mortgage interest too, so itís a consistent comparison. 

Or if you donít want to include inflation in any of the calculations then 9% return for stocks really crushes 4% for paying the mortgage.

True. Either subtract inflation for both or don't. It wasn't clear in your original statement that you were considering real returns, as many (most?) graphs and reasoning around here generally refer to nominal returns.

FIREstache

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Re: DONT Payoff your Mortgage Club
« Reply #1424 on: April 20, 2019, 10:05:32 PM »

I've paid off some home mortgages, it's been many years back, so I've owned my home for nearly two decades.  It was a great feeling of accomplishment at the time.  Since I don't have a mortgage payment, I'll be able to keep my taxable income low during FIRE to qualify for nice ACA subsidies if the ACA is still around next year.
Hmmm, how many years after you paid off the house did you continue to work?

15 since the last one, but the loan was pretty small to begin with because I put so much down.  The interest rate was a lot higher than it is today.
Sorry, my question wasn't specific enough. Are you FIRE? If so, for how long?
I'm not FIRE yet.  Hopefully, in one year if all goes well.  So at that point, my answer will be 16 years.

SwordGuy

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Re: DONT Payoff your Mortgage Club
« Reply #1425 on: April 21, 2019, 07:14:55 AM »
Well looky here, something interesting on Yahoo Finance:

https://finance.yahoo.com/news/pete-planner-pay-off-mortgage-100006133.html

The author has an interesting way of phrasing the decision: The known or the unknown. Itís been the fork in the road since the beginning of time.

Perhaps its this fear of the unknown that keeps many taking what is generally the more lucrative path. I see this crop up in discussions all the time (e.g. "I know what my finances will look like if I pay off the mortgage, but I just don't know what things will look like if I invest instead"). I've never personally had a problem with that kind of uncertainty, relying on history and probability to bolster my decision. But it's a big obstacle for others.

The funny thing is, the "unknown" stock returns don't even have to beat your 4% mortgage rate.  Because you need to account for inflation.  So 4%-2% = 2%.  Your "unknown stock returns" only have to beat 2% in order to beat paying off the mortgage.  That's a pretty freaking low bar.

In order to beat 4%, you need to get better than 4% returns in your alternative investment. Inflation has practically nothing to do with it.

Historically stocks with dividends reinvested will return about 9%.  Then people say you must count for inflation and so they subtract 2 or 3 percent to get ďreal returnsĒ.  So if you do that for stock returns you need to do it for the mortgage interest too, so itís a consistent comparison. 

Or if you donít want to include inflation in any of the calculations then 9% return for stocks really crushes 4% for paying the mortgage.

True. Either subtract inflation for both or don't. It wasn't clear in your original statement that you were considering real returns, as many (most?) graphs and reasoning around here generally refer to nominal returns.

Is that true in this case?   I'll admit that this one hurts my sleepy head.

If you are paying off your mortgage in the future with inflated dollars, you are getting an inflation benefit on the principal and the interest. 

But if you pay it off with today's dollars, you aren't.   It seems like I'm getting the benefit of inflation by paying it off later.   Correspondingly, deflation would be a bitch.



Boofinator

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Re: DONT Payoff your Mortgage Club
« Reply #1426 on: April 23, 2019, 08:02:15 AM »
-SNIP-

True. Either subtract inflation for both or don't. It wasn't clear in your original statement that you were considering real returns, as many (most?) graphs and reasoning around here generally refer to nominal returns.

Is that true in this case?   I'll admit that this one hurts my sleepy head.

If you are paying off your mortgage in the future with inflated dollars, you are getting an inflation benefit on the principal and the interest. 

But if you pay it off with today's dollars, you aren't.   It seems like I'm getting the benefit of inflation by paying it off later.   Correspondingly, deflation would be a bitch.

I find it's illustrative sometimes to use extreme examples to try to show a point. Let's assume you have a mortgage with a 15% interest rate, and a crystal ball showing that inflation is going to be 15% (nobody else has access to this crystal ball, so to them inflation is going to be a future mystery). In this case, does it make sense to not pay off the mortgage because of the gonzo inflation? Well, we know historically that stocks do not correlate well with inflation*; in other words, there's no formula where expected stock returns equal x % plus (y times inflation %). So your expected returns on your money, even given the shitty level of inflation, is either going to be the expected returns from equity or the 15% return from your mortgage (assuming you have enough liquid assets to where you aren't going to lose your house and your job at the same time). Granted, if I had this crystal ball I'd probably load up on TIPS. :)

*A study was linked to in one of these threads that shows equities might have a delayed correlation with inflation over a long period of time (decade). A decade is also the amount of time where sequence of returns risk is very real, so I think "waiting it out" would not be a great option.

SwordGuy

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Re: DONT Payoff your Mortgage Club
« Reply #1427 on: April 23, 2019, 08:11:02 AM »
-SNIP-

True. Either subtract inflation for both or don't. It wasn't clear in your original statement that you were considering real returns, as many (most?) graphs and reasoning around here generally refer to nominal returns.

