Author Topic: DONT Payoff your Mortgage Club  (Read 37886 times)

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #150 on: March 29, 2017, 07:28:46 PM »
Infromsea go debate this in my other thread you can literally argue the emotion fact on anything we face punch people for.

This is for people to see the light or to join in the fun of not paying it down. And to help people FiRE early

Damn daniel!

Rough day?

If you look back on page 4 you'll see I'm already in.

I was just trying to engage in discussion.

My apologies if I took the post off track.

Cheers,

Tim

Just want to keep this one on topic. And let that debate on why emotions are better than math live over there. I really liked frozenbits thought on it all. There is a dumpster fire starting over there bc people refuse to believe one can get the same satisfaction watching a sexy girl in a bikini mow their lawn for 30 bucks as one can get from paying down their mortgage.
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FrozenBits

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Re: DONT Payoff your Mortgage Club
« Reply #151 on: March 29, 2017, 08:06:34 PM »
Well now that we are done with that debacle...

My investments are nearing 240k now :)

Up nearly 37k YTD.  Not too bad for Q1 2017! Excited to hit 250k and we are on track for 300k by years end.

Time to sell some stuff or find some side gigs to throw more cash into investments!

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #152 on: March 29, 2017, 08:27:35 PM »
Emotions are strong, and they are valid. Motivation is a feeling. If someone is more motivated to put money towards their house than they are motivated to invest it, then they will likely earn more money by paying down their house. Obviously that case study is less likely in this crowd.

True, but what I find funny is much of what MMM teaches is directly involved with overcoming emotions in order to build a better life for yourself.  Like learning to overcome emotions that make you spend money on crap you don't need.  The whole philosophy of MMM is based around efficiently deploying your little green army so it grows as fast as possible.

It seems like a lot of the MMM community will bash people for making many decisions based on emotions, but as soon as it comes to pre-paying mortgages, well then emotions are totally valid.  And this decision can have a 200k swing in our 30 year time frame, kind of hypocritical IMO.

What they should really be doing is focusing on is overcoming or re-wiring their emotions to the rewards of what the numbers come out to over the long term.  That's what I did, and now investing motivates me more than anything else.  It wasn't always like that though....
This is pure gold. Here's a big ol' mmmmmwah! for you, FB. Another one who gets it. Oh, boyoboyoboy!
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moonpalace

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Re: DONT Payoff your Mortgage Club
« Reply #153 on: March 30, 2017, 06:58:06 AM »
One thing to keep in mind is that if your PMI payment isn't reducing linearly with as you approach 80% LTV (i.e. such that it would be ~$0/month at 80% LTV) then the equation for whether it's worth paying down faster is constantly changing (in favor of trying to get rid of PMI). You may want to reevaluate in a year.

To help understand this, imagine that your PMI isn't being reduced at all as you pay down the mortgage balance. Imagine you're down to $250k and still paying $91/month in PMI. In that scenario the additional $5k to get rid of PMI would save you an effective ~22% interest rate.

Yes! Thanks for this. Will calendar this to re-evaluate annually.

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #154 on: March 30, 2017, 07:39:47 AM »
Emotions are strong, and they are valid. Motivation is a feeling. If someone is more motivated to put money towards their house than they are motivated to invest it, then they will likely earn more money by paying down their house. Obviously that case study is less likely in this crowd.

True, but what I find funny is much of what MMM teaches is directly involved with overcoming emotions in order to build a better life for yourself.  Like learning to overcome emotions that make you spend money on crap you don't need.  The whole philosophy of MMM is based around efficiently deploying your little green army so it grows as fast as possible.

It seems like a lot of the MMM community will bash people for making many decisions based on emotions, but as soon as it comes to pre-paying mortgages, well then emotions are totally valid.  And this decision can have a 200k swing in our 30 year time frame, kind of hypocritical IMO.

What they should really be doing is focusing on is overcoming or re-wiring their emotions to the rewards of what the numbers come out to over the long term.  That's what I did, and now investing motivates me more than anything else.  It wasn't always like that though....
This is pure gold. Here's a big ol' mmmmmwah! for you, FB. Another one who gets it. Oh, boyoboyoboy!

Dicey i started a whole thread for this specifically.  Enjoy the dumpster fire
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Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #155 on: March 30, 2017, 10:22:48 AM »
I'm on that one, too, b42!

The only reason I hang around here post-FIRE is the possibility of making other people's journey easier. That's why I  sing every verse of the "Don't Kill The Cheap, Affordable Mortgage Before You Stuff Full Every Other Possible Retirement Saving Option" Song at every opportunity. It sure ain't catchy, but fuck, is it ever true.

Naturally, I have perfect pitch and never miss a note, yuk, yuk.
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dandarc

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Re: DONT Payoff your Mortgage Club
« Reply #156 on: March 30, 2017, 10:34:38 AM »
So, lets say you've all-but paid off the house.  And you're starting to think "maybe we shouldn't have done that."  Obvious play is to cash-out refinance to a 30 year loan and invest the lump sum right?

Question - what to say to a risk-averse spouse to convince them this is a good idea.  Particularly with said spouse about to leave job to go back to school for a career change.

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #157 on: March 30, 2017, 11:39:07 AM »
So, lets say you've all-but paid off the house.  And you're starting to think "maybe we shouldn't have done that."  Obvious play is to cash-out refinance to a 30 year loan and invest the lump sum right?

Question - what to say to a risk-averse spouse to convince them this is a good idea.  Particularly with said spouse about to leave job to go back to school for a career change.

