Author Topic: DONT Payoff your Mortgage Club  (Read 9623 times)

tyort1

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Re: DONT Payoff your Mortgage Club
« Reply #50 on: March 01, 2017, 09:30:15 AM »
25x expenses + total mortgage owed - someone posted that's their FI number and I'm stealing it!
Frugalite in training.

nara

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Re: DONT Payoff your Mortgage Club
« Reply #51 on: March 01, 2017, 08:02:00 PM »
We aren't paying it off early. We put down 50% and have 29 more years to go! We're not putting an extra penny into our minimum monthly payments. With out fixed rate of 3.75% our monthly payments will be virtually nothing in the next 15-20+ years!!!

SwordGuy

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Re: DONT Payoff your Mortgage Club
« Reply #52 on: March 01, 2017, 08:36:50 PM »
I went onto www.cFireSim.com and tested a couple of scenarios.  In about a year or so I'll have an infusion of cash that will let me pay off my current 15yr (then 14yr) mortgage early.    I'm testing out whether I should invest that money and pay the mortgage out of the invested money and its earnings.   The investment would be a 75/25% stock/bond split with Vanguard style fees:

$180,000 mortgage, 15 years, $1,235 P&I, 2.75% fixed rate.   Invest the $180,000 and pay out of that for the mortgage.  That works out to a non-inflation-adjusted yearly spend of $14,820.

cFireSim gave it an 80% success rate to pay off the mortgage and have money left over.   


$180,000 mortgage, 30 years, $771  P&I, 3.125% fixed rate.   That works out to a non-inflation-adjusted yearly spend of $9,252.

82% success rate.

The top five failures were in the $45,000 to $80,000 in the hole, rounded to the nearest $5,000.

It also doesn't take into account taxes, either for the mortgage insurance or the investment income.

Based on this, I'm leaning towards of paying it off early.  If I can get a fixed rate of return that's high enough to make this a winner for sure, I'll jump on not paying it off.   In theory I'll have enough surplus cash coming in to cover the bad sequence of returns cases, so maybe I should just get more intestinal fortitude.

I'm not sure I would recommend doing this to anyone who could not easily absorb an extra $45,000 to $80,000 drain on their stash to pay off the mortgage in a bad returns case.   



FrozenBits

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Re: DONT Payoff your Mortgage Club
« Reply #53 on: March 01, 2017, 09:00:52 PM »





$180,000 mortgage, 15 years, $1,235 P&I, 2.75% fixed rate.   Invest the $180,000 and pay out of that for the mortgage.  That works out to a non-inflation-adjusted yearly spend of $14,820.

cFireSim gave it an 80% success rate to pay off the mortgage and have money left over.   

I ran this and got a 91.73% success rate.

75% equities 25% bonds
180,000 portfolio balance
.05% fees for Vanguard
14,820 Non inflation adjusted spending.

Did you happen to run it for inflation adjusted spending?  That may be the difference.

I also ran your 30 year number assuming 100% equities with non inflation adjusted spending and got a 97.46% success rate.

The 30 year scenario had an average ending portfolio of over 500k.  Seems like a pretty good bet to me, but maybe I'm running the numbers wrong?  Seriously, I'm on my phone so cFireSim is a little tricky to work lol

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #54 on: March 02, 2017, 05:13:02 AM »
"It also doesn't take into account taxes, either for the mortgage insurance or the investment income."

Sword guy, are you saying that your current mortgage includes MI? If so, can you run a scenario where you pay down the mortgage enough to get rid of the useless (to you) MI and then let the balance of the mortgage ride to maturity? After getting rid of the MI, you can recast the loan to get maximum leverage and inflation protection. You could then put the balance of your windfall into other investments for maximum return.

ETA: Whoops! Another comment slipped in while I was hunt-and-pecking. The quote was from SwordGuy's post, up two.
« Last Edit: March 03, 2017, 12:48:20 PM by Diane C »
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boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #55 on: March 02, 2017, 05:52:41 AM »
i get 98.29 on the 30 year at cfiresim

this is easily worth investing esp. if youre not FIREd i mean a sub 2% chance you have issues. Thanks for posting that makes me more confident in keeping my mortgage in FIRE now
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gavinshmavin

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Re: DONT Payoff your Mortgage Club
« Reply #56 on: March 02, 2017, 08:36:32 AM »
I'm joining, after someone in another thread recently talked me down from pre-paying my $283k mortgage, which is 15-year fixed at 2.75%.

The most face-punchy thing about my pre-payment plan was that I came up with it despite the fact that the non-prepayment option is pretax saving my wife's self-employment income, which is otherwise taxed at nearly 40%. In hindsight I really can't believe I was going to do it.

They also talked me out of prepaying my student-loan debt, which is all at 3.75% or less. (Maybe that's a different club? :-))

FrozenBits

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Re: DONT Payoff your Mortgage Club
« Reply #57 on: March 02, 2017, 08:55:22 AM »
I'm joining, after someone in another thread recently talked me down from pre-paying my $283k mortgage, which is 15-year fixed at 2.75%.

The most face-punchy thing about my pre-payment plan was that I came up with it despite the fact that the non-prepayment option is pretax saving my wife's self-employment income, which is otherwise taxed at nearly 40%. In hindsight I really can't believe I was going to do it.