Is that true in this case?   I'll admit that this one hurts my sleepy head.

If you are paying off your mortgage in the future with inflated dollars, you are getting an inflation benefit on the principal and the interest. 

But if you pay it off with today's dollars, you aren't.   It seems like I'm getting the benefit of inflation by paying it off later.   Correspondingly, deflation would be a bitch.

I find it's illustrative sometimes to use extreme examples to try to show a point. Let's assume you have a mortgage with a 15% interest rate, and a crystal ball showing that inflation is going to be 15% (nobody else has access to this crystal ball, so to them inflation is going to be a future mystery). In this case, does it make sense to not pay off the mortgage because of the gonzo inflation? Well, we know historically that stocks do not correlate well with inflation*; in other words, there's no formula where expected stock returns equal x % plus (y times inflation %). So your expected returns on your money, even given the shitty level of inflation, is either going to be the expected returns from equity or the 15% return from your mortgage (assuming you have enough liquid assets to where you aren't going to lose your house and your job at the same time). Granted, if I had this crystal ball I'd probably load up on TIPS. :)

*A study was linked to in one of these threads that shows equities might have a delayed correlation with inflation over a long period of time (decade). A decade is also the amount of time where sequence of returns risk is very real, so I think "waiting it out" would not be a great option.

But the interest on the mortgage is only on the principle balance and thus gets smaller every year.
The prices at 15% inflation year after year are compounding, so paying off the mortgage would be really, really cheap after a few years.

Isn't that right?

nereo

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Re: DONT Payoff your Mortgage Club
« Reply #1428 on: April 23, 2019, 08:48:52 AM »
-SNIP-

True. Either subtract inflation for both or don't. It wasn't clear in your original statement that you were considering real returns, as many (most?) graphs and reasoning around here generally refer to nominal returns.

Is that true in this case?   I'll admit that this one hurts my sleepy head.

If you are paying off your mortgage in the future with inflated dollars, you are getting an inflation benefit on the principal and the interest. 

But if you pay it off with today's dollars, you aren't.   It seems like I'm getting the benefit of inflation by paying it off later.   Correspondingly, deflation would be a bitch.

I find it's illustrative sometimes to use extreme examples to try to show a point. Let's assume you have a mortgage with a 15% interest rate, and a crystal ball showing that inflation is going to be 15% (nobody else has access to this crystal ball, so to them inflation is going to be a future mystery).

Ok, you've got me scratching my head with this example.
Here's what I see, adding some numbers to your hypothetical. 
Suppose you take out a $200k loan at 15% with a 30 year note in 2019.  At the same time inflation would be 15% per year. The PI portion will be $2,528/month, and with that obscenely high interest rate in the first few years you will pay off < 1% of the principle.
But in real (2019 dollars) terms it looks like this:
    Monthly PI payment (2019 dollars)
    • 2019 - (year 1)  $2,528
    • 2020 - (year 2)  $2,148
    • 2021 - (year 3)  $1,826
    • 2022 - (year 4)  $1,552
    • 2023 - (year 5)  $1,312
    • 2024 - (year 6)  $1,112
    • 2025 - (year 7)  $953
    • 2026 - (year 8)  $810
    • 2027 - (year 9)  $688
    • 2028 - (year 10) $585
    • ...          ...         ....
    • 2033 - (year 15) $258

    So... what are you trying to emphasize here? 
    From what I see, the monthly payment is cut in half in 5 years, and by year 15 I am paying essentially nothing in PI (~9% of the original).  Would I throw excess funds to get rid of this mortgage sooner?  heck no! And that is considering that even after 15 years of payments I would still have >$180k of the original $200k remaining (about 90% of the principle).
    Genuinely curious...

    CorpRaider

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    Re: DONT Payoff your Mortgage Club
    « Reply #1429 on: April 23, 2019, 09:19:43 AM »
    Yeah the inflation example is a boon to the mortgage debtor to my mind (I mean hyperinflation sucks for everyone but just confining the analysis to this one decision). 

    You also have the one-way call option on inflation with the gov't subsidized 30 year fixed rate loan.  If I obtain my fixed rate loan when inflation expectations are 2% (and nominal rates are ~3%) the bank can't move the rate up if short term rates go to 15% a couple of years later.  Alternatively, if we had deflation like in 2009 and rates crater, the mortgage debtor has the option to refinance (not totally without risk, but to me it is about the probabilities). 

    It does makes sense to compare apples to apples (either nominal or real expected future rates) for the analysis on the front end; 10% nominal historical returns on stocks versus 4% nominal or 8% versus 2%, as an example. 
    « Last Edit: April 23, 2019, 09:38:36 AM by CorpRaider »

    Boofinator

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    Re: DONT Payoff your Mortgage Club
    « Reply #1430 on: April 23, 2019, 09:38:05 AM »
    When we're investing, we should be looking at our investment alternatives. I agree that the mortgage value and payment would both diminish in value fairly quickly at 15% inflation. But in this case, if we received historical stock returns (let's use 10% for easy calculations), the purchasing power of that equity would be diminishing even faster.

