Author Topic: DONT Payoff your Mortgage Club  (Read 183382 times)

dandarc

  • Magnum Stache
  • ******
  • Posts: 3375
  • Age: 36
Re: DONT Payoff your Mortgage Club
« Reply #1500 on: May 23, 2019, 12:00:34 PM »
Question to the Brain Trust:

TL/DR - would you refinance from 4.625% to 3.75% for no out of pocket closing costs?

Long story:
We bought a house in Dec 2018 when rates were 4.625% for owner-occupied, 20% down, etc. I received a quote option from a different bank to refinance with rolling in all the closing costs at 3.75%. Monthly payment would go from $1982 to $1846 (that includes the tax escrow), effectively saving $136 per month. We currently owe $302K and will refinance at $308K. I am a bit leery about the "no cost" refinance but for a savings of $136 per month, I might just go forward. Thoughts?
How long are you planning on staying in the house? As solon points out, there is a cost - they're just rolling the usual fees into the balance. The longer you stay, the more it makes sense - saving .875% on the 300K balance will swamp the cost of the 6K + 3.75% eventually, but if you're going to sell in a year or 2, not a good move.

talltexan

  • Handlebar Stache
  • *****
  • Posts: 2398
Re: DONT Payoff your Mortgage Club
« Reply #1501 on: May 23, 2019, 12:03:14 PM »
Is there a change in the term, too? I'm having trouble matching those numbers.

Blahhhh456

  • 5 O'Clock Shadow
  • *
  • Posts: 85
Re: DONT Payoff your Mortgage Club
« Reply #1502 on: May 23, 2019, 12:13:07 PM »
Is there a change in the term, too? I'm having trouble matching those numbers.

No change in term, both are 30 years. Original balance was $304K, monthly payment is $1562 (P&I) + 420 (Taxes) = $1982. We currently owe just over $302K. New Loan would be $308K for monthly payment of $1426 (P&I) + $420 (taxes) = $1846. I hope I did my math correct :)

I understand the no cost is really adding the costs to the balance hence my quotations :). I was just more curious if it was worth saving $$ if I had no immediate out of pocket costs.


Blahhhh456

  • 5 O'Clock Shadow
  • *
  • Posts: 85
Re: DONT Payoff your Mortgage Club
« Reply #1503 on: May 23, 2019, 12:14:19 PM »
Question to the Brain Trust:

TL/DR - would you refinance from 4.625% to 3.75% for no out of pocket closing costs?

Long story:
We bought a house in Dec 2018 when rates were 4.625% for owner-occupied, 20% down, etc. I received a quote option from a different bank to refinance with rolling in all the closing costs at 3.75%. Monthly payment would go from $1982 to $1846 (that includes the tax escrow), effectively saving $136 per month. We currently owe $302K and will refinance at $308K. I am a bit leery about the "no cost" refinance but for a savings of $136 per month, I might just go forward. Thoughts?
How long are you planning on staying in the house? As solon points out, there is a cost - they're just rolling the usual fees into the balance. The longer you stay, the more it makes sense - saving .875% on the 300K balance will swamp the cost of the 6K + 3.75% eventually, but if you're going to sell in a year or 2, not a good move.

That is a great question. We did just buy this house, so I do not have an answer how long we will stay; but that is definitely a good point I need to consider further.

sherr

  • Pencil Stache
  • ****
  • Posts: 648
  • Age: 33
  • Location: North Carolina
Re: DONT Payoff your Mortgage Club
« Reply #1504 on: May 23, 2019, 12:23:42 PM »
Question to the Brain Trust:

TL/DR - would you refinance from 4.625% to 3.75% for no out of pocket closing costs?

Long story:
We bought a house in Dec 2018 when rates were 4.625% for owner-occupied, 20% down, etc. I received a quote option from a different bank to refinance with rolling in all the closing costs at 3.75%. Monthly payment would go from $1982 to $1846 (that includes the tax escrow), effectively saving $136 per month. We currently owe $302K and will refinance at $308K. I am a bit leery about the "no cost" refinance but for a savings of $136 per month, I might just go forward. Thoughts?

Two things:
1) Generally speaking the "monthly savings" number is misleading. Your refinance would have a new 30-year term and your current mortgage is something less then that. So you'd be paying less per month, for longer. Not particularly useful for deciding if it's a good decision unless the "less per month" is important because you need more cash now. In your case however you've only had this mortgage for 6 months, so the term extension is not that big of a difference.

2) You'd be paying $6k to lower your interest rate by 0.875%.
302000 * .04625 / 12 = 1163.96 interest you'd pay next month without a refinance
308000 * .0375 / 12 = 962.5 interest you'd pay next month with a refinance plus 6000 / 30 / 12 = $16.67 extra principle payment you'd have to make every month for the lifetime of the loan to adjust for the $6k cost = $979 interest + principal difference

So you're saving about $185 of interest in your first month, but that number will decrease over the lifetime of the loan as the principle decreases. But for the first few years it's close enough for an estimate. So you'd have to stay in your house with this mortgage for about 6000 / 185 = 32.4 months to break even.

I'd say go for it if you think you're going to stay in the house longer than 3 years, otherwise don't bother.

talltexan

  • Handlebar Stache
  • *****
  • Posts: 2398
Re: DONT Payoff your Mortgage Club
« Reply #1505 on: May 23, 2019, 12:34:11 PM »
Second question: how certain are you that rates won't fall further?

Blahhhh456

  • 5 O'Clock Shadow
  • *
  • Posts: 85
Re: DONT Payoff your Mortgage Club
« Reply #1506 on: May 23, 2019, 12:51:33 PM »
Second question: how certain are you that rates won't fall further?

Ha! Well, with this climate we are in... I will just never know. As much as the Fed/central bank has declared no further interest rate increases for this year, as of now, we will not know until the actual meetings every few weeks, if this will continue to hold true. So, I cannot with any bit of certainty think that the interest rates will continue to fall. :)

We sold our house in December and it had a 3.25% rate.... Oy, I miss giving up that rate.   


sherr

  • Pencil Stache
  • ****
  • Posts: 648
  • Age: 33
  • Location: North Carolina
Re: DONT Payoff your Mortgage Club
« Reply #1507 on: May 23, 2019, 12:52:05 PM »
Second question: how certain are you that rates won't fall further?

That's not much different from trying to time the stock market is it? Also, how much lower than 3.75% are you expecting 30-year rates to get? My rate is an astonishingly-low 2.5%, but that's the 10-year rate on a 10/1 ARM. At the time 30-year Fixed rates were about the same, 3.5% or so.

It all does come down to how long you're going to stay in the house though, or more specifically how long you're going to keep this mortgage with the house. If you're going to be refinancing every 6 months chasing lower rates then you'll never make up the cost.
« Last Edit: May 23, 2019, 12:53:36 PM by sherr »

Blahhhh456

  • 5 O'Clock Shadow
  • *
  • Posts: 85
Re: DONT Payoff your Mortgage Club
« Reply #1508 on: May 23, 2019, 12:53:50 PM »
Question to the Brain Trust:

TL/DR - would you refinance from 4.625% to 3.75% for no out of pocket closing costs?