1. do you have the cash flow to afford the mortgage payment in the scenario presented
2. show the math difference. our 400k house if we invested 320k would be worth X in 10 years vs just sitting here doing nothing for us.


if you lay down your numbers i'll run them thru moneychimp really quick.
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tyort1

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Re: DONT Payoff your Mortgage Club
« Reply #158 on: March 30, 2017, 11:54:09 AM »
I dunno, that would be too much like leveraging to me.  If I had a chance to kill my mortgage in the short term, I would take it.  But then again, I have job instability and cutting out a massive monthly payment would be pretty awesome.  Since I can't do that, I dump everything into 401k, Roth, Vanguard taxable (in that order).

I do have to say that our investments ($300k) are getting close to overtaking the total left on the mortgage ($350k).  That's pretty cool!
Frugalite in training.

dandarc

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Re: DONT Payoff your Mortgage Club
« Reply #159 on: March 30, 2017, 12:02:20 PM »
House was bought at $125K.  Zillow says $160K today, although I think that's probably high.  Balance is $4,400.  I'm thinking the loan would be in the $100 to $120K range, max.

Cash flow shouldn't be an issue, as I'll still be working, and we have lots - in excess of $400K - of other assets that could be tapped if necessary.  Not quite to "Home is 5% of networth" like the poster in the other thread, but getting there.

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #160 on: March 30, 2017, 12:15:07 PM »
at the end of 30 years you will have 200k more to your name with 7% returns on a 120k lump sum invested now at 4.25% interest on the mortgage side.  913k vs 715k.  assuming you invest the 590 a month mortgage payment in lieu of refi'ing. 
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Cwadda

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Re: DONT Payoff your Mortgage Club
« Reply #161 on: March 30, 2017, 01:02:40 PM »
Need help with doing the math...

Purchase price: $360k, 3.5% down
Mortgage remaining: $347,400
Interest rate: 4% @ 30 year fixed
PMI: 0.85 ($246/month)

PMI is for the life of the loan (FHA) and does not go away on its own. A full refinance into a new loan is needed.

Anyone have an analysis? Thanks!

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #162 on: March 30, 2017, 01:19:13 PM »
I understand the appeal of cashing out in order to invest. But more loan does equal more risk.

I feel like the ideal loan would be 60% of the value of your house (interest only). The bank is happy because you're never under water, and you're happy because that's a lot of extra green employees working for you at the salt mine of VTSAX

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #163 on: March 30, 2017, 01:21:17 PM »
Need help with doing the math...

Purchase price: $360k, 3.5% down
Mortgage remaining: $347,400
Interest rate: 4% @ 30 year fixed
PMI: 0.85 ($246/month)

PMI is for the life of the loan (FHA) and does not go away on its own. A full refinance into a new loan is needed.

Anyone have an analysis? Thanks!

PMI is that .85% meaning the 246 will decrease over time as the loan balance decreases. Or is it 246 per month for the life of the loan.

if its the former its easily a 4.85% rate. if its the latter its a craptasitc situation where your interest is effectively increasing over time

Either way. What i would do in your case is invest money in the market.  at the point that your house appreciates to or you have the funds to obtain 20% Equity.  evaluate the rate climate at that time.

This is the best of both worlds.  if rates are low you can REFI to a 30 year with 20% equity then you can decide if it does make sense at that point.  if rates are higher than 4.85% then you're still in great shape and you can let you money keep growing for you.
« Last Edit: March 30, 2017, 01:23:23 PM by boarder42 »
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boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #164 on: March 30, 2017, 01:24:46 PM »
I understand the appeal of cashing out in order to invest. But more loan does equal more risk.

I feel like the ideal loan would be 60% of the value of your house (interest only). The bank is happy because you're never under water, and you're happy because that's a lot of extra green employees working for you at the salt mine of VTSAX

i'd take an interest only 80% loan to value for life.  that would be just fantastic.  i get all the equity appreciation for the small cost of 3.25% interest on the value of the home. 
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Cwadda

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Re: DONT Payoff your Mortgage Club
« Reply #165 on: March 30, 2017, 01:36:17 PM »
Need help with doing the math...

Purchase price: $360k, 3.5% down
Mortgage remaining: $347,400
Interest rate: 4% @ 30 year fixed
PMI: 0.85 ($246/month)

PMI is for the life of the loan (FHA) and does not go away on its own. A full refinance into a new loan is needed.

Anyone have an analysis? Thanks!

PMI is that .85% meaning the 246 will decrease over time as the loan balance decreases. Or is it 246 per month for the life of the loan.

if its the former its easily a 4.85% rate. if its the latter its a craptasitc situation where your interest is effectively increasing over time

Either way. What i would do in your case is invest money in the market.  at the point that your house appreciates to or you have the funds to obtain 20% Equity.  evaluate the rate climate at that time.

This is the best of both worlds.  if rates are low you can REFI to a 30 year with 20% equity then you can decide if it does make sense at that point.  if rates are higher than 4.85% then you're still in great shape and you can let you money keep growing for you.

I believe it is the latter case, where PMI is locked in for the life of the loan. What does this mean, numbers-wise?

RWD

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Re: DONT Payoff your Mortgage Club
« Reply #166 on: March 30, 2017, 01:42:30 PM »
Need help with doing the math...

Purchase price: $360k, 3.5% down
Mortgage remaining: $347,400
Interest rate: 4% @ 30 year fixed
PMI: 0.85 ($246/month)

PMI is for the life of the loan (FHA) and does not go away on its own. A full refinance into a new loan is needed.

Anyone have an analysis? Thanks!

PMI is that .85% meaning the 246 will decrease over time as the loan balance decreases. Or is it 246 per month for the life of the loan.

if its the former its easily a 4.85% rate. if its the latter its a craptasitc situation where your interest is effectively increasing over time

Either way. What i would do in your case is invest money in the market.  at the point that your house appreciates to or you have the funds to obtain 20% Equity.  evaluate the rate climate at that time.

