Author Topic: DONT Payoff your Mortgage Club  (Read 89511 times)

letsdoit

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Re: DONT Payoff your Mortgage Club
« Reply #750 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 #751 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 #752 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?



Bird In Hand

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Re: DONT Payoff your Mortgage Club
« Reply #753 on: August 03, 2018, 08:43:03 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 ?

There is really no one-size-fits-all answer here IMO.  It will depend on your financial goals, income, probably the size of your investment accounts, the cost of homes vs income in your area, desired/required size of house, etc.

My personal philosophy on housing is about the same as it is for any purchase: try to minimize the price given all the other constraints/requirements imposed by my personal preferences and financial situation.  I try to consider factors that may affect future resale value, but this can be hard to predict and many external factors could come into play that you have no control over.

FWIW my house value is approximately 22% of TNW and likely to get significantly smaller as pre-tax accounts continue to grow.  We've lived here for 10+ years and expect to stay here another 10+ years.

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #754 on: August 03, 2018, 08:45:43 AM »
People here hate on Dave Ramsey, but I've noticed on his millionaire call-in hours that very few of the millionaires make their money from primary house appreciation. It's usually 401k or investment properties.

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #755 on: August 03, 2018, 08:46:25 AM »
which is another way of saying: don't pick a house to live thinking of it as an investment. Think of it as a lifestyle choice, which implies trying to minimize what you spend.

Malkynn

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Re: DONT Payoff your Mortgage Club
« Reply #756 on: August 03, 2018, 09:18:04 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 ?

Nope.
It's too individual and complicated a question to be able to have any kind of simplistic metric.
Besides, most people just use metrics like that to justify spending more.

The first question should be whether or not it makes sense to buy or rent in your area. Beyond that, if you decide to buy, then your big picture goals, housing needs, and local market will determine what may be necessary/advisable to spend.
What might be smart for one person/family could be idiotic for another.

FIreDrill

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Re: DONT Payoff your Mortgage Club
« Reply #757 on: August 03, 2018, 09:24:20 AM »
which is another way of saying: don't pick a house to live thinking of it as an investment. Think of it as a lifestyle choice, which implies trying to minimize what you spend.
I don't think that necessarily implies minimizing your spend.  Housing is one area where we recently "splurged".  We spent a lot of money on a modest house in a great location which also cut our commute time by about 70%.  The goal was to buy a house that we would be happy with for a long time and I honestly don't see us ever moving unless we decided to move out of state. Upgrading homes is a killer and real estate fees can really make an impact on your net worth if you "upgrade" 2 or 3 times in 30 years.

I guess it really just depends on how you envision your FIRE life.  Then make the home purchase based off of that as long as it's within reason from a cash flow standpoint.

For the longest time I couldn't understand how some people could spend so much on a house.  Then I moved to the hottest real estate market in America.....  That sure did teach me a lesson..

Anyways, all this to say that in my mind there is not a really clear answer here.  We may have general guidelines but in the end it just depends on what your FIRE lifestyle goals are and the value you get from house x vs house y after considering the financial costs.



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Malkynn

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Re: DONT Payoff your Mortgage Club
« Reply #758 on: August 03, 2018, 10:22:15 AM »
which is another way of saying: don't pick a house to live thinking of it as an investment. Think of it as a lifestyle choice, which implies trying to minimize what you spend.
I don't think that necessarily implies minimizing your spend.  Housing is one area where we recently "splurged".  We spent a lot of money on a modest house in a great location which also cut our commute time by about 70%.  The goal was to buy a house that we would be happy with for a long time and I honestly don't see us ever moving unless we decided to move out of state. Upgrading homes is a killer and real estate fees can really make an impact on your net worth if you "upgrade" 2 or 3 times in 30 years.

I guess it really just depends on how you envision your FIRE life.  Then make the home purchase based off of that as long as it's within reason from a cash flow standpoint.

For the longest time I couldn't understand how some people could spend so much on a house.  Then I moved to the hottest real estate market in America.....  That sure did teach me a lesson..

Anyways, all this to say that in my mind there is not a really clear answer here.  We may have general guidelines but in the end it just depends on what your FIRE lifestyle goals are and the value you get from house x vs house y after considering the financial costs.



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We're somewhat similar but different as to why spending more makes sense for us. We own a much bigger house than we need and could have easily bought a 1 bedroom for 30-40% less. However, we live in a suuuuper cheap neighborhood where owning is much less than renting and it's rapidly gentrifying, so our small family sized townhouse will drastically out perform a one bedroom condo in terms of value growth over time. Plus the fees are lower since the 1 bedrooms are all in high rises.