They also talked me out of prepaying my student-loan debt, which is all at 3.75% or less. (Maybe that's a different club? :-))
Welcome!  You have some crazy low interest debt.  Perfect for keeping around long term while you invest.  Especially if they enable you to go over the standard deduction and save on that 40% tax bracket. 

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gavinshmavin

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Re: DONT Payoff your Mortgage Club
« Reply #58 on: March 02, 2017, 12:49:54 PM »
Welcome!  You have some crazy low interest debt.  Perfect for keeping around long term while you invest.  Especially if they enable you to go over the standard deduction and save on that 40% tax bracket. 

Thanks! Other than the mortgage, the low interest rates on my debt are pure dumb luck on my part (I went to law school 2003-2006 when interest rates were really good, and then consolidated federal loans at some point when they were even better). I definitely wasn't giving any particular thought to interest rates at the time!

gocubs

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Re: DONT Payoff your Mortgage Club
« Reply #59 on: March 02, 2017, 11:02:47 PM »
29 years 364 days left.  Just bought a house with $288k mortgage @ 4.25% yesterday. 

Been considering investing vs. paying extra, last couple hours of reading has convinced me investing is the winner for me.......sucks having to wait so long to see if I made the best choice but it's gonna be a fun ride!

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #60 on: March 03, 2017, 04:09:09 AM »
29 years 364 days left.  Just bought a house with $288k mortgage @ 4.25% yesterday. 

Been considering investing vs. paying extra, last couple hours of reading has convinced me investing is the winner for me.......sucks having to wait so long to see if I made the best choice but it's gonna be a fun ride!

If you didn't make the best choice all of our FIRE plans will have failed and we won't really care about or mortgage being paid or not
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gavinshmavin

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Re: DONT Payoff your Mortgage Club
« Reply #61 on: March 03, 2017, 05:52:38 AM »
29 years 364 days left.  Just bought a house with $288k mortgage @ 4.25% yesterday. 

Been considering investing vs. paying extra, last couple hours of reading has convinced me investing is the winner for me.......sucks having to wait so long to see if I made the best choice but it's gonna be a fun ride!

I haven't done this particular bit of math, but it would be possible to figure out just how bad the market would have to be before investing would be a worse choice than pre-paying a secured 4.25% loan. Particularly if you're investing pre-tax money, the market would have to have the worst thirty years in its history, by FAR.

boarder42 nailed it: if this turns out to be the wrong choice we'll all have bigger problems.

Let it ride!

KMMK

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Re: DONT Payoff your Mortgage Club
« Reply #62 on: March 03, 2017, 06:11:11 AM »
I'm in Canada so will see what rates are at renewal time but for now at 2.74% all extra money gets invested within TFSA. Then we'll decide at renewal if we put down a lump sum or change our payment amount. I would like to have it paid off before retirement so that's about 20 years instead of the 25 we currently have.

jedsbud

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Re: DONT Payoff your Mortgage Club
« Reply #63 on: March 03, 2017, 07:55:54 AM »
This has really got me thinking about my mortgage plan, so I ran the numbers.  I don't want to spend all of my cash and post tax investments to pay off the house all at once.  But I can afford to pay extra principle each month, therefore maintaining my current investments. 

Mortgage Balance ~ $90,000
Interest Rate 3.5%
Payment ~$550
Remaining Payments 18 years and a few months
Extra Principle or Investment $2,500 a month
Assumed Investment Return 7%

If I invest the $2,500 I show a balance of just under $1.1M
If I add the principle I pay off in 32 months then invest the payment + added principle and end with about $75,000 less at the end.

So the question I ask myself is the peace of mind about not having a mortgage for 15 years worth $75,000 in 18 years.  And what else could I do with that payment that I don't have to make, for example increase giving to my chosen charities. 

I am maxing out my tax sheltered investments, and am on track for early retirement regardless of which direction I go.   



FrozenBits

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Re: DONT Payoff your Mortgage Club
« Reply #64 on: March 03, 2017, 08:28:23 AM »
29 years 364 days left.  Just bought a house with $288k mortgage @ 4.25% yesterday. 

Been considering investing vs. paying extra, last couple hours of reading has convinced me investing is the winner for me.......sucks having to wait so long to see if I made the best choice but it's gonna be a fun ride!
We are in very similar situations. I just refinanced my mortgage 2 months ago to a fixed 30 at 4.125.  Although my mortgage balance is a little lower at 203k.  I think we will have made the right decision in the end ;)

As boarder said. If not, then shit really hit the fan and this could be the least of our worries.

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SwordGuy

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Re: DONT Payoff your Mortgage Club
« Reply #65 on: March 03, 2017, 09:21:11 AM »
"It also doesn't take into account taxes, either for the mortgage insurance or the investment income."

Sword guy, are you saying that your current mortgage includes MI? If so, can you run a scenario where you pay down the mortgage enough to get rid of the useless (to you) MI and then let the balance of the mortgage ride to maturity? After getting rid of the MI, you can recast the loan to get maximum leverage and inflation protection. You could then put the balance of your windfall into other investments for maximum return.

Sorry, meant to write "mortgage interest" as in tax deduction for same.

I'll post how I ran the cFireSim scenario late tonight when I get home.

I did *try* to pick the non-inflated expenses but some fields popped up when I did that didn't make sense to me.

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #66 on: March 03, 2017, 10:08:42 AM »
"It also doesn't take into account taxes, either for the mortgage insurance or the investment income."

