Author Topic: DONT Payoff your Mortgage Club  (Read 159065 times)

redbirdfan

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Re: DONT Payoff your Mortgage Club
« Reply #800 on: September 12, 2018, 02:54:07 PM »
Just finished reading "The Value of Debt in Building Wealth" by Thomas J. Anderson (from the library, of course) and some blog posts on not paying off debt.  It seems clear that the best way to optimize net worth and flexibility is to not pay down low interest fixed-rate debt aggressively.  It's a bit more dangerous to do so when the debt is merely paid down and not paid off.  I get it.  I really think I do.  I just know that I'll always have the knee jerk reaction to want to be out of debt.  I may have to come back to this thread from time to time for moral support.     

RWD

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Re: DONT Payoff your Mortgage Club
« Reply #801 on: September 12, 2018, 04:05:49 PM »
I may have to come back to this thread from time to time for moral support.     
We're here for you! I stopped worrying about our low interest debt a long time ago; probably roughly when we had a year's worth of payments saved up outside of retirement accounts.

terrifictim

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Re: DONT Payoff your Mortgage Club
« Reply #802 on: September 12, 2018, 05:07:24 PM »
Just saying thanks to @boarder42 for helping me see the light. At the time of joining the club (Oct 17) I had $7k in taxable. Since then I've gone up to $30k in taxable while dropping my mortgage $4k. And my FIRE date keeps on getting closer!


After reading through these posts and others, I'm proud to say I'm now a member off the DPYMC.
I bought in San Diego in 2015 for smallest property that was biking distance to work but have been spending the past two years putting extra payments down. But now that I realize I could have had two years of extra money instead going to VTSAX, sigh. At least like MMM says you're winning either way.

Stats:
Purchased (2BR,1.5BA,1100SF) townhouse 05/2015
Purchase price: 289K.
Current market price: 360K
PITI: $1070/month
Initial Mortgage: $231,200 @ 3.75%
Remaining Mortgage: $202,450

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #803 on: September 12, 2018, 08:36:47 PM »
Congratulations. Welcome. Doesn't that cash buffer feel great!

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #804 on: September 13, 2018, 06:57:29 AM »
Just finished reading "The Value of Debt in Building Wealth" by Thomas J. Anderson (from the library, of course) and some blog posts on not paying off debt.  It seems clear that the best way to optimize net worth and flexibility is to not pay down low interest fixed-rate debt aggressively.  It's a bit more dangerous to do so when the debt is merely paid down and not paid off.  I get it.  I really think I do.  I just know that I'll always have the knee jerk reaction to want to be out of debt.  I may have to come back to this thread from time to time for moral support.     

It depends on how the cash flow for the debt compares to your income. And it depends on whether the debt is callable. And it depends on your investment strategy being effective enough over time to lap the debt. Debt is risky, but risks are something you can manage with these other things. Glad to have you in the DNPOYM club!

TempusFugit

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Re: DONT Payoff your Mortgage Club
« Reply #805 on: September 13, 2018, 04:57:56 PM »
Did anyone happen across this article today?

https://www.msn.com/en-us/money/realestate/making-extra-mortgage-payments-not-so-fast/ar-BBNhf5j

I'm a little confused by some of the examples the author used.  I'm not sure I agree with some of his statements.  I'm sure this crowd can either confirm or refute what he says.   I generally agree on the fact that paying off a low interest mortgage early is sub-optimal, but I think this guy is just wrong on some big particulars.

Specifically, I don't think this is correct:

"For example, assume you have a 30-year mortgage with a monthly payment of $2,000. Your first payment includes about $360 in principal and $1,640 in interest, while the last payment includes about $60 in interest and $1,940 in principal. If you made a double payment of $4,000 (to "save" on interest), all you're saving is $60, and that's 30 years from now. Put another way, it's a return of less than 0.1% per year."

This he bases on an earlier statement (which is not exactly clear):

"Mortgage interest is calculated differently from interest on other items (like credit cards). Essentially, the majority of your first monthly payment is interest, while the last payment is mostly principal. Each regular monthly payment you make applies to the next payment due, and any extra payment applies to the last payment due."

I think that the $1,940 in principal paid early will have a return of (your rate)* ($1940) * (the number of years remaining on your) mortgage (ignoring any inflation or tax related stuff).  That's damn sure more that $60. 




dandarc

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Re: DONT Payoff your Mortgage Club
« Reply #806 on: September 13, 2018, 05:16:31 PM »
TempusFugit -

Point 1 in the article is just really bad math.

Point 2 would be correct, except for the horrendously bad math in point 1 leads to things like "even a money market account at 1% will do better", which obviously isn't true.

Point 3 is correct - fixed payment gets cheaper every year due to inflation.

Point 4 is sort of correct - the selling price shouldn't reflect whether there is a mortgage or not, so the very basic profit relative to the purchase price should be the same. Of course, person with a mortgage has paid interest whereas the person without has not, so we've got incomplete reasoning.

Has the right conclusion - you come out ahead by keeping a low, fixed rate mortgage for as long as possible and investing the rest.

