Author Topic: DONT Payoff your Mortgage Club  (Read 114412 times)

Telecaster

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Re: DONT Payoff your Mortgage Club
« Reply #700 on: July 18, 2018, 03:59:25 PM »
I always like to look a things from all reasonable sides.  I've recently decided to pay off my mortgage (don't yell at me).  Please forgive me if I've missed this info in earlier posts.  At what interest rate would the scale tip the other way for you?  Would the likely volatility in the market over the next few years sway you or are you focused mostly on historic long term returns? I was firmly in the invest camp, but my desire to walk away earlier put me in the pay off the mortgage earlier camp. 

My situation - I want to the option to not work at all in a couple of years (this might not actually happen).  My monthly mortgage payment is just under $1k.  I would like to max out Roth conversion ladders in "retirement."  My mortgage balance is about $183k.  I have access to a $56k HELOC.  If I put the full HELOC towards the mortgage and pay it back ASAP, I should be able to pay off the mortgage completely in less than 36 months.  The interest rate on the HELOC will be less than the interest rate on the mortgage for the first 12 months.  After that the HELOC interest rate will be slightly higher than the rate on the mortgage.  Due to the new tax law I will be taking the standard deduction for the foreseeable future.  To pay the mortgage I would need $300k in the portfolio to kick off the $12k per year for the mortgage using a 4% SWR.  I thought it was a bit of a toss up but the Roth conversion ladder space was my tiebreaker. 

Is anyone in this thread on the fence or was investment always a foregone conclusion for you?

I personally have done a 180.   Back when I was a young lad, aggressively paid on the mortgage, because that is what you are supposed to do, right?    Then my contract position ended very unexpectedly, and I still had the mortgage and not much cash.   Non-fun times followed.  The more I investigated the pros and cons, I concluded there are almost no pros, and lots of cons.    I certainly understand the appeal of no mortgage, but the appeal is mostly an illusion.   

RE: The HELOC.  You talked about this in the other thread, and I believe you said part of reason for doing this was that you thought it would keep you more motivated.  If that's the case, then fair enough.     However, since it sounds like you are still thinking about, I'll chime in with my two cents. 

Using the HELOC to payoff the mortgage early is also an illusion, and the people who promote it almost always have something they are selling, even if it is only adviews on Youtube. There are two parts that trip people up (not saying this applies to you personally, but in general):  Many people think that mortgage interest is front loaded.   It is not.  You pay more interest in the beginning because you owe more money.   And the other part that trips people up up is that they think HELOC interest and mortgage interest are calculated differently.   They are calculated exactly the same way.  The only difference is how the payment is calculated. 

Bottom line is that you are just moving the interest from the mortgage to the HELOC, and the amount of interest you owe is calculated the same way.   The HELOC Gurus claim that you save money overall because interest on the mortgage is "front loaded."  But it isn't.  The lump sum payment from the HELOC on the mortage, and then paying the HELOC,  works out pretty close to, if not actually identical to simply paying extra on the mortgage.   

I believe you have lower HELOC interest for the first year, so you might actually get some savings there, but it is only for one year, and you also have fees you have to subtract too, so I suspect you aren't saving very much, if anything, when the smoke clears.  Also keep in mind that you are trading long term, low fixed interest debt for variable interest debt.   No one expects to get divorced, get sick, or lose their job, but what if that happens?  The your the interest on your HELOC very well could go up.   Is that safer than simply paying down the mortgage?

Quote
To pay the mortgage I would need $300k in the portfolio to kick off the $12k per year for the mortgage using a 4% SWR.

Not quite correct.   Remember, the SWR is inflation adjusted (average inflation is 3.5% per year), but your mortgage is fixed.   I'm not sure how to easily do the SWR calculation properly for a fixed expense like a mortgage, but in 30 years inflation will cut that $12k a year payment to something more like $5K in today's dollars.   As RWD indicates,  even with very conservative rates of return you should easily be able to make your mortgage payment indefinitely just by setting aside the mortgage balance, and very likely wind up with a giant pile of money at the end.   

Which is another reason not to pay off your mortgage.  You are using fully valued dollars today to save puny, inflation ravaged dollars in the future. 


Telecaster

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Re: DONT Payoff your Mortgage Club
« Reply #701 on: July 18, 2018, 04:10:20 PM »

I'm assuming that people on this thread are saving money in taxable accounts.  Wouldn't that $915/mo* also be subject to tax?  My thoughts were that if I can pay off the mortgage quickly and invest after it's paid off, I could stay under taxable thresholds for withdrawals in the future.  If I have to pull out $12k/year for the mortgage, it makes staying in the (current) 12% tax bracket much more difficult going forward.  Being single for tax purposes shifts this to the payoff mode for me.  MFJ provides way more space for long-term capital gains. 

*the mortgage payment is closer to $1k.  $915 could be withdrawn as the initial amount invested on the $183k.  I believe the other $85 would be subject to tax depending on LTCG v. STCG and tax bracket at the time.

This is correct.  But that means you only increased your taxable income by $1000/year.   So unless you are right on the cusp that shouldn't push you into a higher tax bracket.    And even if it does, only income about that amount is taxed at the higher rate.  So unnlikely to be much of a factor.   

The same issue could affect Obamacare subsidies.  Might might be worth looking into. 

redbirdfan

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Re: DONT Payoff your Mortgage Club
« Reply #702 on: July 18, 2018, 06:18:43 PM »
Ugh...I've flip flopped again.  I think the only path I can force myself to stay on is to split this 50/50.  I know mathematically speaking investing wins over the long run.  I also have an illogical desire to be debt-free because it feels like I will have more freedom/options.  If I go 100% in either direction I end up doing a complete 180.  A Vulcan I am not. 

protostache

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Re: DONT Payoff your Mortgage Club
« Reply #703 on: July 18, 2018, 06:58:32 PM »
Ugh...I've flip flopped again.  I think the only path I can force myself to stay on is to split this 50/50.  I know mathematically speaking investing wins over the long run.  I also have an illogical desire to be debt-free because it feels like I will have more freedom/options.  If I go 100% in either direction I end up doing a complete 180.  A Vulcan I am not.