Sword guy, are you saying that your current mortgage includes MI? If so, can you run a scenario where you pay down the mortgage enough to get rid of the useless (to you) MI and then let the balance of the mortgage ride to maturity? After getting rid of the MI, you can recast the loan to get maximum leverage and inflation protection. You could then put the balance of your windfall into other investments for maximum return.

Sorry, meant to write "mortgage interest" as in tax deduction for same.

I'll post how I ran the cFireSim scenario late tonight when I get home.

I did *try* to pick the non-inflated expenses but some fields popped up when I did that didn't make sense to me.

you enter it at the end as an added expense.  having a low cost fixed rate mortgage increases the chances for FIRE success so if your chances go down then you entered something wrong.
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infromsea

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Re: DONT Payoff your Mortgage Club
« Reply #67 on: March 03, 2017, 11:39:38 AM »
I have spent the last year challenging my beliefs, asking myself where they came from, are they still valid and what is my purpose/motivation behind just about everything I do. I've found that the more "common sense" something is, the greater the chance that it's bullshit OR really needs evaluation before being applied to each individual/situation.

Case in point, pre-paying on a mortgage. Here is our situation and my current point of view, please tell me if I'm not seeing this problem correctly.

Background:
We took a 186,000 30 year down to 109,363 in eight years via pre-payment.
NOTE: the military pays me 2K a month in housing stipend, I almost felt obligated to put the entire 2k towards the 1,300 monthly payment.
We refinanced three years ago when I couldn't stand to pay the 5.25 in a 3% environment any longer.

That left us with:
15 year note
109,363 balance
3.25% rate

(I drew out a decision tree for the follow analysis, any obvious errors here? I found one bad calc just typing this up...)
NOTE: We max TSP (military retirement) my IRA, her work IRA and drop a dribble in her ROTH IRA just for kicks (putting money in the roth as a hedge if taxes go up, and how can they not....) and THEN pay extra on the mortgage, debt free but the home... living a frugal lifestyle etc....

Option, result....
Savings = 7% return for 13 years (years left on mortgage)
I did not play with any PV calcs or such, just did  a simple "how much would XXX a month at 7% be worth in 13 years?" calc...

Pay extra 500 a month - paid off in 10 years, save extra payments from years 11-13 = 20K savings
Save 500 a month = 126,667 in 13 years

Pay extra 300 a month - paid off in 11 years, extra payments saved from 11-13 = 7,700
Save 300 a month = 76K in 13 years

Pay extra 200 a month - paid off in 12 years, extra payments from yr 12-13 = 5K
Save 200 a month = 50K in 13 years

I know I could take this analysis even further since I didn't roll back any future values or do a real deep dive on the early payment impacts (the time frame is actually less since we've continued making a small pre-payment since the refi....)

BUT

I have a stable military retirement on the way, it pays more than our monthly bills including mortgage. The wife works, loves her job and will continue to do so. I may or may not work after taking 3-6 months off post retirement. (I say all this to explain that our risk tolerance of carrying the debt is fairly high, we are not in a situation where paying the mortgage is hurting us). There is a 65% chance we stay in the home until paid off, 35% chance we sell it in 3-5 years and move to another area (further south, where it's warm!).

That means the question is:

Do we pre-pay up to 500 extra a month and be debt free in 10 years?

OR

Do we save the 500 a month and have an extra 100K in savings? (total of 13 years savings minus 3 years of post-mortgage savings)?

This ignores tax advantages etc.... and I failed to calculate the value of investing the ENTIRE mortgage amount in post-mortgage payment years... maybe I need to do that....

Standing by for face punches, what did I miss in this process, what am I not looking at? What am I looking at from the wrong angle?

Thanks!

Tim

gavinshmavin

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Re: DONT Payoff your Mortgage Club
« Reply #68 on: March 03, 2017, 11:54:22 AM »
infromsea, I think you're definitely on the right track in your math. You could spend time being more precise, but the result would be the same: prepaying a 3.25% loan is waaaay worse for your financial future than saving that money.

Prepaying the loan only makes sense if you would just go spend the extra money on face-punch-worthy frivolities. If you save it (whether pre-tax or post-) then you're much better off letting the mortgage ride.

FrozenBits

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Re: DONT Payoff your Mortgage Club
« Reply #69 on: March 03, 2017, 12:17:37 PM »



This ignores tax advantages etc.... and I failed to calculate the value of investing the ENTIRE mortgage amount in post-mortgage payment years... maybe I need to do that....

Standing by for face punches, what did I miss in this process, what am I not looking at? What am I looking at from the wrong angle?

Thanks!

Tim

Your calculations are fairly basic but seem to be pretty accurate with historical returns.  One thing I might change is to do the calculations with a 9.6% rate of return instead of the inflation adjusted 7% rate of return (average inflation adjusted market returns are about 6.7% while non inflation adjusted returns are closer to 9.6%).  I recommend this because your debt is fixed with no chance of it rising due to inflation, so you should be comparing it to non inflation adjusted returns IMO.

Also, remember that it is much easier to pre-pay the mortgage than it is to extract equity from you home, especially with your ridiculously low rate of 3.25.  Meaning, if you pre-pay down to 50k but then need to extract 50k you would either have to refinance or open a HELOC which would most likely be around 4.5-5% instead of your current 3.25% rate.