But mostly wrong reasoning to get there and some of the specific stuff that you could take as a recommendation is way off base - money market beats paying down mortgage is the most obvious.

dandarc

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Re: DONT Payoff your Mortgage Club
« Reply #807 on: September 13, 2018, 05:22:47 PM »
If you have an amortization schedule, you can see how much interest and how much principal is being paid at different times based on the current equity level (how much principal is left to pay down).  So let's say you have 169K to pay down still... My thinking is if you put down, say, an extra 2K in principal on a payment, meaning that there would be 167K left, then you would just then locate the 167K principal amount on the amortization table, and then see how much interest you avoided by putting down the extra money.  Add up all the interest payments between the 169K level and the 167K level.  That's what I would do anyway.  Not sure if it's right or not.
If you do it this way, add up the principal and the interest between 167K and 169K. Take the example in the article as stated - a $2,000 payment at the beginning is $360 of principal and $1640 of interest. You pay an extra $2,000, and rather than having made the last payment and nothing else happening, you jump in the amortization schedule as you've said - about 5-6 months forward ($2,000 / 360). so that's $10K - $12K of payments on the loan you don't have to make.

Ignoring the time-value of money of course.

The conclusion of the article is right - this thread illustrates over and over again how you come out ahead keeping a low fixed rate mortgage compared to paying it down early - but the math used in the article is about as wrong as it could possibly be.
« Last Edit: September 13, 2018, 05:24:47 PM by dandarc »

TempusFugit

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Re: DONT Payoff your Mortgage Club
« Reply #808 on: September 13, 2018, 05:25:27 PM »
I don't think it is bad math so much as he is incorrect about how interest is applied.  Paying $1940 of principal early means you aren't paying 4% or whatever on that $1940 for 29 years.  That's >$2K not $60. 

v8rx7guy

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Re: DONT Payoff your Mortgage Club
« Reply #809 on: September 13, 2018, 05:26:58 PM »
Did anyone happen across this article today?

https://www.msn.com/en-us/money/realestate/making-extra-mortgage-payments-not-so-fast/ar-BBNhf5j

I'm a little confused by some of the examples the author used.  I'm not sure I agree with some of his statements.  I'm sure this crowd can either confirm or refute what he says.   I generally agree on the fact that paying off a low interest mortgage early is sub-optimal, but I think this guy is just wrong on some big particulars.

Specifically, I don't think this is correct:

"For example, assume you have a 30-year mortgage with a monthly payment of $2,000. Your first payment includes about $360 in principal and $1,640 in interest, while the last payment includes about $60 in interest and $1,940 in principal. If you made a double payment of $4,000 (to "save" on interest), all you're saving is $60, and that's 30 years from now. Put another way, it's a return of less than 0.1% per year."

This he bases on an earlier statement (which is not exactly clear):

"Mortgage interest is calculated differently from interest on other items (like credit cards). Essentially, the majority of your first monthly payment is interest, while the last payment is mostly principal. Each regular monthly payment you make applies to the next payment due, and any extra payment applies to the last payment due."

I think that the $1,940 in principal paid early will have a return of (your rate)* ($1940) * (the number of years remaining on your) mortgage (ignoring any inflation or tax related stuff).  That's damn sure more that $60.

I read it today and about pulled my hair out.  Very poorly written.

dandarc

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Re: DONT Payoff your Mortgage Club
« Reply #810 on: September 13, 2018, 05:35:10 PM »
I don't think it is bad math so much as he is incorrect about how interest is applied.  Paying $1940 of principal early means you aren't paying 4% or whatever on that $1940 for 29 years.  That's >$2K not $60.
It is actually quite a bit more than that - more like $10K saved from that one principal payment (compound interest is amazing that way).

ETA: which sounds like a lot, but still pales in comparison to what you're likely to make investing that money in something like VTSAX over the 30 years or so.

Goldielocks

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Re: DONT Payoff your Mortgage Club
« Reply #811 on: September 13, 2018, 07:35:12 PM »
I don't think it is bad math so much as he is incorrect about how interest is applied.  Paying $1940 of principal early means you aren't paying 4% or whatever on that $1940 for 29 years.  That's >$2K not $60.

And that payment is sort of applied to the end,  (because of the equal payments applied until paid in full); but it eliminates the last SEVERAL payments, not just the $60 interest on the final one.  Could shorten your payments by a year or more, depending on how much you pre pay.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #812 on: September 13, 2018, 11:10:59 PM »
Good premise for an article, alas, incredibly poorly researched. This guy may be able to think, but he can't math. Ugh.

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #813 on: September 14, 2018, 07:36:55 AM »
If you'd like to think these thoughts but cannot do the math, wolfram alpha makes it so easy. They even show year by year how much principal/interest you're paying. http://www.wolframalpha.com/examples/everyday-life/personal-finance/mortgages-and-loans/

Of course, your mortgage statements also show this. In my case (year 5 of a 30-year, 3.0% mortgage), doubling the payment would triple the amount that goes toward principal.