I've flipped a few times myself but I think I've finally, permanently come around to the view that investing the cash instead of paying extra on the mortgage yields more flexibility, and ultimately a bigger return. Like, yes, debt free is for sure a great feeling (I was there before we bought this house) but if I have enough investments to pay off the debt and then some, that's also pretty great.

palerider1858

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Re: DONT Payoff your Mortgage Club
« Reply #704 on: July 18, 2018, 07:01:37 PM »
Ugh...I've flip flopped again.  I think the only path I can force myself to stay on is to split this 50/50.  I know mathematically speaking investing wins over the long run.  I also have an illogical desire to be debt-free because it feels like I will have more freedom/options.  If I go 100% in either direction I end up doing a complete 180.  A Vulcan I am not.
This is where I am at. Max IRA & 401k accounts and then throw a large chunk at the mortgage. On track to have it paid off in 4 years, then I will buy another house.

lisa_mustache

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Re: DONT Payoff your Mortgage Club
« Reply #705 on: July 19, 2018, 10:38:08 AM »
Ugh...I've flip flopped again.  I think the only path I can force myself to stay on is to split this 50/50.  I know mathematically speaking investing wins over the long run.  I also have an illogical desire to be debt-free because it feels like I will have more freedom/options.  If I go 100% in either direction I end up doing a complete 180.  A Vulcan I am not.

I've flipped a few times myself but I think I've finally, permanently come around to the view that investing the cash instead of paying extra on the mortgage yields more flexibility, and ultimately a bigger return. Like, yes, debt free is for sure a great feeling (I was there before we bought this house) but if I have enough investments to pay off the debt and then some, that's also pretty great.

I just keep coming back here to keep my emotions in check, and follow the math.  I hadn't really thought about how, if you're investing the extra cash, rather than paying down the mortgage, at FIRE, I'll have more than enough cash to pay off the mortgage at that point (if I stop following the math then), plus the extra earned in the market.  And in the meantime, if something takes a nasty turn, the money is available without selling/refinancing. 

There was a huge disconnect in my brain, where I could still have a paid off mortgage at FIRE, while not paying extra toward the principal now.  But I don't even have to decide that now, and may just choose to hold the mortgage for the distance.  I like that flexibility. :)

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #706 on: July 19, 2018, 01:42:30 PM »
Ugh...I've flip flopped again.  I think the only path I can force myself to stay on is to split this 50/50.  I know mathematically speaking investing wins over the long run.  I also have an illogical desire to be debt-free because it feels like I will have more freedom/options.  If I go 100% in either direction I end up doing a complete 180.  A Vulcan I am not.

more freedom and options when and at what cost - and as a sacrafice to freedom and options today.  Also saying you have a logical desire to be debt free because of a feeling is an oxymoron. Your freedom being debt free may by you while emotional will in all liklihood come faster if you hit the stocks 100% then made the choice to pay down at the end - the optimal way to get the most of the feeling you're looking for - more freedom and options on your path to debt paydown then the feeling of more cashflow if you choose to pay down in the end - the way i see it based on your feelings here you're attacking this incorrectly to maximize you freedom/options.

SwordGuy

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Re: DONT Payoff your Mortgage Club
« Reply #707 on: July 19, 2018, 03:28:48 PM »
Ugh...I've flip flopped again.  I think the only path I can force myself to stay on is to split this 50/50.  I know mathematically speaking investing wins over the long run.  I also have an illogical desire to be debt-free because it feels like I will have more freedom/options.  If I go 100% in either direction I end up doing a complete 180.  A Vulcan I am not.

50/50 is the worst of both choices, not the best of both choices.

Your living expenses are just as high because the mortgage payment is just as high even though the balance is lower.
So it gives you no cash flow advantage at all, nor does it help you keep your income lower for tax or subsidy purposes.

You have depleted your reserves, so if things go bad, you have less saved up to ride out the bad times.  Even worse, if things get really bad and the bank forecloses on your house, you just made it EASIER for them to do so!   How?  Because they only need to sell it for enough to cover what you owe them plus administrative/closing costs.   Since you cut the debt in half, they'll have a much easier time finding a buyer!

This situation, depending upon interest rates of course, is one of those times where compromise is a bad idea.

.


TexasRunner

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Re: DONT Payoff your Mortgage Club
« Reply #708 on: July 19, 2018, 04:28:57 PM »
Ugh...I've flip flopped again.  I think the only path I can force myself to stay on is to split this 50/50.  I know mathematically speaking investing wins over the long run.  I also have an illogical desire to be debt-free because it feels like I will have more freedom/options.  If I go 100% in either direction I end up doing a complete 180.  A Vulcan I am not.

50/50 is the worst of both choices, not the best of both choices.

Your living expenses are just as high because the mortgage payment is just as high even though the balance is lower.
So it gives you no cash flow advantage at all, nor does it help you keep your income lower for tax or subsidy purposes.

You have depleted your reserves, so if things go bad, you have less saved up to ride out the bad times.  Even worse, if things get really bad and the bank forecloses on your house, you just made it EASIER for them to do so!   How?  Because they only need to sell it for enough to cover what you owe them plus administrative/closing costs.   Since you cut the debt in half, they'll have a much easier time finding a buyer!

This situation, depending upon interest rates of course, is one of those times where compromise is a bad idea.