If all of your assets are tied up in pre-tax accounts, I think there is an even stronger reason for investing instead of pre-pay due to the easy access of the post tax investments.  For example, you end up moving and need a down payment and some extra cash while you purchase a house somewhere else and then wait for your house to sell. 50-100k can go a long way in this situation and gives you more flexibility IMO.

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FrozenBits

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Re: DONT Payoff your Mortgage Club
« Reply #70 on: March 03, 2017, 12:25:14 PM »
Infromsea,

Also, if you do decide to invest make sure you have monthly automated contributions to you taxable account.  This way you are somewhat forcing yourself to stick to the plan. Oh, and increase the contribution amounts if your housing stipend increases.

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Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #71 on: March 03, 2017, 12:58:39 PM »
This has really got me thinking about my mortgage plan, so I ran the numbers.  I don't want to spend all of my cash and post tax investments to pay off the house all at once.  But I can afford to pay extra principle each month, therefore maintaining my current investments. 

Mortgage Balance ~ $90,000
Interest Rate 3.5%
Payment ~$550
Remaining Payments 18 years and a few months
Extra Principle or Investment $2,500 a month
Assumed Investment Return 7%

If I invest the $2,500 I show a balance of just under $1.1M
If I add the principle I pay off in 32 months then invest the payment + added principle and end with about $75,000 less at the end.

So the question I ask myself is the peace of mind about not having a mortgage for 15 years worth $75,000 in 18 years.  And what else could I do with that payment that I don't have to make, for example increase giving to my chosen charities. 

I am maxing out my tax sheltered investments, and am on track for early retirement regardless of which direction I go.
Did you adjust for inflation?  Using $75k in today's dollars plus 3% inflation for 18 years the number would be around $124,000.
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Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #72 on: March 03, 2017, 01:00:38 PM »
I'm joining, after someone in another thread recently talked me down from pre-paying my $283k mortgage, which is 15-year fixed at 2.75%.

The most face-punchy thing about my pre-payment plan was that I came up with it despite the fact that the non-prepayment option is pretax saving my wife's self-employment income, which is otherwise taxed at nearly 40%. In hindsight I really can't believe I was going to do it.

They also talked me out of prepaying my student-loan debt, which is all at 3.75% or less. (Maybe that's a different club? :-))
Oh, God, I love this comment! Hooray! Another one has seen the Light! Yippee!!
I did it! I have a journal!
http://forum.mrmoneymustache.com/journals/a-lot-like-this/
And hell yes, I am still moving confidently in the direction of my dreams...

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #73 on: March 03, 2017, 01:17:57 PM »
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rpr

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Re: DONT Payoff your Mortgage Club
« Reply #74 on: March 03, 2017, 01:20:20 PM »

If all of your assets are tied up in pre-tax accounts, I think there is an even stronger reason for investing instead of pre-pay due to the easy access of the post tax investments.  For example, you end up moving and need a down payment and some extra cash while you purchase a house somewhere else and then wait for your house to sell. 50-100k can go a long way in this situation and gives you more flexibility IMO.

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Frozenbits -- You make a very important point. In fact there was a poster a few days ago bemoaning the fact that since all of his assets were either in retirement accounts and in a fully paid house, he couldn't retire early as easily. 

FrozenBits

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Re: DONT Payoff your Mortgage Club
« Reply #75 on: March 03, 2017, 02:09:53 PM »

If all of your assets are tied up in pre-tax accounts, I think there is an even stronger reason for investing instead of pre-pay due to the easy access of the post tax investments.  For example, you end up moving and need a down payment and some extra cash while you purchase a house somewhere else and then wait for your house to sell. 50-100k can go a long way in this situation and gives you more flexibility IMO.

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Frozenbits -- You make a very important point. In fact there was a poster a few days ago bemoaning the fact that since all of his assets were either in retirement accounts and in a fully paid house, he couldn't retire early as easily.
I know the thread you are talking about.  In fact, I suggested they consider mortgaging the house to obtain enough cash to cover the first 5 years of expenses. Then they would be able to do a Roth conversion over those five years.  This is what I plan to do if we end up in the same situation with a lot of home equity (We tax shelter over 60k a year after matches).

It boggles my mind that so many people can't see how inflexible pre-paying a mortgage really is.

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FrozenBits

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Re: DONT Payoff your Mortgage Club
« Reply #76 on: March 03, 2017, 02:11:29 PM »
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Haha! Brilliant :)

I think this should be posted every time someone comes over from the "dark" side ;)

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Slinky

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Re: DONT Payoff your Mortgage Club
« Reply #77 on: March 03, 2017, 04:14:42 PM »
Ok, obviously this club has math on its side. However, I've been pondering a conundrum - cash flow vs. optimal investing strategy. Here's the assumptions for our word problem:

Assume a Semi-FIRE path is desired, beginning with a step down to a 4 day a week situation and corresponding pay cut. Ignore expenses or assume they stay the same. Savings towards FIRE currently exceeds tax advantaged accounts (401k, Roth IRA), but not by a lot. There is a <$75k mortgage @ 3.25% with a payment that is about the amount necessary to balance the budget. Savings would need to reduce below tax advantaged account capacity to do the same. What is the most optimal way to execute the deliberately sub-optimal path?

rpr

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Re: DONT Payoff your Mortgage Club
« Reply #78 on: March 03, 2017, 04:27:18 PM »
Ok, obviously this club has math on its side. However, I've been pondering a conundrum - cash flow vs. optimal investing strategy. Here's the assumptions for our word problem:

Assume a Semi-FIRE path is desired, beginning with a step down to a 4 day a week situation and corresponding pay cut. Ignore expenses or assume they stay the same. Savings towards FIRE currently exceeds tax advantaged accounts (401k, Roth IRA), but not by a lot. There is a <$75k mortgage @ 3.25% with a payment that is about the amount necessary to balance the budget. Savings would need to reduce below tax advantaged account capacity to do the same. What is the most optimal way to execute the deliberately sub-optimal path?