In our case, spending as little as possible would have been a poorer investment.
That said, we don't care much about housing, and certainly haven't spent much and aren't counting on it's value at all in terms of our retirement plans. We picked the cheap neighborhood because it's convenient and cheap. We just happened to pick a townhouse over an apartment because it was the more financially sound of the two super cheap options. It was the equivalent of picking the used Toyota Corolla over the cheaper used Ford Fiesta.

To simplify this-

There's no metric that says how much you should spend on a home, it all depends on your plans and priorities.
There is, however, an amount that you *shouldn't* spend on a home because it will leave you in a cash flow crunch and put you at substantial risk. Mustachians don't play anywhere close to that number, so it's irrelevant.

In Mustachian terms, spending as little as possible may be what's best for you, it may not. As long as you are spending on housing in a way that's consistent with your goals, then anything goes, really.

Consumer suckers use metrics to set their spending goals. Mustachians use their spending goals to set metrics.

DavidN

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Re: DONT Payoff your Mortgage Club
« Reply #759 on: August 03, 2018, 12:08:32 PM »
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

Jesus, I didn't even think about that. 2 ~ 3% off of my interest (3.625%) would mean it's 0.625% ~ 1.625% and even if I look at my APR (4.716%), it's still just 1.716% ~ 2.716%. Hard to justify paying that down rather than investing it just for peace of mind.

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #760 on: August 03, 2018, 12:10:28 PM »
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

Jesus, I didn't even think about that. 2 ~ 3% off of my interest (3.625%) would mean it's 0.625% ~ 1.625% and even if I look at my APR (4.716%), it's still just 1.716% ~ 2.716%. Hard to justify paying that down rather than investing it just for peace of mind.

Great conclusion. That's why this thread was started it's counterintuitive bit will make you much wealthier faster which decreases your FIRE timeline

RWD

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Re: DONT Payoff your Mortgage Club
« Reply #761 on: August 03, 2018, 12:55:11 PM »
I'm already about $10k ahead by investing instead of paying down the mortgage we got two years ago.

Based on some quick calculations a recent graduate of the opposite thread missed out on ~$40k because they paid off their mortgage in five years. They're on an accelerated path to FI (2 years to go), but that decision will still likely cost them at least 4 months of working.

Telecaster

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Re: DONT Payoff your Mortgage Club
« Reply #762 on: August 03, 2018, 01:17:20 PM »

Jesus, I didn't even think about that. 2 ~ 3% off of my interest (3.625%) would mean it's 0.625% ~ 1.625% and even if I look at my APR (4.716%), it's still just 1.716% ~ 2.716%. Hard to justify paying that down rather than investing it just for peace of mind.

Indeed.   

And it is even worse (better?) than that, because not only is the cost of borrowing close to zero, you are using full value dollars today to save inflation ravaged dollars in the future.   The other thing is that the peace of mind issue is also an illusion.  I just made a post about it in another thread: 

https://forum.mrmoneymustache.com/welcome-to-the-forum/equity-shaming/msg2093302/#msg2093302

You're taking on more risk, not less, by paying down the mortgage even though most people don't think about it that way.     An analogy is learning to ski.   Beginners instinctively want to lean back because you essentially falling forward down the hill.  But you really need to learn forward to get control of your skis.   Leaning back is instinctive, but wrong.  Same with paying off the mortgage. 

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #763 on: August 04, 2018, 07:00:04 AM »

Jesus, I didn't even think about that. 2 ~ 3% off of my interest (3.625%) would mean it's 0.625% ~ 1.625% and even if I look at my APR (4.716%), it's still just 1.716% ~ 2.716%. Hard to justify paying that down rather than investing it just for peace of mind.

Indeed.   

And it is even worse (better?) than that, because not only is the cost of borrowing close to zero, you are using full value dollars today to save inflation ravaged dollars in the future. The other thing is that the peace of mind issue is also an illusion. I just made a post about it in another thread: 

https://forum.mrmoneymustache.com/welcome-to-the-forum/equity-shaming/msg2093302/#msg2093302

You're taking on more risk, not less, by paying down the mortgage even though most people don't think about it that way. An analogy is learning to ski. Beginners instinctively want to lean back because you essentially falling forward down the hill. But you really need to learn forward to get control of your skis. Leaning back is instinctive, but wrong.  Same with paying off the mortgage.
Great analogy!

When I first learned of this don't-pay-off-the-mortgage concept, I had a very hard time believing it could possibly be true. I am so glad that threads like these exist so that others can explore, learn, and make optimal decisions, not emotional ones.

cartman1973

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Re: DONT Payoff your Mortgage Club
« Reply #764 on: August 13, 2018, 08:42:19 AM »
Really interesting thread that has got me thinking about my own situation...looking for some advice.