This is the best of both worlds.  if rates are low you can REFI to a 30 year with 20% equity then you can decide if it does make sense at that point.  if rates are higher than 4.85% then you're still in great shape and you can let you money keep growing for you.

I believe it is the latter case, where PMI is locked in for the life of the loan. What does this mean, numbers-wise?

In this case you should treat PMI as part of the total interest rate. If you consider refinancing you'll just need to compare the new rate to that, while taking into account any closing costs.

FrozenBits

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Re: DONT Payoff your Mortgage Club
« Reply #167 on: March 30, 2017, 01:56:04 PM »
Emotions are strong, and they are valid. Motivation is a feeling. If someone is more motivated to put money towards their house than they are motivated to invest it, then they will likely earn more money by paying down their house. Obviously that case study is less likely in this crowd.

True, but what I find funny is much of what MMM teaches is directly involved with overcoming emotions in order to build a better life for yourself.  Like learning to overcome emotions that make you spend money on crap you don't need.  The whole philosophy of MMM is based around efficiently deploying your little green army so it grows as fast as possible.

It seems like a lot of the MMM community will bash people for making many decisions based on emotions, but as soon as it comes to pre-paying mortgages, well then emotions are totally valid.  And this decision can have a 200k swing in our 30 year time frame, kind of hypocritical IMO.

What they should really be doing is focusing on is overcoming or re-wiring their emotions to the rewards of what the numbers come out to over the long term.  That's what I did, and now investing motivates me more than anything else.  It wasn't always like that though....
This is pure gold. Here's a big ol' mmmmmwah! for you, FB. Another one who gets it. Oh, boyoboyoboy!

Aw shucks, Thanks :)

Glad to see a bunch of like minded Mustachians here that are milking their mortgage long term.  Makes me feel better about the decision I made a couple years ago when we bought the house.

Cwadda

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Re: DONT Payoff your Mortgage Club
« Reply #168 on: March 30, 2017, 02:02:01 PM »
Need help with doing the math...

Purchase price: $360k, 3.5% down
Mortgage remaining: $347,400
Interest rate: 4% @ 30 year fixed
PMI: 0.85 ($246/month)

PMI is for the life of the loan (FHA) and does not go away on its own. A full refinance into a new loan is needed.

Anyone have an analysis? Thanks!

PMI is that .85% meaning the 246 will decrease over time as the loan balance decreases. Or is it 246 per month for the life of the loan.

if its the former its easily a 4.85% rate. if its the latter its a craptasitc situation where your interest is effectively increasing over time

Either way. What i would do in your case is invest money in the market.  at the point that your house appreciates to or you have the funds to obtain 20% Equity.  evaluate the rate climate at that time.

This is the best of both worlds.  if rates are low you can REFI to a 30 year with 20% equity then you can decide if it does make sense at that point.  if rates are higher than 4.85% then you're still in great shape and you can let you money keep growing for you.

I believe it is the latter case, where PMI is locked in for the life of the loan. What does this mean, numbers-wise?

In this case you should treat PMI as part of the total interest rate. If you consider refinancing you'll just need to compare the new rate to that, while taking into account any closing costs.

This property is also a rental property where the PMI is eating into cash flow. The PMI is decreasing my cash-on-cash return by 23%. Yikes. Does this change the circumstances at all?

FrozenBits

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Re: DONT Payoff your Mortgage Club
« Reply #169 on: March 30, 2017, 02:08:20 PM »
Need help with doing the math...

Purchase price: $360k, 3.5% down
Mortgage remaining: $347,400
Interest rate: 4% @ 30 year fixed
PMI: 0.85 ($246/month)

PMI is for the life of the loan (FHA) and does not go away on its own. A full refinance into a new loan is needed.

Anyone have an analysis? Thanks!

PMI is that .85% meaning the 246 will decrease over time as the loan balance decreases. Or is it 246 per month for the life of the loan.

if its the former its easily a 4.85% rate. if its the latter its a craptasitc situation where your interest is effectively increasing over time

Either way. What i would do in your case is invest money in the market.  at the point that your house appreciates to or you have the funds to obtain 20% Equity.  evaluate the rate climate at that time.

This is the best of both worlds.  if rates are low you can REFI to a 30 year with 20% equity then you can decide if it does make sense at that point.  if rates are higher than 4.85% then you're still in great shape and you can let you money keep growing for you.

I believe it is the latter case, where PMI is locked in for the life of the loan. What does this mean, numbers-wise?

Dear God, is there any way you could refinance into a conventional mortgage?  That PMI is just dumb,  the conventional loans I was looking at for 200k had PMI around 64/month that drops off at 80%LTV.  Also, some conventional mortgages you can take a premium hit on the interest rate with no PMI.  Basically PMI is built into the loan at that point and you are taking a 4.375% rate instead of a 4.25% rate.  Still might be way better than your current deal.  Id keep an eye on rates and your property value, if you can refinance with a break even of 2 years on the closing costs, I'd do it in a heartbeat.

FrozenBits

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Re: DONT Payoff your Mortgage Club
« Reply #170 on: March 30, 2017, 02:11:05 PM »
This property is also a rental property where the PMI is eating into cash flow. The PMI is decreasing my cash-on-cash return by 23%. Yikes. Does this change the circumstances at all?

Ouch, this being a rental property will increase the difficulty to refinance.  You will need more equity and they will most likely hit you with a higher interest rate than a primary mortgage.  I'm still sticking with my statement below though.

"I'd keep an eye on rates and your property value, if you can refinance with a break even of 2 years on the closing costs, I'd do it in a heartbeat."

Cwadda

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Re: DONT Payoff your Mortgage Club
« Reply #171 on: March 30, 2017, 02:27:45 PM »
Need help with doing the math...