.


Listen to the man.

If the bank lender has two homes on his desk, both bought for 400k in the same month, both depreciated to 300k in estimated resale value, and both up for foreclosure....  but one is at 200k principal and one is at 365k principal, which one do you think he is going to foreclose on first?  How much rope will he give the underwater guy?....

That is a very legitimate risk.


Compare it to having 600k in the bank/assets with a 350k mortgage, I doubt you will ever be foreclosed on.  In reality, your "E-Fund" if you were to decide to tap into retirement could last for years, as opposed to the standard E-fund of six months or so.

OurTown

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Re: DONT Payoff your Mortgage Club
« Reply #709 on: July 20, 2018, 11:09:08 AM »
I will be in the vicinity of FIRE in or around 2023.  At that time I will have a mortgage balance of appx $69,000, with 5 years left to go on a 15-year fixed at 3 3/8 %.  My monthly payment is $1,800; which is approximately $500 escrow and $1,300 P&I.  So the magic question is, how much do I need above my FIRE number to retire with a mortgage payment?  Is it 60 months of payments, which would be $108k?  Is it 60 months of P&I, which would be $78k?  Or is it the remaining principal balance, which at that time would be about $69k?

protostache

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Re: DONT Payoff your Mortgage Club
« Reply #710 on: July 20, 2018, 11:34:10 AM »
I will be in the vicinity of FIRE in or around 2023.  At that time I will have a mortgage balance of appx $69,000, with 5 years left to go on a 15-year fixed at 3 3/8 %.  My monthly payment is $1,800; which is approximately $500 escrow and $1,300 P&I.  So the magic question is, how much do I need above my FIRE number to retire with a mortgage payment?  Is it 60 months of payments, which would be $108k?  Is it 60 months of P&I, which would be $78k?  Or is it the remaining principal balance, which at that time would be about $69k?

You can sim this out in cfiresim, but I think the prudent thing would be to count the $500 escrow as part of your basic FIRE expenses (because it covers taxes and insurance which don't go away) but not the P&I, and then an additional $78k to cover the rest of the P&I.

Vapour

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Re: DONT Payoff your Mortgage Club
« Reply #711 on: July 20, 2018, 07:01:57 PM »
I will be in the vicinity of FIRE in or around 2023.  At that time I will have a mortgage balance of appx $69,000, with 5 years left to go on a 15-year fixed at 3 3/8 %.  My monthly payment is $1,800; which is approximately $500 escrow and $1,300 P&I.  So the magic question is, how much do I need above my FIRE number to retire with a mortgage payment?  Is it 60 months of payments, which would be $108k?  Is it 60 months of P&I, which would be $78k?  Or is it the remaining principal balance, which at that time would be about $69k?

You can sim this out in cfiresim, but I think the prudent thing would be to count the $500 escrow as part of your basic FIRE expenses (because it covers taxes and insurance which don't go away) but not the P&I, and then an additional $78k to cover the rest of the P&I.

I agree that you need to plan to cover the escrow payment (taxes and insurance) for as long as you own the house.  And these will likely increase with inflation unlike your mortgage P&I.   So property taxes and insurance should be included in your estimated expenses which you use to calculate the stash you need to FIRE at 4% or whatever number works for you.

I don't know that you would need to save an additional $78k for the P&I payments though.  It doesn't make sense to save more than the mortgage if you could just pay it off instead.  Normally, I'd say you just need to save the amount of the mortgage.  I'm hoping to FIRE with around 20 years left of a 30 year mortgage at 3.5%.  When I simulate the amount remaining on my mortgage at that time and my yearly P&I payments (not adjusted for inflation) for 20 years in cFIREsim, it shows around 91% success rate.  When I do the same for OurTown's mortgage of $69k with yearly payments of $15,600 for 5 years, the success rate is 56%.  Not great.  In your case, I think it might make sense to just pay of the mortgage when you FIRE and be done with it.  Or, since this is the Don't Pay off your Mortgage Club, refinance at some point before you FIRE to a 30 year mortgage and then just have the amount of the mortgage saved when you FIRE in addition to your stash for your regular expenses.  This should work out to more like a 90+% success rate compared to 50%.  5 years is just too short of a time period so there's a lot more risk compared to 20-30 years.

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #712 on: July 23, 2018, 07:58:07 AM »
I turn my nose up at that meager amount of high-price debt as a way of virtue-signalling to people outside of this club that I'm still worthy.
I have no idea what this means. Care to elaborate?

I enjoy the company of people who care about personal finance things, whether they are "all debt is bad" people or "use debt smartly as a tool" people. Our club here is the latter group.

When I'm with the former group--whom I do not actively try to educate about the value smart use of debt can have--I can at least say I don't use PMI on my primary residence as a way of fitting in.

Bird In Hand

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Re: DONT Payoff your Mortgage Club
« Reply #713 on: July 23, 2018, 10:28:50 AM »
I enjoy the company of people who care about personal finance things, whether they are "all debt is bad" people or "use debt smartly as a tool" people. Our club here is the latter group.

When I'm with the former group--whom I do not actively try to educate about the value smart use of debt can have--I can at least say I don't use PMI on my primary residence as a way of fitting in.

And this also gives you bonus points among the "live and let live" crowd.  :D

Back to the topic at hand, I recently discovered that quite a few of the more prestigious colleges and universities in the US use the so-called "institutional methodology" in determining how much parents are expected to pay.  This considers home equity in the calculations.  I ran a couple simulations and discovered that our family's hypothetical expected family contribution (EFC) roughly doubles, from $9,xxx to $18,xxx per year, when our home equity is included.  I could imagine in HCOL areas with much higher real estate prices, a large amount of home equity could all but eliminate need-based institutional grants, even for a mustachian couple drawing ~$60k from retirement accounts.

