Author Topic: DONT Payoff your Mortgage Club  (Read 105228 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.

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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.

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #775 on: August 20, 2018, 07:18:13 AM »
I estimated on another thread that our mortgage payments are roughly 9% of our monthly expenses. That will change when our rate resets, but it's been nice to have that kind of flexibility for achieving other goals with the 15% of our budget that isn't going toward house.

letsdoit

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Re: DONT Payoff your Mortgage Club
« Reply #776 on: August 20, 2018, 07:44:50 AM »
i am very thankful for this reply.

our current situation is pretty good (but it is a place with alot of challenges).
, but we are in a housing market where in order to buy a decent place , sticker price would be over 4x HHI



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.

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #777 on: August 20, 2018, 07:47:57 AM »
our mortgage is around 25% of our monthly expenses.

Zola.

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Re: DONT Payoff your Mortgage Club
« Reply #778 on: August 20, 2018, 09:00:17 AM »
I used to overpay on the mortgage a bit and it is exciting and seductive seeing the number drop instantly, an instant result and return, but now I am pouring it more into investments instead.

Money given to the mortgage company is not money to you can get back if you really need it. e.g. job loss. / emergency.

I now am falling into line now, I have worked out that if I invest consistently well for the next 7 years I will be able to pay it off then and there via investments alone (provided there is no big crash).

I still may do the odd small overpayment though. e.g. £1000 here and there.



boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #779 on: August 20, 2018, 09:02:32 AM »
I used to overpay on the mortgage a bit and it is exciting and seductive seeing the number drop instantly, an instant result and return, but now I am pouring it more into investments instead.

Money given to the mortgage company is not money to you can get back if you really need it. e.g. job loss. / emergency.

I now am falling into line now, I have worked out that if I invest consistently well for the next 7 years I will be able to pay it off then and there via investments alone (provided there is no big crash).

I still may do the odd small overpayment though. e.g. £1000 here and there.

congrats and welcome - the bolded statement above is a bad decision worse IMO than just paying down a mortgage why would you put money that cant be obtained easily in an emergency into the house at all - a hybrid approach is worse than going hook line and sinkier one way or the other.

Zola.

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Re: DONT Payoff your Mortgage Club
« Reply #780 on: August 20, 2018, 09:24:15 AM »
As the saying goes 'everything in moderation' 

(playing devils advocate)

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #781 on: August 20, 2018, 09:36:52 AM »
As the saying goes 'everything in moderation' 

(playing devils advocate)
But why do that when there's no need to?

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #782 on: August 20, 2018, 09:41:12 AM »
Zola-
If you're determined to do something high-risk/high-reward with that extra thousand, may I suggest opening a brokerage account and putting it into a Small-Cap Value index fund?

Zola.

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Re: DONT Payoff your Mortgage Club
« Reply #783 on: August 20, 2018, 09:42:46 AM »
  • It gets the total debt down sooner
  • spreads risk between having cash, investments and lowered debt
  • psychological boost

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #784 on: August 20, 2018, 10:32:34 AM »
  • It gets the total debt down sooner
  • spreads risk between having cash, investments and lowered debt
  • psychological boost

its increasing your risk - you may feel like it pyschologically reducing risk but you're increasing it. 

tyort1

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Re: DONT Payoff your Mortgage Club
« Reply #785 on: August 20, 2018, 11:14:39 AM »
  • It gets the total debt down sooner
  • spreads risk between having cash, investments and lowered debt
  • psychological boost

It might get debt down sooner, but it also increases the time it takes to pay off the debt completely.

Andeanmustache

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Re: DONT Payoff your Mortgage Club
« Reply #786 on: August 20, 2018, 06:52:41 PM »
Hi all,

I understand well the logic behind not paying the mortgage under the current conditions in the US (rates about 3%, 30 year fixed term, etc.). However, different conditions apply in my country and I wonder if another path might be feasible/preferable.

Currently I have a 20 year mortgage at 7.25% fixed interest in local currency, for an apartment I bought 1.5 years ago (with a 30% downpayment). About three months ago I prepaid an amount equivalent to approximately of 1/7 of the outstanding balance. In my country the borrower has the option to make any number of prepayments at no cost, with the choice between reducing the term (and keeping the monthly mortgage payments constant) or keeping the term and reducing the monthly payment. I think this is called "recasting". I chose the first option, so that now my mortgage will be repaid in 16 years instead of the original 20. The payments remained the same but the principal is now decreasing at a faster rate, obviously.