Long story:
We bought a house in Dec 2018 when rates were 4.625% for owner-occupied, 20% down, etc. I received a quote option from a different bank to refinance with rolling in all the closing costs at 3.75%. Monthly payment would go from $1982 to $1846 (that includes the tax escrow), effectively saving $136 per month. We currently owe $302K and will refinance at $308K. I am a bit leery about the "no cost" refinance but for a savings of $136 per month, I might just go forward. Thoughts?

Two things:
1) Generally speaking the "monthly savings" number is misleading. Your refinance would have a new 30-year term and your current mortgage is something less then that. So you'd be paying less per month, for longer. Not particularly useful for deciding if it's a good decision unless the "less per month" is important because you need more cash now. In your case however you've only had this mortgage for 6 months, so the term extension is not that big of a difference.

2) You'd be paying $6k to lower your interest rate by 0.875%.
302000 * .04625 / 12 = 1163.96 interest you'd pay next month without a refinance
308000 * .0375 / 12 = 962.5 interest you'd pay next month with a refinance plus 6000 / 30 / 12 = $16.67 extra principle payment you'd have to make every month for the lifetime of the loan to adjust for the $6k cost = $979 interest + principal difference

So you're saving about $185 of interest in your first month, but that number will decrease over the lifetime of the loan as the principle decreases. But for the first few years it's close enough for an estimate. So you'd have to stay in your house with this mortgage for about 6000 / 185 = 32.4 months to break even.

I'd say go for it if you think you're going to stay in the house longer than 3 years, otherwise don't bother.

Awesome! Thank you for the breakdown in point two. I am sensing I need to figure out if we are going to stay in this house for longer than 3 years. We moved from NC to MA and it is quite an adjustment I was not prepared for.


sherr

  • Pencil Stache
  • ****
  • Posts: 648
  • Age: 33
  • Location: North Carolina
Re: DONT Payoff your Mortgage Club
« Reply #1509 on: May 23, 2019, 01:02:02 PM »
Awesome! Thank you for the breakdown in point two. I am sensing I need to figure out if we are going to stay in this house for longer than 3 years. We moved from NC to MA and it is quite an adjustment I was not prepared for.

By the way generic advice when buying a home is that you're better off renting if you stay less than 5 years due solely to the transaction costs of buying/selling. I get that in this case you weren't expecting to be this uncertain. However it's something for you to think about for next time.

CorpRaider

  • Bristles
  • ***
  • Posts: 401
    • The Corpraider Blog
Re: DONT Payoff your Mortgage Club
« Reply #1510 on: May 23, 2019, 01:09:06 PM »
Thinking about cash-out refi to get back to 5/1 leverage, if rates go much lower...

Blahhhh456

  • 5 O'Clock Shadow
  • *
  • Posts: 85
Re: DONT Payoff your Mortgage Club
« Reply #1511 on: May 23, 2019, 01:26:36 PM »
Awesome! Thank you for the breakdown in point two. I am sensing I need to figure out if we are going to stay in this house for longer than 3 years. We moved from NC to MA and it is quite an adjustment I was not prepared for.

By the way generic advice when buying a home is that you're better off renting if you stay less than 5 years due solely to the transaction costs of buying/selling. I get that in this case you weren't expecting to be this uncertain. However it's something for you to think about for next time.

If you talk to my husband, he would tell you he would die in this house, so yes, he would be here longer than 5 years.  Uh, me, I am having a very hard period of adjustment. It's freaking cold up here, BTW.

Dicey

  • Walrus Stache
  • *******
  • Posts: 9968
  • Age: 61
  • Location: NorCal
Re: DONT Payoff your Mortgage Club
« Reply #1512 on: May 23, 2019, 04:21:54 PM »
Awesome! Thank you for the breakdown in point two. I am sensing I need to figure out if we are going to stay in this house for longer than 3 years. We moved from NC to MA and it is quite an adjustment I was not prepared for.

By the way generic advice when buying a home is that you're better off renting if you stay less than 5 years due solely to the transaction costs of buying/selling. I get that in this case you weren't expecting to be this uncertain. However it's something for you to think about for next time.

If you talk to my husband, he would tell you he would die in this house, so yes, he would be here longer than 5 years.  Uh, me, I am having a very hard period of adjustment. It's freaking cold up here, BTW.
Maybe work like hell to get to FIRE, then move somewhere warmer? Or be a snowbirds between two low cost areas?

If you even think you might stay five years, then my vote is do it. If you move in less time, the "loss" won't be horribly significant.

talltexan

  • Handlebar Stache
  • *****
  • Posts: 2398
Re: DONT Payoff your Mortgage Club
« Reply #1513 on: May 24, 2019, 08:11:04 AM »
Second question: how certain are you that rates won't fall further?

That's not much different from trying to time the stock market is it? Also, how much lower than 3.75% are you expecting 30-year rates to get? My rate is an astonishingly-low 2.5%, but that's the 10-year rate on a 10/1 ARM. At the time 30-year Fixed rates were about the same, 3.5% or so.

It all does come down to how long you're going to stay in the house though, or more specifically how long you're going to keep this mortgage with the house. If you're going to be refinancing every 6 months chasing lower rates then you'll never make up the cost.

I'd say mortgage rate selection is more like worrying about "market timing" during the 3-5 years surrounding retirement. It's a big amount of money relative to your net worth, rather than the little drips that we are conditioned to invest monthly.

And closing costs are large, much larger than the fees associated with investing in today's retail investing market place.

talltexan

  • Handlebar Stache
  • *****
  • Posts: 2398
Re: DONT Payoff your Mortgage Club
« Reply #1514 on: May 30, 2019, 09:42:00 AM »
I know that many of you are 100% VTI, and there's quite a bit of discussion about stock investing with all that fiscal space you created with your mortgage.

But I happened to see this interesting blog post from Financial Samurai about using bonds instead of stocks:

https://www.financialsamurai.com/the-case-for-buying-bonds-living-for-free-and-other-benefits/

Blahhhh456

  • 5 O'Clock Shadow
  • *
  • Posts: 85
Re: DONT Payoff your Mortgage Club
« Reply #1515 on: May 30, 2019, 02:37:14 PM »
Awesome! Thank you for the breakdown in point two. I am sensing I need to figure out if we are going to stay in this house for longer than 3 years. We moved from NC to MA and it is quite an adjustment I was not prepared for.

By the way generic advice when buying a home is that you're better off renting if you stay less than 5 years due solely to the transaction costs of buying/selling. I get that in this case you weren't expecting to be this uncertain. However it's something for you to think about for next time.

If you talk to my husband, he would tell you he would die in this house, so yes, he would be here longer than 5 years.  Uh, me, I am having a very hard period of adjustment. It's freaking cold up here, BTW.
Maybe work like hell to get to FIRE, then move somewhere warmer? Or be a snowbirds between two low cost areas?

If you even think you might stay five years, then my vote is do it. If you move in less time, the "loss" won't be horribly significant.