Age 44, single with no kids (and staying that way), in the UK. Discovered MMM just a couple of years ago after being a consumer sucka for most of my life. Totally changed my life. Now finally completely debt free other than the mortgage, and looking to retire at 55 to 57 rather than 67 which would otherwise be my normal retirement age. So not at all early retirement compared to most folks around here, but a wonderfully early retirement for me, potentially, especially given my stupid financial behaviour for most of my life. Got a pretty secure job teaching at a university.

Got a relatively small mortgage, latest remortgage to a 5 year fixed rate of 2.94%, with a starting balance £87k from Feb 2017, currently down to £82k. Monthly payments £461. Property worth £150k.

Having read this thread I've started looking into options for withdrawing the equity I have to invest in my Vanguard account.

With my existing mortgage lender (only option really due to early repayments penalties I would face otherwise) I could increase to 80% LTV and have £38k to invest. This would add another £222 per month to my mortgage payment fixed for 5 years (rate would go to 3.25%).

I'm not 100% sure how to use cfiresim for this sort of modelling, so I put something together in Excel that seems to suggest over the next 10 years given a 5% return on top of the mortgage rate I could end up £60-63k better off ( or £22-25k once you subtract the £38k) , compared to just continuing maxing out my monthly investing.

The big unknown (despite any errors in my sums) is of course the impact of Brexit. It would not surprise me if inflation continues to rise after March next year so the mortgage would be a good hedge against that..?

Any and all advice gratefully received.

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #765 on: August 13, 2018, 09:49:23 AM »
Cartman-
I do not know what mortgage risk you're bearing with that rate. Will it reset again in five or more years? The extent to which you can guarantee the time during which you'll have the low rate is the most important variable in the DNPYM club. Otherwise, having a lower mortgage balance can significantly reduce the risk you bear from an increase in your mortgage rate.


cartman1973

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Re: DONT Payoff your Mortgage Club
« Reply #766 on: August 13, 2018, 10:58:11 AM »
Cartman-
I do not know what mortgage risk you're bearing with that rate. Will it reset again in five or more years? The extent to which you can guarantee the time during which you'll have the low rate is the most important variable in the DNPYM club. Otherwise, having a lower mortgage balance can significantly reduce the risk you bear from an increase in your mortgage rate.
Yes, in the UK we have variable, tracker and fixed rate mortgages, and you might typically fix for 2, 5 or increasingly 10 years, but not really any longer than that, and then they revert to the lender's normal variable rate (currently 4.35% on the one I looked at) - but then, providing rates haven't gone up massively in the meantime you normally take out another fixed rate mortgage... and of course for the last 10 years or so we've had really low rates here in the UK... these 30 year mortgages you guys have in the US sound wonderful in comparison.

letsdoit

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Re: DONT Payoff your Mortgage Club
« Reply #767 on: August 14, 2018, 08:52:52 AM »
i wonder if this thread also applies to 'dont buy a different abode  and , by doing so, saddle yourself with a higher interest rate'

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #768 on: August 14, 2018, 09:38:54 AM »
Really interesting thread that has got me thinking about my own situation...looking for some advice.

Age 44, single with no kids (and staying that way), in the UK. Discovered MMM just a couple of years ago after being a consumer sucka for most of my life. Totally changed my life. Now finally completely debt free other than the mortgage, and looking to retire at 55 to 57 rather than 67 which would otherwise be my normal retirement age. So not at all early retirement compared to most folks around here, but a wonderfully early retirement for me, potentially, especially given my stupid financial behaviour for most of my life. Got a pretty secure job teaching at a university.

Got a relatively small mortgage, latest remortgage to a 5 year fixed rate of 2.94%, with a starting balance £87k from Feb 2017, currently down to £82k. Monthly payments £461. Property worth £150k.

Having read this thread I've started looking into options for withdrawing the equity I have to invest in my Vanguard account.

With my existing mortgage lender (only option really due to early repayments penalties I would face otherwise) I could increase to 80% LTV and have £38k to invest. This would add another £222 per month to my mortgage payment fixed for 5 years (rate would go to 3.25%).

I'm not 100% sure how to use cfiresim for this sort of modelling, so I put something together in Excel that seems to suggest over the next 10 years given a 5% return on top of the mortgage rate I could end up £60-63k better off ( or £22-25k once you subtract the £38k) , compared to just continuing maxing out my monthly investing.

The big unknown (despite any errors in my sums) is of course the impact of Brexit. It would not surprise me if inflation continues to rise after March next year so the mortgage would be a good hedge against that..?

Any and all advice gratefully received.
Two of the main caveats are 1. Fixed rate mortgage and 2. Tax deductible interest. Absent those factors, it's not as easy to call. Since you're late to the saving game, it still might be worth it. How much do you have in other investments?

[Non-mortgage] Debt free is great, but investments and compounding are equally important for a secure long-term retirement (including and especially early retirement).