Purchase price: $360k, 3.5% down
Mortgage remaining: $347,400
Interest rate: 4% @ 30 year fixed
PMI: 0.85 ($246/month)

PMI is for the life of the loan (FHA) and does not go away on its own. A full refinance into a new loan is needed.

Anyone have an analysis? Thanks!

PMI is that .85% meaning the 246 will decrease over time as the loan balance decreases. Or is it 246 per month for the life of the loan.

if its the former its easily a 4.85% rate. if its the latter its a craptasitc situation where your interest is effectively increasing over time

Either way. What i would do in your case is invest money in the market.  at the point that your house appreciates to or you have the funds to obtain 20% Equity.  evaluate the rate climate at that time.

This is the best of both worlds.  if rates are low you can REFI to a 30 year with 20% equity then you can decide if it does make sense at that point.  if rates are higher than 4.85% then you're still in great shape and you can let you money keep growing for you.

I believe it is the latter case, where PMI is locked in for the life of the loan. What does this mean, numbers-wise?

Dear God, is there any way you could refinance into a conventional mortgage?  That PMI is just dumb,  the conventional loans I was looking at for 200k had PMI around 64/month that drops off at 80%LTV.  Also, some conventional mortgages you can take a premium hit on the interest rate with no PMI.  Basically PMI is built into the loan at that point and you are taking a 4.375% rate instead of a 4.25% rate.  Still might be way better than your current deal.  Id keep an eye on rates and your property value, if you can refinance with a break even of 2 years on the closing costs, I'd do it in a heartbeat.

No, conventional isn't possible here, because a conventional mortgage on a multi family property requires 25% down. That's 90 grand I don't have. FHA owner occupied is the only way to do this deal.

FrozenBits

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Re: DONT Payoff your Mortgage Club
« Reply #172 on: March 30, 2017, 02:32:09 PM »
No, conventional isn't possible here, because a conventional mortgage on a multi family property requires 25% down. That's 90 grand I don't have. FHA owner occupied is the only way to do this deal.

I would ride it out then and watch the appreciation of the property.  As soon as you cross that 25% threshold start looking into a conventional mortgage if rates are still competitive with what you currently have.

As long as you have strong cash flow on the property you should be fine.

Cwadda

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Re: DONT Payoff your Mortgage Club
« Reply #173 on: March 30, 2017, 03:07:08 PM »
No, conventional isn't possible here, because a conventional mortgage on a multi family property requires 25% down. That's 90 grand I don't have. FHA owner occupied is the only way to do this deal.

I would ride it out then and watch the appreciation of the property.  As soon as you cross that 25% threshold start looking into a conventional mortgage if rates are still competitive with what you currently have.

As long as you have strong cash flow on the property you should be fine.

The downside is I don't think it's going to appreciate. Well, it might, but I'm not counting on it by any means. I'm paying the seller what they put into it. It's a good income-producing property, cash flowing about $700/month even with PMi. But I think I'm also buying it at full price (FHA is picky about repairs anyways, will not pass an appraisal for chipped paint).

FrozenBits

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Re: DONT Payoff your Mortgage Club
« Reply #174 on: March 30, 2017, 04:12:35 PM »
No, conventional isn't possible here, because a conventional mortgage on a multi family property requires 25% down. That's 90 grand I don't have. FHA owner occupied is the only way to do this deal.

I would ride it out then and watch the appreciation of the property.  As soon as you cross that 25% threshold start looking into a conventional mortgage if rates are still competitive with what you currently have.

As long as you have strong cash flow on the property you should be fine.

The downside is I don't think it's going to appreciate. Well, it might, but I'm not counting on it by any means. I'm paying the seller what they put into it. It's a good income-producing property, cash flowing about $700/month even with PMi. But I think I'm also buying it at full price (FHA is picky about repairs anyways, will not pass an appraisal for chipped paint).

Alright time to break this out with actual numbers.

Current situation

Purchase price: $360k, 3.5% down
Mortgage remaining: $347,400
Interest rate: 4% @ 30 year fixed
PMI: 0.85 ($246/month)

Total monthly payment(P,I,+PMI) = 1907


Conventional Option 1 @ 4%

Assessed value: $360k,
Mortgage remaining: $270,000 (Bring 77k to closing in order to hit 75% LTV and drop PMI)
Interest rate: 4% @ 30 year fixed
PMI: None

Total monthly payment(P,I,+PMI) = 1298


Conventional Option 2 @ 4.25%

Assessed value: $360k,
Mortgage remaining: $270,000 (Bring 77k to closing in order to hit 75% LTV and drop PMI)
Interest rate: 4.25% @ 30 year fixed
PMI: None

Total monthly payment(P,I,+PMI) = 1328


Conventional Option 3 @ 4.5%

Assessed value: $360k,
Mortgage remaining: $270,000 (Bring 77k to closing in order to hit 75% LTV and drop PMI)
Interest rate: 4.5% @ 30 year fixed
PMI: None

Total monthly payment(P,I,+PMI) = 1368



Option 1 = 7,308 yearly cash flow increase on 77,000 "investment" = 9.49% yearly return on investment

Option 2 = 6,948 yearly cash flow increase on 77,000 "investment" = 9.02% yearly return on investment

Option 3 = 6,468 yearly cash flow increase on 77,000 "investment" = 8.4% yearly return on investment


Depending on the rates in the future you could increase your cash flow and ROI drastically by throwing 77k in and refinancing.

I would start investing money in taxable accounts and then re-assess the situation in a couple years.  But a guaranteed return of 9.5% on 77k is nice, assuming I did the math right.