Thanks Dicey!! We are certainly working towards FIRE in 5.5 years and taking the mortgage with us along for the ride. :)

Raenia

  • Pencil Stache
  • ****
  • Posts: 946
Re: DONT Payoff your Mortgage Club
« Reply #1516 on: June 01, 2019, 05:53:16 AM »
Mortgage officially acquired!  30yr fixed rate, 4.25%, for $219,450.  Monthly payment $1525.07 including PMI and escrow for tax and insurance.  Here we go!

protostache

  • Pencil Stache
  • ****
  • Posts: 895
Re: DONT Payoff your Mortgage Club
« Reply #1517 on: June 01, 2019, 09:41:26 AM »
Mortgage officially acquired!  30yr fixed rate, 4.25%, for $219,450.  Monthly payment $1525.07 including PMI and escrow for tax and insurance.  Here we go!

Nice! You might consider dropping the escrow when you're able. The bank might make you wait until you get rid of PMI. I like having a stable, consistent payment to budget around. With escrow I found that the bank did not do a good job guesstimating and so our payment changed every year. Now we just pay taxes and insurance out of cash flow when they're due.

dandarc

  • Magnum Stache
  • ******
  • Posts: 3375
  • Age: 36
Re: DONT Payoff your Mortgage Club
« Reply #1518 on: June 01, 2019, 10:23:40 AM »
Now we just pay taxes and insurance out of cash flow when they're due.



"Seriously you must jest! How can anyone possibly afford to pay for any housing costs out of pocket!?" - Mainstream Financial News

Dicey

  • Walrus Stache
  • *******
  • Posts: 9968
  • Age: 61
  • Location: NorCal
Re: DONT Payoff your Mortgage Club
« Reply #1519 on: June 01, 2019, 07:15:14 PM »
Now we just pay taxes and insurance out of cash flow when they're due.
"Seriously you must jest! How can anyone possibly afford to pay for any housing costs out of pocket!?" - Mainstream Financial News
The smart ones who feather their own nest before giving truckloads of moolah to the bank prematurely, that's who!

Raenia

  • Pencil Stache
  • ****
  • Posts: 946
Re: DONT Payoff your Mortgage Club
« Reply #1520 on: June 02, 2019, 05:33:22 AM »
Mortgage officially acquired!  30yr fixed rate, 4.25%, for $219,450.  Monthly payment $1525.07 including PMI and escrow for tax and insurance.  Here we go!

Nice! You might consider dropping the escrow when you're able. The bank might make you wait until you get rid of PMI. I like having a stable, consistent payment to budget around. With escrow I found that the bank did not do a good job guesstimating and so our payment changed every year. Now we just pay taxes and insurance out of cash flow when they're due.

Thanks for the tip, we'll definitely look into it.  I suspect since this is our first mortgage, they won't trust us to know how to pay bills properly yet, but in a few years they should realize better!

talltexan

  • Handlebar Stache
  • *****
  • Posts: 2398
Re: DONT Payoff your Mortgage Club
« Reply #1521 on: June 03, 2019, 07:50:20 AM »
I'll give a +1 to the Don't payoff your taxes through escrow club. Just write the check, once a year. You're a mustachian, this should be no big problem for you.

If you need help, we can turn the posts here into a contest to see who's setting the most money aside in a savings account to pay their tax bill.

Raenia

  • Pencil Stache
  • ****
  • Posts: 946
Re: DONT Payoff your Mortgage Club
« Reply #1522 on: June 03, 2019, 07:52:51 AM »
I'll give a +1 to the Don't payoff your taxes through escrow club. Just write the check, once a year. You're a mustachian, this should be no big problem for you.

If you need help, we can turn the posts here into a contest to see who's setting the most money aside in a savings account to pay their tax bill.

Oh, I'm not at all worried about saving up for taxes, our property tax isn't even very high.  But the bank required the escrow account as a condition of the mortgage, so I'll have to work with them to see if/when they'll allow us to drop the escrow and pay it ourselves.

talltexan

  • Handlebar Stache
  • *****
  • Posts: 2398
Re: DONT Payoff your Mortgage Club
« Reply #1523 on: June 03, 2019, 08:27:09 AM »
We actually had a situation where we were offered a lower interest rate to accept escrow. We showed up at closing, but they'd drawn up the paperwork to have no escrow AND the lower rate. Our closing attorney told us to just sign the papers and not worry about it.

Villanelle

  • Magnum Stache
  • ******
  • Posts: 2588
Re: DONT Payoff your Mortgage Club
« Reply #1524 on: June 03, 2019, 08:40:37 AM »
I've always been in the "don't pay it off camp" but I'm having doubts and need a sanity check.  I just realized that our mortgage balance is less than the amount available on our HELOC (which is also way less--6 figures--than our equity, so little chance of it being canceled).  Our HELOC is about 2.8% interest vs. 4.25 for the mortgage.  However, the HELOC only has about 6 years left on it (at which point it would need to be paid off in full, or perhaps rolled over into a newly issued HELOC, but surely with less favorable terms than we currently have) vs 12 for the mortgage, and it is adjustable.  (We can also lock it, but I'm not sure what that rate is and when I called, they were little help because they said they couldn't tell me that unless I had a balance, which is weird, but whatever.)  So if I paid off the mortgage with that money, I'd pay off the HELOC very aggressively.

What say you?  Leave it alone or shave off about a point and a half in interest and take on the risk of an adjustable rate, which would necessitate an aggressive pay off?

If it matters, the place is currently a rental and it's doubtful we'd ever live in it again.

talltexan

  • Handlebar Stache
  • *****
  • Posts: 2398
Re: DONT Payoff your Mortgage Club
« Reply #1525 on: June 03, 2019, 12:09:19 PM »
What about "both and"

Each month, as you pay toward your mortgage, borrow enough to offset principal on your HELOC, keeping your total loan balance steady during the next six years.

Put that extra into $VTI, then--six years later--you can withdraw the principal to slay your remaining balance.

SwordGuy

  • Walrus Stache
  • *******
  • Posts: 5182
  • Location: Fayetteville, NC
Re: DONT Payoff your Mortgage Club
« Reply #1526 on: June 03, 2019, 02:46:06 PM »
What about "both and"

Each month, as you pay toward your mortgage, borrow enough to offset principal on your HELOC, keeping your total loan balance steady during the next six years.

Put that extra into $VTI, then--six years later--you can withdraw the principal to slay your remaining balance.

Huh??

Could you explain a bit more?

Because this doesn't seem like a good time to borrow extra money to invest...

Telecaster

  • Handlebar Stache
  • *****
  • Posts: 1780
  • Location: Seattle, WA
Re: DONT Payoff your Mortgage Club
« Reply #1527 on: June 03, 2019, 04:11:08 PM »
I've always been in the "don't pay it off camp" but I'm having doubts and need a sanity check.  I just realized that our mortgage balance is less than the amount available on our HELOC (which is also way less--6 figures--than our equity, so little chance of it being canceled).  Our HELOC is about 2.8% interest vs. 4.25 for the mortgage.  However, the HELOC only has about 6 years left on it (at which point it would need to be paid off in full, or perhaps rolled over into a newly issued HELOC, but surely with less favorable terms than we currently have) vs 12 for the mortgage, and it is adjustable.  (We can also lock it, but I'm not sure what that rate is and when I called, they were little help because they said they couldn't tell me that unless I had a balance, which is weird, but whatever.)  So if I paid off the mortgage with that money, I'd pay off the HELOC very aggressively.