    Another way to look at it, we're paying $30,000 per year in interest at the beginning of the mortgage (15%). If we had the $200,000 to pay it off immediately, we could either get an immediate return of $30,000 per year on those funds, or we could invest it in equities and expect to earn $20,000 in the first year. In the second year, we'd have that $30,000 per year (plus principal payments) invested into the stock market earning 3,000 per year plus the $30k from interest savings (for $33k total), whereas the alternative all equities investment would earn $22k. I imagine you can see where this is going. Here's the table showing that if you immediately paid off the mortgage, you'll eventually end up $1.75M richer than investing instead (granted, $1.75M would be equivalent to $20,000 if 15% inflation were to continue uninterrupted for 30 years).

     POTM     DPOYM
     $-                       $200,000.00
     $2,528.89     $201,666.67
     $5,078.85     $203,347.22
     $7,650.07     $205,041.78
     $10,242.71     $206,750.46
     $12,856.95     $208,473.38
     $15,492.99     $210,210.66
     $18,150.98     $211,962.42
     $20,831.13     $213,728.77
     $23,533.61     $215,509.84
     $26,258.62     $217,305.76
     $29,006.33     $219,116.64
    (......................................)
     $5,617,432.48     $3,902,172.68
     $5,666,773.31     $3,934,690.78
     $5,716,525.31     $3,967,479.87

    At this point, the home is paid off and you're clearly ahead by paying off the mortgage. In this scenario, you would break even in your equities account in about 11 years (of course you're ahead on day two due to the equity in your home).

    All of this is to show that inflation doesn't matter when investing in two different assets with little correlation to inflation. Since inflation affects both equally, it should essentially drop out of the equation and you should consider risks and expected returns in deciding where to invest.

    ETA: Here's the full annual table:

    Year    POTM             DPOYM
    0    $-                       $200,000.00
    1    $31,776.94     $220,942.61
    2    $66,881.34     $244,078.19
    3    $105,661.63     $269,636.37
    4    $148,502.72     $297,870.82
    5    $195,829.84     $329,061.79
    6    $248,112.72     $363,518.86
    7    $305,870.30     $401,584.03
    8    $369,675.86     $443,635.13
    9    $440,162.69     $490,089.52
    10    $518,030.42     $541,408.30
    11    $604,051.91     $598,100.82
    12    $699,080.98     $660,729.79
    13    $804,060.83     $729,916.84
    14    $920,033.45     $806,348.67
    15    $1,048,149.91     $890,783.91
    16    $1,189,681.85     $984,060.63
    17    $1,346,034.02     $1,087,104.63
    18    $1,518,758.31     $1,200,938.69
    19    $1,709,569.09     $1,326,692.67
    20    $1,920,360.26     $1,465,614.73
    21    $2,153,224.01     $1,619,083.74
    22    $2,410,471.64     $1,788,622.97
    23    $2,694,656.46     $1,975,915.16
    24    $3,008,599.14     $2,182,819.30
    25    $3,355,415.72     $2,411,389.00
    26    $3,738,548.54     $2,663,892.94
    27    $4,161,800.36     $2,942,837.35
    28    $4,629,372.18     $3,250,990.87
    29    $5,145,904.88     $3,591,412.10
    30    $5,716,525.31     $3,967,479.87
    « Last Edit: April 23, 2019, 09:46:36 AM by Boofinator »

    Mississippi Mudstache

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    Re: DONT Payoff your Mortgage Club
    « Reply #1431 on: April 23, 2019, 09:41:14 AM »
    I finally get to participate in this thread. We've been paying down our mortgage pretty aggressively for two years, because we bought with a 10% down payment and I was eager to ditch the PMI. As we got close to the 20% threshold, I phoned the bank to ask about getting PMI removed and they informed me that my loan had mandatory PMI for 11 years, regardless of my equity (which is something that was never clarified for me during the mortgage-shopping process).

    So instead, I took advantage of the current low interest rates and re-financed. I was able to drop the interest rate modestly (4.25% to 4.125%), but better yet I was able to nix the PMI for the next 9 years at a savings of $2000/year. And since I recast the mortgage for 30 years, I now have a longer term for which to enjoy the benefits of massive inflation hedge :)

    FIreDrill

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    Re: DONT Payoff your Mortgage Club
    « Reply #1432 on: April 23, 2019, 09:47:18 AM »
    I finally get to participate in this thread. We've been paying down our mortgage pretty aggressively for two years, because we bought with a 10% down payment and I was eager to ditch the PMI. As we got close to the 20% threshold, I phoned the bank to ask about getting PMI removed and they informed me that my loan had mandatory PMI for 11 years, regardless of my equity (which is something that was never clarified for me during the mortgage-shopping process).