I'm not sure it would make sense to take out a new mortgage on a paid-off house just to bring the EFC down, but a fresh 30 year low-rate mortgage and marginal home equity when your kids are starting college could be highly advantageous in some situations.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #714 on: July 23, 2018, 11:43:42 AM »
I enjoy the company of people who care about personal finance things, whether they are "all debt is bad" people or "use debt smartly as a tool" people. Our club here is the latter group.

When I'm with the former group--whom I do not actively try to educate about the value smart use of debt can have--I can at least say I don't use PMI on my primary residence as a way of fitting in.

And this also gives you bonus points among the "live and let live" crowd.  :D

Back to the topic at hand, I recently discovered that quite a few of the more prestigious colleges and universities in the US use the so-called "institutional methodology" in determining how much parents are expected to pay.  This considers home equity in the calculations.  I ran a couple simulations and discovered that our family's hypothetical expected family contribution (EFC) roughly doubles, from $9,xxx to $18,xxx per year, when our home equity is included.  I could imagine in HCOL areas with much higher real estate prices, a large amount of home equity could all but eliminate need-based institutional grants, even for a mustachian couple drawing ~$60k from retirement accounts.

I'm not sure it would make sense to take out a new mortgage on a paid-off house just to bring the EFC down, but a fresh 30 year low-rate mortgage and marginal home equity when your kids are starting college could be highly advantageous in some situations.
Now that is some fine mustachian thinking! Where do you put the funds received so that they don't count against you? Seems like you could funnel it into retirement funds over a few years time. This requires some advanced planning, but that's another fine mustachian trait. Hmmm, more discussion please.

ditkanate

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Re: DONT Payoff your Mortgage Club
« Reply #715 on: July 23, 2018, 11:58:50 AM »
Finally knocked out my last piece of debt other than the house.  So, now that I have cash flow that can go towards actual savings / investing / future planning, I'm curious what the crowd in this thread would say about my home loans.  Here are the details:

Purchase price: $183,000 (appraised at $190,000)

1st Mortgage:
$145,900 current balance
3.125% until May 2023 (5 year ARM)

2nd Mortgage:
$34,400 current balance
4.5% until May 2025 (7 year ARM)

Scenario 1: Pay the minimums and if my rates go up down the road, deal with it then.  For now just invest. 

Scenario 2: Pay enough extra between now and May 2025 (or sooner if possible?) to get the LTV at 80% so I can refinance into a 30 year fixed rate. 

Or perhaps there's another path I'm not seeing. 

Other details.  Currently 47 years old.  Funding 401k up to employer match.  I'm not paying any PMI, the 2nd mortgage is basically set up as a home equity loan amortized over 30 years. 

If I've left something out that would prove helpful, let me know.  Maybe there is no great answer because it really depends on what interest rates do in the next 5-7 years. 

Bird In Hand

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Re: DONT Payoff your Mortgage Club
« Reply #716 on: July 23, 2018, 12:40:06 PM »
I'm not sure it would make sense to take out a new mortgage on a paid-off house just to bring the EFC down, but a fresh 30 year low-rate mortgage and marginal home equity when your kids are starting college could be highly advantageous in some situations.

Now that is some fine mustachian thinking! Where do you put the funds received so that they don't count against you? Seems like you could funnel it into retirement funds over a few years time. This requires some advanced planning, but that's another fine mustachian trait. Hmmm, more discussion please.

Yeah, this would be tricky.  You could spend down a fair bit of cash on Roth IRA conversions, but the tax implications make this less compelling as income goes up.  You'd probably have to spread it out over a bunch of years, far enough ahead of college that you wouldn't even know whether your kid would eventually be attending an institution that considered home equity.  :o

I suppose you could successfully hide the assets by buying a fleet of expensive cars, or a bunch of diamonds, or rare rock & roll memorabilia.  But these obviously come with a lot of risk, not to mention you might need to eventually repair your broken moral compass.  :D

If you had any large expenses you planned on incurring anyway (home renovation, new cars, etc.), it would probably make sense to spend on those right before filling out the financial aid applications.

But probably the most mustachian approach would be to help your kid choose a solid school that doesn't put an oversized financial burden on the family, regardless of home equity.
« Last Edit: July 23, 2018, 03:50:14 PM by Bird In Hand »

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #717 on: July 23, 2018, 03:22:18 PM »
I was idly thinking that if you weren't investing up the annual limits in your 401k because it simply wasn't possible*, you could ratchet them up to the max and use the proceeds from the re-fi to fill the gap. Do this for you and your spouse. I'd think by the time your offspring was about 12, you'd have a pretty good idea if they were college bound. That would give you a good chunk of years to make your position as optimal as possible before the reams of paperwork started.

As to the moral compass, I quite agree. However, I have no problem with massaging assets in any way that is legal and legitimate. I equate it to paying income taxes. I'll happily pay what I owe, but one penny more. Of course, the caveat is "within reason". Unlike another spicy blogger. I'm not willing to do backflips to get my tax liability down to zero.

*Flash: I never once managed to max out my 401k in my entire career. Funny, I got to FIRE anyway.

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #718 on: July 23, 2018, 03:43:02 PM »
Yep earlier Roth conversions to eat some tax now to get savings later. Would be quite the math equation. I'm fully aware my idea behind keeping the mortgage may change as life situations change the math with healthcare or college assistance driving the needle the other way. It's just extremely difficult to do. Esp when my rate is at inflation for 30 years.

Bird In Hand

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Re: DONT Payoff your Mortgage Club
« Reply #719 on: July 23, 2018, 04:05:36 PM »
I was idly thinking that if you weren't investing up the annual limits in your 401k because it simply wasn't possible*, you could ratchet them up to the max and use the proceeds from the re-fi to fill the gap. Do this for you and your spouse.