Afterwards I regretted this decision, since unfortunately my P&I payments are higher than I am comfortable with (almost 50% of take home pay). If I could go back in time, I probably would have not made this purchase in the first place and would have opted for a smaller/cheaper apartment. However, that is done and I intend to stay at my current location indefinitely.

Looking forward, the standard advice in this thread would be to save as much as possible and invest, in order to accumulate enough funds that give me the option option to completely liquidate the loan at some point. Based on some calculations, if I stick to this plan I could reach that point in around 5-6 years.

However, the current mortgage costs in the meantime make me nervous. Would a "hybrid" approach make sense in my situation? To continue accumulating a stash, but also make some periodic prepayments that reduce the monthly payments to about half what they are now, and afterwards just holding the mortgage and focus 100% in saving/investing until maturity. The advantage I see is that I regain some flexibility that my situation is currently lacking.

Does this make sense or does the "don't payoff your mortgage" principle still apply in this scenario?

A couple of points for additional context:
- 7.25% is actually a good rate in my country, so that a refinancing is not realistic.
- Inflation is relatively low and stable, at about 3%.
- Market returns are extremely variable, and investing in the local stock market is also very costly (high fees, capital gains tax, etc.). On the other hand, term deposits at the bank pay up to 7% tax free.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #787 on: August 20, 2018, 11:16:03 PM »
I speak the language of 50% of take-home mortgage payments, even with a substantial down payment. It's what single people sometimes have to to to own a home in a HCOLA, so you won't get any hate from me. With mad frugal skills, I lived comfortably and saved well with the other half of my monthly take-home.  My first thought is if you bought more house than you need, do you have extra space you could rent out? A roommate or airbnb? Having roommates really kept me ahead in the FIRE game.

And I remember being thrilled that my excellent credit got me a 7% mortgage on that condo in 1996.

SwordGuy

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Re: DONT Payoff your Mortgage Club
« Reply #788 on: August 21, 2018, 03:10:22 PM »
Just made my last payment for year 2 of 15.  Only 13 more years to go at 2.75%!

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #789 on: August 21, 2018, 04:39:52 PM »
Just made my last payment for year 2 of 15.  Only 13 more years to go at 2.75%!

Nice

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #790 on: August 22, 2018, 07:09:05 AM »
I have a co-worker who brags about his 2.75.

But he bought in Fall of 2012, so he only gets to enjoy that rate--which is lower than inflation--for nine more years.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #791 on: August 22, 2018, 07:12:51 AM »
Just made my last payment for year 2 of 15.  Only 13 more years to go at 2.75%!
Sweet! It will be interesting to see what mortgage interest rates do in the next 13 years.

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #792 on: August 22, 2018, 07:26:57 AM »
Just made my last payment for year 2 of 15.  Only 13 more years to go at 2.75%!
Sweet! It will be interesting to see what mortgage interest rates do in the next 13 years.

i hope they go down again so i can cash out refi. Strongly looking into a 2nd fixed rate mortgage right now to pull out 50-100k in equity to buy some more VTSAX

onlykelsey

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Re: DONT Payoff your Mortgage Club
« Reply #793 on: August 22, 2018, 07:35:38 AM »
Related but off-topic question: if you include your house in your net worth (long term I don't think I'll stay FIREd in Manhattan, so I'm budgeting for rent somewhere else), how do you value it? 

I rely on the zillow value (it's pretty accurate since there are only 12 units in my building and one sells every year on average), then subtract my mortgage and HELOC, and then also subtract a somewhat arbitrary 40K, which is what I think it would cost to freshen the place up, move stuff out, and pay transfer taxes.  I should maybe change that to 50K at this point.

At any rate, is there a better way to do this so I get an accurate net worth?

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #794 on: August 22, 2018, 07:58:40 AM »
Related but off-topic question: if you include your house in your net worth (long term I don't think I'll stay FIREd in Manhattan, so I'm budgeting for rent somewhere else), how do you value it? 

I rely on the zillow value (it's pretty accurate since there are only 12 units in my building and one sells every year on average), then subtract my mortgage and HELOC, and then also subtract a somewhat arbitrary 40K, which is what I think it would cost to freshen the place up, move stuff out, and pay transfer taxes.  I should maybe change that to 50K at this point.