If I lived in your country and had enough money invested to kill the mortgage in case interest rates made a huge jump, I'd harness and ride that low rate mortgage as long as possible. This includes a re-fi to invest scenario.

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #769 on: August 14, 2018, 09:47:10 AM »
If you're saving into a 401(k)--in keeping with the "investment order''--the money is tax-deductible anyway.

cartman1973

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Re: DONT Payoff your Mortgage Club
« Reply #770 on: August 14, 2018, 10:44:00 AM »

Two of the main caveats are 1. Fixed rate mortgage and 2. Tax deductible interest. Absent those factors, it's not as easy to call. Since you're late to the saving game, it still might be worth it. How much do you have in other investments?

[Non-mortgage] Debt free is great, but investments and compounding are equally important for a secure long-term retirement (including and especially early retirement).

If I lived in your country and had enough money invested to kill the mortgage in case interest rates made a huge jump, I'd harness and ride that low rate mortgage as long as possible. This includes a re-fi to invest scenario.

I had built up some funds in my Vanguard account but just took them out (at a good price thankfully, despite never originally intending or wanting to sell any) to clear my final bits of debt, so not much in other investments yet unfortunately, hence why this idea sounds appealing in order to really kickstart them... I have about £7k in additional voluntary contributions (AVCs - these are somewhat similar I think to your 401k in that it is a pension type account, no company match unfortunately but deferred tax until retirement, so £100 contribution costs £80 at the moment). These are linked to my DB teachers pension, the first part of which I will get when I am 60 and which will by itself be sufficient to cover my living expenses. I'll get the second part of my teacher's pension at 65 (paying extra into that to take it without reductions at 65 rather than 67) and then state pension (which I am not relying on) at 67 (at the moment, until our government screw us over again).

Now debts are cleared I should be able to invest about £1350 per month plus the £200 AVCs contributions per month - which the FIRE calcs reckon will see me FI in middle 50s, which is my target. I only need about £250k to be fully FIRE with 25x (LCOL area, small bungalow, modest living), I just don't want to work until I'm 60 - like my job, just plenty of other things I could be doing. So given my pensions I don't really need to reach 25 x living expenses, I could just get to an amount sufficient to clear the mortgage plus enough years living expenses to carry me over until my pension kicks in, but the idea is appealing...

cartman1973

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Re: DONT Payoff your Mortgage Club
« Reply #771 on: August 14, 2018, 10:47:21 AM »
If you're saving into a 401(k)--in keeping with the "investment order''--the money is tax-deductible anyway.
No 401ks in the UK unfortunately, but yes, the AVCs (no tax payable until withdrawal at pension age) and investments via my ISA (a tax advantaged account where you pay no tax and can access it at anytime) are the first target for my savings, and the ISA would be the target for investing any equity from the mortgage (we have a £20k per annum allowance).

never give up

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Re: DONT Payoff your Mortgage Club
« Reply #772 on: August 14, 2018, 11:01:26 AM »
Hi cartman1973. Fellow UKer here. This is a very interesting thread with lots of great advice and information, but please be aware it is heavily orientated to the US mortgage, tax, & financial system. Completely understandable as this is primarily a US site after all. You may find some useful threads on the UK tax board. We use this to talk about all things UK based not just tax. If there isnít anything useful there feel free to post your questions there for some UK specific advice.

I was very cautious and a heavy mortgage over payer. I was always scared my 5 fix would end and interest rates would have rocketed during the fix and then Iíd be forced into a 9% mortgage or something. If I had the ability to fix a mortgage for 30 years at the low rates we have today then I think I would have joined the people in this thread instead, despite how cautious I am.

In your situation I donít think I would borrow any more. I would keep the low rate you have, control the controllables I.e. your expenses and invest the rest in whatever vehicles make sense tax wise for you. Good luck with your goal.

cartman1973

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Re: DONT Payoff your Mortgage Club
« Reply #773 on: August 14, 2018, 12:17:59 PM »
never give up (and others) - Many thanks, I think that seems to be the sensible conclusion in my situation.

Fomerly known as something

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Re: DONT Payoff your Mortgage Club
« Reply #774 on: August 17, 2018, 07:24:04 PM »
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 ?

Max price of house I can afford, whatever price that makes me go No f*cking way minus $1.

Realistically from last year when I was house shopping between 1x and 3x my salary; the large discrepancy was based on having some expensive areas and some inexpensive areas in my target area.  I ended up buying in the middle at about 2x my income.  I offered on the first house I saw where I wouldn't have been disappointed if the "perfect" house appeared the next day as the only way I'd likely get perfect would be if I were to have a custom house built.

As for monthly mortgage cost, I'd say 1/4 to 1/3 of monthly take home pay is about as high as I'd want to go.