    So instead, I took advantage of the current low interest rates and re-financed. I was able to drop the interest rate modestly (4.25% to 4.125%), but better yet I was able to nix the PMI for the next 9 years at a savings of $2000/year. And since I recast the mortgage for 30 years, I now have a longer term for which to enjoy the benefits of massive inflation hedge :)
    Congratulations! Nice move and welcome to the club :)

    Sent from my moto g(6) using Tapatalk


    CorpRaider

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    Re: DONT Payoff your Mortgage Club
    « Reply #1433 on: April 23, 2019, 09:51:18 AM »
    If 15% inflation materialized (it has to be expected to be priced in to the 30 year mortgage rates), equity securities would almost certainly have to re-price to discount inflation expectations and to provide a reasonable expectation of a positive real equity risk premium.  Like in the late 70's and early 80's; so you would probably be looking at 15% mortgage versus stocks with earnings yields of like 20%.
     
    But yeah if you make the assumption of mortgage rates at 15% and you set the stock returns for the same period at the average over the prior 100 years (~10%) you would come out ahead.

    It's not really any different than assuming equity returns over the next 30 years are only 2% nominal so it is better to pay off my 4% mortgage with additional funds.  Either way you are making a bet based on probabilities. 

    But if rates are low by historical standards, to me the one-way option on rates and future inflation makes the decision easy.  Heads I win...tails, I refinance.

    « Last Edit: April 23, 2019, 10:02:22 AM by CorpRaider »

    Boofinator

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    Re: DONT Payoff your Mortgage Club
    « Reply #1434 on: April 23, 2019, 12:30:56 PM »
    I think that you are assuming a much higher than historical inflation (and a mortgage rate that reflects a pretty accurate appraisal of future inflation) with only average expected equity returns.  If 15% inflation materialized, equity securities would almost certainly have to re-price to discount inflation expectations and to provide a reasonable expectation of a positive real equity risk premium.  Like in the late 70's and early 80's; so you would probably be looking at 15% mortgage versus stocks with earnings yields of like 20%.
     
    But yeah if make the assumption of mortgage at 15% and you set the stock returns for the same period at the average over the prior 100 years you would come out ahead.

    It's not really any different than assuming equity returns over the next 30 years are only 2% nominal so it is better to pay off my 4% mortgage with additional funds.  Either way you are making a bet based on probabilities. 

    But if rates are low by historical standards to me the one-way option on rates and inflation makes the decision easy.

    I agree with a lot of what you're saying. I am a proud member of the DPOYM club (under most circumstances). However, historical data shows that equities don't re-price immediately but have a very delayed reaction (and actually tend to do very poorly in nominal terms during the immediate inflationary years). Let's take actual numbers from the 70's and compare it to our hypothetical $200k mortgage at 15% interest. Here's what we get if we start at the beginning of the inflationary period of the 1970's (around 1966, though it's debatable).
    Spoiler: show
    8 years breakeven in equities (not even considering principal).


    Year           Inflation   Return    POTM             DPOYM
    1/1/1966   -              -             $0                  $200,000.00
    1966    3.50%   -9.97%    $28,833.75     $180,058.09
    1967    3.00%   23.80%    $69,655.43     $222,917.26
    1968    4.70%   10.81%    $109,176.22     $247,025.45
    1969    6.20%   -8.24%    $129,274.79     $226,667.17
    1970    5.60%   3.56%    $164,765.48     $234,739.12
    1971    3.30%   14.22%    $220,701.53     $268,121.72
    1972    3.40%   18.76%    $295,287.40     $318,408.92
    1973    8.70%   -14.31%    $281,213.21     $272,850.82
    1974    12.30%   -25.90%    $234,790.48     $202,177.59
    1975    6.90%   37.00%    $357,611.62     $276,973.46
    1976    4.90%   23.83%    $476,796.68     $342,979.00
    1977    6.70%   -6.98%    $472,805.31     $319,040.08
    1978    9.00%   6.51%    $534,915.90     $339,807.31
    1979    13.30%   18.52%    $667,136.30     $402,737.89
    1980    12.50%   31.74%    $914,015.62     $530,547.75
    1981    8.90%   -4.70%    $900,668.21     $505,599.32
    1982    3.80%   20.42%    $1,118,021.08     $608,837.93
    1983    3.80%   22.34%    $1,401,491.17     $744,835.00
    1984    3.90%   6.15%    $1,518,908.06     $790,613.62
    1985    3.80%   31.24%    $2,028,427.36     $1,037,562.97
    1986    1.10%   18.49%    $2,436,729.38     $1,229,455.87
    1987    4.40%   5.81%    $2,609,598.34     $1,300,920.71
    1988    4.40%   16.54%    $3,074,008.58     $1,516,056.48
    1989    4.60%   31.48%    $4,076,680.94     $1,993,238.04
    1990    6.10%   -3.06%    $3,981,634.72     $1,932,156.23
    1991    3.10%   30.23%    $5,220,410.05     $2,516,340.63
    1992    2.90%   7.49%    $5,643,097.11     $2,704,908.35
    1993    2.70%   9.97%    $6,237,406.52     $2,974,507.96
    1994    2.70%   1.33%    $6,350,657.44     $3,013,947.58
    1995    2.50%   37.20%    $8,748,787.55     $4,134,991.37