Actually this is could be an awesome idea for some folks who otherwise would balk at cashing out a mortgage to invest, yet who don't have enough income to max out retirement accounts.  In our case we have three $18.5k pretax buckets, plus two 5.5k Roth IRA buckets.  We don't earn enough and/or expenses are too high to fill all of that ($55.5k pre-tax and $11k Roth).  But if mortgage rates dipped a bit and we knew for a fact our kid would be attending a school that considers home equity, it sure would be tempting!

Quote
I'd think by the time your offspring was about 12, you'd have a pretty good idea if they were college bound. That would give you a good chunk of years to make your position as optimal as possible before the reams of paperwork started.

The problem is you don't know which problem to optimize ahead of time.  You could optimize for low assets (including home equity) and higher income, and this would work great for schools that looked at these assets.  Or you could optimize for low income and that would help for schools that don't care about home equity.  But until your kid starts looking at colleges, you won't have a good idea which to optimize for, and by then (junior or senior year of HS) it's basically too late because the FAFSA and other forms look at the previous year's financial info.[/quote]

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #720 on: July 24, 2018, 08:14:27 AM »
Yep earlier Roth conversions to eat some tax now to get savings later. Would be quite the math equation. I'm fully aware my idea behind keeping the mortgage may change as life situations change the math with healthcare or college assistance driving the needle the other way. It's just extremely difficult to do. Esp when my rate is at inflation for 30 years.

Your admittedly desirable rate could still be above inflation for those 30 years if things break badly and we have a substantially deflationary period a la Japan in the 1990's.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #721 on: July 24, 2018, 10:13:39 AM »
Yep earlier Roth conversions to eat some tax now to get savings later. Would be quite the math equation. I'm fully aware my idea behind keeping the mortgage may change as life situations change the math with healthcare or college assistance driving the needle the other way. It's just extremely difficult to do. Esp when my rate is at inflation for 30 years.

Your admittedly desirable rate could still be above inflation for those 30 years if things break badly and we have a substantially deflationary period a la Japan in the 1990's.
But it wouldn't be much higher. Seriously, what are the odds that this will happen?

TexasRunner

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Re: DONT Payoff your Mortgage Club
« Reply #722 on: July 24, 2018, 11:28:38 AM »
Yep earlier Roth conversions to eat some tax now to get savings later. Would be quite the math equation. I'm fully aware my idea behind keeping the mortgage may change as life situations change the math with healthcare or college assistance driving the needle the other way. It's just extremely difficult to do. Esp when my rate is at inflation for 30 years.

Your admittedly desirable rate could still be above inflation for those 30 years if things break badly and we have a substantially deflationary period a la Japan in the 1990's.

But it wouldn't be much higher. Seriously, what are the odds that this will happen?

If the US had deflation in the same (or similar) vein as the Japan Deflationary Spiral, we would have much bigger problems to worry about....

I highly doubt the treasury would ever allow that to happen anyways.  If it ever were to get to that point, it is going to be a major crash anyway because the deflationary action would have to be sudden (1929's major...).  In that sort of instance, pretty much all bets are off and even traditional hedge against deflation could be at risk.

Either way, I'm not nearly as much of a fan of taking out another mortgage or refinancing at 5% or 6% as opposed to riding out the beautiful 30-Year mortgage at 3%. One of these is meh, the other nets millions of dollars in (essentially free) gains with lower risk. 

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #723 on: July 25, 2018, 08:11:39 AM »
I agree that the 3% mortgage is better.

But I don't want to be locked into a less-optimal living situation because I don't want to change my mortgage, either.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #724 on: August 01, 2018, 08:04:16 AM »
I agree that the 3% mortgage is better.

But I don't want to be locked into a less-optimal living situation because I don't want to change my mortgage, either.
Don't know the specifics of what you're referring to, but one way to hang on to that mortgage whilst optimizing your living situation might be to keep it as a rental.

DavidN

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Re: DONT Payoff your Mortgage Club
« Reply #725 on: August 01, 2018, 05:07:11 PM »
Hi, all,

First post here! I've been binge-reading the blog and really researching investing and saving after having ignored it for the first 9 or so years of my professional career. Luckily, I have very good income now and will just work extra hard to getting to that sweet spot of financial freedom over the next 15 years or so.

Anyway, in regards to mortgage, I see a lot of folks just using the interest rate of the loan rather than APR when calculating how much their income would be worth once they are mortgage free. Which should we be using?

I ask, because in late 2016, I took a 30-year fixed rate mortgage in the US with only 3.5% down. My interest rate is 3.625%, but once you add in the costs and my MIP, which will always be a part of the loan since I was under 90% LTV when I took the loan, my APR comes out to 4.716%.

I could refinance to a conventional loan now to get rid of the MIP (around 0.85%), but interest rates have risen to the point that it probably doesn't make sense.

So, should I look at my potential mortgage-free income (assuming I prioritize paying it down) at having an effective interest rate of 3.625% or 4.716%?

Sorry if this is a dumb question, but all of this is still rather new to me.

RWD

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Re: DONT Payoff your Mortgage Club
« Reply #726 on: August 01, 2018, 05:52:27 PM »
Hi, all,

First post here! I've been binge-reading the blog and really researching investing and saving after having ignored it for the first 9 or so years of my professional career. Luckily, I have very good income now and will just work extra hard to getting to that sweet spot of financial freedom over the next 15 years or so.

Anyway, in regards to mortgage, I see a lot of folks just using the interest rate of the loan rather than APR when calculating how much their income would be worth once they are mortgage free. Which should we be using?