YevKassem

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Re: DONT Payoff your Mortgage Club
« Reply #814 on: September 24, 2018, 07:24:08 AM »
Hi,

I'm 5 years into a 15 yr. note @2.5% fixed with $170K left on the balance.  I realize that it's crazy to pay it off, but would love the security of having no mortgage payment.  Since CD rates have started to tick back up, would it be a good move to invest in those at 3-3.5% just until I have enough saved where I could cover the mortgage balance?  Even though the return might be less than the stock market over the next few years, it would be guaranteed in the event of a worst-case scenario.  Thoughts?

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #815 on: September 24, 2018, 08:34:41 AM »
If you want something fairly safe, but still have ten years on the mortgage, why not consider the Larry Portfolio? The chances of a draw-down are modest, but the upside is much greater. Set aside 70% in those CD's you're talking about, and put 30% in something like $IJS

https://portfoliocharts.com/portfolio/larry-portfolio/

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #816 on: September 24, 2018, 09:21:02 AM »
Hi,

I'm 5 years into a 15 yr. note @2.5% fixed with $170K left on the balance.  I realize that it's crazy to pay it off, but would love the security of having no mortgage payment.  Since CD rates have started to tick back up, would it be a good move to invest in those at 3-3.5% just until I have enough saved where I could cover the mortgage balance?  Even though the return might be less than the stock market over the next few years, it would be guaranteed in the event of a worst-case scenario.  Thoughts?

you'll probably find the thread where people are paying down their mortgages more helpful.  that money should be going into VTSAX or whatever your AA is and make you piles more than changing your AA b/c of your amazingly low mortgage ... Pay it off as slowly as possible and dont skew your AA b/c of it.

RWD

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Re: DONT Payoff your Mortgage Club
« Reply #817 on: September 24, 2018, 09:21:46 AM »
Hi,

I'm 5 years into a 15 yr. note @2.5% fixed with $170K left on the balance.  I realize that it's crazy to pay it off, but would love the security of having no mortgage payment.  Since CD rates have started to tick back up, would it be a good move to invest in those at 3-3.5% just until I have enough saved where I could cover the mortgage balance?  Even though the return might be less than the stock market over the next few years, it would be guaranteed in the event of a worst-case scenario.  Thoughts?

I don't understand how no mortgage payment means more security. If I had $170k invested and a mortgage payment I would feel much more secure than $0 and no mortgage payment.

The fact that you can get CD rates better than your mortgage just shows how absurd it would be to pay any amount extra on it. As for how to invest your spare dollars you should follow your investment policy statement. If CDs are part of your desired asset allocation then go for it.

meatgrinder

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Re: DONT Payoff your Mortgage Club
« Reply #818 on: September 24, 2018, 10:54:11 AM »
My 5/1 ARM was resetting from 2.25% to 5.5% so I just refinanced into a 3/1 ARM at 3.39% with a 145K balance with another 30 years.  Going to keep riding the wave of ARM refinance until the rate gets to 5%, 6%?

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #819 on: September 24, 2018, 10:57:54 AM »
My 5/1 ARM was resetting from 2.25% to 5.5% so I just refinanced into a 3/1 ARM at 3.39% with a 145K balance with another 30 years.  Going to keep riding the wave of ARM refinance until the rate gets to 5%, 6%?

yeah somewhere aroun 6-7% depending on what the 10 year yield is

onlykelsey

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Re: DONT Payoff your Mortgage Club
« Reply #820 on: September 24, 2018, 11:04:55 AM »
My 5/1 ARM was resetting from 2.25% to 5.5% so I just refinanced into a 3/1 ARM at 3.39% with a 145K balance with another 30 years.  Going to keep riding the wave of ARM refinance until the rate gets to 5%, 6%?

yeah somewhere aroun 6-7% depending on what the 10 year yield is

OMG boarder42 told me to pay down my HELOC early!

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #821 on: September 24, 2018, 11:10:57 AM »
My 5/1 ARM was resetting from 2.25% to 5.5% so I just refinanced into a 3/1 ARM at 3.39% with a 145K balance with another 30 years.  Going to keep riding the wave of ARM refinance until the rate gets to 5%, 6%?

yeah somewhere aroun 6-7% depending on what the 10 year yield is

OMG boarder42 told me to pay down my HELOC early!

if i did i'm sure it depended upon many variables - one of which is HELOCs and mortgages are not the same. - its a math problem i'm not dont pay off your mortgage ever no matter what i'm do the thing that will end you with statistically the best results. 

RWD

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Re: DONT Payoff your Mortgage Club
« Reply #822 on: September 24, 2018, 11:54:52 AM »
Hi,

I'm 5 years into a 15 yr. note @2.5% fixed with $170K left on the balance.  I realize that it's crazy to pay it off, but would love the security of having no mortgage payment.  Since CD rates have started to tick back up, would it be a good move to invest in those at 3-3.5% just until I have enough saved where I could cover the mortgage balance?  Even though the return might be less than the stock market over the next few years, it would be guaranteed in the event of a worst-case scenario.  Thoughts?

I don't understand how no mortgage payment means more security. If I had $170k invested and a mortgage payment I would feel much more secure than $0 and no mortgage payment.