    (Apologies for the crappy table formatting.)
    « Last Edit: April 23, 2019, 12:32:30 PM by Boofinator »

    SwordGuy

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    Re: DONT Payoff your Mortgage Club
    « Reply #1435 on: April 23, 2019, 12:33:03 PM »
    I finally get to participate in this thread. We've been paying down our mortgage pretty aggressively for two years, because we bought with a 10% down payment and I was eager to ditch the PMI. As we got close to the 20% threshold, I phoned the bank to ask about getting PMI removed and they informed me that my loan had mandatory PMI for 11 years, regardless of my equity (which is something that was never clarified for me during the mortgage-shopping process which I didn't know because l didn't read the document before I signed it).
    Fixed that for you.

    The realtors and lawyers comment that my wife and I are pretty much the only people they know who actually read those documents before we sign them.


    Boofinator

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    Re: DONT Payoff your Mortgage Club
    « Reply #1436 on: April 23, 2019, 12:41:09 PM »
    Looks like in the 30-year period discussed (1966-1995), a 6% mortgage would have been about the breakeven point.

    Year     Inflation   Return    POTM     DPOYM
    1/1/1966   -       -               $0                $200,000.00
    1966    3.50%   -9.97%    $13,671.83     $180,058.09
    1967    3.00%   23.80%    $33,027.86     $222,917.26
    1968    4.70%   10.81%    $51,767.06     $247,025.45
    1969    6.20%   -8.24%    $61,297.01     $226,667.17
    1970    5.60%   3.56%    $78,125.30     $234,739.12
    1971    3.30%   14.22%    $104,647.97     $268,121.72
    1972    3.40%   18.76%    $140,013.65     $318,408.92
    1973    8.70%   -14.31%    $133,340.22     $272,850.82
    1974    12.30%   -25.90%    $111,328.39     $202,177.59
    1975    6.90%   37.00%    $169,565.34     $276,973.46
    1976     4.90%   23.83%    $226,078.20     $342,979.00
    1977    6.70%   -6.98%    $224,185.65     $319,040.08
    1978    9.00%   6.51%    $253,636.04     $339,807.31
    1979    13.30%   18.52%    $316,329.75     $402,737.89
    1980    12.50%   31.74%    $433,390.20     $530,547.75
    1981    8.90%   -4.70%    $427,061.38     $505,599.32
    1982    3.80%   20.42%    $530,121.55     $608,837.93
    1983    3.80%   22.34%    $664,531.89     $744,835.00
    1984    3.90%   6.15%    $720,206.36     $790,613.62
    1985    3.80%   31.24%    $961,800.33     $1,037,562.97
    1986    1.10%   18.49%    $1,155,401.07     $1,229,455.87
    1987    4.40%   5.81%    $1,237,368.72     $1,300,920.71
    1988    4.40%   16.54%    $1,457,573.75     $1,516,056.48
    1989    4.60%   31.48%    $1,933,001.48     $1,993,238.04
    1990    6.10%   -3.06%    $1,887,934.31     $1,932,156.23
    1991    3.10%   30.23%    $2,475,312.76     $2,516,340.63
    1992    2.90%   7.49%    $2,675,734.31     $2,704,908.35
    1993    2.70%   9.97%    $2,957,532.42     $2,974,507.96
    1994    2.70%   1.33%    $3,011,231.54     $3,013,947.58
    1995    2.50%   37.20%    $4,148,330.35     $4,134,991.37

    CorpRaider

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    Re: DONT Payoff your Mortgage Club
    « Reply #1437 on: April 23, 2019, 01:39:50 PM »
    Yeah, I mean you can find cuts where long-term treasury bonds (which is really the same thing as prepaying a gov't guaranteed fixed 30 year mortgage give or take a ~100 bps spread) outperformed stocks.  Seems like one should probably be looking at CAGRs for rolling 30 year periods and getting a win loss rate, but I think that data is already in "stocks for the long run" and "triumph of the optimists." 

    It was a lot tougher decision in the early 80's with the potential 18% upside/prepayment payoff; but of course the reason mortgage rates were so high and stocks were so cheap was that stagflation was projected forward to infinity.  [Just like no-flation is right now.] 
    « Last Edit: April 23, 2019, 01:44:19 PM by CorpRaider »

    Boofinator

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    Re: DONT Payoff your Mortgage Club
    « Reply #1438 on: April 23, 2019, 02:56:23 PM »
    Looks like a 15% mortgage would have been about the right breakeven point in 1982, a period that included fairly mild inflation.