What say you?  Leave it alone or shave off about a point and a half in interest and take on the risk of an adjustable rate, which would necessitate an aggressive pay off?

If it matters, the place is currently a rental and it's doubtful we'd ever live in it again.

I'd look at how adjustable the HELOC is.  There is usually a limit how fast they can adjust upwards.   I'd assume worst case scenario, and assume it will adjust upwards as fast as it can.  That's really the risk in this scenario. 

The next step is to do an A - B comparison.  You could kill the mortgage immediately, and presumably because the HELOC has lower interest, you could make the same payment and pay down the HELOC faster than you could the mortgage.  You just have to be reasonably sure of paying off the HELOC before you get into the danger zone of the HELOC possibly adjusting upwards.  That might require increasing your monthly payment, which means it probably isn't worth doing. 

nereo

  • Senior Mustachian
  • ********
  • Posts: 10227
  • Location: la belle province
    • Here's how you can support science today:
Re: DONT Payoff your Mortgage Club
« Reply #1528 on: June 03, 2019, 05:21:21 PM »

Because this doesn't seem like a good time to borrow extra money to invest...

Why do you say this?  Interest rates are near historic lows... why is now not a good time?

tralfamadorian

  • Handlebar Stache
  • *****
  • Posts: 1210
Re: DONT Payoff your Mortgage Club
« Reply #1529 on: June 03, 2019, 06:23:22 PM »
I'd look at how adjustable the HELOC is.  There is usually a limit how fast they can adjust upwards.   I'd assume worst case scenario, and assume it will adjust upwards as fast as it can.  That's really the risk in this scenario. 

Speaking of worst case scenarios- most HELOCs are callable and quite a few people had their financial lives ruined in the great recession by HELOCs called due. Personally for that reason, I would give preference to a fixed rate, non-callable mortgage over a HELOC any day and consider the extra percentage or two money well spent.

Telecaster

  • Handlebar Stache
  • *****
  • Posts: 1780
  • Location: Seattle, WA
Re: DONT Payoff your Mortgage Club
« Reply #1530 on: June 03, 2019, 09:50:19 PM »
Speaking of worst case scenarios- most HELOCs are callable and quite a few people had their financial lives ruined in the great recession by HELOCs called due. Personally for that reason, I would give preference to a fixed rate, non-callable mortgage over a HELOC any day and consider the extra percentage or two money well spent.

HELOCs are almost never called, but they can be frozen.   Since the OP apparently has a low LTV (given that his HELOC size could be larger than his mortgage) and presumably will continue to make payments on time, getting called is pretty remote.  If the OP can't make payments, then he would get foreclosed on anyway.

I agree, a 30-year fixed is the safest option.  The OP needs to evaluate the increased risk of a HELOC with the potential reward. 

talltexan

  • Handlebar Stache
  • *****
  • Posts: 2398
Re: DONT Payoff your Mortgage Club
« Reply #1531 on: June 04, 2019, 08:40:04 AM »
What about "both and"

Each month, as you pay toward your mortgage, borrow enough to offset principal on your HELOC, keeping your total loan balance steady during the next six years.

Put that extra into $VTI, then--six years later--you can withdraw the principal to slay your remaining balance.

Huh??

Could you explain a bit more?

Because this doesn't seem like a good time to borrow extra money to invest...

Six years is a long enough time that $VTI will gain in share price, particularly if you're DCA'ing into it.

But keeping your HELOC balance fairly small will mitigate the risk associated with having the loan called. So I would literally tap the HELOC a few hundred $'s at a time, DCA the extra into VTI, and then--when the loan term is up--have a big enough pot to pay off whatever is due.

solon

  • Handlebar Stache
  • *****
  • Posts: 1524
  • Age: 1818
  • Location: CO
Re: DONT Payoff your Mortgage Club
« Reply #1532 on: June 17, 2019, 02:58:31 PM »
I'm slowly trying to break through to a couple I know, who are good friends, who are convinced paying the mortgage off RIGHT NOW is the best way to go. I put together a little story, deliberately trying to keep it simple. How could I improve it?


One person, we'll call him Ross, decided he wanted to pay off his mortgage as quickly as possible. His normal payment was $1,000, and he has another $1,500 per month he could put toward the principle. This will get his mortgage paid off in about 8 years.

Another person, we'll call him Mr. White, also wanted to pay off his mortgage as quickly as possible. His normal payment was $1,000, and he also had another $1,500, but instead of sending it to the bank, he put it in a safe investment that he maintained control of. Because the interest on this investment is the same as his mortgage rate, he will have enough to pay off his mortgage in 8 years. His plan is to pay the mortgage in one lump sum when his invested balance equals the remaining principle balance on the mortgage.

If Ross suffers a job loss in year 5, he still has a mortgage payment due next month. He has no "mortgage repayment fund" and the bank will offer him no leniency because of his accelerated payments over the last 5 years.

If Mr. White suffers a job loss in year 5, he still has a mortgage payment due next month, but he has 5 years worth of mortgage payments saved up. He can weather a much longer period of unemployment than Ross can.

EngagedToFIRE

  • 5 O'Clock Shadow
  • *
  • Posts: 80
Re: DONT Payoff your Mortgage Club
« Reply #1533 on: June 17, 2019, 03:07:22 PM »
I'm slowly trying to break through to a couple I know, who are good friends, who are convinced paying the mortgage off RIGHT NOW is the best way to go. I put together a little story, deliberately trying to keep it simple. How could I improve it?


One person, we'll call him Ross, decided he wanted to pay off his mortgage as quickly as possible. His normal payment was $1,000, and he has another $1,500 per month he could put toward the principle. This will get his mortgage paid off in about 8 years.

Another person, we'll call him Mr. White, also wanted to pay off his mortgage as quickly as possible. His normal payment was $1,000, and he also had another $1,500, but instead of sending it to the bank, he put it in a safe investment that he maintained control of. Because the interest on this investment is the same as his mortgage rate, he will have enough to pay off his mortgage in 8 years. His plan is to pay the mortgage in one lump sum when his invested balance equals the remaining principle balance on the mortgage.

If Ross suffers a job loss in year 5, he still has a mortgage payment due next month. He has no "mortgage repayment fund" and the bank will offer him no leniency because of his accelerated payments over the last 5 years.

If Mr. White suffers a job loss in year 5, he still has a mortgage payment due next month, but he has 5 years worth of mortgage payments saved up. He can weather a much longer period of unemployment than Ross can.

Has Ross heard of an equity line of credit?

And you are forgetting something very important, which is the human aspect.  Maybe your friends would be more likely to blow through their saved up funds for some sort of drummed up nonsensical reason... "Well, we can afford the trip to Europe, we'll replace it fast enough."  Really, if the goal is to pay off in 8 years, thus accelerating the payoff, then maybe just putting the extra money in every month is right for these people.  Don't underestimate how tempting a big pot of money is to many, many people (most people?).

Regardless, it sounds like both scenarios are squarely in the "payoff your mortgage club."