Goldielocks

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Re: DONT Payoff your Mortgage Club
« Reply #175 on: March 30, 2017, 08:50:16 PM »
Nicely done, frozenbits!

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #176 on: March 31, 2017, 05:13:36 AM »
Emotions are strong, and they are valid. Motivation is a feeling. If someone is more motivated to put money towards their house than they are motivated to invest it, then they will likely earn more money by paying down their house. Obviously that case study is less likely in this crowd.

True, but what I find funny is much of what MMM teaches is directly involved with overcoming emotions in order to build a better life for yourself.  Like learning to overcome emotions that make you spend money on crap you don't need.  The whole philosophy of MMM is based around efficiently deploying your little green army so it grows as fast as possible.

It seems like a lot of the MMM community will bash people for making many decisions based on emotions, but as soon as it comes to pre-paying mortgages, well then emotions are totally valid.  And this decision can have a 200k swing in our 30 year time frame, kind of hypocritical IMO.

What they should really be doing is focusing on is overcoming or re-wiring their emotions to the rewards of what the numbers come out to over the long term.  That's what I did, and now investing motivates me more than anything else.  It wasn't always like that though....
This is pure gold. Here's a big ol' mmmmmwah! for you, FB. Another one who gets it. Oh, boyoboyoboy!

Aw shucks, Thanks :)

Glad to see a bunch of like minded Mustachians here that are milking their mortgage long term.  Makes me feel better about the decision I made a couple years ago when we bought the house.
Full disclosure: we paid over 900k CASH for our current house, more than 10x our annual income. Yup, we have no mortgage on our primary home. I am retired, but we live on DH's income and don't touch our considerable 'stache. WTF? How did we do it?

We live in a HCOLA, so please don't waste your breath hating the amount we spent. It was a short sale and it has appreciated about 40% since we bought it less than four years ago. We sold two mortgaged-and-highly-appreciated homes to buy this one.

We bought this crazy-ass, beautiful clown house so my MIL and her invisible friend, Al Z Heimer, could move in with us. It is 3.5 blocks from DH's work. We paid cash after the mortgage broker refused to lock our rate one Thursday during escrow and the rates spiked nearly a full point the following week. We took advantage of our FU money and brought a huge cashier's check to the closing. It was fun, but we both still kinda miss having a mortgage.

We are FI. We got that way by keeping our mortgages, investing the difference, letting appreciation and time work their powerful magic. "Killing" the mortgage first is an option, but it is a costly choice. Paying more when there is an easy way to pay less is about as anti-mustachian as you can get.

Mortgage + Leverage + Investments + Appreciation + Inflation + Time = Cheaper Financial Freedom.

It's way more complicated than the simplistic "All debt is bad" approach. It is completely worth sitting your ass down and studying it until you understand. Then if you still choose the backwards approach, you'll know how much more of your life energy it's costing you to get rid of that low-interest loan on your affordable house too soon.

I'd like to make it perfectly clear: there is nothing wrong with having a mortgage-free home. What's wrong is to pre-pay a mortgage, at the expense of fully funding all retirement vehicles available to you, and before building a healthy taxable investment account, if you wish to RE.

We're not high wage earners, never were. We live in a crazy HCOLA. We didn't get a particularly early start. We own multiple vehicles, including a <gasp> truck. We stopped and smelled the roses along the way. Yet we're rich beyond our wildest imagination and freely give 10% of our income to charity, because it makes us happy.

We still own three other SFHs, which are rentals. Each of them has a long, lovely, low-interest mortgage. We have no interest (hee) in paying them off, early or ever. Last year we re-fi'd the oldest of the three, resetting the clock to 30 years, lowering the interest rate, and improving the cash flow.

Whew, that was a lot of words and I never even mentioned tax deductibility. If you're in the US, it's just icing on the cake.
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Bruizer

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Re: DONT Payoff your Mortgage Club
« Reply #177 on: March 31, 2017, 06:48:46 AM »


I'd like to make it perfectly clear: there is nothing wrong with having a mortgage-free home. What's wrong is to pre-pay a mortgage, at the expense of fully funding all retirement vehicles available to you, and before building a healthy taxable investment account, if you wish to RE.


100% agree!  Nicely put!


talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #178 on: March 31, 2017, 07:00:50 AM »
Dicey-
you indeed sound badass bringing that god-awful six-digit check to closing just to flex your muscles in front of that disgusting banker. I love it!

FU Money is all about giving yourself options when other people don't expect you to have them!

Cwadda

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Re: DONT Payoff your Mortgage Club
« Reply #179 on: March 31, 2017, 10:04:40 AM »
No, conventional isn't possible here, because a conventional mortgage on a multi family property requires 25% down. That's 90 grand I don't have. FHA owner occupied is the only way to do this deal.

I would ride it out then and watch the appreciation of the property.  As soon as you cross that 25% threshold start looking into a conventional mortgage if rates are still competitive with what you currently have.

As long as you have strong cash flow on the property you should be fine.

The downside is I don't think it's going to appreciate. Well, it might, but I'm not counting on it by any means. I'm paying the seller what they put into it. It's a good income-producing property, cash flowing about $700/month even with PMi. But I think I'm also buying it at full price (FHA is picky about repairs anyways, will not pass an appraisal for chipped paint).

Alright time to break this out with actual numbers.