    Year     Inflation   Return    POTM           DPOYM
    1/1/1982   -          -           $-                $200,000.00
    1982    3.80%   20.42%    $33,444.93     $240,838.11
    1983    3.80%   22.34%    $74,651.55     $294,634.49
    1984    3.90%   6.15%    $110,519.00     $312,743.15
    1985    3.80%   31.24%    $180,125.87     $410,428.94
    1986    1.10%   18.49%    $246,592.31     $486,336.04
    1987    4.40%   5.81%    $292,154.70     $514,605.40
    1988    4.40%   16.54%    $373,324.81     $599,706.69
    1989    4.60%   31.48%    $525,952.00     $788,465.47
    1990    6.10%   -3.06%    $539,716.15     $764,303.33
    1991    3.10%   30.23%    $737,832.80     $995,389.24
    1992    2.90%   7.49%    $824,607.71     $1,069,981.00
    1993    2.70%   9.97%    $938,655.80     $1,176,626.56
    1994    2.70%   1.33%    $981,649.50     $1,192,227.70
    1995    2.50%   37.20%    $1,382,766.42     $1,635,679.16
    1996    3.30%   22.68%    $1,730,179.34     $2,006,666.99
    1997    1.70%   33.10%    $2,338,301.52     $2,670,947.07
    1998    1.60%   28.34%    $3,035,574.81     $3,427,838.81
    1999    2.70%   20.89%    $3,703,080.95     $4,143,754.97
    2000    3.40%   -9.03%    $3,397,601.63     $3,769,498.53
    2001    1.60%   -11.85%    $3,023,542.70     $3,322,822.03
    2002    2.40%   -21.97%    $2,386,403.56     $2,592,929.35
    2003    1.90%   28.36%    $3,097,736.58     $3,328,175.21
    2004    3.30%   10.74%    $3,462,496.20     $3,685,713.62
    2005    3.40%   4.83%    $3,660,970.03     $3,863,898.61
    2006    2.50%   15.61%    $4,265,256.72     $4,467,152.02
    2007    4.10%   5.48%    $4,530,373.66     $4,712,163.49
    2008    0.10%   -36.55%    $2,899,216.36     $2,989,757.27
    2009    2.70%   25.94%    $3,685,416.82     $3,765,157.81
    2010    1.50%   14.82%    $4,264,231.39     $4,323,195.33
    2011    3.00%   2.10%    $4,384,376.01     $4,413,912.17

    tralfamadorian

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    Re: DONT Payoff your Mortgage Club
    « Reply #1439 on: April 23, 2019, 03:46:28 PM »
    So instead, I took advantage of the current low interest rates and re-financed. I was able to drop the interest rate modestly (4.25% to 4.125%), but better yet I was able to nix the PMI for the next 9 years at a savings of $2000/year. And since I recast the mortgage for 30 years, I now have a longer term for which to enjoy the benefits of massive inflation hedge :)

    Woohoo!

    nereo

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    Re: DONT Payoff your Mortgage Club
    « Reply #1440 on: April 23, 2019, 05:08:18 PM »
    When we're investing, we should be looking at our investment alternatives. I agree that the mortgage value and payment would both diminish in value fairly quickly at 15% inflation. But in this case, if we received historical stock returns (let's use 10% for easy calculations), the purchasing power of that equity would be diminishing even faster.

    [snip]


    I have no idea what relevance such an example has on this discussion, or to the real world.  Basically what you are saying is that if real returns are negative for 30 years and less than the mortgage rate a person should pay off their mortgage.  Ok, sure.  But what kind of assumptions are those? A thirty year recession? Banks lending at rates which perpetually lose money?
    I  don't see what point you are trying to make here.

    Boofinator

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    Re: DONT Payoff your Mortgage Club
    « Reply #1441 on: April 23, 2019, 06:16:04 PM »
    When we're investing, we should be looking at our investment alternatives. I agree that the mortgage value and payment would both diminish in value fairly quickly at 15% inflation. But in this case, if we received historical stock returns (let's use 10% for easy calculations), the purchasing power of that equity would be diminishing even faster.

    [snip]


    I have no idea what relevance such an example has on this discussion, or to the real world.  Basically what you are saying is that if real returns are negative for 30 years and less than the mortgage rate a person should pay off their mortgage.  Ok, sure.  But what kind of assumptions are those? A thirty year recession? Banks lending at rates which perpetually lose money?
    I  don't see what point you are trying to make here.

    Did you read the rest of my posts? The point I was making today is that future inflation is irrelevant to the question of whether or not to pay off the mortgage. We considered high inflation scenarios and low inflation scenarios, both made up and actual historical examples. In fact, in the historical examples considered, high inflation encouraged mortgage payment, whereas low inflation encouraged investment in equities (though I hesitate to consider inflation as the biggest causal factor). I do give credit to CorpRaider for making the point about keeping higher interest mortgages as an interest rate hedge, but this is still irrelevant to inflation.

    nereo

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    Re: DONT Payoff your Mortgage Club
    « Reply #1442 on: April 23, 2019, 06:32:00 PM »
    I'm not asking about your other posts here, I'm asking about the hypothetical scenario you gave, which you prefaced by saying "I find it's illustrative sometimes to use extreme examples to try to show a point."
    I don't understand what point you are trying to make by assuming a 30 year recession and market returns that are always less than your mortgage.  Sure, if A is always > B, then invest in A, particularly if you know the outcomes beforehand, as in the scenario. 
    But...