Your advice doesn't make a lot of sense to me, to be honest.  If you are going to put it in a fund that generates the same return as the mortgage.. then the only point is liquidity?  Liquidity can be had with a HELOC, credit cards, brokerage account, emergency fund, etc.   And what sort of safe investment are you suggesting that would be a safer investment than paying off the mortgage?  You are suggesting one that has the same return, but almost certainly isn't as safe an investment as just paying the mortgage directly.  Keep in mind, as you put money towards the mortgage, the payment may stay the same, but interest is reduced.  So they are getting a solid return IF THAT is their goal.  The only reason I would suggest not going this route is to seek higher returns via an index fund, with the understanding that economic forces may mean waiting longer to pay off the mortgage if the time isn't right to cash it out in 8 years.
« Last Edit: June 17, 2019, 03:10:21 PM by EngagedToFIRE »

never give up

  • Handlebar Stache
  • *****
  • Posts: 1723
  • Location: UK
  • Not spending like there is tomorrow
Re: DONT Payoff your Mortgage Club
« Reply #1534 on: June 17, 2019, 03:16:21 PM »
I find it interesting how mortgage products differ between countries. Do you not have mortgage payment holidays or mortgage overpayment borrow back features in your mortgages? The former lets someone take a few months off from paying a mortgage, useful in a job loss scenario, where the latter keeps overpayments in a separate reserve that can be borrowed back if needed. This is also useful in a job loss scenario.

solon

  • Handlebar Stache
  • *****
  • Posts: 1524
  • Age: 1818
  • Location: CO
Re: DONT Payoff your Mortgage Club
« Reply #1535 on: June 17, 2019, 04:34:56 PM »
I'm slowly trying to break through to a couple I know, who are good friends, who are convinced paying the mortgage off RIGHT NOW is the best way to go. I put together a little story, deliberately trying to keep it simple. How could I improve it?


One person, we'll call him Ross, decided he wanted to pay off his mortgage as quickly as possible. His normal payment was $1,000, and he has another $1,500 per month he could put toward the principle. This will get his mortgage paid off in about 8 years.

Another person, we'll call him Mr. White, also wanted to pay off his mortgage as quickly as possible. His normal payment was $1,000, and he also had another $1,500, but instead of sending it to the bank, he put it in a safe investment that he maintained control of. Because the interest on this investment is the same as his mortgage rate, he will have enough to pay off his mortgage in 8 years. His plan is to pay the mortgage in one lump sum when his invested balance equals the remaining principle balance on the mortgage.

If Ross suffers a job loss in year 5, he still has a mortgage payment due next month. He has no "mortgage repayment fund" and the bank will offer him no leniency because of his accelerated payments over the last 5 years.

If Mr. White suffers a job loss in year 5, he still has a mortgage payment due next month, but he has 5 years worth of mortgage payments saved up. He can weather a much longer period of unemployment than Ross can.

Has Ross heard of an equity line of credit?

And you are forgetting something very important, which is the human aspect.  Maybe your friends would be more likely to blow through their saved up funds for some sort of drummed up nonsensical reason... "Well, we can afford the trip to Europe, we'll replace it fast enough."  Really, if the goal is to pay off in 8 years, thus accelerating the payoff, then maybe just putting the extra money in every month is right for these people.  Don't underestimate how tempting a big pot of money is to many, many people (most people?).

Regardless, it sounds like both scenarios are squarely in the "payoff your mortgage club."

Your advice doesn't make a lot of sense to me, to be honest.  If you are going to put it in a fund that generates the same return as the mortgage.. then the only point is liquidity?  Liquidity can be had with a HELOC, credit cards, brokerage account, emergency fund, etc.   And what sort of safe investment are you suggesting that would be a safer investment than paying off the mortgage?  You are suggesting one that has the same return, but almost certainly isn't as safe an investment as just paying the mortgage directly.  Keep in mind, as you put money towards the mortgage, the payment may stay the same, but interest is reduced.  So they are getting a solid return IF THAT is their goal.  The only reason I would suggest not going this route is to seek higher returns via an index fund, with the understanding that economic forces may mean waiting longer to pay off the mortgage if the time isn't right to cash it out in 8 years.

Ross represents the pay off your mortgage club, yes. He's the one I'm trying to convince to change sides (without him realizing I'm doing that). Mr. White represents one small step in the right direction. I just want him to see that the two scenarios are the same, except that one is better.

Malkynn

  • Pencil Stache
  • ****
  • Posts: 877
Re: DONT Payoff your Mortgage Club
« Reply #1536 on: June 17, 2019, 04:53:05 PM »
I find it interesting how mortgage products differ between countries. Do you not have mortgage payment holidays or mortgage overpayment borrow back features in your mortgages? The former lets someone take a few months off from paying a mortgage, useful in a job loss scenario, where the latter keeps overpayments in a separate reserve that can be borrowed back if needed. This is also useful in a job loss scenario.

Lol, no, no, we don't. Sounds delightful though.

EngagedToFIRE

  • 5 O'Clock Shadow
  • *
  • Posts: 80
Re: DONT Payoff your Mortgage Club
« Reply #1537 on: June 17, 2019, 06:58:23 PM »
I'm slowly trying to break through to a couple I know, who are good friends, who are convinced paying the mortgage off RIGHT NOW is the best way to go. I put together a little story, deliberately trying to keep it simple. How could I improve it?


One person, we'll call him Ross, decided he wanted to pay off his mortgage as quickly as possible. His normal payment was $1,000, and he has another $1,500 per month he could put toward the principle. This will get his mortgage paid off in about 8 years.

Another person, we'll call him Mr. White, also wanted to pay off his mortgage as quickly as possible. His normal payment was $1,000, and he also had another $1,500, but instead of sending it to the bank, he put it in a safe investment that he maintained control of. Because the interest on this investment is the same as his mortgage rate, he will have enough to pay off his mortgage in 8 years. His plan is to pay the mortgage in one lump sum when his invested balance equals the remaining principle balance on the mortgage.

If Ross suffers a job loss in year 5, he still has a mortgage payment due next month. He has no "mortgage repayment fund" and the bank will offer him no leniency because of his accelerated payments over the last 5 years.

If Mr. White suffers a job loss in year 5, he still has a mortgage payment due next month, but he has 5 years worth of mortgage payments saved up. He can weather a much longer period of unemployment than Ross can.

Has Ross heard of an equity line of credit?

And you are forgetting something very important, which is the human aspect.  Maybe your friends would be more likely to blow through their saved up funds for some sort of drummed up nonsensical reason... "Well, we can afford the trip to Europe, we'll replace it fast enough."  Really, if the goal is to pay off in 8 years, thus accelerating the payoff, then maybe just putting the extra money in every month is right for these people.  Don't underestimate how tempting a big pot of money is to many, many people (most people?).

Regardless, it sounds like both scenarios are squarely in the "payoff your mortgage club."

Your advice doesn't make a lot of sense to me, to be honest.  If you are going to put it in a fund that generates the same return as the mortgage.. then the only point is liquidity?  Liquidity can be had with a HELOC, credit cards, brokerage account, emergency fund, etc.   And what sort of safe investment are you suggesting that would be a safer investment than paying off the mortgage?  You are suggesting one that has the same return, but almost certainly isn't as safe an investment as just paying the mortgage directly.  Keep in mind, as you put money towards the mortgage, the payment may stay the same, but interest is reduced.  So they are getting a solid return IF THAT is their goal.  The only reason I would suggest not going this route is to seek higher returns via an index fund, with the understanding that economic forces may mean waiting longer to pay off the mortgage if the time isn't right to cash it out in 8 years.