How many years left on the mortgage? Can you refi the mortgage to 30 year? That could potentially help with cash flow.
 

tyort1

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Re: DONT Payoff your Mortgage Club
« Reply #79 on: March 03, 2017, 04:30:59 PM »
Ok, obviously this club has math on its side. However, I've been pondering a conundrum - cash flow vs. optimal investing strategy. Here's the assumptions for our word problem:

Assume a Semi-FIRE path is desired, beginning with a step down to a 4 day a week situation and corresponding pay cut. Ignore expenses or assume they stay the same. Savings towards FIRE currently exceeds tax advantaged accounts (401k, Roth IRA), but not by a lot. There is a <$75k mortgage @ 3.25% with a payment that is about the amount necessary to balance the budget. Savings would need to reduce below tax advantaged account capacity to do the same. What is the most optimal way to execute the deliberately sub-optimal path?

With that little in the mortgage, I'd probably pay it down completely in a year or 2, then step down the work level after that bill is gone for ever.  Getting rid of the mortgage payment immediately frees up cash flow (once it's paid off).  On the other hand, if it's going to take longer than a couple of years, then a refi might be a good idea.
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Goldielocks

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Re: DONT Payoff your Mortgage Club
« Reply #80 on: March 03, 2017, 04:31:30 PM »
KMMK and Swick, and other Canadians out there.

This was my journey to the NOT pay  off mortgage club...

1)  I originally wanted to pay off the mortgage -- interest rate was at 6.5% for our first mortgage in the 90's..  pay it off was our choice, at 2x the require payments... 
2)  After many moves, back in Vancouver with an atrociously high mortgage (IT's still over $400k even with paying down mortgages over the years and rolling each into the new place)...
3) ..... this created a ton of FEAR -- my mortgage rate was at 3.5% and now is at 2.1%...  what happens if my rate goes up only 0.5%?  why, that is a 25% increase in my monthly payment amount!   on $400k, that is huge...  like, $500 more a month, please, says the bank.   


This is when I realized that paying off a mortgage is about A) the numbers* then B) Cashflow and Risk aka FEAR, and then C) back to the numbers*.

So -- I needed to do something to alleviate my fear, and realized that creating a mortgage payoff fund OUTSIDE of my retirement funds (ok,I used my TFSA like KMMK at first, because, duh!), really makes a difference to my ability to sleep and not worry about variable rates and rate resets every few years.

Also -- with 20 years to pay the thing off, accelerating it just makes it creep down faster -- there was no remedy for the cash flow question in a short time.. NOT appealing to chain yourself to mortgage payments.   If we get in trouble later, fine, we will move to a cheaper place away from the city.

3)  Now, I am going FIRE (with a small income), incomes only 35% of what we had before....   Guess what -- we may not qualify to renew a huge mortgage in 2019!   What to do?

4)  -- here is the new feature not mentioned by others....   We can have a self-directed mortgage inside our RRSP.    i.e. we use our RRSP funds to issue a mortgage to ourselves.   The biggest drawback are paying the mortgage origination and management fees, and accepting a retirement portfolio that is heavily weighted to "conservative"  e.g., low interest, investments...because $400k of it would be at only 2-4% return.     

So,  For us, it still makes sense to keep the mortgage at a bank, to use our funds in better returning investments,  but if rates skyrocket or we are denied in future, then we can self-fund from the RRSP... without withdrawing from the RRSP and paying income tax....

5)  We can also pay it down / off later if rates go higher than investment returns.  *now we are back to the numbers game


So -- paying off a mortgage is NOT a requirement for FIRE...  only ensuring you have the cashflow to continue to pay it down..   as long are mortgage rates stay low, and a large balance is owning, why on earth would a person pay it off instead of investing?

*For us, the mortgage rate needs to be 1.5% or lower than what we can pretty much expect from fixed income / preferred shares / dividends  on a low risk investment.  (2.1% plus 1.5% is only 3.6%.... I am pretty sure I can beat 3.6% per year today)...

Slinky

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Re: DONT Payoff your Mortgage Club
« Reply #81 on: March 03, 2017, 05:12:45 PM »
Ok, obviously this club has math on its side. However, I've been pondering a conundrum - cash flow vs. optimal investing strategy. Here's the assumptions for our word problem:

Assume a Semi-FIRE path is desired, beginning with a step down to a 4 day a week situation and corresponding pay cut. Ignore expenses or assume they stay the same. Savings towards FIRE currently exceeds tax advantaged accounts (401k, Roth IRA), but not by a lot. There is a <$75k mortgage @ 3.25% with a payment that is about the amount necessary to balance the budget. Savings would need to reduce below tax advantaged account capacity to do the same. What is the most optimal way to execute the deliberately sub-optimal path?