    CorpRaider

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    Re: DONT Payoff your Mortgage Club
    « Reply #1443 on: April 24, 2019, 06:02:57 AM »
    I think Nereo is right.  Seems like the hypo is basically stating a tautology (or something). 

    RE inflation:  I think inflation comes into play when it is unexpected/not accurately priced into the mortgage rate at the time the fixed rate is established. 
    « Last Edit: April 24, 2019, 12:33:05 PM by CorpRaider »

    SwordGuy

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    Re: DONT Payoff your Mortgage Club
    « Reply #1444 on: April 24, 2019, 07:07:10 AM »
    I've always thought that a fixed rate mortgage is an inflation hedge.  As long as income will generally rise with inflation, the mortgage becomes cheaper to pay off with the inflated currency.   A high inflation year, provided your income caught up, would only make the following year's payments even cheaper.

    Now, there may be a lag of a year before the pay or the rental income increases and that's not good.   Someone living paycheck to paycheck would be hurting big time with any inflation, much less high inflation.   That's why we have emergency funds and FU money.   It acts as a built-in buffer for this kind of problem.


    Boofinator

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    Re: DONT Payoff your Mortgage Club
    « Reply #1445 on: April 24, 2019, 09:41:09 AM »
    The purpose of the hypothetical was to show that there is no mechanism by which high inflation might affect the decision of whether to pay off the mortgage or invest in equities (as seemed to be indicated by some posts). This seems to trip up some people because they think future mortgage payments will be cheaper in real terms (which is true), but the alternative investment in equities will be cheapened by a similar percentage, making inflation a wash. If I misread those posts and everybody understands that inflation is irrelevant to the question of whether to invest or pay off the mortgage, I apologize.

    High inflation would affect the decision of whether to buy or rent, but that is a different question.

    TexasRunner

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    Re: DONT Payoff your Mortgage Club
    « Reply #1446 on: April 24, 2019, 11:43:28 AM »
    The purpose of the hypothetical was to show that there is no mechanism by which high inflation might affect the decision of whether to pay off the mortgage or invest in equities (as seemed to be indicated by some posts). This seems to trip up some people because they think future mortgage payments will be cheaper in real terms (which is true), but the alternative investment in equities will be cheapened by a similar percentage, making inflation a wash. If I misread those posts and everybody understands that inflation is irrelevant to the question of whether to invest or pay off the mortgage, I apologize.

    High inflation would affect the decision of whether to buy or rent, but that is a different question.

    Inflation is a wash, yes.  That is the whole point.  People in the POYMC state that you need to reduce investment earnings by inflation but then turn around and DON'T reduce the mortgage rate by that same inflation percentile.

    In other words, they use the inflation adjusted market returns but then don't inflation-adjust the mortgage.  If you apply inflation to one, you have to apply it to the other, hence the reason its not really part of the calculation at all because they cancel each other out.

    S&P 500 with dividends reinvested and without inflation since 1910 is 9.758%.
    S&P 500 with dividends reinvested and with inflation since 1910 is 6.570%...  Whice some then use to adjust the 'when to pay it off' formula.
    (Source:  https://dqydj.com/sp-500-return-calculator/)

    3.5% margin (typically) is a pretty wide gap that changes the math by millions of dollars.  Thats why we are so adamant that people realize the math and do it accurately.

    Telecaster

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    Re: DONT Payoff your Mortgage Club
    « Reply #1447 on: April 24, 2019, 04:21:39 PM »
    I've always thought that a fixed rate mortgage is an inflation hedge.  As long as income will generally rise with inflation, the mortgage becomes cheaper to pay off with the inflated currency.   A high inflation year, provided your income caught up, would only make the following year's payments even cheaper.

    That's the way I view it as well.  The dollar amount of the payment remains the same.   So why use fully valued dollars to save tiny, inflated dollars in the future?   Your wages are increasing with inflation (hopefully), so the payment is effectively becoming smaller and smaller on its own.   Even with modest amounts of inflation that monster $1500 mortgage today will seem pretty darn tame in 20 years.   

    Works the same way in the withdrawal phase.  The WR increases with inflation, but the mortgage payment doesn't.  FIRECalc simulations confirm that holding a low interest, long term mortgage increases portfolio survivability.  The reason is that inflation is portfolio killer.   1966 was bad year due to following years of stagnant stock values and high inflation.  To survive periods like that you either need a higher initial portfolio value, and/or the ability to lower your WR.   Holding a low interest, long term mortgage in inflationary times does just that. 

    Usual caveats which need to be repeated every page or so:  Of course, it is possible to come up with a scenario where paying off a mortgage makes sense and every has different circumstances, financial situations, etc. etc. etc.  And in this discussion we're talking long term, low interest mortgages, blah, blah, blah.   

    Boofinator

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    Re: DONT Payoff your Mortgage Club
    « Reply #1448 on: April 25, 2019, 01:29:13 PM »
    I've always thought that a fixed rate mortgage is an inflation hedge.  As long as income will generally rise with inflation, the mortgage becomes cheaper to pay off with the inflated currency.   A high inflation year, provided your income caught up, would only make the following year's payments even cheaper.