The fact that you can get CD rates better than your mortgage just shows how absurd it would be to pay any amount extra on it. As for how to invest your spare dollars you should follow your investment policy statement. If CDs are part of your desired asset allocation then go for it.
No one is saying only pay off a morgage.  Obviously one should not only invest in one thing, whether stocks, debt payment or rental real estate in a single area unless they want to take that risk level.  If you already have 2M in stocks, are 60 yrs old and carry a 200k morgage, would your advice change?

Again, this is not saying carrying debt when you are accumulating to invest more is not awsome for wealth building, just to stimulate thinking.

I agree. That's why I suggest creating a general investment policy statement to follow instead of always evaluating how to invest with every new dollar.

If I had $2 million in stocks at 60 years old with a $200k fixed rate mortgage at 2.5% (or 4% or whatever reasonable number) I would still make the minimum payment. There would have to be some large incentive not to (maybe a tax cliff or something).

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #823 on: September 25, 2018, 12:37:40 AM »
If I had $2 million in stocks at 60 years old with a $200k fixed rate mortgage at 2.5% (or 4% or whatever reasonable number) I would still make the minimum payment. There would have to be some large incentive not to (maybe a tax cliff or something).
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talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #824 on: September 25, 2018, 06:57:05 AM »
If you have $2,000,000 liquid, do whatever you want. I won't pretend that my humble thoughts about mortgages or accumulation will teach you anything!

If I had significantly more than that--say $5 million--I wouldn't even own. Would just rent. Want to change that wall? Just move to a place where it's already changed!

Goldielocks

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Re: DONT Payoff your Mortgage Club
« Reply #825 on: September 25, 2018, 02:15:44 PM »
Hi,

I'm 5 years into a 15 yr. note @2.5% fixed with $170K left on the balance.  I realize that it's crazy to pay it off, but would love the security of having no mortgage payment.  Since CD rates have started to tick back up, would it be a good move to invest in those at 3-3.5% just until I have enough saved where I could cover the mortgage balance?  Even though the return might be less than the stock market over the next few years, it would be guaranteed in the event of a worst-case scenario.  Thoughts?

If you can answer this -- then you will be close to your answer...

Why would paying it off provide you with "..security of having no mortgage payment" versus owning a CD?

The percentage differences in your question are small enough that the numerical answer is not as important as figuring out why a paid off home is more secure to your situation than a CD.

Simplefunlife

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Re: DONT Payoff your Mortgage Club
« Reply #826 on: October 02, 2018, 12:29:32 PM »
I'd like to join the club!

I've got a little over 11 years left on a 15 year mortgage at 3.125% current balance is $74k.  I've only paid the required payment ever since I refinanced at the end of 2014. 

When I was paying off student loans 10 years ago it was a very tangible goal and felt good to watch that balance go to zero.  I get the math when it comes to mortgage rates so I'm not going to pay it off early.  However, I am looking how to get that same "good feeling" and working towards a goal.  What do others here do to stay motivated on aggressively investing?  Track NW every month? Set a goal to get an investment account up to mortgage amount?  Just looking for fun ways to track and feel the progress.

letsdoit

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Re: DONT Payoff your Mortgage Club
« Reply #827 on: October 02, 2018, 12:32:59 PM »
I'd like to join the club!

I've got a little over 11 years left on a 15 year mortgage at 3.125% current balance is $74k.  I've only paid the required payment ever since I refinanced at the end of 2014. 

When I was paying off student loans 10 years ago it was a very tangible goal and felt good to watch that balance go to zero.  I get the math when it comes to mortgage rates so I'm not going to pay it off early.  However, I am looking how to get that same "good feeling" and working towards a goal.  What do others here do to stay motivated on aggressively investing?  Track NW every month? Set a goal to get an investment account up to mortgage amount?  Just looking for fun ways to track and feel the progress.

you could make a graph of P or equity

RWD

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Re: DONT Payoff your Mortgage Club
« Reply #828 on: October 02, 2018, 12:58:32 PM »
I'd like to join the club!

I've got a little over 11 years left on a 15 year mortgage at 3.125% current balance is $74k.  I've only paid the required payment ever since I refinanced at the end of 2014. 

When I was paying off student loans 10 years ago it was a very tangible goal and felt good to watch that balance go to zero.  I get the math when it comes to mortgage rates so I'm not going to pay it off early.  However, I am looking how to get that same "good feeling" and working towards a goal.  What do others here do to stay motivated on aggressively investing?  Track NW every month? Set a goal to get an investment account up to mortgage amount?  Just looking for fun ways to track and feel the progress.

There's a thread where a few people are working on exceeding their debt in their taxable brokerage accounts. Though obviously you should be using tax advantaged space (IRAs, 401k, 403b, etc.) as much as possible first.
https://forum.mrmoneymustache.com/throw-down-the-gauntlet/defeat-the-delta/

I track our net worth, but mostly I get excited about keeping our expenses low (also tracked).

Bird In Hand

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Re: DONT Payoff your Mortgage Club
« Reply #829 on: October 02, 2018, 12:59:57 PM »
However, I am looking how to get that same "good feeling" and working towards a goal.  What do others here do to stay motivated on aggressively investing?  Track NW every month? Set a goal to get an investment account up to mortgage amount?  Just looking for fun ways to track and feel the progress.