How many years left on the mortgage? Can you refi the mortgage to 30 year? That could potentially help with cash flow.

30 year mortgage, 26 years left.

rpr

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Re: DONT Payoff your Mortgage Club
« Reply #82 on: March 03, 2017, 05:19:36 PM »



30 year mortgage, 26 years left.

Have you prepaid significantly on this mortgage? What was the original principal? I guess my question is -- if you were to refi again to a 30 year FRM would the new PITI be significantly less than your current PITI. 
« Last Edit: March 03, 2017, 05:23:32 PM by rpr »

Slinky

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Re: DONT Payoff your Mortgage Club
« Reply #83 on: March 03, 2017, 05:55:47 PM »



30 year mortgage, 26 years left.

Have you prepaid significantly on this mortgage? What was the original principal? I guess my question is -- if you were to refi again to a 30 year FRM would the new PITI be significantly less than your current PITI.

Very little prepayment, just rounded up to a whole number for auto pay so it would end up about the same. Although since my CU is showing 4.125% for a 30 year FRM, possibly higher.

FrozenBits

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Re: DONT Payoff your Mortgage Club
« Reply #84 on: March 03, 2017, 06:23:44 PM »


Ok, obviously this club has math on its side. However, I've been pondering a conundrum - cash flow vs. optimal investing strategy. Here's the assumptions for our word problem:

Assume a Semi-FIRE path is desired, beginning with a step down to a 4 day a week situation and corresponding pay cut. Ignore expenses or assume they stay the same. Savings towards FIRE currently exceeds tax advantaged accounts (401k, Roth IRA), but not by a lot. There is a $75k mortgage @ 3.25% with a payment that is about the amount necessary to balance the budget. Savings would need to reduce below tax advantaged account capacity to do the same. What is the most optimal way to execute the deliberately sub-optimal path?

With a mortgage that low you would only be paying about 300-400 a month at a rate of 3.25%.  I would ride out the mortgage and keep investing.  Mostly because freeing up 300-400 a month wouldn't make a difference in my budget.  I'd continue maxing out pre-tax accounts and then start creating an after tax investment fund that could act as a buffer between you and the mortgage payment (if you fell short some months after going part time).  Math is math, so a 75k mortgage at 3.25% is still better to keep and invest.  Whether that is in pre or post tax accounts is really up to you.  It sounds like you may not have enough income to fund all pre tax accounts and a post tax account. If that is the case, maybe fund the pre tax accounts to get you out of a higher tax bracket and then start on the post tax account.

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SwordGuy

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Re: DONT Payoff your Mortgage Club
« Reply #85 on: March 03, 2017, 08:52:07 PM »
"It also doesn't take into account taxes, either for the mortgage insurance or the investment income."

Sword guy, are you saying that your current mortgage includes MI? If so, can you run a scenario where you pay down the mortgage enough to get rid of the useless (to you) MI and then let the balance of the mortgage ride to maturity? After getting rid of the MI, you can recast the loan to get maximum leverage and inflation protection. You could then put the balance of your windfall into other investments for maximum return.

Sorry, meant to write "mortgage interest" as in tax deduction for same.

I'll post how I ran the cFireSim scenario late tonight when I get home.

I did *try* to pick the non-inflated expenses but some fields popped up when I did that didn't make sense to me.

you enter it at the end as an added expense.  having a low cost fixed rate mortgage increases the chances for FIRE success so if your chances go down then you entered something wrong.

This is very odd.

When I ran it before, I put in the yearly expense under "Initial Yearly Expense" and marked it as "Not Inflation Adjusted"

Based on your suggestion, I put a 0 there and moved the yearly expense to the Expense section at the bottom of the page, also marking as not inflation adjusted.

There are a LOT of numbers on the simulation results page besides the success percentage.

The success percentage is the same either way but the rest of the numbers -- not even close!   At this point I'm not sure what the rest of the numbers actually mean.   Any ideas as to why there is so  much difference?

The success was 98.46%, but the failures were horrible!  Negative $76,000 on a $180,000 nest egg reserved for that purpose.  Yowsa.   Without some buffer to cover that 1.54% it could get really ugly.

SwordGuy

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Re: DONT Payoff your Mortgage Club
« Reply #86 on: March 03, 2017, 08:59:17 PM »
$225,000 invested to cover a $180,000 15yr, 2.75% mortgage  never dipped into negative territory given any 15 year time period.

That's good to know.

So, in the example I gave earlier, a $180,000 nest egg invested and drawn down to pay the mortgage over time (instead of paying it off early) had a 98.5% (rounded) chance of success but with a 1.5% chance of running $76,000 in the hole.   

An extra $45,000 invested covered the downside risk.   

That's still WAY better than having to save 25* your annual P&I mortgage payment!   That's only 1.25 times!

For the 30 yr mortgage at 3.125%, I only had to increase the amount to $185,000 to keep out of the hole.

Ok, I confess, I'm getting a whole lot more comfortable not paying the mortgage off early.
« Last Edit: March 03, 2017, 09:08:19 PM by SwordGuy »

FrozenBits

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Re: DONT Payoff your Mortgage Club
« Reply #87 on: March 03, 2017, 09:34:57 PM »



For the 30 yr mortgage at 3.125%, I only had to increase the amount to $185,000 to keep out of the hole.