At any rate, is there a better way to do this so I get an accurate net worth?

its all pretty personal to your area.  i keep up with all home sales so i know what my house is worth approximately.  i dont include the cost to update my house i the calcs though i just subtract transfer fees.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #795 on: August 22, 2018, 08:04:57 AM »
Related but off-topic question: if you include your house in your net worth (long term I don't think I'll stay FIREd in Manhattan, so I'm budgeting for rent somewhere else), how do you value it? 

I rely on the zillow value (it's pretty accurate since there are only 12 units in my building and one sells every year on average), then subtract my mortgage and HELOC, and then also subtract a somewhat arbitrary 40K, which is what I think it would cost to freshen the place up, move stuff out, and pay transfer taxes.  I should maybe change that to 50K at this point.

At any rate, is there a better way to do this so I get an accurate net worth?
Hmmm, I'd expect the transaction alone to cost about that. I would add more for freshening up, or better still, stay on top of that stuff and enjoy "fresh" while you live there.

From the other side of the FIRE finish line, I suggest you just ballpark it. It won't matter that much. When I sold my house, my agent wanted to go on at $529k. I pushed for $539k and ended up getting $600k. No way to predict that.

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Re: DONT Payoff your Mortgage Club
« Reply #796 on: August 26, 2018, 07:32:59 PM »
DH is waffling all over the board. 

If you recall, a few months ago he was justifiably concerned about our 5 year variable rate mortgage that is being renewed next spring.  Two impacts -- one, it has been rising steadily for the past year, so we keep paying more each month, and two, we may not be able to renew / shop it for best rates next year as our income is much, much smaller now.  (Semi / Fire).

So, I ran the numbers to pull money from our bond funds into the mortgage to reduce it.  This can make sense for us, especially due to cash flow and ability to qualify.   But, not what I really want to do.

Then, DH ran the market numbers and showed me how keeping it in the market makes sense (D'uh..?), started arguing against what he was insisting upon....

Now, of course, he will be buying solar panels for the roof, as an alternate investment rather than the Bond funds or the mortgage payback.

I suppose the good news is that the solar panels are not nearly as large of chunk of money, only 10% of what we were talking about... and he has been prepping for this and running the numbers for two years... still.   It's a bit of a roller coaster with him.

ACK.   I don't want to know what is next.

Telecaster

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Re: DONT Payoff your Mortgage Club
« Reply #797 on: August 26, 2018, 07:48:25 PM »
Mortgage free home owners on the rise:

If youíre among the thousands struggling with the high cost of housing in Seattle, hereís a statistic that might make you wince.

Census data show that in 2016, more than one in four Seattle homeowners owned their home outright, free from any mortgage debt.

This lucky segment of Seattle households has grown at a remarkably fast pace. There were about 31,000 owner-occupied households with no mortgage in 2010. By 2016, the most recent data available, the number had jumped to almost 42,000, which pencils out to a 36 percent increase. Thatís nearly seven times faster than the rate of growth for homeowners carrying a mortgage.



https://www.seattletimes.com/seattle-news/data/mortgage-free-homeowners-on-the-rise-in-seattle-data-show/

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #798 on: August 26, 2018, 11:15:46 PM »
Mortgage free home owners on the rise:

...This lucky segment of Seattle households...


https://www.seattletimes.com/seattle-news/data/mortgage-free-homeowners-on-the-rise-in-seattle-data-show/
Hmmm, what makes them "lucky"?

tomorrowsomewherenew

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Re: DONT Payoff your Mortgage Club
« Reply #799 on: August 27, 2018, 06:56:14 AM »
Related but off-topic question: if you include your house in your net worth (long term I don't think I'll stay FIREd in Manhattan, so I'm budgeting for rent somewhere else), how do you value it? 

I rely on the zillow value (it's pretty accurate since there are only 12 units in my building and one sells every year on average), then subtract my mortgage and HELOC, and then also subtract a somewhat arbitrary 40K, which is what I think it would cost to freshen the place up, move stuff out, and pay transfer taxes.  I should maybe change that to 50K at this point.

At any rate, is there a better way to do this so I get an accurate net worth?

There are several houses in my area with the exact same floor plan as my own house. So, I look at what those houses have sold for, and judge whether they're in better or worse condition than mine. Also, do they have a pool? In my area, that adds about $30,000 to the selling price. (I live in FL).