Current situation

Purchase price: $360k, 3.5% down
Mortgage remaining: $347,400
Interest rate: 4% @ 30 year fixed
PMI: 0.85 ($246/month)

Total monthly payment(P,I,+PMI) = 1907


Conventional Option 1 @ 4%

Assessed value: $360k,
Mortgage remaining: $270,000 (Bring 77k to closing in order to hit 75% LTV and drop PMI)
Interest rate: 4% @ 30 year fixed
PMI: None

Total monthly payment(P,I,+PMI) = 1298


Conventional Option 2 @ 4.25%

Assessed value: $360k,
Mortgage remaining: $270,000 (Bring 77k to closing in order to hit 75% LTV and drop PMI)
Interest rate: 4.25% @ 30 year fixed
PMI: None

Total monthly payment(P,I,+PMI) = 1328


Conventional Option 3 @ 4.5%

Assessed value: $360k,
Mortgage remaining: $270,000 (Bring 77k to closing in order to hit 75% LTV and drop PMI)
Interest rate: 4.5% @ 30 year fixed
PMI: None

Total monthly payment(P,I,+PMI) = 1368



Option 1 = 7,308 yearly cash flow increase on 77,000 "investment" = 9.49% yearly return on investment

Option 2 = 6,948 yearly cash flow increase on 77,000 "investment" = 9.02% yearly return on investment

Option 3 = 6,468 yearly cash flow increase on 77,000 "investment" = 8.4% yearly return on investment


Depending on the rates in the future you could increase your cash flow and ROI drastically by throwing 77k in and refinancing.

I would start investing money in taxable accounts and then re-assess the situation in a couple years.  But a guaranteed return of 9.5% on 77k is nice, assuming I did the math right.

Thank you for this analysis. Unfortunately $77k is more than all my lifetime assets. I would need to borrow money to get there. This will definitely be good to revisit say a year from now when the loan is seasoned and refinance eligible.

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #180 on: March 31, 2017, 10:19:47 AM »
loans are REFI able in 6 months. just an FYI... and you can rate lock prior to the actual close date of exactly 6 months out.
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boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #181 on: March 31, 2017, 10:22:13 AM »
cwadda. 

something else to look into is to do conventional and not bring 77k to close you do not have to have 20% down to avoid PMI in most cases a mortgage broker can get you a higher interest fixed rate loan and pre pay your PMI with the points they've sold. 

My friend actually just did a sub 5% equity REFI no PMI in July of 2016(the bottom of rates) for 3.5% ...

this was only 1/4 point higher than my no cost REFI at 3.25%

so if you assume 3/8ths above prime as worst case you'd still be at 4.5% which is better that 4.85%.  your banker or lender should have run all these scenarios if they didnt then you should find a new one.  you shouldnt have to ask.
« Last Edit: March 31, 2017, 10:23:54 AM by boarder42 »
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boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #182 on: March 31, 2017, 01:57:20 PM »

Another "Should I pay down my mortgage just to get out of PMI" question.

Loan Information: $266,222.39 @ 3.125% with 29.5 years left.
P&I: $1,190.48
PMI: $42.64
80% LTV @ $255,270.80, 78% LTV @ $248,041.58

Your PMI is adding 4.67% interest for the amount remaining to get to 80% LTV. Or 2.81% more interest for the amount remaining to get to 78%.

Does this mean I should pay down the mortgage to 80% LTV to get a 3.125+4.67=7.795% return?

no you dont add them together.
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Stachless

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Re: DONT Payoff your Mortgage Club
« Reply #183 on: March 31, 2017, 04:36:17 PM »
Cwadda - have you considered getting a 2nd mortgage for the $77k you need to avoid PMI?

Even the most usurous 2nd mortgage is better than a 'fee' that never gets paid off.  Plus having a 2nd mortgage would make my truth-preaching neighbor boarder42 twice as proud of you!

Best of luck!

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Re: DONT Payoff your Mortgage Club
« Reply #184 on: April 02, 2017, 12:43:19 PM »
I commented in the other thread that you've convinced me.

Current mortgage balance: $170,148.52
Current payment (PITI): $1,062.19
Years Left: 28.5
APR: 3.25%
FHA MI: 0.85%
Effective APR: 4.1%

Due to some over-payment already, I am 10 months ahead or it would still be over 29 years.  I was paying $1,750 to the mortgage the last few months.  I am now paying $1,100 and have added $650 a month to my VTSAX automatic purchase.  The MI won't be removed unless I refinance to a different type of loan.  With the current direction the rates are heading, it looks like that won't make sense.

The VTSAX account is not a tax-advantaged one, which provides me with some flexibility.  It actually makes me sleep better at night, because I can pull from that to cover the mortgage payment if things go pear-shaped.  Where, I wouldn't have many options otherwise.

Edit: I might even go and remove that extra $37.81, used to round it out, because it shortens the loan by around 2 years! And, that money could be added to the investment.  It just ruins my nice round numbers.  But, are nice round numbers worth the extra cost?

---------------
Edit 2:  Redid the numbers, think I have it right this time.

Pay minimum and Invest $687.81 =   649,920.55 after 29 years
Overpay then invest PI+$687.81 =    574,836.61 after 17 years

Difference: 75,083.94

In both cases, I have a paid off house and the investment plus returns.  I end up with $75k more when I invest the $687.81 than I end up with when I use it to pay down the loan.  I think I have it right this time.  That's significant enough to make it worth it.
« Last Edit: April 02, 2017, 01:22:20 PM by FIT_Goat »

FrozenBits

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Re: DONT Payoff your Mortgage Club
« Reply #185 on: April 02, 2017, 12:55:55 PM »


I commented in the other thread that you've convinced me.

Welcome to the club!

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FrozenBits

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Re: DONT Payoff your Mortgage Club
« Reply #186 on: April 02, 2017, 01:03:53 PM »
Just got a bonus which made my taxable investment contribution for this month a little over 3400.

We are set to automatically max out 2 401ks and an HSA, we then usually max 2 Iras during tax season.  After 401k match the total comes out to about 63k a year in tax differed investment accounts.