Ok, I confess, I'm getting a whole lot more comfortable not paying the mortgage off early.

30 year is definitely the way to go if you can lock in a 3.125% rate.  I wasn't able to get anywhere near that rate when I just refinanced though (I locked in at 4.125).  I'll still have a great chance to beat out the guaranteed return of 4.125%, especially after tax breaks.




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Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #88 on: March 04, 2017, 12:36:18 AM »
.
Ok, I confess, I'm getting a whole lot more comfortable not paying the mortgage off early.
*!
I did it! I have a journal!
http://forum.mrmoneymustache.com/journals/a-lot-like-this/
And hell yes, I am still moving confidently in the direction of my dreams...

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #89 on: March 04, 2017, 03:35:31 AM »
Sword guy glad you're coming around. 4.125 is probably the best 30 year right now. If anyone ever got 3.125 they almost certainly bought points. My refi guy gave me 3.25 at the bottom last July BC of how many times I've refid and all the referrals.  One other point. The 225k is 1.25x your mortgage balance. Which is still. 21.5x your annual mortgage. But great way to think about it for some concerned about running out of money. It doesn't have to be 25X.
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dreams_and_discoveries

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Re: DONT Payoff your Mortgage Club
« Reply #90 on: March 04, 2017, 04:47:27 AM »
I'm a firm member of this club - 1.5% mortgage rate currently, about 18 years remaining.

Le Barbu

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Re: DONT Payoff your Mortgage Club
« Reply #91 on: March 04, 2017, 05:20:39 AM »

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

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

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

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

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

Swick, maybe you could refinance (3 years is now @ 2.25%) and max out your TFSA every year.

Or, start the Smith Manoeuvre (the way for us, Canadian, to make our mortgage tax-deductible. Take a HELOC @ a good rate (3.2%) and reimburse every penny you can on the mortgage each payment, each year, with no penalty. Finaly, pull the money back from the HELOC and invest in a taxable account. Your interests are now deductibles at your marginal tax rate so your net interest rate is now arround 2%!

By the way, just ditch your bonds because it does not make sense to own debt (bonds) while have debt (mortgage). Samething about your REITs, MERs are to high and your house expose you a lot to the real estate and interest rates future rise.
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Le Barbu

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Re: DONT Payoff your Mortgage Club
« Reply #92 on: March 04, 2017, 05:51:24 AM »
I ponder this all the time, and I think we have a somewhat unique situation around this forum:

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

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

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

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

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

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

I exactly got this feeling, mine is 43k @ 2.24% with 15 years left. Monthly payment is 275$
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FrozenBits

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Re: DONT Payoff your Mortgage Club
« Reply #93 on: March 04, 2017, 07:06:40 AM »
I'm a firm member of this club - 1.5% mortgage rate currently, about 18 years remaining.
How in the world did you get that low of a rate?

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nottoolatetostart

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Re: DONT Payoff your Mortgage Club
« Reply #94 on: March 04, 2017, 07:09:08 AM »
Just wanted to pop in to say thanks on the extra tips on Cfiresim. While I am a huge fan of a paid off mortgage and emotionally always will be, your actual math (and running my own scenarios with these tips) has shown me everything will be okay if we just slowly go the pace. I am actually getting over 100% success with my super conservative assumptions. So it might be better than that. 

I think we are going to go back to 30 yr mortgage and just finance unpaid balance, as opposed to bringing extra cash to close for an even lower payment. We have a good rate now (2.875%) but we want better cash flow since retirement is under 20 months (when we took loan DH was planning on working longer so a 15 yr was not a problem). I can get 4% as of yesterday, so we'll see how this goes.

infromsea

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Re: DONT Payoff your Mortgage Club
« Reply #95 on: March 04, 2017, 07:15:49 AM »
One question....

Are we putting too much emphasis on the "tax write-off" that we get by paying a mortgage?

I'll "work up some numbers" later this weekend (got beer to drink today!) to compare what I paid in interest last year VS what my federal tax deduction was... BUT, has anyone else ran those numbers?

Top of my head, I wonder if it make sense to pay XXXXX in monthly interest payments just to get the fed tax deduction....

FrozenBits

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Re: DONT Payoff your Mortgage Club
« Reply #96 on: March 04, 2017, 07:18:33 AM »


Just wanted to pop in to say thanks on the extra tips on Cfiresim. While I am a huge fan of a paid off mortgage and emotionally always will be, your actual math (and running my own scenarios with these tips) has shown me everything will be okay if we just slowly go the pace. I am actually getting over 100% success with my super conservative assumptions. So it might be better than that. 

I think we are going to go back to 30 yr mortgage and just finance unpaid balance, as opposed to bringing extra cash to close for an even lower payment. We have a good rate now (2.875%) but we want better cash flow since retirement is under 20 months (when we took loan DH was planning on working longer so a 15 yr was not a problem). I can get 4% as of yesterday, so we'll see how this goes.

Glad we were able to help with the cFireSim calculations.  20 months away from retirement? Exciting times!

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Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #97 on: March 04, 2017, 10:27:43 AM »
I'm a firm member of this club - 1.5% mortgage rate currently, about 18 years remaining.
How in the world did you get that low of a rate?
I want to know too. Wow!
I did it! I have a journal!
http://forum.mrmoneymustache.com/journals/a-lot-like-this/
And hell yes, I am still moving confidently in the direction of my dreams...