Everyone is motivated by different things, but what helps me is monitoring my retirement/investment balances frequently when markets are smoking, and infrequently when they're lagging.  :)

And I think it's a great idea to plot your investments (and expected future investment balances) versus your mortgage balance to see where they cross!

Simplefunlife

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Re: DONT Payoff your Mortgage Club
« Reply #830 on: October 02, 2018, 01:42:28 PM »

There's a thread where a few people are working on exceeding their debt in their taxable brokerage accounts. Though obviously you should be using tax advantaged space (IRAs, 401k, 403b, etc.) as much as possible first.
https://forum.mrmoneymustache.com/throw-down-the-gauntlet/defeat-the-delta/

I track our net worth, but mostly I get excited about keeping our expenses low (also tracked).

Thanks I may start tracking that and joining that thread.  So far I've just been maxing out 401K, HSA, IRA, Dependent care spending account, and 10% after tax 401k (max allowed) for mega backdoor roth.  Starting in the next few months I should have some extra money after expenses to throw into a taxable brokerage account.  Unless someone knows of some other tax advantaged space : )

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #831 on: October 02, 2018, 02:44:19 PM »
I track the dividend income from my investments versus the interest on my mortgage.

K-ice

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Re: DONT Payoff your Mortgage Club
« Reply #832 on: October 04, 2018, 09:29:33 AM »
I track the dividend income from my investments versus the interest on my mortgage.

This sounds like a good idea. 

I'm not the best member of this club but in one investment account the amount it makes on its own will exceed the regular payment I put in this past year. That is exciting.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #833 on: October 04, 2018, 10:07:07 AM »
The other thing that's exciting is watching your investment account balances grow. The next steps are when the account balances grow at a rate higher than your monthly income, then your annual income, then your actual mortgage balance, then your FI number. It happens, it really does. It is so much more exciting and empowering than killing the mortgage. People think paying that off is going to feel good, but they have no idea what a blast it is to ride the rocket ship of compound interest to infinity and beyond.

I cannot explain what an amazingly powerful feeling it is, but if you try it, you're statistically likely to have the same result. It's amazing how many of life's problems disappear, and how many doors are opened, when you have a huge pile of investments to optimize your time on this planet.

It is important to note that I was single, never a high wage earner, always lived in a HCOLA, and was never able to save the majority of my salary or anywhere near that. Keeping a mortgage and investing steadily got me over the finish line. This shit works, it really, really works! I know I'm mostly preaching to the choir here, but you never know what open-minded souls are reading this thread, willing to learn a concept that is often misunderstood, if it's considered at all.

When I first heard of the idea of NOT prepaying a mortgage, I was an unwilling pupil, and skeptical to the hilt. I am so grateful to the two people in my life who kept teaching until I was willing to learn. My life is amazing now, due to their persistence and willingness to keep at it until I finally got it. Hanging around here and continuing to post on this topic is my way of paying it forward.

Obligatory disclaimer: The above refers to affordable, long term, fixed rate, (mostly) tax deductible mortgages, primarily in the US. If you live somewhere else, I cannot speak to your situation. Please do your own due dilligence.


K-ice

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Re: DONT Payoff your Mortgage Club
« Reply #834 on: October 04, 2018, 11:07:55 AM »
I track the dividend income from my investments versus the interest on my mortgage.

Done! 2018 to date

Interest 2181 < Dividends 2620.

Cool, I'm on the right track.  Both are very small but it is nice to see I<D.


PathtoFIRE

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Re: DONT Payoff your Mortgage Club
« Reply #835 on: October 04, 2018, 11:32:54 AM »
I guess I'll join this club.

Every few months, I start thinking about what ifs regarding our financial life, and of course a big one of those is "what if I didn't have the mortgage expense anymore", but I always snap back to reality and realize that having a mortgage was and is one of the keys to our current financial success plus living how we want to live right now.

Does anyone here try to determine what an optimal mortgage balance is for them, and then try to maintain that in some way, either by refinancing every few years or using interest only loans, etc.?

I'm in a little different situation than many on this board, our financials would look more Boglehead-ish. We originally had a mortgage of 698k at 5%, we then refinanced in 2015 with cashout to increase the balance to 840k at 3.5% (used proceeds to pay off student loans that we couldn't deduct and that had rates of just over 4%, and then also invested about 50k in an aftertax account). We are now down to a balance of 762k (we prepay a small amount extra each month just to round up the payment, the extra probably represented less than 5% of what we save each month), and while we are maybe 1/3 to 1/2 of the way to hitting our FIRE number, I am trying to internally gauge what the ideal balance would be for me.

I've kinda always ballparked that comfortable number around 500k, which would mean doing nothing for the next 7 years (we have a 10/1, so that will be a decision point) as we'll still be above 500k. But I do toy with the idea of getting our payment down a little by refinancing again on this smaller amount while resetting the 30y clock, or even going the interest-only route. We _probably_ won't move for another 12 years (youngest is in kindergarten), although I do constantly feeling the siren call of upgrading to a nicer place in the neighborhood.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #836 on: October 04, 2018, 12:16:58 PM »
The other thing that's exciting is watching your investment account balances grow. The next steps are when the account balances grow at a rate higher than your monthly income, then your annual income, then your actual mortgage balance, then your FI number. It happens, it really does. It is so much more exciting and empowering than killing the mortgage. People think paying that off is going to feel good, but they have no idea what a blast it is to ride the rocket ship of compound interest to infinity and beyond.