This brokerage account will be where we pull money out to max the Iras and anything above the 11k will add to our taxable investments.  My goal. Is to have 25k in the taxable brokerage account by the end of the year.  Stretch goal would be 40k but I don't see how that's possible with our current savings rate.

Also, I thought it would be fun to start monthly tracking of our outstanding mortgage balances verses our investment.  Mortgage numbers for 2016 are estimates.



                       Investment Balance                Mortgage Balance

01/31/16 =              129,707                               204,466
02/29/16 =              137,003                               204,102
03/31/16 =              151,122                               203,738
04/30/16 =              158,218                               203,374
05/31/16 =              176,190                               203,010
06/30/16 =              183,020                               202,846
07/31/16 =              195,013                               202,482
08/31/16 =              190,813                               202,118
09/30/16 =              192,290                               201,754
10/31/16 =              190,672                               201,390
11/30/16 =              198,065                               201,026
12/31/16 =              203,004                               200,650
01/31/17 =              212,600                               203,200 <----- Refinanced out of a 5/1 ARM to a fix 30@4.125 and dropped PMI due to value increase
02/28/17 =              225,035                               202,913
03/31/17 =              240,341                               202,626


I'm hoping this will motivate me to save and invest more.  And it will give me some accountability going forward, especially when it comes to after tax investments.




« Last Edit: April 02, 2017, 01:39:52 PM by FrozenBits »

FIT_Goat

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Re: DONT Payoff your Mortgage Club
« Reply #187 on: April 02, 2017, 02:09:52 PM »
I am not sure I am looking at this correctly.  And, I think I used the wrong numbers in my calculations above.  When I reran it, I got a benefit of almost 200k.

Basically, if I used the extra to prepay as fast as possible, I would be done with the mortgage in 142 months, and have 201 months of investing $1,452.72 at 7%.  Or, I could invest $687.81 at 7% for the full 343 months.  The graphic below is what I came up with.  I might go look at that cFIRE or whatever people were talking about and run the numbers in that.  To see if I get something close.  In either case, $75k or $200k, it's all good.

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #188 on: April 02, 2017, 02:53:30 PM »
Your 200k math is correct.  It's THAT much better. one of the big reasons I'm overly passionate about it almost to a fault in many instances in this forum.
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FIT_Goat

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Re: DONT Payoff your Mortgage Club
« Reply #189 on: April 02, 2017, 03:45:17 PM »
Your 200k math is correct.  It's THAT much better. one of the big reasons I'm overly passionate about it almost to a fault in many instances in this forum.

That's awesome. I figured out what I did wrong. I ran the first numbers with the investing returning 6% and prepay then investing returning 7% (typo when playing with different rate potentials). So, handicapping the investing scenario still kept it as a clear winner.

Even changing the way I calculate returns to be more conservative still gets to $180k benefit. It is scary, to be in debt that long, but clearly best.

FrozenBits

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Re: DONT Payoff your Mortgage Club
« Reply #190 on: April 02, 2017, 03:48:38 PM »
I am not sure I am looking at this correctly.  And, I think I used the wrong numbers in my calculations above.  When I reran it, I got a benefit of almost 200k.

Basically, if I used the extra to prepay as fast as possible, I would be done with the mortgage in 142 months, and have 201 months of investing $1,452.72 at 7%.  Or, I could invest $687.81 at 7% for the full 343 months.  The graphic below is what I came up with.  I might go look at that cFIRE or whatever people were talking about and run the numbers in that.  To see if I get something close.  In either case, $75k or $200k, it's all good.
I prefer the cFireSim calculator myself.

It's pretty easy to do. I assume the house is completely paid off and calculate the success rate on a 30 year refinance.

Your retirement length would be 30 years, the portfolio would be whatever your cash acquired would be by mortgaging it, and your expenses would be non inflation adjusted and fixed at the amount of your yearly mortgage principal and interest payments.

Then it will spit out your success right with median and average ending portfolios. It also gives you best and worse case scenarios.



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FrozenBits

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Re: DONT Payoff your Mortgage Club
« Reply #191 on: April 02, 2017, 04:50:03 PM »
You guys are brilliant. I had never heard of this strategy before this thread. It sounds great! Appreciated the link to MMM's thoughts on it too.

In Canada, we generally lock in a mortgage rate for 2-5 years (sometimes up to 10). According to one article, there is an option for the full amortization period, but it was expensive at the time of writing: http://business.financialpost.com/personal-finance/mortgages-real-estate/heres-how-to-play-it-really-safe-in-housing-at-a-price

Does this strategy work in Canada, then? According to some sources, mortgage rates and stock prices don't maintain a consistent relationship -one may go down while the other goes down too, or the other may go up. So, just a potential scenario:

I lock in for 7 years at 3.4%.
At the 7 year mark for renewal, mortgage rates are 7.2%.
I can renew at that OR pay off the mortgage OR go with variable until rates mellow again.
My investments happen to be in a dip, returning only 4% at that point.
I'd be selling stocks at a nonoptimal moment in order to pay the mortgage off now or going with a crap mortgage rate (short, medium, or long term).

What say you?
That's a tough one.

I would probably stick to investing as much as possible in taxable accounts and then deal with the rate changes as they come.  I honestly don't see Canadian rates going up drastically anytime soon. Unless they want to see a nice housing crash....

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Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #192 on: April 02, 2017, 05:25:05 PM »
Your 200k math is correct.  It's THAT much better. one of the big reasons I'm overly passionate about it almost to a fault in many instances in this forum.
Not possible. It's a message worth preaching. Keep the faith, b42!
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FrozenBits

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Re: DONT Payoff your Mortgage Club
« Reply #193 on: April 02, 2017, 05:52:19 PM »
Thanks very much, FrozenBits.

Just wanted to see if i'm missing something...