I ask, because in late 2016, I took a 30-year fixed rate mortgage in the US with only 3.5% down. My interest rate is 3.625%, but once you add in the costs and my MIP, which will always be a part of the loan since I was under 90% LTV when I took the loan, my APR comes out to 4.716%.

I could refinance to a conventional loan now to get rid of the MIP (around 0.85%), but interest rates have risen to the point that it probably doesn't make sense.

So, should I look at my potential mortgage-free income (assuming I prioritize paying it down) at having an effective interest rate of 3.625% or 4.716%?

Sorry if this is a dumb question, but all of this is still rather new to me.

Hi and welcome! I'm not sure APR is the right term for interest rate + MIP, but I understand what you're asking. You should definitely be including MIP in your calculations and comparisons. There are several other people with similar questions earlier in this thread (if you dare dig through 15 pages to find them).

The way to do this calculation is to look at how much you save by getting rid of MIP and divide it by how much it takes to get rid of MIP to calculate the return on investment of just this partial mortgage paydown. You also need to be sure that the terms of your MIP allow it to go away just by getting your LTV low enough. Some mortgages, like relatively recent FHA loans, require refinancing to get rid of PMI. This calculation may also change as you get closer to the drop point, so you may want to rerun it periodically to see if it makes sense to make a single principal payment to knock it out.

Here's an example of the calculation, since you didn't provide your specific numbers:
$100k value
$90k mortgage
$81.83/month MIP removed automatically at $78k
$12k required to remove MIP which will save $981.96/year = 8.18% return on investment

edit: you could also add your mortgage interest rate to that return on investment, depending on what you're trying to calculate
« Last Edit: August 01, 2018, 05:57:57 PM by RWD »

DavidN

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Re: DONT Payoff your Mortgage Club
« Reply #727 on: August 01, 2018, 06:25:32 PM »
Hi, all,

First post here! I've been binge-reading the blog and really researching investing and saving after having ignored it for the first 9 or so years of my professional career. Luckily, I have very good income now and will just work extra hard to getting to that sweet spot of financial freedom over the next 15 years or so.

Anyway, in regards to mortgage, I see a lot of folks just using the interest rate of the loan rather than APR when calculating how much their income would be worth once they are mortgage free. Which should we be using?

I ask, because in late 2016, I took a 30-year fixed rate mortgage in the US with only 3.5% down. My interest rate is 3.625%, but once you add in the costs and my MIP, which will always be a part of the loan since I was under 90% LTV when I took the loan, my APR comes out to 4.716%.

I could refinance to a conventional loan now to get rid of the MIP (around 0.85%), but interest rates have risen to the point that it probably doesn't make sense.

So, should I look at my potential mortgage-free income (assuming I prioritize paying it down) at having an effective interest rate of 3.625% or 4.716%?

Sorry if this is a dumb question, but all of this is still rather new to me.

Hi and welcome! I'm not sure APR is the right term for interest rate + MIP, but I understand what you're asking. You should definitely be including MIP in your calculations and comparisons. There are several other people with similar questions earlier in this thread (if you dare dig through 15 pages to find them).

The way to do this calculation is to look at how much you save by getting rid of MIP and divide it by how much it takes to get rid of MIP to calculate the return on investment of just this partial mortgage paydown. You also need to be sure that the terms of your MIP allow it to go away just by getting your LTV low enough. Some mortgages, like relatively recent FHA loans, require refinancing to get rid of PMI. This calculation may also change as you get closer to the drop point, so you may want to rerun it periodically to see if it makes sense to make a single principal payment to knock it out.

Here's an example of the calculation, since you didn't provide your specific numbers:
$100k value
$90k mortgage
$81.83/month MIP removed automatically at $78k
$12k required to remove MIP which will save $981.96/year = 8.18% return on investment

edit: you could also add your mortgage interest rate to that return on investment, depending on what you're trying to calculate

Thanks for the quick reply!

With my current terms, being an FHA mortgage from 2016 with less than 90% LTV, the mortgage insurance premiums are a fixed ~0.85% for the life the loan, but it is only re-calculated once per year based on the remaining loan amount at that time. I don't have the math skills to quickly figure out how that would work, but if I combine the 0.85% with the 3.625% interest, I get 4.475%.

I have around $470,000 remaining on the loan, but I am in a position to go full bore and put in an extra $50,000 per year (or around $4166 per month) towards the principal. According to a calculator on my loan handlers site, if I started doing that next month and continued it each month, I would be paid off by August 2025 (7 years) for a total of $470,446 principal and $62,281 interest for $532,727 total. At 4.475%, that would be $556,566, whereas if I invested it assuming a 7% return, I would be at $570,017 or a difference of $13,451. This is all assuming that I would continue to put in 10% or more in my pre-tax 401k and max out my Roth IRA every year.

Assuming my calculations are correct, that's a pretty tough choice. I would be effectively paying $13,451 for peace of mind and a good chunk of equity in rapidly appreciating Seattle-area real estate (who knows how long that will continue, though). On the other hand, I wouldn't have nearly $600k in investments that could easily pay for a lifestyle should I decide to sell the property at that point and downsize to something less expensive (although there's no telling where the Seattle real estate market will be then).

Got some thinking to do for sure.

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #728 on: August 01, 2018, 06:26:28 PM »
The above math to calculate your interest rate with pmi is incorrect I'll post some correct math later or you could provide your numbers and I can get real specific.

RWD

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Re: DONT Payoff your Mortgage Club
« Reply #729 on: August 01, 2018, 07:15:53 PM »
The above math to calculate your interest rate with pmi is incorrect I'll post some correct math later or you could provide your numbers and I can get real specific.

Are you referring to my math? You agreed with it last year.