Feels like that person slightly oversaved if their gains are higher than the total they need to retire...
My sixth FIREversary is around the corner. A lot of appreciation has happened since I pulled the plug on the paycheck. Maybe I saved exactly the right amount and compound interest and market gains did the "oversaving" for me while I was off doing other things? Hmmm, wasn't that my point in the first place?

Not comparing myself to the master, except to mention that Pete himself has experienced something similar, albeit on a much larger scale, with the success of his blog, and, presumably, the extended bull market we've all enjoyed.

One can't predict a bull run the likes of which we're still experiencing, so sure, it happens. Why does your comment sound slightly accusatory? Sad if that's all you could glean from my post.

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #837 on: October 04, 2018, 12:40:38 PM »
I guess I'll join this club.

Every few months, I start thinking about what ifs regarding our financial life, and of course a big one of those is "what if I didn't have the mortgage expense anymore", but I always snap back to reality and realize that having a mortgage was and is one of the keys to our current financial success plus living how we want to live right now.

Does anyone here try to determine what an optimal mortgage balance is for them, and then try to maintain that in some way, either by refinancing every few years or using interest only loans, etc.?

I'm in a little different situation than many on this board, our financials would look more Boglehead-ish. We originally had a mortgage of 698k at 5%, we then refinanced in 2015 with cashout to increase the balance to 840k at 3.5% (used proceeds to pay off student loans that we couldn't deduct and that had rates of just over 4%, and then also invested about 50k in an aftertax account). We are now down to a balance of 762k (we prepay a small amount extra each month just to round up the payment, the extra probably represented less than 5% of what we save each month), and while we are maybe 1/3 to 1/2 of the way to hitting our FIRE number, I am trying to internally gauge what the ideal balance would be for me.

I've kinda always ballparked that comfortable number around 500k, which would mean doing nothing for the next 7 years (we have a 10/1, so that will be a decision point) as we'll still be above 500k. But I do toy with the idea of getting our payment down a little by refinancing again on this smaller amount while resetting the 30y clock, or even going the interest-only route. We _probably_ won't move for another 12 years (youngest is in kindergarten), although I do constantly feeling the siren call of upgrading to a nicer place in the neighborhood.

Glad to have you in the club. From what I recall about Dallas, an $840,000 mortgage comes with a Bogle-Head-House indeed!

If it were me, and if I thought I could replicate my income indefinitely, I'd probably aim to have an interest-only mortgage for 60% of the value of my house. That way, I'm unlikely to lose all my equity in a crash, but I'm also able to put my principal-advancement into stock investments.

Telecaster

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Re: DONT Payoff your Mortgage Club
« Reply #838 on: October 04, 2018, 12:42:49 PM »
The other thing that's exciting is watching your investment account balances grow. The next steps are when the account balances grow at a rate higher than your monthly income, then your annual income, then your actual mortgage balance, then your FI number. It happens, it really does. It is so much more exciting and empowering than killing the mortgage. People think paying that off is going to feel good, but they have no idea what a blast it is to ride the rocket ship of compound interest to infinity and beyond.

Feels like that person slightly oversaved if their gains are higher than the total they need to retire...

If you follow the 4% rule, in most cases you wind up filthy rich in retirement.   In other words, most people save more than they need, but that extra is for insurance purposes.   

englishteacheralex

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Re: DONT Payoff your Mortgage Club
« Reply #839 on: October 04, 2018, 12:52:12 PM »
I've been slowly coming around to this concept over the past year or so. Can anyone read over the following to see if I've got this straight? If I write it down I'll understand it better.

1. The problem with paying off your mortgage is that then all that money is locked up in an asset that is not very liquid at all.

2. Here are our circumstances:
Mortgage: $298k left on a 30 year fixed mortgage at 3.75%. The condo is worth ~$425k.

The interest rate is low and fixed. So....

3. The smart thing to do is to let the mortgage ride, while investing as much as possible in our retirement accounts. Since we budget very carefully and do not randomly blow extra money, making the intentional decision to invest extra money rather than pay off the mortgage is a better choice because

A. The money will probably earn more (possibly substantially more) interest in an index fund than it will save us interest by paying down the mortgage early

B. 3.75% is an extremely low rate, and the risk involved with keeping this mortgage is pretty low, too, since we're nowhere near underwater on the condo and we both have very stable incomes.

4. To put extra money towards paying off the condo early would mean tying up money in an ill-liquid asset--we'd have to sell the place to get the money out, in the event of a situation in which we needed money--and the opportunity cost paid by putting the money towards the 3.75% interest rate instead of the 7+% returns on index funds.

Have I got this thing dialed in yet? It took me a long time to come around.