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #98 on: March 04, 2017, 10:40:07 AM »
One question....
Are we putting too much emphasis on the "tax write-off" that we get by paying a mortgage?
I didn't buy a house so I could write the interest off, but it sure is a nice benefit to have, as our Canadian friends can attest. Why shouldn't it be included in the calculations?

Well, I used to anyway...Current home was purchased sans mortgage, which occasionally makes me weep, especially when I read comments like dreams_and_discoveries'. Wah!
I did it! I have a journal!
http://forum.mrmoneymustache.com/journals/a-lot-like-this/
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Nords

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Re: DONT Payoff your Mortgage Club
« Reply #99 on: March 04, 2017, 12:07:48 PM »
I have spent the last year challenging my beliefs, asking myself where they came from, are they still valid and what is my purpose/motivation behind just about everything I do. I've found that the more "common sense" something is, the greater the chance that it's bullshit OR really needs evaluation before being applied to each individual/situation.

Case in point, pre-paying on a mortgage. Here is our situation and my current point of view, please tell me if I'm not seeing this problem correctly.

Background:
We took a 186,000 30 year down to 109,363 in eight years via pre-payment.
NOTE: the military pays me 2K a month in housing stipend, I almost felt obligated to put the entire 2k towards the 1,300 monthly payment.
We refinanced three years ago when I couldn't stand to pay the 5.25 in a 3% environment any longer.

That left us with:
15 year note
109,363 balance
3.25% rate

I have a stable military retirement on the way, it pays more than our monthly bills including mortgage.

This ignores tax advantages etc.... and I failed to calculate the value of investing the ENTIRE mortgage amount in post-mortgage payment years... maybe I need to do that....

Standing by for face punches, what did I miss in this process, what am I not looking at? What am I looking at from the wrong angle?

Thanks!

Tim
I'd keep the mortgage.

Everyone with a COLA pension can reasonably expect to make money from a 30-year mortgage.  You're using an inflation-adjusted annuity (with a rising stream of nominal income) to make a fixed payment of an obligation that's being eroded by inflation. 

A military pension makes this even easier because the inflation-adjusted annuity is coming from the world's best source.  In 15 years of military retirement, my pension has risen by over 30%... despite three separate years of 0% COLAs. 

To boost the portfolio's success rate even further, money which could have paid off the mortgage can now stay invested in a high-equity portfolio.  However the market volatility is not for the faint of heart.

Back in 2004 my spouse and I signed up for a 30-year mortgage fixed at 5.5%.  We'd been having the usual "Pay off the mortgage or invest?" debate at Early-Retirement.org, so I ran FIRECalc on the success rate and decided to track the result:
http://www.early-retirement.org/forums/f28/covering-a-mortgage-without-losing-your-ass-ets-15237.html

These numbers are for the iShares small-cap value ETF (ticker IJS).  They assume that the dividend distributions are taxed at 15% and the remainder is invested at the next day's share price.  My spreadsheet does not consider the additional tax deduction for paying mortgage interest, because after the first 10 years the interest goes below the standard deduction.  That ETF also has a heftier expense ratio (0.25%), so an equivalent ETF today may have a much smaller drag on returns.

Year::APY
2005: 17.1%
2006: 13.3%
2007: 13.5%
2008: 5.3%
2009: 2.0%
2010: 3.3%
2011: 2.3%
2012:  5.9%
2014: 8.2%
2016:  8.2%

Note that we "won" the early years but suffered a nasty recession during the first decade.  (In early 2009 the APY actually turned negative for a couple months.)  I suspect the Great Recession is a pretty good example of sequence-of-returns risk, and perhaps from now on the long-term APY is going to hold above 7%. 

In other words, borrowing at 5.5% and investing in equities for the long term gave us an after-tax risk premium of over 1.5%.

Last month we decided to refinance our rental-property mortgage (4.625%).  The broker suggested that instead we should pay off its loan by taking out a bigger 30-year mortgage on our home.  The result is that we're borrowing a new 30-year mortgage at 3.25% and using it to pay off the mortgages on our rental property (4.625%) and our home (3.625%).  The refinance drops our monthly payments by over $400 and will pay back the closing costs in less than two years.

Note that since I now have a VA disability rating, we opted for a VA loan where we can waive the 1.25% funding fee.  The payback would be longer if I'd had to pay that fee.

Borrowing money at 3.25% and investing it?  Navy Federal Credit Union is already offering 7-year CDs at 3%.  Now one of my new life goals is outliving the mortgage-- we'll make our final payment when I'm 86 years old.

Again, this works great with a military pension because it has a COLA.  More importantly, that federal pension should be reliably paid for at least the next 30 years.  Those with a corporate COLA pension, or a pension with no COLA at all, will find that mortgage arbitrage is more risky. 

If you're using the 4% SWR with no annuity income whatsoever (except Social Security) then your FIRECalc success rate may be less than 75%... even in a high-equity portfolio.  More importantly, I suspect that the emotions of behavioral financial psychology will be very difficult to handle.

Mortgage arbitrage also makes the most sense for an asset allocation that has an average historical return which is higher than the mortgage interest rate.  If you're holding a large amount of your investment portfolio in bonds or cash then you're just wasting money on the assets which return less than the mortgage.
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