I think I'm eternally shell-shocked by the 21% rate that hit my parents and countless others. I was just barely old enough to understand the stress and ramifications. It (and other variables, like my house taxes and house insurance tripling to ~$2400 each, and a few awful tenants) compelled me to sell after just six years. Up til that point, I was trying to pay down the mortgage because of all the variables present.
No problem.

If your able to stache enough away in investments that you could pay off the mortgage during a rate change then you are negating a lot of the risk.

Say after 7 years you have a mortgage balance of 300k but you also have 300k invested, you basically can leverage that investment however you want on the refinance. If rates are 10% pay it off, if they are 4% milk it another 7 years.

Worst case, If rates are 10% and your investments just fell 50% from a market crash you could pay the 10% on the mortgage until your investments recover in 5 years or so.  The chances of this happening are probably under 1%.  Shit would really have to hit the fan...  We could over analyze this a ton if we wanted. Lol

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Le Barbu

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Re: DONT Payoff your Mortgage Club
« Reply #194 on: April 02, 2017, 06:57:14 PM »
What about people who decide to keep a mortgage but meanwhile invest in bonds? I can understand and indulge 5-10% bonds for short term needs but 30-50%? No way! Maybe I am missing something...
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FrozenBits

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Re: DONT Payoff your Mortgage Club
« Reply #195 on: April 02, 2017, 07:38:47 PM »
What about people who decide to keep a mortgage but meanwhile invest in bonds? I can understand and indulge 5-10% bonds for short term needs but 30-50%? No way! Maybe I am missing something...
I've come to the conclusion that bonds just aren't worth it to have in my portfolio.  My version of bonds will be my ability to pick up part time work while FI if I need it.

As for treating a mortgage like a bond allocation of your portfolio, it kinda defeats the main purpose of a bond.  Bonds are for down times so you can rebalance and take advantage of lower stock prices. If your mortgage is your bond allocation, then you can't rebalance unless you refinance, and you are totally missing out on the main purpose of bonds in an investment portfolio. Just my opinion but I'm sticking to it.

I am basically 100% VTSAX and plan on keeping that allocation for the foreseeable future.

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Goldielocks

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Re: DONT Payoff your Mortgage Club
« Reply #196 on: April 03, 2017, 02:22:18 AM »
I am not sure I am looking at this correctly.  And, I think I used the wrong numbers in my calculations above.  When I reran it, I got a benefit of almost 200k.

Basically, if I used the extra to prepay as fast as possible, I would be done with the mortgage in 142 months, and have 201 months of investing $1,452.72 at 7%.  Or, I could invest $687.81 at 7% for the full 343 months.  The graphic below is what I came up with.  I might go look at that cFIRE or whatever people were talking about and run the numbers in that.  To see if I get something close.  In either case, $75k or $200k, it's all good.


I think you forgot to include the reduced mortgage interest in your pre-pay example?  Not sure...  even so, mortgage interest is still much less than the 200k

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #197 on: April 03, 2017, 04:27:35 AM »
I am not sure I am looking at this correctly.  And, I think I used the wrong numbers in my calculations above.  When I reran it, I got a benefit of almost 200k.

Basically, if I used the extra to prepay as fast as possible, I would be done with the mortgage in 142 months, and have 201 months of investing $1,452.72 at 7%.  Or, I could invest $687.81 at 7% for the full 343 months.  The graphic below is what I came up with.  I might go look at that cFIRE or whatever people were talking about and run the numbers in that.  To see if I get something close.  In either case, $75k or $200k, it's all good.


I think you forgot to include the reduced mortgage interest in your pre-pay example?  Not sure...  even so, mortgage interest is still much less than the 200k

The reduced interest comes in when the mortgage is paid off and all money is now funneled to investing. It was done correctly bc the base mortgage payment doesn't change.
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Re: DONT Payoff your Mortgage Club
« Reply #198 on: April 03, 2017, 04:52:29 AM »
What about people who decide to keep a mortgage but meanwhile invest in bonds? I can understand and indulge 5-10% bonds for short term needs but 30-50%? No way! Maybe I am missing something...
I've come to the conclusion that bonds just aren't worth it to have in my portfolio.  My version of bonds will be my ability to pick up part time work while FI if I need it.

As for treating a mortgage like a bond allocation of your portfolio, it kinda defeats the main purpose of a bond.  Bonds are for down times so you can rebalance and take advantage of lower stock prices. If your mortgage is your bond allocation, then you can't rebalance unless you refinance, and you are totally missing out on the main purpose of bonds in an investment portfolio. Just my opinion but I'm sticking to it.

I am basically 100% VTSAX and plan on keeping that allocation for the foreseeable future.

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I'm also 100% stock and my HELOC is used for 200k$ for investing purposes

But let face it, in this thread, we celebrate individuals who choose to invest and keep their mortgage but a lot of them invest in a 70/30 or 60/40 portfolio! I often get comments about the "risk" of being 100% stock at 45 and 5 years to go before ER.

Like you, my "bond" is my ability to work part time if needed...
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boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #199 on: April 03, 2017, 10:56:44 AM »
I thought it was pretty common place to be no more than 20 to maybe 25% bonds as a rule in a FiRE forum. I know we have alot of oversaved older people retiring much closer to normal age around here. But if you're cutting the cord in your 30s or 40s you need a larger stock allocation to make it. Assuming you didn't over save.  I personally think money can make a large difference in many lives over time. And don't plan to carry over 10% bonds ever to maximize the earnings to hopefully positively affect those who are less fortunate. The odds of bad things happening are so incredibly small and I think far too many oversave. There are many ways to make money post FIRE. Look at ARS who pulled the cord a little early and now funds retirement and then some soley from tradelines which is a 20k+ 20 hour per year job.
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