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #840 on: October 04, 2018, 01:32:15 PM »
Item B. of your list requires a little more explanation: in the USA, mortgage debt is non-callable, so it's less risky to have a high balance if it's amortized over a very long payment period.

Telecaster

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Re: DONT Payoff your Mortgage Club
« Reply #841 on: October 04, 2018, 01:34:04 PM »
I've been slowly coming around to this concept over the past year or so. Can anyone read over the following to see if I've got this straight? If I write it down I'll understand it better.

1. The problem with paying off your mortgage is that then all that money is locked up in an asset that is not very liquid at all.

2. Here are our circumstances:
Mortgage: $298k left on a 30 year fixed mortgage at 3.75%. The condo is worth ~$425k.

The interest rate is low and fixed. So....

3. The smart thing to do is to let the mortgage ride, while investing as much as possible in our retirement accounts. Since we budget very carefully and do not randomly blow extra money, making the intentional decision to invest extra money rather than pay off the mortgage is a better choice because

A. The money will probably earn more (possibly substantially more) interest in an index fund than it will save us interest by paying down the mortgage early

B. 3.75% is an extremely low rate, and the risk involved with keeping this mortgage is pretty low, too, since we're nowhere near underwater on the condo and we both have very stable incomes.

4. To put extra money towards paying off the condo early would mean tying up money in an ill-liquid asset--we'd have to sell the place to get the money out, in the event of a situation in which we needed money--and the opportunity cost paid by putting the money towards the 3.75% interest rate instead of the 7+% returns on index funds.

Have I got this thing dialed in yet? It took me a long time to come around.

Spot on.  One other thing to keep in mind is the future value of money.   The historical inflation rate is about 3.5%.   That cuts the value of money in half over 30 years.   Paying down the mortgage is literally like paying a dollar now to save 50 cents in the future. 

RWD

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Re: DONT Payoff your Mortgage Club
« Reply #842 on: October 04, 2018, 01:37:43 PM »
The other thing that's exciting is watching your investment account balances grow. The next steps are when the account balances grow at a rate higher than your monthly income, then your annual income, then your actual mortgage balance, then your FI number. It happens, it really does. It is so much more exciting and empowering than killing the mortgage. People think paying that off is going to feel good, but they have no idea what a blast it is to ride the rocket ship of compound interest to infinity and beyond.

Feels like that person slightly oversaved if their gains are higher than the total they need to retire...
My sixth FIREversary is around the corner. A lot of appreciation has happened since I pulled the plug on the paycheck. Maybe I saved exactly the right amount and compound interest and market gains did the "oversaving" for me while I was off doing other things? Hmmm, wasn't that my point in the first place?

Not comparing myself to the master, except to mention that Pete himself has experienced something similar, albeit on a much larger scale, with the success of his blog, and, presumably, the extended bull market we've all enjoyed.

One can't predict a bull run the likes of which we're still experiencing, so sure, it happens. Why does your comment sound slightly accusatory? Sad if that's all you could glean from my post.

I think he was pointing out a bit of ambiguity with your "account balances grow at a rate higher [...] than your FI number". Does that mean your investments are earning your original FI number every year? For example, you hit FI at $1 million and now you have $10 million earning $1 million per year (assuming 10% returns).

NeverTooLate

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Re: DONT Payoff your Mortgage Club
« Reply #843 on: October 04, 2018, 02:13:26 PM »
This whole concept really stresses me out.  I am newish to MMM although by default I have always been a pretty frugal person.  But I tend to be really conservative and always assume the worst.  One of the things I have done after reading all his articles is throw an extra 40k into investments that I had sitting around in account just "in case" when I realized what my fear was costing me.  I had upped my mortgage payments to pay off the place I just bought in 15 years since at that point I figured I could go part-time, live off of that, and then just let me investments grow without further contributions.  If something happened I figured a paid off house was a buffer for me.  But after reading Boarder42's very impassioned arguments for not paying off the mortgage early in other threads I decided to back off on extra payments.

Especially since I still wasn't maxing out my 403b (the plan was to do it in the next 5 years).  So I upped my 403b from 19% to 28% and put my mortgage payments back to what I am required to pay just rounded up to the nearest hundred.

I owe $143k at 4.25% and have 28.5 years on it.  The psychological effects of NOT paying off early is really huge for me.  I have read the arguments and I am sure I am now doing the right thing but it is tough.  At least for a couple years the couple hundred I get back from taxes is probably going into the mortgage just so I can feel better. Also the fact that I won't ever have a partner to rely on makes me even more timid. Realistically I am way more likely to get injured with my job in the next 30 than the next 15 and not be able to work for awhile.

Anyways, I am glad for Boarder42 and glad I joined this club but I will probably be stressed for the next 28.5 years.  *chuckle*

solon

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Re: DONT Payoff your Mortgage Club
« Reply #844 on: October 04, 2018, 02:19:13 PM »
Rather than banned, I think boarder42 must have been moved to view-only status. On his profile (https://forum.mrmoneymustache.com/profile/?u=11328) his last active date is today (10-4). But his last post was 9-29.