    That's the way I view it as well.  The dollar amount of the payment remains the same.   So why use fully valued dollars to save tiny, inflated dollars in the future?   Your wages are increasing with inflation (hopefully), so the payment is effectively becoming smaller and smaller on its own.   Even with modest amounts of inflation that monster $1500 mortgage today will seem pretty darn tame in 20 years.   

    Works the same way in the withdrawal phase.  The WR increases with inflation, but the mortgage payment doesn't.  FIRECalc simulations confirm that holding a low interest, long term mortgage increases portfolio survivability.  The reason is that inflation is portfolio killer.   1966 was bad year due to following years of stagnant stock values and high inflation.  To survive periods like that you either need a higher initial portfolio value, and/or the ability to lower your WR.   Holding a low interest, long term mortgage in inflationary times does just that. 

    Usual caveats which need to be repeated every page or so:  Of course, it is possible to come up with a scenario where paying off a mortgage makes sense and every has different circumstances, financial situations, etc. etc. etc.  And in this discussion we're talking long term, low interest mortgages, blah, blah, blah.

    Regarding the bolded part: I think you misread a lot of what I posted. 1966 was probably one of the few years where it made sense (in retrospect) to pay off the entirety of your mortgage loan even at 30 years duration (though I'm not positive on mortgage interest rates (I can't locate great data going back that far), they seem by correlation to 10-year treasuries to be above the calculated breakeven point of 6%). Inflation doesn't matter, because stocks do not correlate well with inflation (in fact there's been a negative correlation with really high interest rates, increasing sequence of return risks).

    Let's put it another way: you discuss the benefit of the mortgage payment staying constant while other prices rise with inflation, thereby increasing your odds to success. What you discount is that by keeping the mortgage, you usually are increasing your initial withdrawal rate, thereby negating this benefit and increasing the sequence of returns risk (because your highest withdrawals are at the beginning of retirement, at the same time sequence of returns is most potent).

    ETA: This brings us back full circle to the other hypothetical mortgage mentioned earlier in this thread (the one amortized to rise with inflation): https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/msg2242045/#msg2242045.
    « Last Edit: April 25, 2019, 01:40:40 PM by Boofinator »

    Telecaster

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    Re: DONT Payoff your Mortgage Club
    « Reply #1449 on: April 25, 2019, 03:34:34 PM »
    Regarding the bolded part: I think you misread a lot of what I posted. 1966 was probably one of the few years where it made sense (in retrospect) to pay off the entirety of your mortgage loan even at 30 years duration (though I'm not positive on mortgage interest rates (I can't locate great data going back that far), they seem by correlation to 10-year treasuries to be above the calculated breakeven point of 6%). Inflation doesn't matter, because stocks do not correlate well with inflation (in fact there's been a negative correlation with really high interest rates, increasing sequence of return risks).

    I think you are misunderstanding what I wrote:

    Quote from: Telecaster
    And in this discussion we're talking long term, low interest mortgages, blah, blah, blah.

    About the last 50 times I wrote out that caveat I'd say "today's low interest rates" but I realized that makes the advice dated.   So let me fix that.  I mean about 4%-ish on a 30-year fixed.  I'm not talking about the possibility that DPOTM works in all cases and all scenarios.   BTW, I didn't see anyone voice any basic disagreement to your premise, including me.

    Anyway in the 1966 scenario, as I stated, I was talking about withdrawals, not accumulation like you used in your examples.  I've fiddled with this extensively in cFIRESIM and what you find is that because you start with a higher portfolio value, and the mortgage payment is fixed  (sometimes people forget to check the "fixed" box), the portfolio value success improves.    That's just what happens.   When I was looking at it, I was assuming I was partway into a 30-year fixed, and the decision would be to payoff the mortgage all at once with some long-ish period remaining on the mortgage  vs.  hold the mortgage in retirement.   That's a pretty real world decision for a lot of people. 

    There is a guy named Mike Golio who wrote a book on the topic of retirement.  He's been pretty active on the Internet over the years, and he came with an elegant way to frame this issue (paraphrasing and going from memory).  I mention this because he came up with this illustration:     If someone offered a 30-year loan at zero percent interest, would you take it?   The answer is no brainer! 

    How about 1%  Back up the truck!
    2% Sure!
    3% 
    .
    .
    7%  This one is starting to get iffy.  I'd have to have a clear for the money.
    .
    .
    15%  I'd have to be desperate for the money
    .
    .
    25%  No way!   I'd rather live in my car. 

    We're pretty close to no brainer!/back up the truck at the moment.  If we were at "Desperate!"  then mortgage payoff is a different conversation.  I've never seen anyone dispute that notion. 

    Usual caveats which need to be repeated every post:  Of course, it is possible to come up with a scenario where paying off a mortgage makes sense and every has different circumstances, financial situations, etc. etc. etc.  And in this discussion we're talking long term, 4%-ish  mortgages, blah, blah, blah.