I should reiterate that it is calculating the ROI on getting rid of MIP and not the effective rate of the whole mortgage.

RWD

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Re: DONT Payoff your Mortgage Club
« Reply #730 on: August 01, 2018, 07:22:31 PM »
If you can't make a single lump sum payment to get rid of of MIP you should invest instead. You only get the benefit of paying extra on the loan at the exact moment MIP goes away. Any partial amounts will only help the effective rate of 4.475%. Better to invest at that rate. Eventually when you have enough to get rid of it in one single payment you should reevaluate if it's worth it.

Telecaster

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Re: DONT Payoff your Mortgage Club
« Reply #731 on: August 01, 2018, 07:24:39 PM »
Assuming my calculations are correct, that's a pretty tough choice. I would be effectively paying $13,451 for peace of mind and a good chunk of equity in rapidly appreciating Seattle-area real estate (who knows how long that will continue, though). On the other hand, I wouldn't have nearly $600k in investments that could easily pay for a lifestyle should I decide to sell the property at that point and downsize to something less expensive (although there's no telling where the Seattle real estate market will be then).


Minor point of clarification.  Equity does not grow faster by paying down the mortgage.  For example, let's you put  $0 down on a property that appreciates from $400K to $600K.  You now have $200K in equity.  Now let's say you put $400K down on a property that appreciates from $400K to $600K.  You now have $200K in equity.  Same thing.  It doesn't matter if you put it down all at once or over time, equity does not grow faster. 


boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #732 on: August 01, 2018, 07:28:11 PM »
Assuming my calculations are correct, that's a pretty tough choice. I would be effectively paying $13,451 for peace of mind and a good chunk of equity in rapidly appreciating Seattle-area real estate (who knows how long that will continue, though). On the other hand, I wouldn't have nearly $600k in investments that could easily pay for a lifestyle should I decide to sell the property at that point and downsize to something less expensive (although there's no telling where the Seattle real estate market will be then).


Minor point of clarification.  Equity does not grow faster by paying down the mortgage.  For example, let's you put  $0 down on a property that appreciates from $400K to $600K.  You now have $200K in equity.  Now let's say you put $400K down on a property that appreciates from $400K to $600K.  You now have $200K in equity.  Same thing.  It doesn't matter if you put it down all at once or over time, equity does not grow faster.

Profit doesn't grow faster equity does. In the second case you have 600k in equity. But that's also 600 little green soldiers tied up saving you less than 5%

DavidN

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Re: DONT Payoff your Mortgage Club
« Reply #733 on: August 01, 2018, 07:55:17 PM »
Good point on the equity. I feel a bit more enlightened with each of these facts as they get pointed out.

One more thing that this came to mind (and again, sorry if this is a stupid question) but how do you factor capital gains tax into all of this? My understanding is that you can make up to a $250,000 profit by selling your primary residence after having lived in it for at least two years without any of that being subject to capital gains. Obviously that wouldn't apply to any profits you made from investing in index funds at an assumed 7% growth rate.

RWD

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Re: DONT Payoff your Mortgage Club
« Reply #734 on: August 01, 2018, 09:30:10 PM »
If you invest inside a tax sheltered account (401k, Roth IRA, etc.) you won't have any capital gains tax. If you've used up all your tax advantaged space then you would be slightly more conservative to account for taxes. The Investment Order post recommends setting the debt payments vs invest threshold 2% lower (currently 8% for tax advantaged and 6% for taxable).

Depending on your tax situation you may owe very little in capital gains taxes.

DavidN

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Re: DONT Payoff your Mortgage Club
« Reply #735 on: August 01, 2018, 10:59:53 PM »
If you invest inside a tax sheltered account (401k, Roth IRA, etc.) you won't have any capital gains tax. If you've used up all your tax advantaged space then you would be slightly more conservative to account for taxes. The Investment Order post recommends setting the debt payments vs invest threshold 2% lower (currently 8% for tax advantaged and 6% for taxable).

Depending on your tax situation you may owe very little in capital gains taxes.

Wow, thanks a lot for this. Great information. Looks like I've got some more studying this stuff to do, but perhaps paying towards the mortgage after maxing out 401k and Roth IRA each year is not a bad idea.

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #736 on: August 02, 2018, 04:25:59 AM »
If you invest inside a tax sheltered account (401k, Roth IRA, etc.) you won't have any capital gains tax. If you've used up all your tax advantaged space then you would be slightly more conservative to account for taxes. The Investment Order post recommends setting the debt payments vs invest threshold 2% lower (currently 8% for tax advantaged and 6% for taxable).

Depending on your tax situation you may owe very little in capital gains taxes.

Wow, thanks a lot for this. Great information. Looks like I've got some more studying this stuff to do, but perhaps paying towards the mortgage after maxing out 401k and Roth IRA each year is not a bad idea.

In general at your rate its a terrible idea. It's the entire reason I created this thread. You increase your risk of financial failure during Paydown. Which causes many to hold large efs. Then you increase your chances of your money dieing before you after you FIRE. You also are all but guaranteed to work longer.
« Last Edit: August 02, 2018, 04:31:37 AM by boarder42 »

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #737 on: August 02, 2018, 04:35:10 AM »
Also if you're using a 7% growth rate for equities you've deducted inflation. Which means you should pull 3% off your mortgage interest too. So you're comparing apples to apples

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #738 on: August 02, 2018, 07:47:10 AM »
Assuming that your income is high and robust (such that it's a reasonable house for you), I favor not over-paying on the mortgage, and instead investing the difference.

If you own many bonds in your investment account, that might be a sign that your risk tolerance is not sufficient that this will make sense for you.

I appreciate you coming her to let the DNPYM Club make their case.