Telecaster

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Re: DONT Payoff your Mortgage Club
« Reply #845 on: October 04, 2018, 02:40:00 PM »
I owe $143k at 4.25% and have 28.5 years on it.  The psychological effects of NOT paying off early is really huge for me.  I have read the arguments and I am sure I am now doing the right thing but it is tough.  At least for a couple years the couple hundred I get back from taxes is probably going into the mortgage just so I can feel better. Also the fact that I won't ever have a partner to rely on makes me even more timid. Realistically I am way more likely to get injured with my job in the next 30 than the next 15 and not be able to work for awhile.

Anyways, I am glad for Boarder42 and glad I joined this club but I will probably be stressed for the next 28.5 years.  *chuckle*

The stress will change to exhilaration in a few years when you start to see your brokerage account balances shoot up like Dicey described.   And remember, if you get injured and can't pay the mortgage for some reason, the bank will still foreclose regardless of how many extra payments you've made.   So, until the mortgage is completely paid off, you are taking more risk by paying it down, not less risk.  Safety is liquid assets. 




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Re: DONT Payoff your Mortgage Club
« Reply #846 on: October 04, 2018, 02:42:43 PM »
Rather than banned, I think boarder42 must have been moved to view-only status. On his profile (https://forum.mrmoneymustache.com/profile/?u=11328) his last active date is today (10-4). But his last post was 9-29.

@boarder42 ..."view-only," but not forgotten! Thanks, b42, for carrying the DPYM torch!

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Re: DONT Payoff your Mortgage Club
« Reply #847 on: October 04, 2018, 02:53:20 PM »
I'd like to join the club!

I've got a little over 11 years left on a 15 year mortgage at 3.125% current balance is $74k.  I've only paid the required payment ever since I refinanced at the end of 2014. 

When I was paying off student loans 10 years ago it was a very tangible goal and felt good to watch that balance go to zero.  I get the math when it comes to mortgage rates so I'm not going to pay it off early.  However, I am looking how to get that same "good feeling" and working towards a goal.  What do others here do to stay motivated on aggressively investing?  Track NW every month? Set a goal to get an investment account up to mortgage amount?  Just looking for fun ways to track and feel the progress.

I track dividends and actually compare them to my mortgage payment so by leaving my money in the investments, my investments are working to pay for the mortgage.  (Actually they do pay the mortgage working on taxes and insurance) 

PizzaSteve

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Re: DONT Payoff your Mortgage Club
« Reply #848 on: October 04, 2018, 03:04:27 PM »
The other thing that's exciting is watching your investment account balances grow. The next steps are when the account balances grow at a rate higher than your monthly income, then your annual income, then your actual mortgage balance, then your FI number. It happens, it really does. It is so much more exciting and empowering than killing the mortgage. People think paying that off is going to feel good, but they have no idea what a blast it is to ride the rocket ship of compound interest to infinity and beyond.

Feels like that person slightly oversaved if their gains are higher than the total they need to retire...
My sixth FIREversary is around the corner. A lot of appreciation has happened since I pulled the plug on the paycheck. Maybe I saved exactly the right amount and compound interest and market gains did the "oversaving" for me while I was off doing other things? Hmmm, wasn't that my point in the first place?

Not comparing myself to the master, except to mention that Pete himself has experienced something similar, albeit on a much larger scale, with the success of his blog, and, presumably, the extended bull market we've all enjoyed.

One can't predict a bull run the likes of which we're still experiencing, so sure, it happens. Why does your comment sound slightly accusatory? Sad if that's all you could glean from my post.

I think he was pointing out a bit of ambiguity with your "account balances grow at a rate higher [...] than your FI number". Does that mean your investments are earning your original FI number every year? For example, you hit FI at $1 million and now you have $10 million earning $1 million per year (assuming 10% returns).

Yup! I meant that if you just by your FI number, you've oversaved. (Sure it might have been by accident, or due to markets, but still oversaved!)

Just as a nit pick, I really don't think it is fare to say a person over saved, just because they have more than they need now.  Weve had a historic bull market which has created more wealth than many frugal savers will need. 

If one retires with a stash size number that is reasonable, based on the best available historic returns data, to me that is saving the right amount.    If later, one receives 15% compound returns or has a stock windfall from their employer, it is not the fault of their planning, it is just luck.

Conversely, if you yolo assuming 15% never ending returns, with no backup plan, then you are probably foolish, even if you actually get them.   

Bull markets are great for your success rate, but they do not mean you over saved.  Had you saved less and assumed higher returns, that would have been foolishly optimistic.  Excess wealth <> over saving.  Over saving only occurs if you saved more than you would ever need, even with reasonable assumptions.  Even there, the savings allow charity and other actions that can benefit the world beyond consuming more.

Good luck and I hope we all achieve our dreams, without judgement.
« Last Edit: October 04, 2018, 03:10:00 PM by PizzaSteve »

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #849 on: October 04, 2018, 11:40:03 PM »
For you to receive your FI number in account changes, we're talking about 100% gain.
If I've translated what you're saying here correctly (in account = in your investment accounts), yes, that's the miracle of compound interest! More than 100% gain, given sufficient time, so start early, people! Do it before you prepay your ...blah, blah, blah.