Ross represents the pay off your mortgage club, yes. He's the one I'm trying to convince to change sides (without him realizing I'm doing that). Mr. White represents one small step in the right direction. I just want him to see that the two scenarios are the same, except that one is better.

But your Mr. White is not better.  It's bad advice.  And both are squarely in the payoff your mortgage club, period.  The don't pay off your mortgage club is about holding the mortgage as long as possible and seeking higher returns elsewhere.  Your own advice suggests a safe investment with a similar interest rate as the mortgage, with the goal of paying it off in the same time frame.  That's not good advice.  Just put it towards the mortgage, as they appear to be doing, if that is the goal.

If you want to sell your friends on the "don't" pay off your mortgage club, then you need to sell them on keeping the mortgage for the duration, and that low cost index funds, over the same duration, are highly likely to produce a much higher return.  But they really need to understand what that means, it's not the best solution for everyone.
« Last Edit: June 17, 2019, 06:59:56 PM by EngagedToFIRE »

tyort1

  • Handlebar Stache
  • *****
  • Posts: 2272
  • Age: 47
  • Location: Denver, Colorado
Re: DONT Payoff your Mortgage Club
« Reply #1538 on: June 17, 2019, 07:13:34 PM »
I'm slowly trying to break through to a couple I know, who are good friends, who are convinced paying the mortgage off RIGHT NOW is the best way to go. I put together a little story, deliberately trying to keep it simple. How could I improve it?


One person, we'll call him Ross, decided he wanted to pay off his mortgage as quickly as possible. His normal payment was $1,000, and he has another $1,500 per month he could put toward the principle. This will get his mortgage paid off in about 8 years.

Another person, we'll call him Mr. White, also wanted to pay off his mortgage as quickly as possible. His normal payment was $1,000, and he also had another $1,500, but instead of sending it to the bank, he put it in a safe investment that he maintained control of. Because the interest on this investment is the same as his mortgage rate, he will have enough to pay off his mortgage in 8 years. His plan is to pay the mortgage in one lump sum when his invested balance equals the remaining principle balance on the mortgage.

If Ross suffers a job loss in year 5, he still has a mortgage payment due next month. He has no "mortgage repayment fund" and the bank will offer him no leniency because of his accelerated payments over the last 5 years.

If Mr. White suffers a job loss in year 5, he still has a mortgage payment due next month, but he has 5 years worth of mortgage payments saved up. He can weather a much longer period of unemployment than Ross can.

Has Ross heard of an equity line of credit?

And you are forgetting something very important, which is the human aspect.  Maybe your friends would be more likely to blow through their saved up funds for some sort of drummed up nonsensical reason... "Well, we can afford the trip to Europe, we'll replace it fast enough."  Really, if the goal is to pay off in 8 years, thus accelerating the payoff, then maybe just putting the extra money in every month is right for these people.  Don't underestimate how tempting a big pot of money is to many, many people (most people?).

Regardless, it sounds like both scenarios are squarely in the "payoff your mortgage club."

Your advice doesn't make a lot of sense to me, to be honest.  If you are going to put it in a fund that generates the same return as the mortgage.. then the only point is liquidity?  Liquidity can be had with a HELOC, credit cards, brokerage account, emergency fund, etc.   And what sort of safe investment are you suggesting that would be a safer investment than paying off the mortgage?  You are suggesting one that has the same return, but almost certainly isn't as safe an investment as just paying the mortgage directly.  Keep in mind, as you put money towards the mortgage, the payment may stay the same, but interest is reduced.  So they are getting a solid return IF THAT is their goal.  The only reason I would suggest not going this route is to seek higher returns via an index fund, with the understanding that economic forces may mean waiting longer to pay off the mortgage if the time isn't right to cash it out in 8 years.

Ross represents the pay off your mortgage club, yes. He's the one I'm trying to convince to change sides (without him realizing I'm doing that). Mr. White represents one small step in the right direction. I just want him to see that the two scenarios are the same, except that one is better.

But your Mr. White is not better.  It's bad advice.  And both are squarely in the payoff your mortgage club, period.  The don't pay off your mortgage club is about holding the mortgage as long as possible and seeking higher returns elsewhere.  Your own advice suggests a safe investment with a similar interest rate as the mortgage, with the goal of paying it off in the same time frame.  That's not good advice.  Just put it towards the mortgage, as they appear to be doing, if that is the goal.

If you want to sell your friends on the "don't" pay off your mortgage club, then you need to sell them on keeping the mortgage for the duration, and that low cost index funds, over the same duration, are highly likely to produce a much higher return.  But they really need to understand what that means, it's not the best solution for everyone.

In the event of job loss, it's far better to be liquid than not.

Dicey

  • Walrus Stache
  • *******
  • Posts: 9968
  • Age: 61
  • Location: NorCal
Re: DONT Payoff your Mortgage Club
« Reply #1539 on: June 17, 2019, 10:52:31 PM »
Dear @EngagedToFIRE,
You have stumbled into the DPOYM Club, wherein you may not argue with the basic assumption of the thread. Why? Because we are not allowed to present any other POV over on the Pay Off Your Mortgage thread. They wanted to celebrate their decision(s) with their fingers in their ears, saying, "La la la, I can't hear you", and the moderators agreed, so this thread was established. Therefore, you may not come here and tell us we're wrong. You can ask questions, and think and learn. If you choose to make a different decision for yourself, the other thread will welcome you with open arms. Over there, you can talk all the smack you want about this group, because we won't be there to see what is being said, but please do not do that here.
Sincerely,
Dicey

CorpRaider

  • Bristles
  • ***
  • Posts: 401
    • The Corpraider Blog
Re: DONT Payoff your Mortgage Club
« Reply #1540 on: June 18, 2019, 08:17:02 AM »
He sort of has a point though.  The example really still results in prepayment of the mortgage and only emphasizes the liquidity advantage over a brief period, not expected excess returns from other sources stretched over 30 years.  Also, maybe add in a meth den popping up next door.  :-)

EngagedToFIRE

  • 5 O'Clock Shadow
  • *
  • Posts: 80
Re: DONT Payoff your Mortgage Club
« Reply #1541 on: June 18, 2019, 08:29:21 AM »
I'm slowly trying to break through to a couple I know, who are good friends, who are convinced paying the mortgage off RIGHT NOW is the best way to go. I put together a little story, deliberately trying to keep it simple. How could I improve it?


One person, we'll call him Ross, decided he wanted to pay off his mortgage as quickly as possible. His normal payment was $1,000, and he has another $1,500 per month he could put toward the principle. This will get his mortgage paid off in about 8 years.

Another person, we'll call him Mr. White, also wanted to pay off his mortgage as quickly as possible. His normal payment was $1,000, and he also had another $1,500, but instead of sending it to the bank, he put it in a safe investment that he maintained control of. Because the interest on this investment is the same as his mortgage rate, he will have enough to pay off his mortgage in 8 years. His plan is to pay the mortgage in one lump sum when his invested balance equals the remaining principle balance on the mortgage.

If Ross suffers a job loss in year 5, he still has a mortgage payment due next month. He has no "mortgage repayment fund" and the bank will offer him no leniency because of his accelerated payments over the last 5 years.