RWD

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Re: DONT Payoff your Mortgage Club
« Reply #739 on: August 02, 2018, 05:30:56 PM »
YouTube recommended this video to me about why it's a bad idea to pay down your mortgage early:
https://www.youtube.com/watch?v=AJSCT51Rfws

Bird In Hand

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Re: DONT Payoff your Mortgage Club
« Reply #740 on: August 02, 2018, 07:55:27 PM »
YouTube recommended this video to me about why it's a bad idea to pay down your mortgage early:
https://www.youtube.com/watch?v=AJSCT51Rfws

It's unfortunate that he started off his 3-part argument with the oft-repeated, usually specious claim that you can write off your entire mortgage interest as a tax deduction.  It's 2018, man.  The standard deduction was a thing before, but now it's a kind of huge thing for most people, and basically everyone outside of HCOL areas.  He lost a lot of credibility right off the bat, given that the video was posted in May 2018.

Also, from the comment section, I'm pretty dang sure that Golumn (sic) McSmeagolHomie is boarder42.  Or his long lost brother.

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #741 on: August 02, 2018, 08:16:11 PM »
YouTube recommended this video to me about why it's a bad idea to pay down your mortgage early:
https://www.youtube.com/watch?v=AJSCT51Rfws

It's unfortunate that he started off his 3-part argument with the oft-repeated, usually specious claim that you can write off your entire mortgage interest as a tax deduction.  It's 2018, man.  The standard deduction was a thing before, but now it's a kind of huge thing for most people, and basically everyone outside of HCOL areas.  He lost a lot of credibility right off the bat, given that the video was posted in May 2018.

Also, from the comment section, I'm pretty dang sure that Golumn (sic) McSmeagolHomie is boarder42.  Or his long lost brother.

No it's not me.  But that is a horrible way to start a video in 2018 with the new tax law. But it's still crazy advantageous

RWD

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Re: DONT Payoff your Mortgage Club
« Reply #742 on: August 02, 2018, 08:22:35 PM »
YouTube recommended this video to me about why it's a bad idea to pay down your mortgage early:
https://www.youtube.com/watch?v=AJSCT51Rfws

It's unfortunate that he started off his 3-part argument with the oft-repeated, usually specious claim that you can write off your entire mortgage interest as a tax deduction.  It's 2018, man.  The standard deduction was a thing before, but now it's a kind of huge thing for most people, and basically everyone outside of HCOL areas.  He lost a lot of credibility right off the bat, given that the video was posted in May 2018.

Also, from the comment section, I'm pretty dang sure that Golumn (sic) McSmeagolHomie is boarder42.  Or his long lost brother.

I was also disappointed he didn't clarify that you only can deduct as much interest as goes over the standard deduction. Also, it wasn't even necessary to the argument as with his 4.2% example it is still very clear you should be investing. I do like that he mentioned using an S&P 500 index fund. I'm just happy there are people out there (besides just on specialized forums like this one) that will challenge the Dave Ramsey mantra.

Haha, yeah, I'm going with long lost brother.

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #743 on: August 02, 2018, 08:35:26 PM »
Seriously. How the hell could you think that was s me lol I don't ever fucking lol this isn't a laughing matter lol this is people wasting money.

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #744 on: August 02, 2018, 08:36:40 PM »
Lol

solon

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Re: DONT Payoff your Mortgage Club
« Reply #745 on: August 02, 2018, 08:42:26 PM »
Seriously. How the hell could you think that was s me lol I don't ever fucking lol this isn't a laughing matter lol this is people wasting money.

Same difficulty with caps and run-on sentences, though.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #746 on: August 02, 2018, 10:59:27 PM »
Seriously. How the hell could you think that was s me lol I don't ever fucking lol this isn't a laughing matter lol this is people wasting money.

Same difficulty with caps and run-on sentences, though.
yup he's never gonna change we've got to love him the way he is ♡♡♡♡♡

letsdoit

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Re: DONT Payoff your Mortgage Club
« Reply #747 on: August 03, 2018, 07:21:10 AM »
does anyone have any wisdom nuggets for how much house they can afford.?
the rubrics that exist are slanted in favor of buying too much house.

any thoughts on house value vs NW or annual savings/investments ?

 

RWD

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Re: DONT Payoff your Mortgage Club
« Reply #748 on: August 03, 2018, 08:37:13 AM »
does anyone have any wisdom nuggets for how much house they can afford.?
the rubrics that exist are slanted in favor of buying too much house.

any thoughts on house value vs NW or annual savings/investments ?

Whatever allows you to still hit your savings goals. I like to prioritize the longest time frame goals first. For example:
1. Saving enough for FIRE in 10 years
2. Saving enough for house down payment in 3 years
3. Saving enough for car replacement in 1 year
etc.

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #749 on: August 03, 2018, 08:38:20 AM »
Since this is the DNPYM Club, the most important variable in whether you can afford a property is cash-flow.

Some of it depends on your stage in life. My wife and I bought our current house at the start of a five-year period in which we've exceeded $20,000 annually in childcare expenses. Having three digit mortgage payments has been quite the relief, but we could have afforded much more. Our mortgage payment represents about 10% of our monthly take-home. About 1/2 of that mortgage payment is principal decrease. These numbers sound very low compared to what a bank will approve for a mortgage, but there was a discussion thread on this forum a while ago in which many mustachians reported figures in line with that.

Some of it depends on how well you think you can make the house perform as an investment. If you're a serious Mustachian (saving rate at least 40%), you can bear more risk to buy into a neighborhood in which you think you'll get capital appreciation, even if that won't appear in your checking account right away.

Some of it depends on how robust your income is: if you are in a two-income household, are you and your partner in the same industry? Could a single employer hitting bad times result in both of your incomes evaporating at the same time?