If Mr. White suffers a job loss in year 5, he still has a mortgage payment due next month, but he has 5 years worth of mortgage payments saved up. He can weather a much longer period of unemployment than Ross can.

Has Ross heard of an equity line of credit?

And you are forgetting something very important, which is the human aspect.  Maybe your friends would be more likely to blow through their saved up funds for some sort of drummed up nonsensical reason... "Well, we can afford the trip to Europe, we'll replace it fast enough."  Really, if the goal is to pay off in 8 years, thus accelerating the payoff, then maybe just putting the extra money in every month is right for these people.  Don't underestimate how tempting a big pot of money is to many, many people (most people?).

Regardless, it sounds like both scenarios are squarely in the "payoff your mortgage club."

Your advice doesn't make a lot of sense to me, to be honest.  If you are going to put it in a fund that generates the same return as the mortgage.. then the only point is liquidity?  Liquidity can be had with a HELOC, credit cards, brokerage account, emergency fund, etc.   And what sort of safe investment are you suggesting that would be a safer investment than paying off the mortgage?  You are suggesting one that has the same return, but almost certainly isn't as safe an investment as just paying the mortgage directly.  Keep in mind, as you put money towards the mortgage, the payment may stay the same, but interest is reduced.  So they are getting a solid return IF THAT is their goal.  The only reason I would suggest not going this route is to seek higher returns via an index fund, with the understanding that economic forces may mean waiting longer to pay off the mortgage if the time isn't right to cash it out in 8 years.

Ross represents the pay off your mortgage club, yes. He's the one I'm trying to convince to change sides (without him realizing I'm doing that). Mr. White represents one small step in the right direction. I just want him to see that the two scenarios are the same, except that one is better.

But your Mr. White is not better.  It's bad advice.  And both are squarely in the payoff your mortgage club, period.  The don't pay off your mortgage club is about holding the mortgage as long as possible and seeking higher returns elsewhere.  Your own advice suggests a safe investment with a similar interest rate as the mortgage, with the goal of paying it off in the same time frame.  That's not good advice.  Just put it towards the mortgage, as they appear to be doing, if that is the goal.

If you want to sell your friends on the "don't" pay off your mortgage club, then you need to sell them on keeping the mortgage for the duration, and that low cost index funds, over the same duration, are highly likely to produce a much higher return.  But they really need to understand what that means, it's not the best solution for everyone.

In the event of job loss, it's far better to be liquid than not.

HELOC.  MMM talks about exactly how to handle situations like this:  https://youtu.be/tFpJrqp0l_4?t=628

In fact, he actually recommends NOT selling shares for liquidity and instead, the HELOC is a better solution.
« Last Edit: June 18, 2019, 08:43:19 AM by EngagedToFIRE »

EngagedToFIRE

  • 5 O'Clock Shadow
  • *
  • Posts: 80
Re: DONT Payoff your Mortgage Club
« Reply #1542 on: June 18, 2019, 08:34:53 AM »
He sort of has a point though.  The example really still results in prepayment of the mortgage and only emphasizes the liquidity advantage over a brief period, not expected excess returns from other sources stretched over 30 years.  Also, maybe add in a meth den popping up next door.  :-)

Correct.  The examples suggest liquidity but are not necessarily any more liquid.  So the benefit is non existent.  It just didn't make any sense.  I'm not arguing at all about whether someone should pay off their mortgage, as both examples were literally "pay off your mortgage early in 8 years"...

DadJokes

  • Bristles
  • ***
  • Posts: 455
Re: DONT Payoff your Mortgage Club
« Reply #1543 on: June 18, 2019, 08:55:15 AM »
He sort of has a point though.  The example really still results in prepayment of the mortgage and only emphasizes the liquidity advantage over a brief period, not expected excess returns from other sources stretched over 30 years.  Also, maybe add in a meth den popping up next door.  :-)

Correct.  The examples suggest liquidity but are not necessarily any more liquid.  So the benefit is non existent.  It just didn't make any sense.  I'm not arguing at all about whether someone should pay off their mortgage, as both examples were literally "pay off your mortgage early in 8 years"...

His hypothetical operated under the fictitious assumption that the mortgage interest rate is the same as the market interest rate. I believe the annualized market rate has been ~9%, whereas current mortgage rates are less than half that. If we include that in the scenario, then Mr. White's in a much better position.

To throw the numbers in, let's say they both currently owe $240k on their mortgage at 4% and have 20.5 years left on their mortgages (original principal balance of $300k).

Ross puts $1,500/month toward the mortgage and pays his house off in 8 years, 3 months, over 12 years faster than he would have with minimum payments.

Mr. White puts $1,500/month in the S&P 500. On the day that Ross paid off his mortgage, Mr. White still owes $168.6k on his, but has nearly $209.8k in that investment account. He could pay off the house in one fell swoop and have an extra $41k. Of course, we hope that Mr. White will see that the money can work harder for him in the stock market and will continue to make minimum payments on the mortgage while throwing more money into his investments.
« Last Edit: June 18, 2019, 09:06:03 AM by DadJokes »

solon

  • Handlebar Stache
  • *****
  • Posts: 1524
  • Age: 1818
  • Location: CO
Re: DONT Payoff your Mortgage Club
« Reply #1544 on: June 18, 2019, 09:26:26 AM »
He sort of has a point though.  The example really still results in prepayment of the mortgage and only emphasizes the liquidity advantage over a brief period, not expected excess returns from other sources stretched over 30 years.  Also, maybe add in a meth den popping up next door.  :-)

Correct.  The examples suggest liquidity but are not necessarily any more liquid.  So the benefit is non existent.  It just didn't make any sense.  I'm not arguing at all about whether someone should pay off their mortgage, as both examples were literally "pay off your mortgage early in 8 years"...

His hypothetical operated under the fictitious assumption that the mortgage interest rate is the same as the market interest rate. I believe the annualized market rate has been ~9%, whereas current mortgage rates are less than half that. If we include that in the scenario, then Mr. White's in a much better position.

To throw the numbers in, let's say they both currently owe $240k on their mortgage at 4% and have 20.5 years left on their mortgages (original principal balance of $300k).

Ross puts $1,500/month toward the mortgage and pays his house off in 8 years, 3 months, over 12 years faster than he would have with minimum payments.

Mr. White puts $1,500/month in the S&P 500. On the day that Ross paid off his mortgage, Mr. White still owes $168.6k on his, but has nearly $209.8k in that investment account. He could pay off the house in one fell swoop and have an extra $41k. Of course, we hope that Mr. White will see that the money can work harder for him in the stock market and will continue to make minimum payments on the mortgage while throwing more money into his investments.

Many people in the pay off your mortgage camp get nervous when you start talking about stock market returns. The stock market is something they don't understand well enough to have confidence in, I guess. You are correct, of course, that superior stock market returns over 30 years are a better return than the mortgage, but I'm having trouble convincing people (and Ross specifically) of that. Even if you show them the numbers, they just say, "Yeah, but that's not guaranteed!"

The original story was an attempt to leave returns off the table so we don't get stuck in the weeds. (Too many metaphors.) Right now, I only want to demonstrate that even if your goal is to eliminate your mortgage, you are still better off not sending the money to the mortgage company.

EngagedToFIRE

  • 5 O'Clock Shadow
  • *
  • Posts: 80
Re: DONT Payoff your Mortgage Club
« Reply #1545 on: June 18, 2019, 09:37:05 AM »
He sort of has a point though.  The example really still results in prepayment of the mortgage and only emphasizes the liquidity advantage over a brief period, not expected excess returns from other sources stretched over 30 years.  Also, maybe add in a meth den popping up next door.  :-)

Correct.  The examples suggest liquidity but are not necessarily any more liquid.  So the benefit is non existent.  It just didn't make any sense.  I'm not arguing at all about whether someone should pay off their mortgage, as both examples were literally "pay off your mortgage early in 8 years"...

His hypothetical operated under the fictitious assumption that the mortgage interest rate is the same as the market interest rate. I believe the annualized market rate has been ~9%, whereas current mortgage rates are less than half that. If we include that in the scenario, then Mr. White's in a much better position.

To throw the numbers in, let's say they both currently owe $240k on their mortgage at 4% and have 20.5 years left on their mortgages (original principal balance of $300k).

Ross puts $1,500/month toward the mortgage and pays his house off in 8 years, 3 months, over 12 years faster than he would have with minimum payments.

Mr. White puts $1,500/month in the S&P 500. On the day that Ross paid off his mortgage, Mr. White still owes $168.6k on his, but has nearly $209.8k in that investment account. He could pay off the house in one fell swoop and have an extra $41k. Of course, we hope that Mr. White will see that the money can work harder for him in the stock market and will continue to make minimum payments on the mortgage while throwing more money into his investments.

Many people in the pay off your mortgage camp get nervous when you start talking about stock market returns. The stock market is something they don't understand well enough to have confidence in, I guess. You are correct, of course, that superior stock market returns over 30 years are a better return than the mortgage, but I'm having trouble convincing people (and Ross specifically) of that. Even if you show them the numbers, they just say, "Yeah, but that's not guaranteed!"

The original story was an attempt to leave returns off the table so we don't get stuck in the weeds. (Too many metaphors.) Right now, I only want to demonstrate that even if your goal is to eliminate your mortgage, you are still better off not sending the money to the mortgage company.

That's not at all what you wrote.  You said Mr. White would put his money in a "safe investment" with the "same return as his mortgage."  If the return is the same, then it makes no sense.  Leaving returns off the table essentially leaves the entire point off the table!  Instead you argued liquidity, and I'm assuming you did this with your friend as well.  That's just not good advice (see MMM video I posted above).  It's not going to resonate with your friends.  Simply because if your goal is to demonstrate it's better to not send the money to the bank for the mortgage, you haven't done that with the above scenario.

If the goal is paying off the mortgage in 8 years, an S&P 500 investment is hardly safe.  That's trying to time the market over a relatively short period of time.  If the goal is to invest in the S&P until both the market is up and you have enough to pay off the house, without a set time period, then it's probably good advice (and the advice I give, as well).

It seems your friends are in the pay off your mortgage club and you may be better served just letting them do that.  It can be a great idea for some people, depending on their financial discipline.  There is no right answer, neither club is right.  Your friends seem very interested in the lower risk, guaranteed returns of paying off their mortgage.  It's probably the right decision for them.  They are never going to see the light with long term stock investing without doing a LOT more reading and learning, and even then, there is the "unknown" that is difficult for a lot of people.
« Last Edit: June 18, 2019, 09:39:23 AM by EngagedToFIRE »

nereo

  • Senior Mustachian
  • ********
  • Posts: 10227
  • Location: la belle province
    • Here's how you can support science today:
Re: DONT Payoff your Mortgage Club
« Reply #1546 on: June 18, 2019, 09:47:25 AM »
No, holding money in a 'safe investment' (e.g. bonds)  is not the same as paying down your mortgage, even if the respective interest rates are comparable.  In the former you have your NW divided between two categories, your home (because you are still making minimum payments) and your 'safe investment'.  In the latter you have a higher percentage of your NW tied to your home.  Earlier you made the point for a HELOC, and indeed that can be one of several strategies to handle unexpected expenses/life emergencies.  However, as has been pointed out multiple times, HELOCs are often frozen during recessions, and their interest rates mirror prime + x%: they're a reliable option as long as the 'emergency' isn't coming during a downturn in the broader economy or during periods of higher interest rates.

robartsd

  • Handlebar Stache
  • *****
  • Posts: 2257
  • Location: Sacramento, CA
Re: DONT Payoff your Mortgage Club
« Reply #1547 on: June 18, 2019, 11:25:25 AM »
The don't pay off your mortgage club is about holding the mortgage as long as possible and seeking higher returns elsewhere.  Your own advice suggests a safe investment with a similar interest rate as the mortgage, with the goal of paying it off in the same time frame.  That's not good advice.
While you are correct about the optimum, a key DPYM principle is that a mortgage that is paid down, but not paid off, is not as flexible as having the funds in a liquid investment so it does not provide the security that most in the Payoff Your Mortgage club seek. Paying down the mortgage is sub-optimal AND the emotional reason (security) people argue that they don't care that it is sub-optimal is an illusion.

Do you not have mortgage payment holidays or mortgage overpayment borrow back features in your mortgages? The former lets someone take a few months off from paying a mortgage, useful in a job loss scenario, where the latter keeps overpayments in a separate reserve that can be borrowed back if needed. This is also useful in a job loss scenario.
Yes, if US mortgages had these features, paying the mortgage down early would provide the security many seek; however, I bet we wouldn't have low long term fixed rates if we did have those features. Imagine the investor holding a mortgage with a fixed rate below the current going rates that has 100k of extra principle payments made on it being required to allow the 100k to be borrowed back at the original fixed rates. HELOC is pretty much as close to this style of mortgage that we have. HELOC rates are generally not fixed and the lender can freeze the line of credit, preventing the borrower from borrowing more. Lenders are more likely to freeze a HELOC at the time when the borrower most needs financial flexibility.

never give up

  • Handlebar Stache
  • *****
  • Posts: 1723
  • Location: UK
  • Not spending like there is tomorrow
Re: DONT Payoff your Mortgage Club
« Reply #1548 on: June 18, 2019, 12:16:12 PM »
I see yes, thanks robertsd. In having those features most mortgages in the UK can only be fixed for two, three or five years. Personally I would rather have the long term fixed rate with less features/flexibility than the way it is here, but the differences are interesting.

CorpRaider

  • Bristles
  • ***
  • Posts: 401
    • The Corpraider Blog
Re: DONT Payoff your Mortgage Club
« Reply #1549 on: June 18, 2019, 12:22:08 PM »
Yeah I get it Salon.  Makes sense if that is your goal/feature you are trying to highlight. 

I also agree the HELOC is not an equivalent substitute for the liquid investments; if you've lost your job (or lending has dried up in a financial crisis, or your house won't appraise because the town factory shut down...thus you lost your job) you might not qualify for a HELOC.


Based on all the information I've gleaned via UK housing rental/slumlord shows on Netflix, I feel that your housing laws are in serious need of revision.  haha. 
« Last Edit: June 18, 2019, 12:26:10 PM by CorpRaider »